As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/07/14  Cipher Pharmaceuticals Inc        40FR12B               84:13M                                    Merrill Corp-MD/FA

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Cipher Pharmaceuticals Inc.

Notes to Financial Statements

September 30, 2013

(in thousands of Canadian dollars, except per share amounts - unaudited)

 

1       DESCRIPTION OF THE BUSINESS

 

Cipher Pharmaceuticals Inc. (“Cipher” or “the Company”) is a specialty pharmaceutical company focused on commercializing novel formulations of successful, currently marketed drugs.  The Company’s strategy is to in-license products that incorporate proven drug delivery technologies and advance them through the clinical development and regulatory approval process, after which the products are out-licensed to marketing partners or, in Canada, may be marketed by the Company itself.  Cipher is incorporated under the Business Corporations Act of Ontario and is located at 5650 Tomken Boulevard, Mississauga, Ontario.

 

2       BASIS OF PREPARATION

 

These condensed interim financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), applicable to the preparation of interim financial statements, including IAS 34 and Interim Financial Reporting.  These condensed interim financial statements should be read in conjunction with the Company’s annual financial statements for the year ended December 31, 2012, which were prepared in accordance with IFRS as issued by the IASB. The Board of Directors approved these condensed interim financial statements for issuance on October 29, 2013.

 

During the second quarter of 2013, the Company adopted the following significant accounting policies:

Inventory

Inventory, which is comprised of finished goods, is valued at the lower of cost and net realizable value. Cost is determined using the first in, first out method. Net realizable value is the estimated selling price less applicable selling expenses. If the carrying value exceeds net realizable amount, a write-down is recognized. The write-down may be reversed in a subsequent period if the circumstances which caused it no longer exist.

 

Revenue Recognition - Product Revenue

Product revenue is recognized upon delivery of product to the Company’s customers, at which time ownership is transferred, and is recorded net of sales discounts, credits and allowances.

 

Derivative Financial Instruments and Hedging Activities

Derivatives are initially recognized at fair value on the date derivative contracts are entered into and are subsequently re-measured at their fair value.  The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.  When derivatives are designated as hedges, the Company classifies them as: (i) hedges in the change in fair value of recognized assets or liabilities or firm commitments (fair value hedges), or, (ii) hedges of the variability in highly probable future cash flows attributable to a recognized asset or liability, or a forecast transaction (cash flow hedges).

 

At the inception of a hedging relationship, the Company documents the relationship between the hedging instrument and the hedged item, as well as the risk management objectives and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the Balance Sheets or to specific firm commitments or forecast transactions. The Company also assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used are effective in offsetting changes in fair values or cash flows of hedged items. All derivatives are recorded at fair value.  Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Statements of Operations and Comprehensive Income, together with any changes in the value of the hedged asset or liability that are attributable to the hedged risk.  The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and are reclassified to the Statements of Operations and Comprehensive Income in the periods when the hedged item affects the Statements of Operations and Comprehensive Income.  When a fair value or cash flow hedge no longer meets the criteria for hedge accounting or when there is an ineffective portion to a hedge, a gain or loss is recognized in the Statements of Operations and Comprehensive Income.

 

New and amended standards adopted by the Company

IFRS 13 Fair Value Measurment & Amendment to IFRS 7, Financial Instruments: Disclosures.

IFRS 13, Fair value measurement, provides a single framework for measuring fair value.  The measurement of the fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk.  The Company adopted IFRS 13 on January 1, 2013 on a prospective basis.  The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the Company to measure fair value and did not result in any measurement adjustments as at January 1, 2013.

 

Amendment to IFRS 7, Financial instruments: disclosures, on assets and liabilities offsetting provides disclosure requirements that are intended to help investors and other financial statement users to better assess the effect or potential effect of offsetting arrangements on a company’s financial position.  The Company adopted the Amendment to IFRS 7 on January 1, 2013 on a prospective basis.  The adoption of IFRS 7 did not require any measurement adjustment as at January 1, 2013.

 

 

Cipher Pharmaceuticals Inc.

Notes to Financial Statements

September 30, 2013

(in thousands of Canadian dollars, except per share amounts - unaudited)

 

3       FINANCIAL INSTRUMENTS

 

Under certain agreements, the Company has the rights to set-off financial assets with financial liabilities with respect to advances, rebates and licensing payments.  At September 30, 2013, the Company had gross financial assets of $1,234 and gross financial liabilities of $4,412 related to the same counterparty.  The net amount of $3,178 owing to the counterparty has been recorded in accounts payable and accrued liabilities at September 30, 2013 (gross financial assets of $79 and gross financial liabilities of $1,390 for a net amount of $1,311 at September 30, 2012).

 

4       INTANGIBLE ASSETS

 

The Company has entered into agreements with Galephar Pharmaceutical Research Inc. (“Galephar”) for the rights to package, test, obtain regulatory approvals and market certain products in various countries.  In accordance with the terms of the agreements, the Company has acquired certain product rights.  The recoverability of these product rights is dependant upon sufficient revenues being generated from the related products.  The Company is currently amortizing the product rights related to CIP-ISOTRETINOIN and CIP-TRAMADOL ER.  In accordance with these agreements, after certain prescribed thresholds are achieved, the Company pays Galephar a 50% share of all amounts received, after deducting product-related expenses under licensing and distribution agreements.

 

During 2012, the Company paid an upfront fee of $100 to acquire the exclusive license and distribution rights in Canada to market the Betesil Patch.  As at September 30, 2013, certain milestones remain outstanding, including Health Canada approval and accordingly, amortization of these licensing rights has not yet begun.

 

		Product Rights			Licensing Rights			Total
As at January 1, 2012
Cost		$	6,365		$	—		$	6,365
Accumulated amortization		(3,421		)	—			(3,421		)
Net book value		$	2,944		$	—		$	2,944
For the year ended December 31, 2012
Opening net book value		$	2,944		$	—		$	2,944
Additions		671			100			771
Amortization		(1,025		)	—			(1,025		)
Net book value		$	2,590		$	100		$	2,690
As at December 31, 2012
Cost		$	7,036		$	100		$	7,136
Accumulated amortization		(4,446		)	—			(4,446		)
Net book value		$	2,590		$	100		$	2,690
For the period ended September 30, 2013
Opening net book value		$	2,590		$	100		$	2,690
Additions		—			—			—
Amortization		(831		)	—			(831		)
Net book value		$	1,759		$	100		$	1,859
As at September 30, 2013
Cost		$	7,036		$	100		$	7,136
Accumulated amortization		(5,277		)	—			(5,277		)
Net book value		$	1,759		$	100		$	1,859

 

The Company has considered indicators of impairment as of December 31, 2012 and September 30, 2013 and no indicators were identified.

 

5      ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

		As at			As at
		Sept 30, 2013			Dec 31, 2012
Trade accounts payable		$	4,881		$	1,965
Accrued liabilities		866			843
		$	5,747		$	2,808

 

 

Cipher Pharmaceuticals Inc.

Notes to Financial Statements

September 30, 2013

(in thousands of Canadian dollars, except per share amounts - unaudited)

 

6      SHARE CAPITAL

 

Authorized share capital

The authorized share capital consists of an unlimited number of preference shares, issuable in series, and an unlimited number of voting common shares.

 

Issued share capital

The following is a summary of the changes in share capital from January 1, 2012 to September 30, 2013:

 

		Number of
		common shares		Amount
		(in thousands)		$
Balance outstanding - January 1, 2012		24,316		50,172
Options exercised in 2012		5		8
Shares issued in 2012 under the share purchase plan		114		159
Balance outstanding - December 31, 2012		24,435		50,339
Reduction of stated capital (note 7)		—		(41,160	)
Shares issued in Q1 2013 under the share purchase plan		12		35
Options exercised in Q2 2013		23		26
Shares issued in Q2 2013 under the share purchase plan		14		58
Options exercised in Q3 2013		105		168
Shares issued in Q3 2013 under the share purchase plan		6		48
Balance outstanding - September 30, 2013		24,595		9,514

 

Share purchase plan - during the quarter ended September 30, 2013, 6,434 shares were issued under the Employee and Director Share Purchase Plan (25,306 in Q3 2012).  Included in share-based compensation expense is $7 ($6 in Q3 2012) which is the discount on the shares issued under the ESPP during the period.

 

Stock option plan

The following is a summary of the changes in the stock options outstanding from January 1, 2012 to September 30, 2013:

 

		Number of		Weighted average
		options		exercise price
		(in thousands)		$
Balance outstanding - January 1, 2012		1,755		2.24
Granted in 2012		200		1.18
Exercised in 2012		(11	)	0.87
Cancelled in 2012		(8	)	1.18
Expired in 2012		(150	)	1.48
Balance outstanding - December 31, 2012		1,786		2.20
Granted in Q1 2013		302		2.88
Exercised in Q2 2013		(22	)	0.66
Cancelled in Q2 2013		(1	)	1.04
Granted in Q3 2013		40		7.00
Exercised in Q3 2013		(105	)	0.85
Balance outstanding - September 30, 2013		2,000		2.49

 

At September 30, 2013, 1,363,041 options were fully vested and exercisable (1,284,966 at September 30, 2012).

 

During the nine months ended September 30, 2013, the Company issued 342,000 stock options under the employee and director stock option plan, with exercise prices of $2.88 and $7.00, 25% of which vest on either March 5 or August 6 of each year for the next four years, commencing in 2014, and expire in 2023.  Total compensation cost for these stock options is estimated to be $972, which will be recognized on a graded basis over the vesting period of the stock options.

 

The stock options were valued using the Black-Scholes option pricing model, at $2.43 and $5.92 per option, with the following assumptions. Expected volatility is based on the Company’s historical volatility, while estimated forfeitures are not considered significant.

 

Risk-free interest rate		1.80%, 2.50%
Expected life		10 years
Expected volatility		86.8%, 85.7%
Expected dividend		Nil

 

 

Cipher Pharmaceuticals Inc.

Notes to Financial Statements

September 30, 2013

(in thousands of Canadian dollars, except per share amounts - unaudited)

 

7      REDUCTION OF STATED CAPITAL

 

On May 3, 2013, by way of a special resolution of the shareholders of the Company, the legal stated capital in the common shares of the Company was reduced by $71,160 which represented the deficit of the Company as at December 31, 2012.  The Company has reclassified the Shareholders’ Equity portion of the balance sheet with a reduction in deficit by $71,160 and a corresponding reduction of Contributed Surplus by $30,000 and Share Capital by $41,160.

 

8      EXPENSES BY NATURE

 

		Nine Months Ended			Nine Months Ended
		Sept 30, 2013			Sept 30, 2012
Employees salaries and other short term benefits		$	1,976		$	1,834
Directors fees		210			210
Share-based compensation		351			168
Depreciation of property and equipment		12			16
Amortization of intangible assets		831			747
Professional and consulting fees		1,911			568
Contract sales		292			—
Contract research		5			64
Regulatory fees		—			116
Facility rent		55			57
Cost of inventory expensed		39			—
Other expenses, net of interest income		869			689
		$	6,551		$	4,469

 

9      COMPENSATION OF KEY MANAGEMENT

 

Key management includes directors and executives of the Company.  The compensation paid or payable to key management for services is shown below:

 

		Nine Months Ended			Nine Months Ended
		Sept 30, 2013			Sept 30, 2012
Salaries and short-term employee benefits, including bonuses		$	1,199		$	946
Directors fees		210			210
Share-based compensation		316			152
		$	1,725		$	1,308

 

10 EARNINGS PER SHARE

 

Earnings per share is calculated using the weighted average number of shares outstanding.  The weighted average number of shares outstanding for the three and nine month periods ended September 30, 2013 was 24,531,781 and 24,480,081 respectively (for the three and nine month periods ended September 30, 2012 - 24,399,820 and 24,368,497 respectively).

 

Diluted earnings per share is calculated using the weighted average number of shares outstanding taking into consideration the weighted average impact of dilutive securities, such as stock options.  The dilutive weighted average for the three and nine month periods ended September 30, 2013 was 25,903,335 and 25,513,735 respectively (for the three and nine month periods ended September 30, 2012 - 24,712,271 and 24,601,594 respectively).

 

11 SEGMENTED INFORMATION

 

The Company’s operations are categorized into one industry segment, being specialty pharmaceuticals.  All of the Company’s assets, including capital and intangible assets, are in Canada, while virtually all licensing revenue is derived from the United States.  Product revenue reflected in the Statements of Operations and Comprehensive Income is solely derived from Canada.