UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934
OR
☒ Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 2019
☐ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
OR
☐ Shell Company Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
OR
Commission file number 0-30752
AETERNA ZENTARIS INC.
(Exact Name of Registrant as Specified in its Charter)
Not Applicable
(Translation of Registrant’s Name into English)
Canada
(Jurisdiction of Incorporation)
315 Sigma Drive
Summerville, South Carolina, USA
29486
(Address of Principal Executive Offices)
Klaus Paulini
Telephone: +49-69-426020
E-mail: KPaulini@aezsinc.com
Weismüllerstr. 50
Frankfurt am Main, Germany
D-60314
(Name, Telephone, E-mail and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares
Name of Each Exchange on Which Registered
NASDAQ Capital Market
Toronto Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the ACT: NONE
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as at the close of the period covered by the annual report: [19,994,510] Common Shares as at
December 31, 2019.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No : ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐
No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definitions of “accelerated filer,” “large
accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP ☐ International Financial Reporting Standards as issued by the Other ☐
International Accounting Standards Board ☒
If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Basis of Presentation
General
Except where the context otherwise requires, all references in this Annual Report on Form 20-F to the “Company”, “Aeterna Zentaris”, “we”, “us”, “our”
or similar words or phrases are to Aeterna Zentaris Inc. and its subsidiaries, taken together. In this Annual Report on Form 20-F, references to “$” and
“U.S.$” are to United States (“U.S.”) dollars, references to “CAN$” are to Canadian dollars and references to “EUR” are to euros. Unless otherwise
indicated, the statistical and financial data contained in this Annual Report on Form 20-F are presented as at December 31, 2019.
All share, option and share purchase warrant as well as per share, option and share purchase warrant information presented in this Annual Report on Form
20-F have been adjusted, including proportionate adjustments being made to each option and share purchase warrant exercise price, to reflect and to give
effect to a share consolidation (or reverse stock split), on November 17, 2015, of our issued and outstanding common shares on a 100-to-1 basis (the “Share
Consolidation”). The Share Consolidation affected all shareholders, optionholders and warrantholders uniformly and thus did not materially affect any
securityholder’s percentage of ownership interest.
This Annual Report on Form 20-F also contains certain information regarding products or product candidates that may potentially compete with our
products and product candidates, and such information has been primarily derived from information made publicly available by the companies developing
such potentially competing products and product candidates and has not been independently verified by Aeterna Zentaris.
Special Note on Forward-Looking Statements
This Annual Report on Form 20-F and the documents incorporated herein by reference contain “forward-looking statements” made pursuant to the safe-
harbor provision of the U.S. Private Securities Litigation Reform Act of 1995, which reflect our current expectations regarding future events. All
statements other than statements of historical facts included in or incorporated by reference into this Annual Report on Form 20-F, under the caption “Key
Information—Risk Factors” filed with the relevant Canadian securities regulatory authorities in lieu of an annual information form and with the U.S.
Securities and Exchange Commission (“SEC”) that address activities, events or developments that we expect, believe or anticipate will or may occur in the
future are forward-looking statements. Our forward-looking statements generally include statements about our plans, objectives, strategies and prospects
regarding, among other things, our businesses, results of operations, liquidity and financial condition. In some cases, we have identified these forward-
looking statements with words like “believe,” “may,” “could,” “might,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,”
“predict,” “anticipate,” “estimate,” “approximate,” “contemplate” or “continue,” or the negative of these words or other words and terms of similar
meaning. Known and unknown risks and uncertainties could cause our actual results to differ materially from those in forward-looking statements. Such
risks and uncertainties include, but are not limited to, the following:
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our ability to raise capital and obtain financing to continue our currently planned operations;
our ability to continue to list our Common Shares on the NASDAQ;
our ability to continue as a going concern is dependent, in part, on our ability to transfer cash from Aeterna Zentaris GmbH (“AEZS
Germany”) to Aeterna Zentaris and the U.S. subsidiary and secure additional financing;
our now heavy dependence on the success of Macrilen™ (macimorelin) and related out-licensing arrangements and the continued
availability of funds and resources to successfully commercialize the product, including our heavy reliance on the success of the license
and assignment agreement with Novo Nordisk A/S (“Novo”);
our ability to enter into out-licensing, development, manufacturing, marketing and distribution agreements with other pharmaceutical
companies and keep such agreements in effect;
●
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our reliance on third parties for the manufacturing and commercialization of Macrilen™ (macimorelin);
potential disputes with third parties, leading to delays in or termination of the manufacturing, development, out-licensing or
commercialization of our product candidates, or resulting in significant litigation or arbitration;
uncertainties related to the regulatory process;
unforeseen global instability, including the instability due to the global pandemic of the novel coronavirus;
our ability to efficiently commercialize or out-license Macrilen™ (macimorelin);
our reliance on the success of the pediatric clinical trial in the European Union (“E.U.”) and U.S. for Macrilen™ (macimorelin);
the degree of market acceptance of Macrilen™ (macimorelin);
our ability to obtain necessary approvals from the relevant regulatory authorities to enable us to use the desired brand names for our
product;
our ability to successfully negotiate pricing and reimbursement in key markets in the E.U. for Macrilen™ (macimorelin);
any evaluation of potential strategic alternatives to maximize potential future growth and shareholder value may not result in any such
alternative being pursued, and even if pursued, may not result in the anticipated benefits;
our ability to take advantage of business opportunities in the pharmaceutical industry;
our ability to protect our intellectual property; and
the potential of liability arising from shareholder lawsuits and general changes in economic conditions.
More detailed information about these and other factors is included under “Risk Factors” in this Annual Report on Form 20-F and in other documents
incorporated herein by reference. Many of these factors are beyond our control. Future events may vary substantially from what we currently foresee. You
should not place undue reliance on such forward-looking statements. We disavow and are under no obligation to update or alter such forward-looking
statements whether as a result of new information, future results, events, developments or otherwise, unless required to do so by a governmental authority
or applicable law. We advise you, however, to review any further disclosures we make on related subjects in our reports on Form 6-K filed or furnished to
the SEC.
TABLE OF CONTENTS
GENERAL INFORMATION
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Identity of Directors, Senior Management and Advisers
A. Directors and senior management
B. Advisers
C. Auditors
Offer Statistics and Expected Timetable
A. Offer statistics
B. Method and expected timetable
Key Information
A. Selected financial data
B. Capitalization and indebtedness
C. Reasons for the offer and use of proceeds
D. Risk factors
Information on the Company
A. History and development of the Company
B. Business overview
C. Organizational structure
D. Property, plants and equipment
Unresolved Staff Comments
Operating and Financial Review and Prospects
A. Operating results
B. Liquidity, cash flows and capital resources
C. Research and development, patents and licenses, etc.
D. Trend information
E. Off-balance sheet arrangements
F. Tabular disclosure of contractual obligations
Directors, Senior Management and Employees
A. Directors and senior management
B. Compensation
C. Board practices
D. Employees
E. Share ownership
Major Shareholders and Related Party Transactions
A. Major shareholders
B. Related party transactions
C. Interests of experts and counsel
Financial Information
A. Consolidated statements and other financial information
B. Significant changes
The Offer and Listing
A. Offer and listing details
B. Plan of distribution
C. Markets
D. Selling shareholders
E. Dilution
F. Expenses of the issue
Page
Responsibility
6
6
6
6
6
6
8
8
8
29
30
41
42
42
46
52
57
57
58
58
58
60
74
75
76
76
77
77
77
77
78
78
78
78
78
78
Additional Information
A. Share capital
B. Memorandum and articles of association
C. Material contracts
D. Exchange controls
E. Taxation
F. Dividends and paying agents
G. Statement by experts
H. Documents on display
I. Subsidiary information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other than Equity Securities
A. Debt securities
B. Warrants and rights
C. Other securities
D. American depositary shares
Item 10.
Item 11.
Item 12.
PART II
Defaults, Dividend Arrearages and Delinquencies
Item 13.
Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 14.
Controls and Procedures
Item 15.
Audit Committee Financial Expert
Item 16A.
Code of Ethics
Item 16B.
Principal Accountant Fees and Services
Item 16C.
Exemptions from the Listing Standards for Audit Committees
Item 16D.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16E.
Change in Registrant’s Certifying Accountant
Item 16F.
Corporate Governance
Item 16G.
Item 16H. Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
78
78
89
92
92
100
100
100
100
100
102
102
102
102
102
102
103
103
104
104
105
105
105
105
105
106
106
107
Item 1.
Identity of Directors, Senior Management and Advisers
A.
Directors and senior management
PART I
Not applicable.
B.
Advisers
Not applicable.
C.
Auditors
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
A.
Offer statistics
Not applicable.
B.
Method and expected timetable
Not applicable.
Item 3.
Key Information
A.
Selected financial data
The consolidated statement of comprehensive (loss) income information set forth in this Item 3.A. with respect to the years ended December 31, 2019,
2018 and 2017 and the consolidated statement of financial position information as at December 31, 2019 and 2018 have been derived from the audited
consolidated financial statements set forth in Item 18, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”),
as issued by the International Accounting Standards Board (“IASB”). The consolidated statement of comprehensive income (loss) information with respect
to the years ended December 31, 2016 and 2015 and the consolidated statement of financial position information as at December 31, 2017, 2016 and 2015
set forth in this Item 3.A. have been derived from our previous consolidated financial statements not included herein, and have also been prepared in
accordance with IFRS, as issued by the IASB. The selected financial data should be read in conjunction with our audited consolidated financial statements
and the related notes included elsewhere in this Annual Report on Form 20-F, as well as “Item 5. – Operating and Financial Review and Prospects” of this
Annual Report on Form 20-F.
The Company has not declared or paid any dividends per share during the periods covered by the selected financial data.
6
Consolidated Statements of Comprehensive (Loss) Income Information
(in thousands of U.S. dollars, except share and per share data)
Derived from consolidated audited financial statements prepared in accordance with IFRS, as issued by the IASB
Revenues
License fees
Product sales
Royalty income
Sales commission
Supply chain
Cost of sales
Research and development costs
General and administrative expenses
Selling expenses
Restructuring costs
Impairment of right of use asset
Write-off of other current assets
(Loss) income from operations
Settlements
Gain (loss) due to changes in foreign currency exchange
rates
Change in fair value of warrant liability
Warrant exercise inducement fee
Other finance (costs) income
Net finance income (costs)
(Loss) income before income taxes
Income tax recovery (expense)
Net (loss) income from operations
Net income from discontinued operations
Net (loss) income
Other comprehensive (loss) income:
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation adjustments
Items that will not be reclassified to profit or loss:
Actuarial gain (loss) on defined benefit plans
Comprehensive (loss) income
Basic net (loss) income per share from continuing
operations(1)
Diluted net (loss) income per share from continuing
operations(1)
Net income per share (basic and diluted) from
discontinued operations1
Net (loss) income per share (basic)1
Net (loss) income per share (diluted)1
Weighted average number of shares outstanding:
Basic
Diluted
2019
$
2018
$
December 31,
2017
$
2016
$
2015
$
74
129
45
—
284
532
410
1,837
6,615
1,214
507
22
169
10,774
(10,242)
—
87
4,518
—
(593)
4,012
(6,230)
188
(6,042)
—
(6,042)
24,325
2,167
184
110
95
26,881
2,104
2,932
8,894
3,109
—
—
—
17,039
9,842
(1,400)
656
263
—
278
1,197
9,639
(5,452)
4,187
—
4,187
458
—
—
—
465
923
—
10,704
8,198
5,095
—
—
—
23,997
(23,074)
—
502
2,222
—
75
2,799
(20,275)
3,479
(16,796)
—
(16,796)
497
—
—
—
414
911
—
16,495
7,147
6,745
—
—
—
30,387
(29,476)
—
(70)
4,437
—
150
4,517
(24,959)
—
(24,959)
—
(24,959)
248
—
—
—
297
545
—
17,234
11,308
6,887
—
—
—
35,429
(34,884)
—
(1,767)
(10,956
(2,926)
305
(15,344)
(50,228)
—
(50,228)
85
(50,143)
83
(260)
(1,430)
569
1,509
(1,068)
(7,027)
193
4,120
694
(17,532)
(1,479)
(25,869)
844
(47,790)
(0.35)
0.25
(1.12)
(2.41)
(18.17)
(0.35)
0.24
(1.12)
(2.41)
(18.17)
—
(0.35)
(0.35)
—
0.25
0.24
—
(1.12)
(1.12)
—
(2.41)
(2.41)
0.03
(18.14)
(18.14)
17,494,472
17,494,472
16,440,760
17,034,812
14,958,704
14,958,704
10,348,879
10,348,879
2,763,603
2,763,603
1
Adjusted to reflect the November 17, 2015 100-to-1 Share Consolidation
7
Consolidated Statement of Financial Position Information
(in thousands of U.S. dollars)
Derived from consolidated financial statements prepared in accordance with IFRS, as issued by the IASB
2019
$
7,838
364
19,981
2,255
224,528
(2,463)
2018
$
As at December 31,
2017
$
2016
$
14,512
418
25,011
3,634
222,335
1,907
7,780
381
22,195
3,897
222,335
(2,783)
21,999
496
31,659
6,854
213,980
6,212
2015
$
41,450
255
51,498
10,891
204,596
21,615
Cash and cash equivalents
Restricted cash equivalents
Total assets
Warrant liability (current and non-current portion)
Share capital
Shareholders’ (deficiency) equity
B.
Capitalization and indebtedness
Not applicable.
C.
Reasons for the offer and use of proceeds
Not applicable.
D.
Risk factors
An investment in our securities involves a high degree of risk. You should carefully consider the risks described below, together with all of the other
information included in this Annual Report, before making an investment decision. If any of the following risks actually occurs, our business, prospects,
financial condition or results of operations could be materially, adversely affected by any of these risks. Additional risks not presently known to us or that
we currently deem immaterial may also impair our business operations. The trading price of our securities could decline due to any of these risks, and you
may lose all or part of your investment. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks mentioned below.
Forward-looking statements included in this Annual Report are based on information available to us on the date hereof, and all forward-looking statements
in the documents incorporated by reference are based on information available to us as of the date of each such document. We disavow and are under no
obligation to update or alter such forward-looking statements whether as a result of new information, future events or otherwise, other than as required by
applicable securities legislation.
8
Risks Relating to Us and Our Business
We may not be able to continue as a going concern if we do not obtain cash from AEZS Germany to fund our North American operations, and we do
not obtain additional financing.
We have incurred, and expect to continue to incur, substantial expenses in our efforts to develop Macrilen™ (macimorelin). Consequently, we have
incurred operating losses and negative cash flow from operations historically and in each of the last several years except for the year ended December 31,
2018, when we earned revenue from the sale of a license for the adult indication of Macrilen™ (macimorelin) in the U.S. and Canada.
The ability to realize our assets and meet our obligations as they come due is dependent on earning sufficient revenues under the license and assignment
agreement with a subsidiary of Novo (the “License Agreement”), monetizing commercial opportunities for Macrilen™ (macimorelin) in the rest of the
world (“ROW”), realizing other monetizing transactions and raising additional sources of funding, the outcome of which cannot be predicted at this time.
The revenue provided under the License Agreement was $45,000 for the year ended December 31, 2019. Furthermore, the Company had cash of
$7,838,000 for the year ended December 31, 2019. In September 2019, the Company closed an equity financing which provided approximately $4,193,000
in net cash proceeds (“September 2019 Financing”). Subsequent to 2019, in February 2020, the Company closed an equity financing which provided
approximately $3,900,000 in net cash proceeds (“February 2020 Financing”).
Aeterna Zentaris is a holding company and a substantial portion of our non-cash assets is the share capital of our subsidiaries. Our principal operating
subsidiary, AEZS Germany, holds most of our intellectual property rights and is also the counter-party for revenue earned under the License Agreement. In
the event that Aeterna Zentaris is unable to obtain additional funding from third party sources, it will require cash from AEZS Germany to fund its North
American operations. If and when current and medium term liabilities of AEZS Germany exceed the values ascribed to AEZS Germany’s assets, it may no
longer be possible under applicable German solvency laws for AEZS Germany’s operations to continue. The Company has some discretion to manage
research and development costs, administrative expenses and capital expenditures in order to maintain its cash liquidity; however, the Company will need
to conclude agreement(s) for licensing or selling the European or worldwide rights to Macrilen™ (macimorelin) and, if necessary, obtain further financing
in order to continue its currently planned operations. Management has assessed the Company’s ability to continue as a going concern and concluded that
additional capital will be required. There can be no assurance that the Company will be able to execute license or purchase agreements or to obtain equity
or debt financing, or on terms acceptable to it. Factors within and outside the Company’s control could have a significant bearing on its ability to obtain
additional financing. As a result, management has determined that there are material uncertainties that may cast significant doubt upon the Company’s
ability to continue as a going concern. For additional discussion of risks related to licensing and selling of Macrilen™ (macimorelin), see risk factor titled
“If we are unable to successfully commercialize or out-license Macrilen™ (macimorelin), or if we experience significant delays in doing so, our business
would be materially harmed, and the future and viability of the Company could be imperiled” below.
In the event we use up the proceeds from recent third party financings and are not able to transfer cash from AEZS Germany to fund our North American
operations and/or secure additional funding, we may be forced to curtail operations, cease operations altogether or file for bankruptcy.
The economic effects of a pandemic, epidemic or outbreak of an infectious disease could adversely affect our operations or the market price of our
Common Shares.
Public health crises such as pandemics, epidemics or similar outbreaks could adversely impact our operations or the market price of our Common Shares.
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China and has reached multiple other countries,
resulting in government-imposed quarantines, travel restrictions, school closures and other significant restrictions on business operations imposed by
governmental authorities in North America, Europe and worldwide. On January 30, 2020, the World Health Organization declared the outbreak of the
COVID-19 a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II
declared a public health emergency for the U.S. to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020, the World
Health Organization characterized the outbreak as a “pandemic”. The extent to which the COVID-19 impacts our operations or market price of our
Common Shares will depend on future developments, which are highly uncertain and cannot be predicted with confidence, either internationally or within
the U.S., Canada or Germany, including the duration of the outbreak, new information that may emerge concerning the severity of the COVID-19 and the
actions to contain the virus or treat its impact, among others. COVID-19, however, has already resulted in significant volatility in the world and the national
trading markets.
9
The spread of COVID-19 may impact our operations, including the potential interruption of our clinical trial activities and our supply chain. For example,
the COVID-19 outbreak may delay enrollment in our pediatric clinical trial due to prioritization of hospital resources toward the outbreak, and some
patients may be unwilling to enroll in our trials or be unable to comply with clinical trial protocols if quarantines impede patient movement or interrupt
healthcare services, which would delay our ability to conduct clinical trials or release clinical trial results and could delay our ability to obtain regulatory
approval and commercialize our product candidates. The spread of an infectious disease, including COVID-19, may also result in the inability of our
suppliers to deliver components or raw materials on a timely basis or at all. In addition, hospitals may reduce staffing and reduce or postpone certain
treatments in response to the spread of an infectious disease. Such events may result in a period of business disruption and, in reduced operations, doctors
or medical providers may be unwilling to participate in our clinical trials, any of which could materially affect our business, financial condition or results of
operations. The significant spread of COVID-19 within the U.S., Canada or Germany resulted in a widespread health crisis and has had adverse effect on
the national economies generally, the markets that we serve, our operations and the market price of our Common Shares.
Investments in biopharmaceutical companies are generally considered to be speculative in nature.
The prospects for companies operating in the biopharmaceutical industry are uncertain, given the very nature of the industry, and, accordingly, investments
in biopharmaceutical companies should be considered to be speculative assets.
If we are unable to successfully commercialize or out-license Macrilen™ (macimorelin), or if we experience significant delays in doing so, our
business would be materially harmed, and the future and viability of the Company could be imperiled.
Our principal focus is on the licensing and development of Macrilen™ (macimorelin) and we currently do not have any other product. We are a party to the
License Agreement to carry out development, manufacturing, registration and commercialization of Macrilen™ (macimorelin) in the U.S. and Canada. We
continue to explore licensing opportunities worldwide.
The commercial success of Macrilen™ (macimorelin) depends on several factors, including, but not limited to, the following:
● receipt of approvals from foreign regulatory authorities;
● successfully negotiating pricing and reimbursement in key markets in the E.U. for macimorelin;
● successfully contracting with qualified third-party suppliers to manufacture macimorelin;
● developing appropriate distribution and marketing infrastructure and arrangements for our product;
● launching and growing commercial sales of the product;
● out-licensing macimorelin to third parties; and
● acceptance of the product in the medical community, among patients and with third-party payers.
If we are unable to successfully achieve any of these factors, our business, financial condition and results of operations may be materially, adversely
affected.
10
Our revenues and expenses may fluctuate significantly, and any failure to meet financial expectations may disappoint securities analysts or investors
and result in a decline in the price or the value of our Common Shares or other securities.
We have a history of operating losses. Our revenues and expenses have fluctuated in the past and may continue to do so in the future. These fluctuations
could cause our share price of Common Shares or the value of our other securities to decline. Some of the factors that could cause our revenues and
expenses to fluctuate include, but are not limited to, the following:
● the timing and willingness of any current or future collaborators to invest the resources necessary to commercialize Macrilen™ (macimorelin);
● not obtaining necessary regulatory approvals from the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency (“EMA”), the
European Commission (“EC”) or other agencies that may delay or prevent us from obtaining approval of a pediatric indication for Macrilen™
(macimorelin), which may affect the share price of our Common Shares;
● the timing of regulatory submissions and approvals;
● the nature and timing of licensing fee revenues;
● the outcome of future litigation;
● foreign currency fluctuations;
● the effects of the recent outbreak of COVID-19, including the effects of intensified efforts to contain the spread of the virus, which has, to date,
included, among other things, quarantines and travel restrictions.
● the timing of the achievement and the receipt of milestone payments from current or future licensing partners; and
● failure to enter into new or the expiration or termination of current agreements with suppliers who manufacture Macrilen™ (macimorelin).
Due to fluctuations in our revenues and expenses, we believe that period-to-period comparisons of our results of operations are not necessarily indicative of
our future performance. It is possible that in some future periods, our revenues and expenses will be above or below the expectations of securities analysts
or investors. In this case, the share price of our Common Shares and the value of our other securities could fluctuate significantly or decline.
If we are unable to successfully complete the pediatric clinical trial program for Macrilen™ (macimorelin), or if such clinical trial takes longer to
complete than we project, our ability to execute any related business strategy will be adversely affected.
If we experience delays in identifying and contracting with sites and/or in-patient enrollment in our pediatric clinical trial program for Macrilen™
(macimorelin), we may incur additional costs and delays in our development programs, and may not be able to complete our clinical trials on a cost-
effective or timely basis. In addition, conducting multi-national studies adds another level of complexity and risk as we are subject to events affecting
countries other than the U.S. and Canada. Moreover, negative or inconclusive results from the clinical trials we conduct or adverse medical events could
cause us to have to repeat or terminate the clinical trials. Furthermore, children have different metabolic issues than adults. Accordingly, we may not be
able to complete the pediatric clinical trial within an acceptable time-frame, if at all. If we or our contract research organization (a “CRO”) have difficulty
enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing clinical trials.
Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and must, among other
requirements:
● meet the requirements of these authorities from multiple countries and jurisdictions and their related statutes, regulations and guidance;
● meet the requirements for informed consent;
● meet the requirements for institutional review boards; and
● meet the requirements for good clinical practices.
11
We are currently dependent on certain strategic relationships with third parties for the development, manufacturing and licensing of Macrilen™
(macimorelin) and we may enter into future collaborations for the development, manufacturing and licensing of Macrilen™ (macimorelin).
Our arrangements with third parties may not provide us with the benefits we expect and may expose us to a number of risks.
Currently, we are dependent on Novo to commercialize Macrilen™ (macimorelin) in the U.S. and Canada. Most of our potential revenue consists of
contingent payments, including milestones and royalties on the sale of Macrilen™ (macimorelin). The milestone and royalty revenue that we may receive
under this collaboration will depend upon Novo’s ability to successfully introduce, market and sell Macrilen™ (macimorelin) in the U.S. If Novo does not
devote sufficient time and resources to its collaboration arrangement with us, we may not realize the potential commercial benefits of the arrangement, and
our results of operations may be materially, adversely affected.
Our reliance on relationships with Novo and other potential third parties poses a number of risks. We may not realize the contemplated benefits of such
agreements nor can we be certain that any of these parties will fulfill their obligations in a manner which maximizes our revenue. These arrangements may
also require us to transfer certain material rights to third parties. These agreements create certain additional risks. The occurrence of any of the following or
other events may delay or impair commercialization of Macrilen™ (macimorelin):
● in certain circumstances, third parties may assign their rights and obligations under these agreements to other third parties without our consent or
approval;
● the third parties may cease to conduct business for financial or other reasons;
● we may not be able to renew such agreements;
● the third parties may not properly maintain or defend certain intellectual property rights that may be important to the commercialization of Macrilen™
(macimorelin);
● the third parties may encounter conflicts of interest, changes in business strategy or other issues which could adversely affect their willingness or
ability to fulfill their obligations to us (for example, pharmaceutical companies historically have re-evaluated their priorities following mergers and
consolidations, which have been common in this industry);
● delays in, or failures to achieve, scale-up to commercial quantities, or changes to current raw material suppliers or product manufacturers (whether the
change is attributable to us or the supplier or manufacturer) could delay clinical studies, regulatory submissions and commercialization of Macrilen™
(macimorelin); and
● disputes may arise between us and the third parties that could result in the delay or termination of the manufacturing or commercialization of
Macrilen™ (macimorelin), resulting in litigation or arbitration that could be time-consuming and expensive, or causing the third parties to act in their
own self-interest and not in our interest or those of our shareholders.
In addition, the third parties can terminate our agreements with them for a number of reasons based on the terms of the individual agreements that we have
entered into with them. If one or more of these agreements were to be terminated, we would be required to devote additional resources to manufacturing
and commercializing Macrilen™ (macimorelin), which would likely cause a drop in share price of our Common Shares.
We may be unsuccessful in consummating further out-licensing arrangements for MacrilenTM (macimorelin) on favorable terms and conditions, or we
may be significantly delayed in doing so.
As part of our product development and commercialization strategy, we are evaluating out-licensing opportunities for macimorelin in addition to the
License Agreement. If we elect to collaborate with third parties in respect of macimorelin, we may not be able to negotiate a collaborative arrangement for
macimorelin on favorable terms and conditions, if at all. Should any partner fail to successfully commercialize macimorelin, our business, financial
condition and results of operations may be adversely affected.
We may require significant additional financing, and we may not have access to sufficient capital.
We may require significant additional capital to fund our commercialization efforts and may require additional capital to pursue planned clinical trials and
regulatory approvals. Although we have capital from the License Agreement, we do not anticipate generating significant revenues from operations in the
near future other than from the License Agreement. Moreover, we currently have no committed sources of capital. Please see the Risk Factor entitled “We
may not be able to continue as a going concern if we do not obtain cash from AEZS Germany to fund our North American operations and we do not obtain
additional financing.”
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We may attempt to raise additional funds through public or private financings, collaborations with other pharmaceutical companies or from other sources,
including, without limitation, through at-the-market offerings and issuances of securities. Additional funding may not be available on terms that are
acceptable to us. If adequate funding is not available to us on reasonable terms, we may need to delay, reduce or eliminate our product development
programs or obtain funds on terms less favorable than we would otherwise accept. To the extent that additional capital is raised through the sale of equity
securities or securities convertible into or exchangeable or exercisable for equity securities, the issuance of those securities would result in dilution to our
shareholders. Moreover, the incurrence of debt financing or the issuance of dividend-paying preferred shares, could result in a substantial portion of our
future operating cash flow, if any, being dedicated to the payment of principal and interest on such indebtedness or the payment of dividends on such
preferred shares and could impose restrictions on our operations and on our ability to make certain expenditures and/or to incur additional indebtedness,
which could render us more vulnerable to competitive pressures and economic downturns.
Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including, but not limited to,
the following:
● the duration of changes to and results of our clinical trials for any future products going forward;
● unexpected delays or developments in seeking regulatory approvals;
● the time and cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
● unexpected developments encountered in implementing our business development and commercialization strategies;
● the potential addition of commercialized products to our portfolio;
● the outcome of future litigation; and
● further arrangements, if any, with collaborators.
In addition, global economic and market conditions, as well as future developments in the credit and capital markets, may make it even more difficult for us
to raise additional financing in the future.
We are and will be subject to stringent ongoing government regulation for our products and our product candidates, even if we obtain regulatory
approvals for the latter.
The manufacturing, marketing and sale of Macrilen™ (macimorelin) are and will be subject to strict and ongoing regulation, even with marketing approval
by the FDA and the EC for Macrilen™ (macimorelin). Compliance with such regulation will be expensive and consume substantial financial and
management resources. For example, the EC approval for macimorelin was conditioned on our agreement to conduct post-marketing follow-up studies to
monitor the safety or efficacy of the product. In addition, as clinical experience with a drug expands after approval because the drug is used by a greater
number and more diverse group of patients than during clinical trials, side effects or other problems may be observed after approval that were not observed
or anticipated during pre-approval clinical trials. In such a case, a regulatory authority could restrict the indications for which the product may be sold or
revoke the product’s regulatory approval.
We and our contract manufacturers will be required to comply with applicable Current Good Manufacturing Practice (cGMP) regulations for the
manufacture of our current or future products and other regulations. These regulations include requirements relating to quality assurance, as well as the
corresponding maintenance of rigorous records and documentation. Manufacturing facilities must be approved before we can use them in the commercial
manufacturing of a product and are subject to subsequent periodic inspection by regulatory authorities. In addition, material changes in the methods of
manufacturing or changes in the suppliers of raw materials are subject to further regulatory review and approval.
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If we, or if any future marketing collaborators or contract manufacturers, fail to comply with applicable regulatory requirements, we may be subject to
sanctions including fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil
penalties, suspension or withdrawals of previously granted regulatory approvals, warning or untitled letters, refusal to approve pending applications for
marketing approval of new products or of supplements to approved applications, complete withdrawal of a marketing application, exclusion from
government healthcare programs, import or export bans or restrictions, and/or criminal prosecution and penalties. Any of these penalties could delay or
prevent the promotion, marketing or sale of a product.
Even with marketing approval for MacrilenTM (macimorelin), such product approval could be subject to restrictions or withdrawals. Regulatory
requirements are subject to change.
On December 20, 2017, the FDA granted marketing approval in the U.S. for Macrilen™ (macimorelin) to be used in the diagnosis of patients with adult
growth hormone deficiency (“AGHD”), and on January 16, 2019, the EC granted marketing approval in Europe for macimorelin for the diagnosis of
AGHD. Regulatory authorities generally approve products for specified indications. If an approval is for a limited indication, this limitation reduces the
size of the potential market for that product. Product approvals, once granted, are subject to continual review and periodic inspections by regulatory
authorities. Our operations and practices are subject to regulation and scrutiny by the U.S. government, as well as governments of any other countries in
which we do business or conduct activities. Later discovery of previously unknown problems or safety issues and/or failure to comply with domestic or
foreign laws, knowingly or unknowingly, can result in various adverse consequences, including, among other things, a possible delay in the approval or
refusal to approve a product, warning or untitled letters, fines, injunctions, civil penalties, recalls or seizures of products and related publicity requirements,
total or partial suspension of production, import or export bans or restrictions, refusal of the government to renew marketing applications, complete
withdrawal of a marketing application, criminal prosecution and penalties, suspension or withdrawals of previously granted regulatory approvals,
withdrawal of an approved product from the market and/or exclusion from government healthcare programs. Such regulatory enforcement could have a
direct and negative impact on the product for which approval is granted, but also could have a negative impact on the approval of any pending applications
for marketing approval of new drugs or supplements to approved applications.
Because we operate in a highly regulated industry, regulatory authorities could take enforcement action against us in connection with our licensees’ or
collaborators’ businesses or marketing activities for various reasons.
From time to time, new legislation is passed into law that could significantly change the statutory provisions governing the approval, manufacturing and
marketing of products regulated by the FDA, the EC and other health authorities. In addition, regulations and guidance are often revised or reinterpreted by
health agencies in ways that may significantly affect our business. It is impossible to predict whether further legislative changes will be enacted, or whether
regulations, guidance, or interpretations will change, and what the impact of such changes, if any, may be.
Healthcare reform measures could hinder or prevent the commercial success of a product and adversely affect our business.
The business prospects and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party
payers to contain or reduce the costs of healthcare. The U.S. government and other governments have shown significant interest in pursuing healthcare
reform and reducing healthcare costs. Any government-adopted reform measures could cause significant pressure on the pricing of healthcare products and
services, including Macrilen™ (macimorelin), both in the U.S. and internationally, as well as the amount of reimbursement available from governmental
agencies and other third-party payers. If reimbursement for Macrilen™ (macimorelin) is substantially less than we expect, our revenue prospects could be
materially and adversely impacted.
In the U.S. and in other jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed
at changing the healthcare system, such as proposals relating to the pricing of healthcare products and services in the U.S. or internationally, the
reimportation of drugs into the U.S. from other countries (where they are then sold at a lower price), and the amount of reimbursement available from
governmental agencies or other third-party payers. Furthermore, the pricing of pharmaceutical products, in general, and specialty drugs, in particular, has
been a topic of concern in the U.S. Congress, where hearings on the topic have been held, and has been a topic of speeches given by political figures,
including President Donald Trump. Additionally, in the U.S., individual states have also passed legislation and proposed bills that are aimed at drug pricing
transparency, which will likely impact drug pricing. There can be no assurance as to how this scrutiny on pricing of pharmaceutical products will impact
future pricing of Macrilen™ (macimorelin).
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The Patient Protection and Affordable Care Act and the Healthcare and Education Affordability Reconciliation Act of 2010 (collectively, the “ACA”) has
had far-reaching consequences for most healthcare companies, including specialty biopharmaceutical companies like us. The future of the ACA is,
however, uncertain. Since January 2017, the U.S. Congress has proposed various bills to revise the ACA. In addition, President Donald Trump has
suggested similar action and enacted Executive Orders to curtail the ACA and its impact on healthcare in the U.S. In addition, on December 18, 2019, the
5th Circuit of the U.S. ruled that the individual mandate in the ACA is unconstitutional, and sent the case back to the applicable District Court to determine
whether the entire law is invalid or if some parts of the ACA can survive. We cannot predict the ultimate content, timing or effect of any healthcare reform
legislation, or potential legislation, regulation, judicial review and orders, or their impact on us.
In addition, the Food and Drug Administration Amendments Act of 2007 gives the FDA enhanced post-market authority, including the authority to require
post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies
approved by the FDA. The FDA’s exercise of this authority may result in delays or increased costs during the period of product development, clinical trials
and regulatory review and approval, which may also increase costs related to complying with new post-approval regulatory requirements, and increase
potential FDA restrictions on the sale or distribution of approved products.
If we or our licensees market products or interact with health care practitioners in a manner that violates healthcare fraud or abuse laws, we or our
licensees may be subject to civil or criminal penalties, including exclusion from participation in government healthcare programs.
As a pharmaceutical company, even though we do not provide healthcare services or receive payments directly from or bill directly to Medicare, Medicaid
or other national or third-party payers for our current product, U.S. federal and state healthcare laws and regulations, as well as certain E.U. regulatory and
government agencies, pertaining to fraud or abuse are and will be applicable to our business. We and our licensees are subject to healthcare fraud and abuse
regulation by E.U. regulatory and government agencies in the countries where we may seek marketing access, and the U.S. federal government and the
states in which we conduct our business.
The laws that may affect our or that of our licensee’s ability to operate include the federal healthcare program anti-kickback statute, which prohibits, among
other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce, or in return for, the purchase, lease or order, or
arrangement for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed
healthcare programs. This statute applies to arrangements between pharmaceutical manufacturers and prescribers, purchasers and formulary managers.
Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities, the exceptions and safe harbors are
drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they
do not qualify for an exception or a safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government,
or knowingly making, or causing to be made, a false statement to get a false claim paid. Pharmaceutical companies have been prosecuted under these laws
for a variety of alleged promotional and marketing activities, such as providing free product to customers with the expectation that the customers would bill
federal programs for the product, reporting to pricing services inflated average wholesale prices that were then used by federal programs to set
reimbursement rates, engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered off-label uses and submitting inflated
best price information to the Medicaid Drug Rebate Program.
The Health Insurance Portability and Accountability Act of 1996 also created prohibitions against healthcare fraud and false statements relating to
healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including
private payers. The false statements statute immediately noted above prohibits knowingly and willfully falsifying, concealing or covering up a material fact
or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
15
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. The ACA, through the Physician
Payment Sunshine Act of 2010, imposed new requirements on manufacturers of drugs, devices, biologics and medical supplies for which payment is
available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare
and Medicaid Services (“CMS”) information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists,
optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and group purchasing organizations to report annually to
CMS ownership and investment interests held by physicians (as defined above) and their immediate family members and payments or other “transfers of
value” to such physician owners and their immediate family members. Manufacturers are required to report such data to the government by the
90th calendar day of each year.
The majority of states also have statutes or regulations similar to these federal laws, which apply to items and services reimbursed under Medicaid and
other state programs, or, in several states, apply regardless of the payer. In addition, some states have laws that require pharmaceutical companies to adopt
comprehensive compliance programs. For example, under California law, pharmaceutical companies must comply with both the April 2003 Office of
Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and the PhRMA Code on Interactions with Healthcare Professionals,
as amended. Certain states also mandate the tracking and reporting of gifts, compensation, and other remuneration paid by us to physicians and other
healthcare providers.
Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated.
Any action against us or our licensees for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses, cause reputational harm and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining
compliance with E.U. government and regulatory agencies and applicable U.S. federal and state laws may prove costly.
Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge
under one or more of such laws. The ACA also made several important changes to the federal anti-kickback statute, false claims laws and healthcare fraud
statute by weakening the intent requirement under the anti-kickback and healthcare fraud statutes that may make it easier for the government or
whistleblowers to charge such fraud and abuse violations. A person or entity no longer needs to have actual knowledge of this statute or specific intent to
violate it. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal
anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. In addition, the ACA increases penalties for fraud and
abuse violations. If our past, present or future operations are found to be in violation of any of the laws described above or other similar governmental
regulations to which we are subject, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion
from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, any of which could
adversely affect our ability to operate our business and negatively impact our financial results.
If Macrilen™ (macimorelin) does not gain market acceptance, we may be unable to generate significant revenues.
Market acceptance of Macrilen™ (macimorelin) depends on a number of factors, including, but not limited to, the following:
● demonstration of clinical efficacy and safety;
● the prevalence and severity of any adverse side effects;
● limitations or warnings contained in the product’s approved labeling;
● availability of alternative treatments or tests for the indications we target;
● the advantages and disadvantages of Macrilen™ (macimorelin) relative to current or alternative treatments and tests;
● the availability of acceptable pricing and adequate third-party reimbursement; and
● the effectiveness of marketing and distribution methods for Macrilen™ (macimorelin).
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If Macrilen™ (macimorelin) does not gain market acceptance among physicians, patients, healthcare payers and others in the medical community, who
may not accept or utilize Macrilen™ (macimorelin), our ability to generate significant revenues from Macrilen™ (macimorelin) would be limited, and our
financial condition could be materially, adversely affected. In addition, if we fail to further penetrate our core markets and existing geographic markets or to
successfully expand our business into new markets, the growth in sales of Macrilen™ (macimorelin), 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 is subject to numerous factors, many of which are beyond our control. Macrilen™ (macimorelin), if
successfully commercialized, may compete with a number of drugs, therapies, products and tests currently manufactured and marketed by major
pharmaceutical and other biotechnology companies. Macrilen™ (macimorelin) may also compete with new products currently under development by
others or with products which may be less expensive than Macrilen™ (macimorelin). There can be no assurance 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 and would likely cause a drop in the share price of our Common Shares.
We may expend our limited resources to pursue a particular product or indication and fail to capitalize on other products or indications for which there
may be a greater likelihood of success.
Because we have limited financial and managerial resources, we are currently focusing our efforts on Macrilen™ (macimorelin), and we are doing so for
specific indications. As a result, we may forego or delay pursuit of opportunities for other potential indications for Macrilen™ (macimorelin), which there
may be a greater likelihood of success or may prove to have greater commercial potential. Research programs to identify new product candidates or pursue
alternative indications for Macrilen™ (macimorelin) require substantial technical, financial and human resources. These activities – if pursued – may
initially show promise in identifying potential product candidates or indications, yet fail to yield product candidates or indications for further clinical
development.
We may not achieve our projected development goals in the time-frames we announce and expect.
We may set goals and make public statements regarding the timing of the accomplishment of objectives material to our success, such as the
commencement, enrollment and anticipated completion of clinical trials, anticipated regulatory submission and approval dates and time of product launch.
The actual timing of these events can vary dramatically due to factors such as delays or failures in any clinical trials, the uncertainties inherent in the
regulatory approval process and delays in achieving manufacturing or marketing arrangements sufficient to commercialize Macrilen™ (macimorelin).
There can be no assurance that we will make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our
schedule for launching of Macrilen™ (macimorelin) outside of the U.S. If we fail to achieve one or more of these milestones as planned, the share price of
our Common Shares would likely decline.
If we fail to obtain acceptable prices or adequate reimbursement for Macrilen™ (macimorelin), our ability to generate revenues will be diminished.
Our ability or that of our licensee(s) to successfully commercialize Macrilen™ (macimorelin) will depend significantly on our or their ability to obtain
acceptable prices and the availability of reimbursement to the patient from third-party payers, such as governmental and private insurance plans. These
third-party payers frequently require companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices
charged for pharmaceuticals and other medical products. Macrilen™ (macimorelin) may not be considered cost-effective, and reimbursement to the patient
may not be available or sufficient to allow us or our licensee(s) to sell our products on a competitive basis. It may not be possible to negotiate favorable
reimbursement rates for Macrilen™ (macimorelin). Adverse pricing and reimbursement conditions would also likely diminish our ability to induce third
parties to in-license Macrilen™ (macimorelin).
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In addition, the continuing efforts of third-party payers to contain or reduce the costs of healthcare through various means may limit our commercial
opportunity and reduce any associated revenue and profits. We expect that proposals to implement similar government controls will continue. The pricing
of pharmaceutical products, in general, and specialty drugs, in particular, has been a topic of concern in the U.S. Congress, where hearings on the topic
have been held, and has been a topic of speeches given by political figures, including President Donald Trump. Specifically, there have been several recent
U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between
pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Furthermore, there is drug pricing
reform taking place at the state level in the U.S., in the form of laws and bills, that will impact how pharmaceutical companies can market and sell drug
products and at what price. Additionally, third-party payers are increasingly challenging the price, examining the medical necessity and reviewing the cost-
effectiveness of medical drug products and medical services, in addition to questioning their safety and efficacy. There can be no assurance as to how this
scrutiny on pricing of pharmaceutical products will impact future pricing of a product or orphan drugs or pharmaceutical products generally. In addition,
increasing emphasis on managed care will continue to put pressure on the pricing of pharmaceutical and biopharmaceutical products. Cost control
initiatives could decrease the price that we or any current or potential collaborators could receive a product and could adversely affect our profitability. In
addition, in the U.S., Canada and many other countries, pricing and/or profitability of some or all prescription pharmaceuticals and biopharmaceuticals are
subject to government control.
If we or our licensee(s) fail to obtain acceptable prices or an adequate level of reimbursement for Macrilen™ (macimorelin), the sales of Macrilen™
(macimorelin) would be adversely affected or there may be no commercially viable market for Macrilen™ (macimorelin).
Competition in our targeted markets is intense, and development by other companies could render Macrilen™ (macimorelin) non-competitive.
The biopharmaceutical field is highly competitive. New products developed by other companies in the industry could render Macrilen™ (macimorelin)
uncompetitive or significantly less competitive. Competitors are developing and testing products and technologies that would compete with Macrilen™
(macimorelin). Some of these products may be more effective or have an entirely different approach or means of accomplishing the desired effect than
Macrilen™ (macimorelin). We expect competition from pharmaceutical and biopharmaceutical companies and academic research institutions to continue to
increase over time. Many of our competitors and potential competitors have substantially greater product development capabilities and financial, scientific,
marketing and human resources than we do.
We may not obtain adequate protection for Macrilen™ (macimorelin) through our intellectual property.
We rely heavily on our proprietary information in developing and manufacturing Macrilen™ (macimorelin). Our success depends, in large part, on our
ability to protect our competitive position through patents, trade secrets, trademarks and other intellectual property rights. We have filed and are pursuing
applications for patents and trademarks in many countries. Pending patent applications may not result in the issuance of patents, and we may not be able to
obtain additional issued patents relating to Macrilen™ (macimorelin).
The laws of some countries do not protect intellectual property rights to the same extent as the laws of the U.S. and Canada. Many companies have
encountered significant problems in protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe,
have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the
enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which
could materially diminish the value of the patent. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor
the aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop and prevent infringement.
Our patents may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from
marketing similar products or limit the length of term of patent protection we may have for Macrilen™ (macimorelin). Changes in either patent laws or in
interpretations of patent laws in the U.S. and other countries may diminish the value of our intellectual property or narrow the scope of our patent
protection for Macrilen™ (macimorelin). The patents issued or to be issued to us for Macrilen™ (macimorelin) may not provide us with any competitive
advantage or protect us against competitors with similar technology. In addition, it is possible that third parties with products that are very similar to ours
will circumvent our patents by means of alternate designs or processes. We may have to rely on method-of-use, methods of manufacture and/or new-
formulation protection for our compounds in development, and any resulting products, which may not confer the same protection as claims to compounds
per se.
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In addition, our patents may be challenged by third parties in patent litigation, which is becoming widespread in the biopharmaceutical industry. There may
be prior art of which we are not aware that may affect the validity or enforceability of a patent claim. There may also be prior art of which we are aware,
but which we do not believe affects the validity or enforceability of a claim, which may, nonetheless, ultimately be found to affect the validity or
enforceability of a claim. No assurance can be given that our patents would, if challenged, be held by a court to be valid or enforceable or that a
competitor’s technology or product would be found by a court to infringe our patents. Our granted patents could also be challenged and revoked in U.S.
post-grant proceedings as well as in opposition or nullity proceedings in certain countries outside the U.S. In addition, we may be required to disclaim part
of the term of certain patents. The costs of these proceedings could be substantial, and it is possible that our efforts could be unsuccessful, resulting in a loss
of our U.S. patent position.
We also rely on trade secrets and proprietary know-how to protect our intellectual property. If we are unable to protect the confidentiality of our proprietary
information and know-how, the value of our technology and products could be adversely affected. We seek to protect our unpatented proprietary
information in part by requiring our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to enter into
confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the
individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees,
the agreements provide that all of the technology that is conceived by the individual during the course of employment is our exclusive property. These
agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. In
addition, it is possible that third parties could independently develop proprietary information and techniques substantially similar to ours or otherwise gain
access to our trade secrets. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this
information to develop products that compete with our products and technologies, which could adversely impact our business.
We currently have the right to use certain patents and technologies under license agreements with third parties. Our failure to comply with the requirements
of one or more of our license agreements could result in the termination of such agreements, which could cause us to terminate the related development
program and cause a complete loss of our investment in that program or given market. Inventions claimed in certain in-licensed patents may have been
made with funding from the U.S. government and may be subject to the rights of the U.S. government and we may be subject to additional requirements in
the event we seek to commercialize or manufacture product candidates incorporating such in-licensed technology.
As a result of the foregoing factors, we may not be able to rely on our intellectual property to protect Macrilen™ (macimorelin) in the marketplace.
We may infringe the intellectual property rights of others.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties.
There could be issued patents of which we are not aware that our products or methods may be found to infringe, or patents of which we are aware and
believe we do not infringe, but which we may ultimately be found to infringe. Moreover, patent applications and their underlying discoveries are in some
cases maintained in secrecy until patents are issued. Because patents can take many years to issue, there may be currently pending applications of which we
are unaware that may later result in issued patents that our products or technologies are found to infringe. Moreover, there may be published pending
applications that do not currently include a claim covering our products or technologies, but, which nonetheless, provide support for a later drafted claim
that, if issued, our products or technologies could be found to infringe.
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If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business. Third parties may own or control
these patents or patent applications in the U.S. and abroad. These third parties could bring claims against us or our collaborators that would cause us to
incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought
against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product
candidate that is the subject of the suit.
The biopharmaceutical industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover
various types of products. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. In the event of
infringement or violation of another party’s patent or other intellectual property rights, we may not be able to enter into licensing arrangements or make
other arrangements at a reasonable cost. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products
or lead to prohibition of the manufacture or sale of products by us or our partners and collaborators.
Patent litigation is costly and time consuming and may subject us to liabilities.
If we become involved in any patent litigation, interference, opposition, re-examination or other administrative proceedings, we will likely incur substantial
expenses in connection therewith, and the efforts of our technical and management personnel will be significantly diverted. In addition, an adverse
determination in litigation could subject us to significant liabilities.
We may not obtain trademark registrations for our current or future products.
We have filed applications for trademark registrations, including Macrilen™ (macimorelin), in various jurisdictions, including the U.S. We may file
applications for other possible trademarks for macimorelin. No assurance can be given that any of our trademarks will be registered elsewhere, or that the
use of any registered or unregistered trademarks will confer a competitive advantage in the marketplace.
We rely on third parties to conduct, supervise and monitor our clinical trials, and those third parties may not perform satisfactorily.
We rely on third parties such as CROs, medical institutions and clinical investigators to enroll qualified patients and to conduct, supervise and monitor our
clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Our reliance on these third
parties, however, does not relieve us of our regulatory responsibilities, including ensuring that our clinical trials are conducted in accordance with Good
Clinical Practice (“GCP”) guidelines and the investigational plan and protocols contained in an Investigational New Drug (“IND”) application to the FDA,
or a comparable foreign regulatory submission. Furthermore, these third parties may also have relationships with other entities, some of which may be our
competitors. In addition, they may not complete activities on schedule, or may not conduct our preclinical studies or clinical trials in accordance with
regulatory requirements or our trial design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our
efforts to obtain regulatory approvals for, and to commercialize, our products may be delayed or prevented.
We are dependent on, and rely upon, third parties to perform various functions related to our business, including, but not limited to, development of some
of our product candidates. Our reliance on these relationships poses a number of risks.
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, our contract manufacturers or our licensees, will be able, in the future, to continue to purchase products from our current
suppliers or any other supplier on terms that are favorable or similar to current terms or at all. An interruption in the availability of certain raw materials or
ingredients, or significant increases in the prices we pay for them, could have a material adverse effect on our business, financial condition, liquidity and
operating results.
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The failure to perform satisfactorily by third parties upon which we expect to rely to manufacture and supply products may lead to supply shortfalls.
We rely on third parties to manufacture and supply Macrilen™ (macimorelin). We also have or may have certain supply obligations vis-à-vis our existing
and potential licensees, who are or will be responsible for the marketing of Macrilen™ (macimorelin). To be successful, Macrilen™ (macimorelin) has to
be manufactured in commercial quantities in compliance with quality controls and regulatory requirements. Even though it is our objective to minimize
such risk by introducing alternative suppliers to ensure a constant supply at all times, there are a limited number of contract manufacturers or suppliers that
are capable of manufacturing Macrilen™ (macimorelin) or the materials used in its manufacture. If we are unable to do so ourselves or to arrange for third-
party manufacturing or supply of Macrilen™ (macimorelin) or materials, or to do so on commercially reasonable terms, we may not be able to
commercialize Macrilen™ (macimorelin) through our licensees. Reliance on third-party manufacturers entails risks to which we would not be subject if we
manufactured products ourselves, including reliance on the third party for regulatory compliance, the possibility of breach of the manufacturing agreement
by the third party because of factors beyond our control, and the possibility of termination or non-renewal of the agreement by the third party, based on its
own business priorities, at a time that is costly or inconvenient for us.
We are subject to intense competition for our skilled personnel, and the loss of key personnel or the inability to attract additional personnel could
impair our ability to conduct our operations.
We are highly dependent on our management and our clinical, regulatory and scientific staff, the loss of whose services might adversely impact our ability
to achieve our objectives. Recruiting and retaining qualified management and clinical, scientific and regulatory personnel is critical to our success.
Reductions in our staffing levels have eliminated redundancies in key capabilities and skill sets among our full-time staff and required us to rely more
heavily on outside consultants and third parties. We have been unable to increase the compensation of our associates to the extent required to remain fully
competitive for their services, which increased our employee retention risk. The competition for qualified personnel in the biopharmaceutical field is
intense, and if we are not able to continue to retain qualified personnel and/or maintain positive relationships with our outside consultants, we may not be
able to achieve our strategic and operational objectives.
We may be subject to litigation in the future.
We may, from time to time, be a party to litigation in the normal course of business. Monitoring and defending against legal actions, whether meritorious, is
time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and
costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims
for significant monetary damages. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse
effect on our cash flow, results of operations and financial position.
With respect to any litigation, our insurance may not reimburse us or may not be sufficient to reimburse us for the expenses or losses we may suffer in
contesting and concluding such lawsuit. Substantial litigation costs, including the substantial self-insured retention that we are required to satisfy before
any insurance applies to a claim, unreimbursed legal fees or an adverse result in any litigation may adversely impact our business, operating results or
financial condition.
We are subject to the risk of product liability claims, for which we may not have or may not be able to obtain adequate insurance coverage.
The sale and use of Macrilen™ (macimorelin) will involve the risk of product liability claims and associated adverse publicity. Product liability claims
might be made against us directly by patients, healthcare providers or pharmaceutical companies or others selling, buying or using our products. We
attempt to manage our liability risks by means of insurance. We maintain insurance covering our liability for our preclinical and clinical studies as well as
products liability insurance. However, we may not have or be able to obtain or maintain sufficient and affordable insurance coverage, including coverage
for potentially very significant legal expenses, and without sufficient coverage any claim brought against us could have a materially adverse effect on our
business, financial condition or results of operations.
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We are a holding company, and claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims
and those of our creditors and shareholders. In addition, our principal operating subsidiary, AEZS Germany, may become subject to insolvency
proceedings if it is illiquid or “over-indebted” in accordance with German law.
Aeterna Zentaris is a holding company and a substantial portion of our non-cash assets is the share capital of our subsidiaries. AEZS Germany, our
principal operating subsidiary, based in Frankfurt, Germany, holds most of our intellectual property rights. Because Aeterna Zentaris is a holding company,
our obligations to our creditors are structurally subordinated to all existing and future liabilities of our subsidiaries, which may incur additional or other
liabilities and/or obligations. As a result, our rights and the rights of our creditors to participate in any distribution of the assets of any subsidiary in the
event that such subsidiary were to be liquidated or reorganized or in the event of any bankruptcy or insolvency proceeding relating to or involving such
subsidiary, and, therefore, the rights of the holders of our securities to participate in those assets, are subject to the prior claims of such subsidiary’s
creditors. To the extent that we may be a creditor with recognized claims against any such subsidiary, our claims would still be subject to the prior claims of
our subsidiary’s creditors to the extent that they are secured or senior to those held by us.
Holders of our securities are not creditors of our subsidiaries. Claims to the assets of our subsidiaries will derive from our own ownership interest in those
operating subsidiaries. Claims of our subsidiaries’ creditors will generally have priority as to the assets of such subsidiaries over our own ownership
interest claims and, therefore, will have priority over the holders of our securities. Our subsidiaries’ creditors may from time to time include general
creditors, trade creditors, employees, secured creditors, taxing authorities and creditors holding guarantees. Accordingly, in the event of any foreclosure,
dissolution, winding-up, liquidation or reorganization, or a bankruptcy, insolvency or creditor protection proceeding relating to us or our property, or any
subsidiary, there can be no assurance as to the value, if any, that would be available to holders of our securities. In addition, any distributions to us by our
subsidiaries could be subject to monetary transfer restrictions in the jurisdictions in which our subsidiaries operate.
German law, which governs our principal operating subsidiary AEZS Germany, imposes an obligation on the managing director(s) of AEZS Germany to
institute insolvency proceedings of that subsidiary if the managing director(s) concludes that AEZS Germany is insolvent because it is either illiquid or
“over-indebted” in accordance with the provisions of German law.
It may be difficult for U.S. investors to obtain and enforce judgments against us because of our Canadian incorporation and German presence.
We are a company existing under the laws of Canada. A number of our directors and officers are residents of Canada or otherwise reside outside the U.S.,
and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside the U.S. Consequently, although we have appointed
an agent for service of process in the U.S., it may be difficult for investors in the U.S. to bring an action against such directors or officers or to enforce
against those persons or us a judgment obtained in a U.S. court predicated upon the civil liability provisions of federal securities laws or other laws of the
U.S. Investors should not assume that foreign courts (i) would enforce judgments of U.S. courts obtained in actions against us or such directors, officers or
experts predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or “blue sky” laws of any state within the U.S. or
(ii) would enforce, in original actions, liabilities against us or such directors, officers or experts predicated upon the U.S. federal securities laws or any such
state securities or “blue sky” laws.
We are subject to various internal control reporting requirements under applicable Canadian securities laws and the Sarbanes-Oxley Act in the U.S. We
can provide no assurance that we will at all times in the future be able to report that our internal controls over financial reporting are effective.
As a public company, we are required to comply with Section 404 of the U.S. Sarbanes-Oxley Act of 2002 (“Section 404”) and National Instrument 52-
109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian securities administrators. In any given year, we cannot be certain
as to the time of completion of our internal control evaluation, testing and remediation actions or of their impact on our operations. Upon completion of this
process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board (U.S.)
rules and regulations. As a public company, we are required to report, among other things, control deficiencies that constitute material weaknesses or
changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a
deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual consolidated financial statements will not be prevented or detected on a timely basis. If we fail to comply with the requirements
of Section 404 or similar Canadian requirements or if we report a material weakness, we might be subject to regulatory sanction and investors may lose
confidence in our consolidated financial statements, which may be inaccurate if we fail to remedy such material weakness.
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We are subject to a broad range of environmental laws and regulations and may be subject to environmental remediation obligations under such safety
and related laws and regulations. The impact of these obligations and the Company’s ability to respond effectively to them may have a material adverse
effect on our business, financial condition, cash flows and results of operations and could cause the market value of our Common Shares to decline.
We are subject to a broad range of federal, state, provincial and local environmental laws and regulations in the U.S., Canada and Germany concerning the
environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate
our business. These requirements include, among other matters, regulation of the handling, manufacture, transportation, storage, use and disposal of
materials, including the discharge of pollutants, hazardous substances and waste into the environment. In the normal course of our business, such
substances and waste may be released into the environment, which could cause environmental or property damage or personal injuries, and which could
subject us to remediation obligations regarding contaminated soil and groundwater, potential liability for damage claims or to social or reputational harm
and other similar adverse impacts. Under certain laws, we may be required to remediate contamination at certain of our properties regardless of whether the
contamination was caused by us or by previous occupants of the property or by others and at third-party sites where we send waste.
In recent years, the operations of all companies have become subject to increasingly stringent legislation and regulation related to environmental protection.
Such legislation and regulations are complex and constantly changing. Future events, such as changes in existing laws or regulations or the enforcement
thereof or the discovery of contamination at our facilities may, among other things, require us to install additional controls for certain of our emission
sources, undertake changes in our manufacturing processes, remediate soil or groundwater contamination at facilities where such cleanup is not currently
required or to take action to address social expectations or concerns arising from or relating to such changes and our response to such changes. The cost of
such additional compliance or remediation obligations or responding to such social expectations or concerns may be significant and could have a material
adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our Common Shares and/or
debt securities to decline.
It is possible that we may be a passive foreign investment company, which could result in adverse tax consequences to U.S. investors.
Adverse U.S. federal income tax rules apply to “U.S. Holders” (as defined in “Item 10.E - Taxation - Material U.S. Federal Income Tax Considerations” in
this Annual Report on Form 20-F) who directly or indirectly hold stock of a passive foreign investment company (“PFIC”). We will be classified as a PFIC
for U.S. federal income tax purposes for a taxable year if (i) at least 75% of our gross income is “passive income” or (ii) at least 50% of the average value
of our assets, including goodwill (based on annual quarterly average), is attributable to assets which produce passive income or are held for the production
of passive income.
We believe that we were a PFIC for the 2015 taxable year, but were not a PFIC for the 2016, 2017, 2018 and 2019 taxable years. However, the PFIC
determination depends on the application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose,
and these rules are uncertain in some respects. In addition, the fair market value of our assets may be determined in large part by the market price of our
Common Shares, which is likely to fluctuate, and the composition of our income and assets will be affected by how, and how quickly, we spend any cash
that is raised in any financing transaction. No assurance can be provided that we will not be classified as a PFIC for the 2020 taxable year and for any
future taxable year.
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If we are a PFIC for any taxable year during which a U.S. Holder holds Common Shares, we generally would continue to be treated as a PFIC with respect
to that U.S. Holder for all succeeding years during which the U.S. Holder holds such Common Shares, even if we ceased to meet the threshold
requirements for PFIC status. PFIC characterization could result in adverse U.S. federal income tax consequences to U.S. Holders. In particular, absent
certain elections, a U.S. Holder would generally be subject to U.S. federal income tax at ordinary income tax rates, plus a possible interest charge, in
respect of a gain derived from a disposition of our Common Shares, as well as certain distributions by us. If we are treated as a PFIC for any taxable year, a
U.S. Holder may be able to make an election to “mark-to-market” Common Shares each taxable year and recognize ordinary income pursuant to such
election based upon increases in the value of the Common Shares.
In addition, U.S. Holders may mitigate the adverse tax consequences of the PFIC rules by making a “qualified electing fund” (“QEF”) election; however,
there can be no assurance that we will satisfy the record keeping requirements applicable to a QEF or that we will provide the information regarding our
income that would be necessary for a U.S. Holder to make a QEF election.
If the Company is a PFIC, U.S. Holders will generally be required to file an annual information return with the Internal Revenue Service (the “IRS”) (on
IRS Form 8621, which PFIC shareholders will be required to file with their U.S. federal income tax or information returns) relating to their ownership of
Common Shares. This filing requirement is in addition to any pre-existing reporting requirements that apply to a U.S. Holder’s interest in a PFIC (which
this requirement does not affect).
For a more detailed discussion of the potential tax impact of us being a PFIC, see “Item 10.E - Taxation - Material U.S. Federal Income Tax
Considerations” in this Annual Report on Form 20-F. The PFIC rules are complex. U.S. Holders should consult their tax advisors regarding the potential
application of the PFIC regime and any reporting obligations to which they may be subject under that regime.
Our net operating losses may be limited for U.S. federal income tax purposes under Section 382 of the Internal Revenue Code.
If a corporation with net operating losses (“NOLs”) undergoes an “ownership change” within the meaning of Section 382 of the U.S. Internal Revenue
Code of 1986, as amended, then such corporation’s use of such “pre-change” NOLs to offset income incurred following such ownership change may be
limited. Such limitation also may apply to certain losses or deductions that are “built-in” (i.e., attributable to periods prior to the ownership change, but not
yet taken into account for tax purposes) as of the date of the ownership change that are subsequently recognized. An ownership change generally occurs
when there is either (i) a shift in ownership involving one or more “5% shareholders”, or (ii) an “equity structure shift” and, as a result, the percentage of
stock of the corporation owned by one or more 5% shareholders (based on value) has increased by more than 50 percentage points over the lowest
percentage of stock of the corporation owned by such shareholders during the “testing period” (generally the 3 years preceding the testing date). In general,
if such change occurs, the corporation’s ability to utilize its net operating loss carry-forwards and certain other tax attributes would be subject to an annual
limitation, as described below. The unused portion of any such net operating loss carry-forwards or tax attributes each year is carried forward, subject to the
same limitation in future years. The impact of an ownership change on state NOL carryforwards may vary from state to state. Recent legislation added
several limitations to the ability to claim deductions for NOLs, including a deduction limit equal to 80% of taxable income and a restriction on NOL
carryback deductions.
We may incur losses associated with foreign currency fluctuations.
Our operations are in many instances conducted in currencies other than our functional currency or the functional currencies of our subsidiaries.
Fluctuations in the value of currencies could cause us to incur currency exchange losses. We do not currently employ a hedging strategy against exchange
rate risk. We cannot assert with any assurance that we will not suffer losses as a result of unfavorable fluctuations in the exchange rates between the U.S.
dollar, the euro, the Canadian dollar and other currencies.
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Legislative actions, new accounting pronouncements and higher insurance costs may adversely impact our future financial position or results
of operations.
Changes in financial accounting standards or implementation of accounting standards may cause adverse, unexpected revenue or expense fluctuations and
affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with greater
frequency and are expected to occur in the future, and we may make or be required to make changes in our accounting policies in the future. Compliance
with changing regulations of corporate governance and public disclosure, notably with respect to internal controls over financial reporting, may result in
additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for
companies such as ours, and insurance costs are increasing as a result of this uncertainty.
Data security breaches may disrupt our operations and adversely affect our operating results.
Our network security and data recovery measures and those of third parties with which we contract, may not be adequate to protect against computer
viruses, cyber-attacks, breaches, and similar disruptions from unauthorized tampering with our computer systems. The misappropriation, theft, sabotage or
any other type of security breach with respect to any of our proprietary and confidential information that is electronically stored, including research or
clinical data, could cause interruptions in our operations, could result in a material disruption of our clinical activities and business operations and could
expose us to third-party legal claims. Furthermore, we could be required to make substantial expenditures of resources to remedy the cause of cyber-attacks
or break-ins. This disruption could have a material adverse impact on our business, operating results and financial condition. Additionally, any break-in or
trespass of our facilities that results in the misappropriation, theft, sabotage or any other type of security breach with respect to our proprietary and
confidential information, including research or clinical data, or that results in damage to our R&D equipment and assets could have a material adverse
impact on our business, operating results and financial condition.
Our business processes personal information, both in connection with clinical activities and our employees. The use of this information is critical to our
operations and innovation, including the development of our products, as well as management of our employees. New and evolving regulations, such as the
European Union General Data Protection Regulation, could bring increased scrutiny of our data management in the future. Any cyber-attacks or other
failure to protect critical and sensitive systems and information could damage our reputation, prompt litigation or lead to regulatory sanctions, all of which
could materially affect our financial condition and results of operation.
Risks Relating to our Common Shares
Our Common Shares may be delisted from the NASDAQ or the TSX, which could affect their market price and liquidity. If our Common Shares were
to be delisted, investors may have difficulty in disposing their Common Shares.
Our Common Shares are currently listed on both the NASDAQ and the TSX under the symbol “AEZS”. We must meet continuing listing requirements to
maintain the listing of our Common Shares on the NASDAQ and the TSX. For continued listing, the NASDAQ requires, among other things, that listed
securities maintain a minimum closing bid price of not less than $1.00 per share. On January 8, 2020, we received a letter from the Listing Qualifications
Staff of the NASDAQ, notifying us that for the last 30 consecutive business days prior to the date of the letter, the closing bid price of our Common Shares
was below $1.00 per share and, therefore, we did not meet the requirement for continued listing on the NASDAQ as required by Nasdaq Listing Rule
5550(b)(2). On January 23, 2020, we received a letter from the Listing Qualifications Staff of the NASDAQ notifying us that we had regained compliance
with the minimum bid price requirement. However, since February 21, 2020, our share price has fallen below $1.00 and as of March 17, was $0.49 on the
NASDAQ. There can be no assurance that we will regain compliance with the minimum bid price requirement for continued listing. If we do regain
compliance with the minimum bid price requirement for continued listing, there can be no assurance, however, that the market price of our Common Shares
will not again fall below $1.00 in the future or that, if it does, we will regain compliance with the minimum bid price requirement for continued listing.
In addition to the minimum bid price requirement, the continued listing rules of the NASDAQ require us to meet at least one of the following listing
standards: (i) stockholders’ equity of at least $2.5 million, (ii) market value of listed securities (calculated by multiplying the daily closing bid price of our
securities by our total outstanding securities) of at least $35 million or (iii) net income from continuing operations (in the latest fiscal year or in two of the
last three fiscal years) of at least $500,000 (collectively, the “Additional Listing Standards”). If we fail to meet at least one of the Additional Listing
Standards, our Common Shares may be subject to delisting after the expiration of the period of time, if any, that we are allowed for regaining compliance.
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Based on our financial results as at December 31, 2019, we do not believe we are in compliance with the continued listing standards of the NASDAQ.
There is no assurance that we will obtain and then maintain compliance and therefore there can be no assurance that our Common Shares will remain listed
on the NASDAQ or the TSX. If we fail to meet any of the NASDAQ’s or the TSX’s continued listing requirements, our Common Shares may be delisted.
Any delisting of our Common Shares may adversely affect our ability to raise additional financing through the public or private sale of equity securities,
would significantly adversely affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our Common
Shares. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest
and fewer business opportunities. If our Common Shares are delisted by the NASDAQ or the TSX, the price of our Common Shares may decline, and a
shareholder may find it more difficult to dispose, or obtain quotations as to the market value, of such shares. Moreover, if we are delisted, we could incur
additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our
Common Shares and the ability of our shareholders to sell our Common Shares in the secondary market.
Our share price is volatile, which may result from factors outside of our control.
Our valuation and share price since the beginning of trading after our initial listings, first in Canada and then in the U.S., have had no meaningful
relationship to current or historical financial results, asset values, book value or many other criteria based on conventional measures of the value of shares.
Between January 1, 2019 and December 31, 2019, the closing price of our Common Shares ranged from $0.90 to $4.65 per share on the NASDAQ and
from C$1.19 to C$6.25 per share on the TSX. As of March 17, 2020, the price of our Common Shares on the NASDAQ was $0.49 and C$0.71 on the TSX.
Our share price may be affected by developments directly affecting our business and by developments out of our control or unrelated to us. The stock
market generally, and the biopharmaceutical sector in particular, are vulnerable to abrupt changes in investor sentiment. Prices of shares and trading volume
of companies in the biopharmaceutical industry can swing dramatically in ways unrelated to, or that bear a disproportionate relationship to, operating
performance. Our share price and trading volume may fluctuate based on a number of factors including, but not limited to, the following:
● developments regarding current or future third-party suppliers and licensee(s);
● clinical trial and regulatory developments regarding Macrilen™ (macimorelin);
● delays in our anticipated clinical trial development or commercialization timelines;
● announcements by us regarding technological, regulatory or other matters;
● arrivals or departures of key personnel;
● governmental or regulatory action affecting our product candidates and our competitors’ products in the U.S., Canada and other countries;
● developments or disputes concerning patent or proprietary rights;
● actual or anticipated fluctuations in our revenues or expenses;
● general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; and
● economic conditions in the U.S. or abroad, including the instability due to COVID-19.
Our listing on both the NASDAQ and the TSX may increase price volatility due to various factors, including different ability to buy or sell our Common
Shares, different market conditions in different capital markets and different trading volumes. In addition, low trading volume may increase the price
volatility of our Common Shares. A thin trading market could cause the share price of our Common Shares to fluctuate significantly more than the stock
market as a whole.
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We do not intend to pay dividends in the near future.
To date, we have not declared or paid any dividends on our Common Shares. As a result, the return on an investment in our Common Shares, or any of our
other securities, will depend upon any future appreciation in value. There is no guarantee that our Common Shares or any of our other securities will
appreciate in value or even maintain the price at which shareholders have purchased them.
Future issuances of securities and hedging activities may depress the trading price of our Common Shares.
Any additional or future issuance of securities or convertible securities, including the issuance of securities upon the exercise of stock options and upon the
exercise of warrants or other convertible securities or securities pursuant to which Common Shares are issuable, could dilute the interests of our existing
shareholders, and could substantially decrease the trading share price of our Common Shares.
We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to satisfy our obligations
upon the exercise of options or warrants or for other reasons. Our stock option plans generally permit us to have outstanding, at any given time, stock
options that are exercisable for a maximum number of Common Shares equal to 11.4% of all then issued and outstanding Common Shares. As at December
31, 2019, there were:
● 19,994,510 Common Shares issued and outstanding;
● no issued and outstanding Preferred Shares;
● 28,144 Common Shares issuable upon exercise of warrants that we issued in March 2015, which had a weighted average exercise price of $1.07 per
Common Share (the March 2015 warrants expired by their terms in March 2020); 2,331,000 Common Shares issuable upon exercise of warrants that
we issued in December 2015, which had a weighted average exercise price of $7.10 per Common Share; 945,000 Common Shares issuable upon
exercise of warrants that we issued in November 2016, which had a weighted average exercise price of $4.70 per Common Share; and 3,325,000
Common Shares issuable upon exercise of warrants that we issued in September 2019, which had a weighted average exercise price of $1.65 per
Common Share;
● 953,116 Common Shares that underlie outstanding stock options and deferred share units granted under our plans, having a weighted average exercise
price of $3.38 per Common Share;
● 441 Common Shares that underlie outstanding stock options and deferred share units granted under our plans, having a weighted average exercise
price of C$912.00 per Common Share; and
● 246,619 additional Common Shares available for future grants under our Second Amended and Restated Stock Option Plan, and 1,079,198 additional
Common Shares available for future grants under our 2018 Long Term Incentive Plan. The maximum number of Common Shares issuable under the
plans may equal 11.4% of the issued and outstanding Common Shares at any given time.
In addition, the share price of our Common Shares could also be affected by possible sales of securities by investors who view other investment vehicles as
more attractive means of equity participation in us and by hedging or arbitrage trading activity that may develop involving our securities. This hedging or
arbitrage could, in turn, affect the trading share price of our Common Shares.
In the event we were to lose our foreign private issuer status as of June 30 of a given financial year, we would be required to comply with the Securities
Exchange Act of 1934 domestic reporting regime, which could cause us to incur additional legal, accounting and other expenses.
In order to maintain our current status as a foreign private issuer, either (1) a majority of our Common Shares must not be either directly or indirectly
owned of record by residents of the U.S. or (2) (a) a majority of our executive officers and of our directors must not be U.S. citizens or residents, (b) more
than 50 percent of our assets cannot be located in the U.S. and (c) our business must be administered principally outside the U.S.
27
In 2019, our management conducted its annual assessment of the various facts and circumstances underlying the determination of our status as a foreign
private issuer and, based on the foregoing, our management has determined that, as of the date of such determination and as of June 30, 2019, we continued
to be a foreign private issuer.
There can be no assurance, however, that we will remain a foreign private issuer either in 2020 or in future financial years.
If we were to lose our foreign private issuer status as of June 30 of any given financial year, we would be required to comply with the Securities Exchange
Act of 1934 reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign
private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC rules and the NASDAQ
listing standards. The regulatory and compliance costs to us of complying with the reporting requirements applicable to a U.S. domestic issuer under U.S.
securities laws may be higher than the cost we have historically incurred as a foreign private issuer. In addition, if we were to lose our foreign private issuer
status, we would no longer qualify under the Canada-U.S. multijurisdictional disclosure system to benefit from being able to file registration statements on
Form F-10 (even if we satisfy the other conditions to eligibility), which could make it longer and more difficult to register our securities and raise funds by
way of public, registered offerings in the U.S., and we would become subject to “baby shelf” rules that place limitations on our ability to issue an amount
of securities above a certain threshold depending on our market capitalization and public float at a given point in time. As a result, we would expect that a
potential loss of foreign private issuer status at some future point in time could increase our legal, financial reporting and accounting compliance costs, and
it is difficult at this time to estimate by how much our legal, financial reporting and accounting compliance costs may increase in such eventuality.
Our articles of incorporation contain “blank check” preferred share provisions, which could delay or impede an acquisition of our company.
Our articles of incorporation, as amended, authorize the issuance of an unlimited number of “blank check” preferred shares, which could be issued by our
board of directors (“Board”) without shareholder approval and which may contain liquidation, dividend and other rights equivalent or superior to our
Common Shares. In addition, we have implemented in our constating documents an advance notice procedure for shareholder approvals to be brought
before an annual meeting of our shareholders, including proposed nominations of persons for election to our Board. These provisions, among others,
whether alone or together, could delay or impede hostile takeovers and changes in control or changes in our management. Any provision of our constating
documents that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their
Common Shares and could also affect the price that some investors are willing to pay for our Common Shares.
Our business could be negatively affected as a result of the actions of activist shareholders.
Proxy contests have been waged against many companies in the biopharmaceutical industry over the last few years. If faced with a proxy contest, we may
not be able to successfully respond to the contest, which would be disruptive to our business. Even if we are successful, our business could be adversely
affected by a proxy contest because:
● responding to proxy contests and other actions by activist shareholders may be costly and time-consuming, and may disrupt our operations and divert
the attention of management and our employees;
● perceived uncertainties as to the potential outcome of any proxy contest may result in our inability to consummate potential acquisitions, collaborations
or in-licensing opportunities and may make it more difficult to attract and retain qualified personnel and business partners; and
● if individuals that have a specific agenda different from that of our management or other members of our board of directors are elected to our Board as
a result of any proxy contest, such an election may adversely affect our ability to effectively and timely implement our strategic plan and to create
value for our shareholders.
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Item 4.
Information on the Company
A.
History and development of the Company
We are a specialty biopharmaceutical company engaged in commercializing novel pharmaceutical therapies, principally through out-licensing
arrangements. We are a party to a License Agreement with Novo to carry out development, manufacturing, registration, regulatory and supply chain
services for the commercialization of Macrilen™ (macimorelin), which is to be used in the diagnosis of patients with AGHD, in the U.S. and Canada. In
addition, we are actively pursuing business development opportunities for macimorelin in the ROW and to monetize the value of our non-strategic assets.
We were incorporated on September 12, 1990 under the Canada Business Corporations Act (the “CBCA”) and continue to be governed by the CBCA. Our
registered address is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario, Canada M5L 1B9 c/o Stikeman Elliott LLP; the telephone
number for the registered address is (416) 869-5500. Our principal executive offices are located at 315 Sigma Drive, Summerville, South Carolina 29486;
our telephone number is (843) 900-3223 and our website is www.zentaris.com. None of the documents or information found on our website, or any other
website referenced in this Annual Report on Form 20-F, shall be deemed to be included in or incorporated by reference into this Annual Report on Form
20-F, unless such document is specifically incorporated herein by reference. The SEC also maintains a website at www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically with the SEC.
On December 30, 2002, we acquired Zentaris AG, a biopharmaceutical company based in Frankfurt, Germany. Zentaris AG was a spin-off of Asta Medica
GmbH, a former pharmaceutical company affiliated with Degussa AG.
In May 2004, we changed our name to Aeterna Zentaris Inc., and on May 11, 2007, Zentaris GmbH was renamed Aeterna Zentaris GmbH. AEZS Germany
conducts our drug development efforts. Thereafter, in September 2007, we incorporated Aeterna Zentaris, Inc. under the laws of Delaware. This wholly-
owned subsidiary, which is based in the Charleston, South Carolina area, conducts certain of our administrative operations.
On November 17, 2015, we effected a 100-to-1 Share Consolidation (reverse stock split). Our Common Shares commenced trading on a consolidated and
adjusted basis on both the NASDAQ and the TSX on November 20, 2015.
On June 6, 2019, we announced that the Company is reducing the size of its German workforce and operations to more closely reflect our ongoing
commercial activities in Frankfurt, Germany. This restructuring affected eight employees in Frankfurt, Germany. The restructuring was completed by
January 31, 2020, resulting in approximately $600,000 in severance costs.
On August 1, 2019, we filed a shelf registration statement on Form F-3 with the SEC. Under the shelf registration statement we may sell certain
combinations of securities described in the applicable prospectus as offered, from time to time in one or more offerings, up to a total dollar amount of
$45,000,000, subject to restrictions under SEC rules.
On September 20, 2019, we entered into a securities purchase agreement with institutional investors in the U.S. to purchase our Common Shares in a
registered direct offering and warrants to purchase our Common Shares in a concurrent private placement. The net proceeds from this offering were
approximately $4.2 million.
Subsequent to 2019, on February 19, 2020, we entered into a securities purchase agreement with institutional investors in the U.S. to purchase our
Common Shares in a registered direct offering and warrants to purchase our Common Shares in a concurrent private placement. The net proceeds from this
offering were approximately $3.9 million.
We currently have three wholly-owned direct and indirect subsidiaries, AEZS Germany, based in Frankfurt am Main, Germany; Zentaris IVF GmbH, a
direct wholly-owned subsidiary of AEZS Germany based in Frankfurt am Main, Germany; and Aeterna Zentaris, Inc., an entity incorporated in the State of
Delaware with an office in the Charleston, South Carolina area in the U.S.
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Our Common Shares are listed for trading on both the NASDAQ and the TSX under the trading symbol “AEZS”.
Our agent for service of process and SEC matters in the U.S. is our wholly-owned subsidiary, Aeterna Zentaris, Inc., located at 315 Sigma Drive,
Summerville, South Carolina 29486.
There have been no principal capital expenditures and divestures (including interest in other companies) during the last three financial years or as the date
hereof.
There have been no public takeover offers by third parties with respect to us or by us in respect of other companies’ shares during the last or current
financial year.
Recent Developments
For a complete description of our recent corporate and pipeline developments, refer to “Item 5. - Operating and Financial Review and Prospects - Key
Developments”.
B.
Business overview
Our primary business strategy is to finalize the development, manufacturing, registration and commercialization of Macrilen™ (macimorelin) through the
License Agreement in the U.S. and Canada. We continue to explore various alternatives to monetize our rights to Macrilen™ (macimorelin) in other
countries around the globe, by finding other license partners in these jurisdictions. Our vision is to become a growth-oriented specialty biopharmaceutical
company.
Macrilen™ (macimorelin)
Macrilen™ (macimorelin) is a novel orally available peptidomimetic ghrelin receptor agonist that stimulates the secretion of growth hormone by binding to
the ghrelin receptor (GHSR-1a) and that has potential uses in both endocrinology and oncology indications. Macrilen™ (macimorelin) was granted orphan-
drug designation by the FDA for use in evaluating growth hormone deficiency (“GHD”).
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Competitors for Macrilen™ (macimorelin) as a product for the diagnosis of AGHD are principally the diagnostic tests currently performed by
endocrinologists, although none of these tests are approved by the FDA for this purpose. The most commonly used diagnostic tests for GHD are:
● The Insulin Tolerance Test (“ITT”), which has historically been considered the gold standard for the evaluation of AGHD because of its high
sensitivity and specificity. However, the ITT is inconvenient to both patients and physicians, administered intravenously (IV), and contra-indicated in
certain patients, such as patients with coronary heart disease or seizure disorder, because it requires the patient to experience hypoglycemia to obtain
an accurate result. Some physicians will not induce full hypoglycemia, intentionally compromising accuracy to increase safety and comfort for the
patient. Furthermore, administration of the ITT includes additional costs associated with the patient being closely monitored by a physician for the
two- to four-hour duration of the test and the test must be administered in a setting where emergency equipment is available and where the patient
may be quickly hospitalized. The ITT is not used for patients with co-morbidities, such as cardiovascular disease, seizure disorder or a history of
brain cancer, or for patients who are elderly and frail, due to safety concerns.
● The Glucagon Stimulation Test (“GST”) is considered relatively safe by endocrinologists. The mechanism of action for this test is unclear. Also, this
test takes up to three to four hours. It produces side effects in up to one-third of the patients with the most common being nausea during and after the
test. This test is administered intramuscularly (“IM”).
● The GHRH + ARG test (growth hormone releasing hormone-arginine stimulation) which is an easier test to perform in an office setting and has a
good safety profile but is considered to be costly to administer compared to the ITT and the GST. GHRH + ARG has been proposed to be the best
alternative to ITT, but GHRH is no longer available in the U.S. This test is administered intravenously (“IV”).
Oral administration of Macrilen™ (macimorelin) offers convenience and simplicity over the current GHD tests used, all of which require either IV or IM
administration. Additionally, Macrilen™ (macimorelin) may demonstrate a more favorable safety profile than existing diagnostic tests, some of which may
be inappropriate for certain patient populations (e.g. patients with diabetes mellitus or coronary heart disease), and have demonstrated a variety of side
effects, which Macrilen™ (macimorelin) has not thus far. These factors may be limiting the use of GHD testing and may potentially enable Macrilen™
(macimorelin) to become the product of choice in evaluating AGHD. We believe that Macrilen™ (macimorelin) is well-positioned to displace the ITT as
the preferred means by endocrinologists of evaluating AGHD for the following reasons:
● it is safer and more convenient than the ITT because it does not require the patient to become hypoglycemic;
● Macrilen™ (macimorelin) is administered orally, while the ITT requires an intravenous injection of insulin;
● Macrilen™ (macimorelin) is a more robust test than the ITT leading to evaluable test results;
● Macrilen™ (macimorelin) results are highly reproducible;
● the evaluation of AGHD using Macrilen™ (macimorelin) is less time-consuming and labor-intensive than the ITT; and
● the evaluation can be conducted in the physician’s office rather than in a hospital-like setting.
We believe that approximately 15,000 – 20,000 AGHD tests will be conducted annually, in the U.S., after full market introduction of Macrilen™
(macimorelin). In addition, based on published information from the U.S. Centers for Disease Control and Prevention, different scientific publications,
Huron, TVG and Navigant Research, we estimate that the total potential U.S. market for AGHD evaluation is in the range of 28,000 to 43,000 tests per
year, excluding the evaluation of patients who have suffered traumatic brain injury (“TBI”). In patients with TBI, GHD is frequent and may contribute to
cognitive sequelae and reduction in quality of life. GHD may develop in approximately 10% to 35% of TBI victims according to published study results.
These data support a large upside potential for GHD testing.
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Development History
The following is a summary of the history of our development of Macrilen™ (macimorelin):
2004 - 2014
● We out-licensed the development compound macimorelin acetate to Ardana Bioscience in 2004. Ardana Bioscience subsequently initiated the clinical
development program of macimorelin acetate as an orally active compound intended to be used in the diagnosis of AGHD, however in 2008 Ardana
Bioscience filed for bankruptcy so we terminated the license and regained rights to the compound. On October 19th, 2009, we announced that we
would continue the macimorelin clinical development program for use in evaluating the AGHD and assumed the sponsorship of the IND application.
On December 20, 2010, we announced we had reached agreement with the FDA on a Special Protocol Assessment (“SPA”) for Macrilen™
(macimorelin), enabling us to complete the ongoing registration study required to gain approval for use in evaluating AGHD. On July 26, 2011, we
announced the completion of the Phase 3 study of Macrilen™ (macimorelin) as a first oral product for use in evaluating AGHD and the decision to
meet with the FDA for the future filing of a New Drug Application (“NDA”) for the registration of Macrilen™ (macimorelin) in the U.S. On June 26,
2012, we announced that the final results from a Phase 3 trial for Macrilen™ (macimorelin) showed that the drug is safe and effective in evaluating
AGHD. In November 2013, we filed an NDA for Macrilen™ (macimorelin) for the evaluation of AGHD by evaluating the pituitary gland secretion of
growth hormone in response to an oral dose of the product. The FDA accepted the NDA for substantive review in January 2014. On November 6,
2014, the FDA informed us, by issuing a Complete Response Letter (“CRL”), that it had determined that our NDA could not be approved in its then
present form. The CRL stated that the planned analysis of our pivotal trial did not meet its stated primary efficacy objective as agreed to in the SPA.
The CRL further mentioned issues related to the lack of complete and verifiable source data for determining whether patients were accurately
diagnosed with AGHD. The FDA concluded that, “in light of the failed primary analysis and data deficiencies noted, the clinical trial does not by itself
support the indication.” To address the deficiencies identified above, the CRL stated that we needed to demonstrate the efficacy of Macrilen™
(macimorelin) as a diagnostic test for GHD in a new, confirmatory clinical study. The CRL also stated that a serious event of electrocardiogram QT
interval prolongation occurred for which attribution to drug could not be excluded. Therefore, a dedicated thorough QT study to evaluate the effect of
macimorelin on the QT interval would be necessary for FDA clearance and approval.
2015 - present
● Following receipt of the CRL, we assembled a panel of experts in the field of growth-hormone deficiency, including experts in the field from both the
U.S. and the E.U. The panel met on January 8, 2015, during which we discussed our conclusions from the CRL, as well as the potential design of a
new pivotal study. The panel advised us to continue to seek approval for Macrilen™ (macimorelin) because of their confidence in its efficacy and
because there currently is no FDA-approved diagnostic test for AGHD. In parallel, we collected information on timelines and costs for such a study.
● During an end-of-review meeting with the FDA on March 6, 2015, we agreed with the FDA on the general design of the confirmatory Phase 3 study of
Macrilen™ (macimorelin) for the evaluation of AGHD, as well as evaluation criteria. We agreed with the FDA that the confirmatory study will be
conducted as a two-way crossover with the ITT as the benchmark comparator.
● On April 13, 2015, we announced plans to conduct a new, confirmatory Phase 3 clinical study to demonstrate the efficacy of Macrilen™ (macimorelin)
for the evaluation of AGHD, as well as a dedicated thorough QT study to evaluate the effect of Macrilen™ (macimorelin) on myocardial
repolarization. The confirmatory Phase 3 clinical study of Macrilen™ (macimorelin), entitled “Confirmatory validation of oral macimorelin as a
growth hormone stimulation test (“GHST”) for the diagnosis of AGHD in comparison with the insulin tolerance test (ITT)”, was designed as a two-
way crossover study with the ITT as the benchmark comparator and involved 31 sites in the U.S. and Europe. The study population was planned to
include at least 110 subjects (at least 55 ITT-positive and 55 ITT-negative) with a medical history documenting risk factors for AGHD, and was
planned to include a spectrum of subjects from those with a low risk of having AGHD to those with a high risk of having the condition.
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● On May 26, 2015, we announced that we had received written scientific advice from the EMA regarding the further development plan, including the
study design, for the new confirmatory Phase 3 clinical study of Macrilen™ (macimorelin) for use in evaluating AGHD. As a result of the advice, we
believe that the confirmatory Phase 3 study that was agreed with the FDA meets the EMA’s study-design expectations as well, allowing for U.S. and
European approval, if the study is successful.
● On November 19, 2015, we announced the enrollment of the first patient in the confirmatory Phase 3 clinical study of Macrilen™ (macimorelin).
● On October 26, 2016, we announced completion of patient recruitment for the confirmatory Phase 3 clinical trial of Macrilen™ (macimorelin) as a
GHST for the evaluation of AGHD. In addition, we completed the dedicated QT study as requested by the FDA in the CRL to evaluate the effect of
Macrilen™ (macimorelin) on the QT interval.
● On January 4, 2017, we announced that, based on an analysis of top-line data, the confirmatory Phase 3 clinical trial of Macrilen™ (macimorelin)
failed to achieve one of its co-primary endpoints. Under the study protocol, the evaluation of AGHD with Macrilen™ (macimorelin) would be
considered successful, if the lower bound of the two-sided 95% confidence interval for the primary efficacy variables was 75% or higher for “percent
negative agreement” with the ITT, and 70% or higher for the “percent positive agreement” with the ITT. While the estimated percent negative
agreement met the success criteria, the estimated percent positive agreement did not reach the criteria for a successful outcome. Therefore, the results
did not meet the pre-defined equivalence criteria which required success for both the percent negative agreement and the percent positive agreement.
● On February 13, 2017, we announced that, after reviewing the raw data on which the top-line data were based, we had concluded that Macrilen™
(macimorelin) had demonstrated performance supportive of achieving FDA registration and that we intended to pursue registration. The announcement
set forth the facts on which our conclusion was based. The Company met with the FDA at the end of March 2017 to discuss this position.
● On March 7, 2017, we announced that the Pediatric Committee (“PDCO”) EMA agreed to the Company’s Pediatric Investigation Plan (“PIP”) for
Macrilen™ (macimorelin) and agreed that the Company may defer conducting the PIP until after it files a Marketing Authorization Application
(“MAA”) seeking marketing authorization for the use of Macrilen™ (macimorelin) for the evaluation of AGHD.
● On July 18, 2017, we were provided a PDUFA date of December 30, 2017 by the FDA.
● On November 27, 2017, the EMA accepted our MMA submission for Macrilen™ (macimorelin).
● On December 20, 2017, the FDA approved the market authorization for Macrilen™ (macimorelin), to be used in the diagnosis of patients with AGHD.
● On January 16, 2018, the Company, through AEZS Germany, entered into a License Agreement to carry out development, manufacturing, registration,
regulatory and supply chain services for the commercialization of Macrilen™ (macimorelin) in the U.S. and Canada as further described below.
● In the August 2018, Volume 103, Issue 8 edition of The Journal of Clinical Endocrinology and Metabolism, the pivotal Phase 3 data from the
macimorelin confirmatory trial was published by Jose M. Garcia, MD, PhD, et al., titled ‘Macimorelin as a Diagnostic Test for Adult GH Deficiency’.
● On November 19, 2018, we announced the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA adopted a positive opinion
recommending a marketing authorization for macimorelin.
● On January 16, 2019, we announced that the EC granted marketing authorization for macimorelin.
● On December 18, 2019, we announced that the American Association of Clinical Endocrinologists (“AACE”) and the American College of
Endocrinology (“ACE”) published new “Guidelines for Management of Growth Hormone Deficiency in Adults and Patients Transitioning from
Pediatric to Adult Care” (“Guidelines”). Theses AACE/ACE 2019 Guidelines identify macimorelin as a “shorter and simpler alternative” compared to
the traditionally available GHST.
● On January 28, 2020, we announced successful completion of patient recruitment for the first pediatric study of macimorelin as a GHST for the
evaluation of GHD in children.
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Macrilen™ (macimorelin) License Agreement
On January 16, 2018, we entered into the License Agreement which provides (i) for the “right to use” license relating to the Adult Indication, (ii) for the
right to acquire a license for the Pediatric Indication if and when the FDA approves a pediatric indication, (iii) that the licensee is to fund 70% of the costs
of a pediatric clinical trial submitted for approval to the EMA under the PIP to be run by the Company with customary oversight from a joint steering
committee (the “JSC”) and (iv) an interim supply arrangement (“Supply Arrangement”). Strongbridge Ireland Limited (“Strongbridge”), effective
December 19, 2018, sold the U.S. and Canadian rights to Macrilen™ (macimorelin) to Novo for a payment plus tiered royalties on net sales. The service
agreement under which Novo agreed to fund Strongbridge’s Macrilen™ (macimorelin) field organization as a contract field force to promote the product in
the U.S. was terminated as of December 1, 2019.
(i) Adult Indication
Under the terms of the License Agreement, and for as long as Macrilen™ (macimorelin) is patent-protected, the Company will be entitled to a 15% royalty
on annual net sales up to $75.0 million, and an 18% royalty on annual net sales above $75.0 million. Following the end of patent protection in the U.S. or
Canada for Macrilen™ (macimorelin), the Company will be entitled to a 5% royalty on net sales in that country. In addition, the Company will receive one-
time payments ranging from $4.0 million to $100.0 million upon the achievement of commercial milestones going from $25.0 million annual net sales up
to $500.0 million annual net sales.
In January 2018, the Company received a cash payment of $24.0 million from Strongbridge and on July 23, 2018, Strongbridge launched product sales of
Macrilen™ (macimorelin) in the U.S. In 2018, the Company received royalty fees of $183,878 and in in the year ended December 31, 2019, received
royalty fees of $45,000 under the License Agreement.
(ii) Pediatric Indication
Upon approval by the FDA of a pediatric indication for Macrilen™ (macimorelin), the Company will receive a one-time milestone payment from Novo of
$5.0 million.
(iii) PIP Study
We have initiated an open label, single dose trial to investigate the pharmacokinetics, pharmacodynamics, safety and tolerability of macimorelin in pediatric
patients from two to less than 18 years of age with suspected GHD. Under the terms of the License Agreement, the licensee will pay 70% and the Company
will pay the remaining 30% of the research and development costs associated with the PIP. The Company invoiced $358,000 in 2018 and $979,000 in the
year ended December 31, 2019, as the licensee’s share of the costs incurred by the Company under the PIP.
(iv) Supply Arrangement
The Company agreed, in the Supply Arrangement to the License Agreement, to supply ingredients for the manufacture of Macrilen™ (macimorelin) during
an interim period at a price that is set ‘at cost’ without any profit margin. The Company believes the stand-alone selling price of the manufacturing
ingredients to be their cost, as that approximates the amount at which Novo would be able to procure those same goods with other suppliers.
In November 2019, Novo contracted AEZS Germany, to provide supply chain services including API batch production and delivery of certain API and
semi-finished goods, as well as the provision of ongoing support activities. In 2019, the Company invoiced $1,159,000 (2018 – $2,167,000) and has
received payment in full of these invoices.
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Rest of the world commercialization of macimorelin
On January 16, 2019, we announced that the EC had granted marketing authorization for macimorelin for the diagnosis of AGHD. AGHD may occur in an
adult patient who has a history of childhood onset GHD or may occur during adulthood as an acquired condition. Considering a population of 513 million
for the E.U. and the UK, research based on prevalence suggests that about 34,000 adults could be afflicted with GHD, with about 5,600 new cases per year.
This milestone marks a key development in our European commercialization strategy and we are in discussions with a variety of companies regarding
licensing and/or distribution opportunities in the ROW, although there can be no assurances that any such discussions will result in any definitive licensing
and/or distribution arrangements.
Monetization of non-strategic assets
Opportunities for the Company to monetize non-strategic assets include preclinical work done on AEZS-120, a prostate cancer vaccine and preclinical and
clinical work done on AEZS-108 (zoptarelin doxorubicin) and AEZS-104 (perifosine).
Other
Our commercial operations were significantly reduced in the fourth quarter of 2017. We eliminated our contract sales team in its entirety, as well as
remaining sales management in November 2017, in accordance with the terms of our agreement with inVentiv Commercial Services, LLC, an affiliate of
inVentiv Health, Inc. (“inVentiv”), a contract-sales organization. Our agreement with inVentiv commenced in November 2014.
Pursuant to termination of the inVentiv agreement, we ended our co-promotion with EMD Serono, Inc. (“EMD Serono”) and Armune BioScience, Inc.
(“Armune”).
Until September 1, 2016, we co-promoted a product, EstroGel®, and until termination of our sales team in November 2017, the inVentiv sales force
promoted two products:
Saizen® [somatropin (rDNA origin) for injection] is a prescription medicine indicated for the treatment of GHD in children and adults. We promoted
Saizen® pursuant to our promotional services agreement (the “EMD Serono Agreement”) with EMD Serono Inc. which we entered into in May 2015 and
amended as of December 31, 2016. The EMD Serono Agreement, as amended, provided that we were to promote Saizen® in specific agreed-upon U.S.
territories to adult and pediatric endocrinologists in exchange for a sales commission that was based upon new patient starts of the product. The agreement
was terminated in accordance with its terms in December 2017.
APIFINY® is the only cancer-specific, non-PSA blood test for the evaluation of the risk of prostate cancer. The test was developed by Armune, a medical
diagnostics company that develops and commercializes unique proprietary technology exclusively licensed from the University of Michigan for diagnostic
and prognostic tests for cancer. We entered into a co-marketing agreement with Armune in November 2015 (the “Armune Agreement”), which was
amended effective as of June 1, 2016, which allowed us to exclusively promote APIFINY® throughout the entire U.S. We received a commission for each
test performed resulting from our targeted promotion without regard to any established baseline. The Armune Agreement, as amended, had a three-year
term that renewed automatically for successive one-year periods. The parties agreed in January 2018 that the Armune Agreement was terminated.
ZoptrexTM is a complex molecule that combines a synthetic peptide carrier with doxorubicin, a well-known chemotherapy agent. The synthetic peptide
carrier is a luteinizing hormone-releasing hormone (“LHRH”) agonist, a modified natural hormone with affinity for the LHRH receptor. The design of the
compound should allow for the specific binding and selective uptake of the cytotoxic conjugate by LHRH receptor-positive tumors. On December 1, 2014,
we have licensed the development, commercialization and certain other rights to Zoptrex™ to Sinopharm A-Think for China, Hong Kong and Macau; on
July 1, 2016, to an affiliate of Orient EuroPharma Co., Ltd. for Taiwan and southeast Asia; on July 31, 2016, to Rafa Laboratories, Ltd for Israel and the
Palestinian territories and on December 12, 2016, to Specialised Therapeutics Asia Pte Ltd for Australia and New Zealand (collectively, the “Zoptrex
Agreement”).
35
Geographic Areas
A description of the principal geographic areas in which we compete, including a geographical and categorical breakdown of our revenues in the past three
years, is presented in note 25 (Segment information) to our consolidated financial statements included in this Annual Report on Form 20-F at Item 18.
Seasonality
As a specialty biopharmaceutical company, the Company does not consider any of its products or services to be seasonal.
Raw Materials
Raw materials and supplies are generally available in quantities adequate to meet the needs of our business. We will be dependent on third-party
manufacturers for the pharmaceutical products that we or our licensees will market. 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.
Regulation of Drug Development
Generally. Governmental authorities in the U.S., Canada, Europe and other countries extensively regulate the preclinical and clinical testing,
manufacturing, labeling, storage, record keeping, advertising, promotion, export, marketing and distribution, among other things, of pharmaceuticals.
Under the laws of the U.S., the countries of the E.U., and other countries, we are subject to obligations to ensure that our clinical trials are conducted in
accordance with GCP guidelines and the investigational plan and protocols contained in an IND application, or comparable foreign regulatory submission.
Set forth below is a brief summary of the material governmental regulations affecting us in the major markets in which we intend to market our products
and/or promote products that we acquire or in-license or to which we obtain promotional rights.
The United States. In the U.S., the FDA’s Center for Drug Evaluation and Research (“CDER”) under the Federal Food, Drug and Cosmetic Act of 1938, as
amended (the “FDCA”), the Public Health Service Act and other federal statutes and regulations, subjects pharmaceutical products to rigorous review. In
order to market and sell a new drug product in the U.S., we must first test it and send CDER evidence from these tests to prove that the drug is safe and
effective for its intended use. In most cases, these tests include extensive preclinical, clinical, and laboratory tests. A team of CDER physicians,
statisticians, chemists, pharmacologists, and other scientists reviews the company’s data and proposed labeling. If this independent and unbiased review
establishes that a drug’s health benefits outweigh its known risks, the drug is approved for sale. CDER does not test the drug itself but it does conduct
limited research in the areas of drug quality, safety, and effectiveness standards. Before approving a new drug or marketing application, the FDA may
conduct pre-approval inspections of the developer of the drug (the “sponsor”), its CROs and/or its clinical trial sites to ensure that clinical, safety, quality
control, and other regulated activities are compliant with GCP, or Good Laboratory Practices (“GLP”), for specific non-clinical toxicology studies.
Manufacturing facilities used to produce a product are also subject to ongoing inspection by the FDA. The FDA may also require confirmatory trials, post-
marketing testing, and/or extra surveillance to monitor the effects of approved products, or place conditions on any approvals that could restrict the
commercial applications of a product. Once approved, the labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must
be in compliance with FDA regulatory requirements.
The first stage required for ultimate FDA approval of a new biologic or drug involves completion of preclinical studies whereby a sponsor must test new
drugs on animals for toxicity. Multiple species are used to gather basic information on the safety and efficacy of the compound being investigated and/or
researched. The FDA regulates preclinical studies under a series of regulations called the current GLP regulations as well as regulatory requirements found
in Part 21 subchapter D of the Code of Federal Regulations. If the sponsor violates these regulations, the FDA may require that the sponsor replicate those
studies or can subject the sponsor to enforcement actions or penalties as described further below. The sponsor then submits to the FDA an IND application
based on the results from initial testing that include the drug’s composition and manufacturing, along with a plan for testing the drug on humans. The FDA
reviews the IND to ensure that the proposed studies (clinical trials) do not place human subjects at unreasonable risk of harm. FDA also verifies that there
are adequate informed consent and human subject protections in place.
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After a sponsor submits an IND application, it must wait 30 days before starting a clinical trial to allow FDA time to review the prospective study. If FDA
finds a problem, it can order a clinical hold to delay an investigation, or interrupt a clinical trial if problems occur during the study. After the IND
application is in effect, a sponsor may commence human clinical trials. The sponsor typically conducts human clinical trials in three sequential phases, but
the phases may overlap. In Phase 1 trials, the sponsor tests the product in a small number of patients or healthy volunteers (typically 20-80 healthy
volunteers), primarily for safety at one or more doses. The goal in this phase is to determine what the drug’s most frequent side effects are and, often, how
the drug is metabolized and excreted. Phase 2 studies begin if Phase 1 studies do not reveal unacceptable toxicity. In Phase 2, in addition to safety, the
sponsor evaluates the efficacy of the product in a patient population somewhat larger than Phase 1 trials. The number of subjects in Phase 2 studies
typically ranges from a few dozen to about 300. This phase aims to obtain preliminary data on whether a drug works in people who have a certain disease
or condition. At the end of Phase 2, the FDA and sponsor try to come to an agreement on how large-scale studies in Phase 3 should be done.
Phase 3 studies begin if evidence of effectiveness is shown in Phase 2. Phase 3 trials typically involve additional testing for safety and clinical efficacy in
an expanded population at geographically dispersed test sites. The sponsor must submit to the FDA a clinical plan, or “protocol”, accompanied by the
approval of the institutions participating in the trials, prior to commencement of each clinical trial. The FDA may order the temporary or permanent
discontinuation of a clinical trial at any time. In the case of product candidates for cancer, the initial human testing may be done in patients with the disease
rather than in healthy volunteers. Because these patients are already afflicted with the target disease, such studies may provide results traditionally obtained
in Phase 2 studies. Accordingly, these studies are often referred to as “Phase 1/2” studies as they combine two phases. Even if patients participate in initial
human testing and a Phase 1/2 study is carried out, the sponsor is still responsible for obtaining all the data usually obtained in both Phase 1 and Phase 2
studies.
The sponsor must submit to the FDA the results of the preclinical and clinical testing, together with, among other things, detailed information on the
manufacture and composition of the product, in the form of an NDA or, in the case of a biologic, a Biologics License Applications (“BLA”). In a process
that can take a year or more, the FDA reviews this application and, when and if it decides that adequate data are available to show that the new compound
is both safe and effective for a particular indication and that other applicable requirements have been met, approves the drug or biologic for marketing. The
amount of time taken for this approval process is a function of a number of variables, including the quality of the submission and studies presented and the
potential contribution that the compound will make in improving the treatment of the disease in question.
Orphan-drug designation is granted by the FDA Office of Orphan Drug Products to novel drugs or biologics that are intended for the safe and effective
treatment, diagnosis or prevention of rare diseases or disorders that affect fewer than 200,000 people in the U.S., or that affect more than 200,000 people
but are not expected to recover the costs of developing and marketing a treatment drug. The designation provides the sponsor with a seven-year period of
U.S. marketing exclusivity if the drug is the first of its type approved for the specified indication or if it demonstrates superior safety, efficacy or a major
contribution to patient care versus another drug of its type previously granted the designation for the same indication. We have been granted orphan drug
designations for Macrilen™ (macimorelin) for the evaluation of GHD.
Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), newly-approved drugs and indications may
benefit from a statutory period of non-patent data exclusivity. The Hatch-Waxman Act provides five-year data exclusivity to the first applicant to gain
approval of an NDA for a new chemical entity (“NCE”) meaning that the FDA has not previously approved any other drug containing the same active
pharmaceutical ingredient, or active moiety. Although protection under the Hatch-Waxman Act will not prevent the submission or approval of another full
NDA, such an NDA applicant would be required to conduct its own preclinical and adequate, well-controlled clinical trials to demonstrate safety and
effectiveness.
The Hatch-Waxman Act also provides three years of data exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2)
applications, for, among other things, new indications, dosage forms, routes of administration, or strengths of an existing drug, or for a new use, if new
clinical investigations that were conducted or sponsored by the sponsor are determined by the FDA to be essential to the approval of the application. This
exclusivity, which is sometimes referred to as clinical investigation exclusivity, would not prevent the approval of another application if the sponsor has
conducted its own adequate, well-controlled clinical trials demonstrating safety and efficacy, nor would it prevent approval of a generic product that did not
incorporate the exclusivity-protected changes of the approved drug product.
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The labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements.
Failure to comply with applicable requirements can lead to the FDA demanding that production and shipment cease and, in some cases, that the
manufacturer recall products, or to enforcement actions that can include seizures, injunctions, and criminal prosecution. These failures can also lead to
FDA withdrawal of approval to market a product.
Canada. In Canada, the Therapeutic Products Directorate of Health Canada is the Canadian federal authority that regulates pharmaceutical drugs and
medical devices for human use. Prior to being given market authorization, a sponsor must present substantive scientific evidence of a product’s safety,
efficacy and quality as required by the Food and Drugs Act and other legislation and regulations. The requirements for the development and sale of
pharmaceutical drugs in Canada are substantially similar to those in the U.S., which are described above.
The European Union. Medicines can be authorized in the E.U. by using either the centralized authorization procedure or national authorization procedures.
The E.U. has implemented a centralized procedure coordinated by the EMA for the approval of human medicines, which results in a single marketing
authorization issued by the EC that is valid across the E.U., as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for
human medicines that are derived from biotechnology processes, such as genetic engineering, that contain a new active substance indicated for the
treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions,
and designated orphan medicines. For medicines that do not fall within these categories, an applicant has the option of submitting an application for a
centralized marketing authorization to the EMA, as long as the medicine concerned is a significant therapeutic, scientific or technical innovation, or if its
authorization would be in the interest of public health.
There are also two other possible routes to authorize medicinal products in several EU countries, which are available for investigational drug products that
fall outside the scope of the centralized procedure:
● Decentralized procedure. Using the decentralized procedure, a sponsor may apply for simultaneous authorization in more than one EU country of
medicinal products that have not yet been authorized in any EU country and that do not fall within the mandatory scope of the centralized procedure. The
application will be reviewed by a selected Reference Member State (“RMS”). The Marketing Authorization granted by the RMS will then be recognized by
the other Member States involved in this procedure.
● Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with the
national procedures of that country. Following this, further marketing authorizations can be sought from other EU countries in a procedure whereby the
countries concerned agree to recognize the validity of the original, national marketing authorization.
Regulation of Commercial Operations
The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the manner in which manufacturers interact with
purchasers and prescribers, are subject to various U.S. federal and state laws, including the federal anti-kickback statute and the False Claims Act and state
laws governing kickbacks, false claims, unfair trade practices, and consumer protection, and to similar laws in other countries. In the U.S., these laws are
administered by, among others, the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, the
Federal Trade Commission, the Office of Personnel Management and state attorneys general. Over the past several years, the FDA, the DOJ and many
other agencies have increased their enforcement activities with respect to pharmaceutical companies and increased the inter-agency coordination of
enforcement activities.
In the U. S., biopharmaceutical and medical device manufacturers are required to record any transfers of value made to licensed physicians and teaching
hospitals and to disclose such data to the Department of Health and Human Services (“HHS”). In addition to civil penalties for failure to report transfers of
value to physicians or teaching hospitals, there will be criminal penalties if a manufacturer intentionally makes false statements or excludes information in
such reports. The payment data across biopharmaceutical and medical device companies is posted by HHS on a publicly available website. Increased
access to such data by fraud and abuse investigators, industry critics and media will draw attention to our collaborations with reported entities and will
importantly provide opportunities to underscore the critical nature of our collaborations for developing new medicines and exchanging scientific
information. This national payment transparency effort coupled with industry commitment to uphold voluntary codes of conduct (such as the PhRMA Code
on Interactions with Healthcare Professionals and PhRMA Guiding Principles Direct to Consumer Advertisements About Prescription Medicines) and
rigorous internal training and compliance efforts will complement existing laws and regulations to help ensure ethical collaboration and truthful product
communications.
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The Canadian association of Research-Based Pharmaceutical Companies (“Rx & D”) has adopted “Guidelines for Transparency in Stakeholder Funding”
that require member companies to regularly disclose, by means of the web sites and annual reports, a list of all stakeholders to which they provide direct
funding. The term “stakeholder” is defined in Rx & D’s Code of Ethical Practices to include “Health Care Professionals”. In the E.U., the disclosure code
of transfers of value to healthcare professionals and organizations adopted by the European Federation of Pharmaceutical Industries and Associations
(“EFPIA”) requires all members of EFPIA to disclose transfers of value to healthcare professionals and healthcare organizations beginning in 2016,
covering the relevant transfers in 2015. Each member company will be required to document and disclose: (i) the names of healthcare professionals and
associations that have received payments or other transfers of value and (ii) the amounts or value transferred, and the type of relationship.
For more information about the regulatory risks associated with our business operations, see “Item 3D. Risk Factors”.
Intellectual Property - Patents
We seek to protect our compounds, manufacturing processes, compositions and methods of medical use for our lead drugs and drug candidates through a
combination of patents, trade secrets and know-how. Our patent portfolio consists of approximately 6 owned and in-licensed patent families (issued,
granted or pending in the U.S., Europe and other jurisdictions). The patent positions of companies in the biotechnology and pharmaceutical industries are
highly uncertain and involve complex legal and factual questions. Therefore, we cannot predict the breadth of claims, if any, that may be allowed under any
of our patent applications, or the enforceability of any of our allowed patents. See “Item 3.D. Risk Factors - We may not obtain adequate protection for our
products through our intellectual property.”
Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent
protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its
coverage and the availability of legal remedies in the country. In the U.S., the patent term of a patent that covers an FDA-approved drug may also be
eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review
process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent, in which the patentee may file an
application for yearly interim extensions within five years if the patent will expire and the FDA has not yet approved the NDA. The length of the patent
term extension is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a
total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended.
Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In these jurisdictions,
however, no interim extensions exist and the marketing approval must be granted before the patent expires. In the future, we expect to apply for patent term
extensions on patents covering those products, outside the U.S. While we anticipate that any such applications for patent term extensions will likely be
granted, we cannot predict the precise length of time for which such patent terms would be extended in the U.S., Europe or other jurisdictions. If we are not
able to secure patent term extensions on patents covering our products for meaningful periods of additional time, we may not achieve or sustain
profitability, which would adversely affect our business.
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In addition to patent protection, our products may benefit from the market-exclusivity provisions contained in the orphan-drug regulations or the pediatric-
exclusivity provisions or other provisions of the FDA Act, such as a NCE exclusivity or new formulation exclusivity. Orphan drug regulations provide
incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of rare diseases, currently defined as
diseases that exist in fewer than 200,000 individuals in the U.S., or diseases that affect more than 200,000 individuals in the U.S. but that the sponsor does
not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can seek tax benefits, and the
holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for such FDA-approved
orphan product. In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts specified testing
in pediatric or adolescent populations. If granted, this pediatric exclusivity provides an additional six months which are added to the term of data protection
as well as to the term of any relevant patents, to the extent these protections have not already expired. We may also seek to utilize market exclusivities in
other territories, such as in the E.U. There can be no assurance that any of our drug candidates will obtain such orphan drug designation, pediatric
exclusivity, a NCE exclusivity or any other market exclusivity in the U.S., the E.U. or any other territory, or that we will be the first to receive the
regulatory approval in a given country or territory for such drugs so as to be eligible for any market exclusivity protection.
Macrilen™ (macimorelin):
We hold the worldwide rights to macimorelin pursuant to an exclusive license agreement with the French Centre National de la Recherche Scientifique, as
licensor, and AEZS Germany, as licensee. Macrilen™ is the approved trademark for macimorelin as licensed under the License Agreement for
commercialization in the U.S. and Canada, only.
The following patents and patent applications relate to macimorelin:
● U.S. patent 6,861,409 covers macimorelin and U.S. patent 7,297,681 covers other related growth hormone secretagogue compounds, each also
covering pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. U.S.
patent 6,861,409 and U.S. patent 7,297,681 both expire in August 2022.
● European patent 1 289 951 covers macimorelin and European patent 1 344 773 covers other related growth hormone secretagogue compounds,
pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. EP patent 1
289 951 and EP patent 1 344 773 both expire in June 2021.
● Japanese patent 3 522 265 covers macimorelin and pharmaceutical compositions comprising the compounds as well as their medical use for elevating
the plasma level of growth hormone. This patent expires in June 2021.
● Canadian patent 2,407,659 covers macimorelin and pharmaceutical compositions comprising the compounds as well as their medical use for elevating
the plasma level of growth hormone. This patent expires in June 2021.
● U.S. patent 8,192,719 covers a method of assessing pituitary-related GHD in a human or animal subject comprising an oral administration of the
compound macimorelin and determination of the level of growth hormone in the sample and assessing whether the level of growth hormone in the
sample is indicative of GHD. This patent expires in October 2027.
● European patent 1 984 744 covers a method of assessing pituitary-related GHD by oral administration of macimorelin. This patent expires in February
2027.
● Japanese patent 4 852 728 covers a method of assessing pituitary-related GHD by oral administration of macimorelin. This patent expires in February
2027.
● U.S. provisional patent applications Serial No. 62/607,866 was filed on December 19, 2017 and Serial No. 62/609,059 was filed on December 21,
2017. Both are identical and are directed to a method of assessing GHD comprising oral administration of a macimorelin containing composition and
collecting one or two post-administration samples.
● The non-provisional U.S. application 15/993,507 was filed on May 30, 2018 drawing the priority of both provisional applications. The related U.S.
patent 10,288,629 was granted on May 14, 2019, and will expire on May 30, 2038.
● A PCT application was filed December 18, 2018 drawing the priority of both provisional U.S. applications. In addition to the method of assessing
GHD comprising oral administration of a macimorelin containing composition and collecting one or two post-administration samples, the PCT
application also covers a similar method of assessing GHD using 3 post-administration samples.
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Zoptrex™
We have licensed the intellectual property and associated rights relating to LHRH agonists and LHRH antagonists carrying various cytotoxic radicals
(including zoptarelin doxorubicin) from the Administrators of the Tulane Educational Fund (“Tulane”) pursuant to a license agreement dated September 17,
2002 between Tulane, as licensor, and AEZS Germany, as licensee (the “Tulane Agreement”). The Tulane Agreement grants to us an exclusive worldwide
license for all therapeutic uses of LHRH agonists and LHRH antagonists carrying various cytotoxic radicals, to the extent covered by one of the licensed
patents. The term of the Tulane Agreement continues for ten years after the first commercial sale of a product based on the licensed intellectual property (a
“Licensed Product”) or until the expiration of the last to expire of the licensed patents, whichever is longer, on a country-by- country basis.
Pursuant to the Tulane Agreement, we are required to pay Tulane the following amounts: (i) $400,000 upon the first grant of regulatory approval for a
Licensed Product in the U.S., Canada, the E.U. or Japan; (ii) 10% of all consideration received by us from a sublicensee for authorization to use the
licensed intellectual property to develop, manufacture, market, distribute and sell a Licensed Product; (iii) 2.5% of our net sales of Licensed Products; and
(iv) 50% of any royalties that we receive from a sublicensee with respect to its net sales of Licensed Products; provided, however, that the payment with
respect to royalties received from a sublicensee shall not be less than 1.75% nor more than 2.5% of the sublicensee’s net sales of the Licensed Product.
All patents covered by the Tulane Agreement expired by November 2016. In early 2015, we filed a European patent application directed to a novel method
of manufacturing Zoptrex™. Within the 12 months priority period, we also filed an international patent application for the manufacturing process, as well
as national patent applications in selected countries, including the U.S., China, and Taiwan, Japan and India. As a consequence of the negative Phase 3
ZoptEC study received in April 2017, we ceased further Zoptrex™ (zoptarelin doxorubicin) development and intellectual property filings and maintenance.
Disorazol Z - LHRH conjugates (AEZS-138):
We own a number of patents that relate to our Disorazol Z - LHRH conjugates. As a consequence of the negative Phase III ZoptEC study received in April
2017, we ceased further Disorazol Z - LHRH conjugate development and intellectual property filings.
C.
Organizational structure
Our corporate structure, the jurisdiction of incorporation of our direct and indirect subsidiaries and the percentage of shares that we held in those
subsidiaries as at December 31, 2019 is depicted in the chart set forth under the caption “Item 4.A. History and development of the Company”.
41
D.
Property, plant and equipment
Our registered address is located in Toronto, Canada. Our corporate head office is located in Summerville, South Carolina, which is a suburb of Charleston,
South Carolina and our largest office is located in Frankfurt, Germany. We do not own any real property. The following table sets forth information with
respect to our main facilities as at December 31, 2019.
Location
Use of space
Occupied for administration
Square Footage
168
Type of interest
Leasehold
Occupied for management, R&D, business development
30,343
Leasehold
and administration
315 Sigma Drive, Summerville SC
29486
Weismüllerstr. 50
D-60314
Frankfurt-am-Main, Germany
We believe that our current facilities are adequate to meet our ongoing needs.
Item 4A
Unresolved Staff Comments
Not required.
Item 5.
Operating and Financial Review and Prospects
Key Developments
Financing activities
On September 20, 2019, the Company entered into a securities purchase agreement with U.S. institutional investors to purchase $5.0 million (before
transaction costs of $0.8 million) of our Common Shares for $1.50 per share in a registered direct offering and warrants to purchase Common Shares in a
concurrent private placement. Under the terms of the securities purchase agreement, the Company sold 3,325,000 Common Shares. In a concurrent private
placement, the Company issued warrants to purchase up to an aggregate of 3,325,000 Common Shares. The warrants are exercisable commencing six
months from the date of issuance, have an exercise price of $1.65 per share and expire five years following the date of issuance.
Subsequent to 2019, on February 21, 2020, the Company closed a registered direct offering for 3,478,261 Common Shares, at a purchase price of $1.29375
per share, priced at-the-market. Additionally, the Company issued to the investors unregistered warrants to purchase up to an aggregate of 2,608,696
Common Shares in a concurrent private placement. The warrants have an exercise price of $1.20 per Common Share, are exercisable immediately and will
expire five and one-half years following the date of issuance. The net cash proceeds to the Company from the offering totaled approximately $3.9 million.
The Company also issued 243,478 warrants to the placement agent with an exercise price of $1.61719 per Common Share, which are exercisable
immediately and will expire five years following the date of issuance.
Commercialization of Macrilen™ (macimorelin) in the U.S. and Canada
On January 16, 2018, the Company through AEZS Germany entered into the License Agreement with Strongbridge to carry out development,
manufacturing, registration, regulatory and supply chain services for the commercialization of Macrilen™ (macimorelin) in the U.S. and Canada, which
provides for (i) the “right to use” license relating to the Adult Indication; (ii) the sale of the right to acquire a license of a future pediatric indication
approved by the FDA; (iii) the licensee to fund 70% of the costs of a pediatric clinical trial submitted for approval to the EMA and FDA (the “PIP Study”)
to be run by the Company with customary oversight from a JSC; and (iv) an interim supply arrangement (the “Supply Arrangement”). Product sales of
Macrilen™ (macimorelin) began on July 23, 2018 by Strongbridge. Effective December 19, 2018, Strongbridge was sold to Novo.
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Following Novo’s acquisition of the U.S. and Canadian rights to Macrilen™ (macimorelin), the JSC met in January, May, August and December 2019 to
discuss Novo’s commercialization plan for the U.S. and Canada, their supply chain needs and the enrollment of patients and protocols of the PIP Study. The
Company expects that quarterly meetings will continue as forecasts for sales, inventory build and needs for the PIP Study progresses.
On December 18, 2019, the Company announced that the American Association of Clinical Endocrinologists (“AACE”) and American College of
Endocrinology (“ACE”) recently published the new ‘Guidelines for Management of Growth Hormone Deficiency in Adults and Patients transitioning from
Pediatric to Adult Care’. These AACE/ACE 2019 Guidelines (publicly available at (https://journals.aace.com/doi/10.4158/GL-2019-0405) identify
macimorelin as a “shorter and simpler alternative” compared to the traditionally available growth hormone stimulation tests (“GHSTs”). For further details,
refer to the text of the guideline. Full citation: AMERICAN ASSOCIATION OF CLINICAL ENDOCRINOLOGISTS AND AMERICAN COLLEGE OF
IN ADULTS AND PATIENTS
ENDOCRINOLOGY GUIDELINES FOR MANAGEMENT OF GROWTH HORMONE DEFICIENCY
TRANSITIONING FROM PEDIATRIC TO ADULT CARE Kevin C. J. Yuen, Beverly M. K. Biller, Sally Radovick, John D. Carmichael, Sina Jasim,
Kevin M. Pantalone, and Andrew R. Hoffman Endocrine Practice 2019 25:11, 1191-1232
Royalty income earned under the License Agreement for the twelve-month period ending December 31, 2019 was $0.05 million (2018 - $0.2 million) and,
during the twelve-month period ended December 31, 2019, the Company invoiced Novo $1.0 million for its share of PIP Study costs (2018 - $0.4 million).
The Company agreed, in the Supply Arrangement to the License Agreement, to supply ingredients for the manufacture of Macrilen™ (macimorelin) during
an interim period at a price that is set ‘at cost’ without any profit margin. In November 2019, Novo contracted AEZS Germany, to provide supply chain
services including API batch production and delivery of certain API and semi-finished goods, as well as the provision of ongoing support activities. In
2019, the Company invoiced $1.2 million (2018 – $2.2 million) and has received payment in full of these invoices.
Rest of the world commercialization of macimorelin
On January 16, 2019, we announced that the EC granted marketing authorization for macimorelin for the diagnosis of AGHD. We believe that this marks
an important development in our European commercialization strategy based on our research evaluating the potential number of GHSTs in adults in
Europe. We are in discussions with a variety of companies regarding licensing and/or distribution opportunities in the ROW, although there can be no
assurances that any such discussions will result in any definitive licensing and/or distribution arrangements.
Pediatric clinical trial for Macrilen™ (macimorelin)
Subsequent to 2019, on January 28, 2020, the Company announced the successful completion of patient recruitment for the first pediatric study of
macimorelin as a GHST for the evaluation of GHD in children. This study, AEZS-130-P01 (“Study P01”), is the first of two studies as agreed with the
European Medicines Agency in the Company’s PIP for macimorelin. Macimorelin, a ghrelin agonist, is an orally active small molecule that stimulates the
secretion of growth hormone from the pituitary gland into the circulatory system. The goal of Study P01 is to establish a dose that can both be safely
administered to pediatric patients and cause a clear rise in growth hormone concentration in subjects ultimately diagnosed as not having GHD. The
recommended dose derived from Study P01 will be evaluated in the pivotal second study AEZS-130-P02 (“Study P02”) on diagnostic efficacy and safety.
Study P01 is an international, multicenter study which is being conducted in Hungary, Poland, Ukraine, Serbia, Belarus and Russia. Study P01 is an open
label, group comparison, dose escalation trial designed to investigate the safety, tolerability, and pharmacokinetic/pharmacodynamic(“PK/PD”) of
macimorelin acetate after ascending single oral doses of macimorelin at 0.25, 0.5, and 1.0 mg per kg body weight in pediatric patients from 2 to less than
18 years of age with suspected GHD. We enrolled a total of 24 pediatric patients across the three cohorts of the study. Per study protocol, all enrolled
patients will complete four study visits after successful completion of the screening period. At Visit 1 and Visit 3, a provocative GH stimulation test will be
conducted according to the study sites’ local practices. At Visit 2, the macimorelin test will be performed: following the oral administration of the
macimorelin solution, blood samples will be taken at predefined times for PK/PD assessment. Visit 4 is a safety follow-up visit at study end.
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Study P01 is the first of two studies as agreed with the EMA in the Company’s PIP for macimorelin as a GHD diagnostic. Study P01 final study results are
expected in the second quarter of 2020. Thereafter, we plan to proceed with the pivotal Study P02 with expected start date in the fourth quarter of 2020 and
an expected completion date in July 2022, according to the PIP agreement with EMA.
Changes in personnel
On June 6, 2019, the Company announced that it was reducing the size of its German workforce and operations to more closely reflect the Company’s
ongoing commercial activities. AEZS Germany and its Works Council approved a restructuring that affected 8 employees and was completed on January
31, 2020, resulting in approximately $0.6 million in severance costs.
In July 2019, Michael Ward resigned as managing director of AEZS Germany and Dr. Klaus Paulini assumed this role. In August 2019, Jonathan Pollack
resigned as a director and, in September 2019, Brian Garrison, resigned as a Senior Vice President, Global Commercial Operations of Aeterna Zentaris. On
October 4, 2019, we announced the appointment of Dr. Klaus Paulini as President and Chief Executive Officer of Aeterna Zentaris, replacing Michael
Ward. Dr. Paulini was also appointed as a director of Aeterna Zentaris at that time.
On December 16, 2019, the Company announced changes to its director composition planned for the first quarter of 2020. Mr. Gilles Gagnon (M.Sc.,
MBA, ICD.D) joined the Board of the Company on January 1, 2020. Mr. Gérard Limoges, who has served on the Board of the Company since 2004, is
planning to retire from the Board on March 31, 2020, and, upon his retirement, Mr. Pierre-Yves Desbiens (CPA, CA, CF, MBA) is joining the Board on
April 1, 2020 and replaces Mr. Limoges as Chair of the Audit Committee.
NASDAQ notifications
On January 8, 2020, the Company announced that it had received a notification letter from the NASDAQ indicating that, because the closing bid price of
the Company’s common stock for 30 consecutive business days was below $1.00 per share, the Company no longer meets the minimum bid price
requirement set forth in NASDAQ Listing Rule5550(a)(2). NASDAQ Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price
requirement exists if the deficiency continues for a period of 30 consecutive business days. On January 23, 2020, the Company received a letter from the
NASDAQ stating that because the Company’s shares had a closing bid price at $1.00 per share or greater for a minimum of ten (10) consecutive business
days, Aeterna Zentaris’ stock has regained compliance with the Bid Price Rule and the NASDAQ considers the matter closed. As of the date of this Annual
Report on Form 20-F, the Company’s closing bid price was below $1.00. See “Item 3.D. Risk factors—Our Common Shares may be delisted from the
NASDAQ or the TSX, which could affect their market price and liquidity. If our Common Shares were to be delisted, investors may have difficulty in
disposing their Common Shares.”
44
Settlement of Class-Action Lawsuit
On March 9, 2020, the Company settled the previously disclosed class-action lawsuit against it pending in the U.S. District Court for New Jersey. The
settlement payment of $6.5 million will be funded entirely by our insurers. The class-action lawsuit alleged that the Company and certain of its former
officers and directors violated the Securities Exchange Act of 1934 in connection with certain public statements between August 30, 2011 and November 6,
2014, regarding the safety and efficacy of Macrilen™ (macimorelin) and the prospects for the approval of the Company’s NDA for the product by the
FDA. This settlement remains subject to execution of final settlement documents and approval by the U.S. District Court for the District of New Jersey.
Exposure to Epidemic or Pandemic Outbreak
As of March 25, 2020, coronavirus or COVID-19, a contagious disease that has been characterized by the World Health Organization as a pandemic, is
affecting the global community and is adversely affecting our business operations, which at this time cannot currently be fully determined or quantified.
Aeterna Zentaris has developed protocols and procedures should they be required to deal with any potential epidemics and pandemics, and has put these
protocols and procedures in place to address the current COVID-19 pandemic. Despite appropriate steps being taken to mitigate such risks, there can be no
assurance that existing policies and procedures will ensure that the Company’s operations will not be adversely affected.
The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected the economies and financial markets of many regions and
countries. While the COVID-19 outbreak may still be in its early stages, international stock markets have begun to reflect the uncertainty associated with
the potential economic impact of the outbreak and the significant declines in the TSX Composite Index, the NASDAQ and other major indices around the
world in the latter part of February and in March 2020 has largely been attributed to the effects of COVID-19. There can be no assurance that a disruption
in financial markets, regional economies and the world economy would not negatively affect Aeterna Zentaris’ access to capital or the financial
performance of the Company.
Uncertain factors, including the duration of the outbreak, the severity of the disease and the actions to contain or treat its impact, could impair our
operations including, among other things, employee mobility and productivity, availability of our facilities, conduct of our clinical trials and the availability
and the productivity of third party product and service suppliers. Please see the Risk Factor entitled “The economic effects of a pandemic, epidemic or
outbreak of an infectious disease could adversely affect our operations or the market price of our Common Shares” in our Annual Report on Form 20-F for
the year ended December 31, 2019.
Monetization of non-strategic assets
Opportunities for the Company to monetize non-strategic assets include preclinical work done on AEZS-120, a prostate cancer vaccine and preclinical and
clinical work done on AEZS-108 (zoptarelin doxorubicin) and AEZS-104 (perifosine).
45
A. Operating Results
Consolidated Statements of Comprehensive Loss Information
(in thousands, except share and per share data)
2019
2018
2019
Three months ended December
31,
Years ended
December 31,
2018
2017
Revenues
License fees
Product sales
Royalty income
Sales commission
Supply chain
Total revenues
Operating expenses
Cost of sales
Research and development costs
General and administrative expenses
Selling expenses
Restructuring costs
Impairment of right of use asset
Write-off of other current assets
Total operating expenses
(Loss) income from operations
Settlements
Gain due to changes in foreign currency exchange rates
Change in fair value of warrant liability
Other finance (costs) income
Net finance income (costs)
(Loss) income before income taxes
Income tax recovery (expense)
Net (loss) income
Other comprehensive (loss) income:
Foreign currency translation adjustments
Actuarial gain (loss) on defined benefit plans
Comprehensive (loss) income
Net loss per share (basic)
Net loss per share (diluted)
$
19
—
16
—
(17)
18
309
263
1,691
38
(266)
(254)
—
1,781
(1,763)
—
26
533
10
569
(1,194)
188
(1,006)
(268)
959
(315)
(0.05)
(0.05)
$
(332)
1,446
184
—
94
1,392
1,413
767
1,665
588
—
—
—
4,433
(3,041)
(1,400)
64
(1,489)
104
(1,321)
(5,762)
636
(5,126)
(13)
(418)
(5,557)
(0.31)
(0.31)
$
74
129
45
—
284
532
410
1,837
6,615
1,214
507
22
169
10,774
(10,242)
—
87
4,518
(593)
4,012
(6,230)
188
(6,042)
83
(1,068)
(7,027)
(0.35)
(0.35)
$
24,325
2,167
184
110
95
26,881
2,104
2,932
8,894
3,109
—
—
—
17,039
9,842
(1,400)
656
263
278
1,197
9,639
(5,452)
4,187
(260)
193
4,120
0.25
0.24
$
458
—
—
465
—
923
—
10,704
8,198
5,095
—
—
—
23,997
(23,074)
—
502
2,222
75
2,799
(20,275)
3,479
(16,796)
(1,430
694
(17,532)
(1.12)
(1.12)
Our operating and financial review and prospects should be read in conjunction with our consolidated financial statements, accompanying notes and other
information appearing in this Annual Report.
46
2019 compared with 2018
Fourth Quarter
Revenues
Our total revenue for the three-month period ended December 31, 2019 was $0.02 million as compared with $1.4 million for the same period in 2018,
representing a decrease of $1.4 million. The 2019 revenue was comprised of $0.02 million in royalty revenue (2018 - $0.2 million), $nil in product sales
(2018 - $1.4 million), ($0.02) million in supply chain revenue (2018 - $0.1 million) and $0.02 million in licensing revenue (2018 – ($0.3) million). The
product sales in 2018 represented sales of Macrilen™ (macimorelin) . There were no sales of Macrilen™ (macimorelin) in the fourth quarter of 2019.
Operating expenses
Our total operating expense for the three-month period ended December 31, 2019 was $1.8 million as compared with $4.4 million for the same period in
2018, representing a decrease of $2.7 million. This decrease arises primarily from a $1.1 million decline in cost of sales, a $0.5 million decline in research
and development costs, a $0.5 million decline in general and administrative expenses, a $0.3 million reversal of restructuring costs and a $0.3 impairment
in right of use assets. The decline in cost of sales arose from there being no sales of Macrilen™ (macimorelin) in the fourth quarter of 2019, as compared to
the fourth quarter of 2019 during which there were sales of Macrilen™ (macimorelin). The decline in research and development costs are attributed to the
difference phases of activity of Study P01. In the fourth quarter of 2018, study activities included study start with document development, medication
manufacturing, study feasibility testing at different sites and clinical trial applications in Hungary, Poland, Belarus, Russia, Ukraine and Serbia, while in
2019, the focus was on the clinical conduct. The expense amounts in the fourth quarter of 2019 reflect that most sites had completed their enrollment and
clinical activities. The decline in general and administrative expenses is due primarily to our cost control measures implemented in 2018 and the decline in
selling expenses arises from a reclassification of costs to cost of sales, in accordance with the signed supply agreement with Novo.
Settlements
In prior year’s fourth quarter, $1.4 million was classified as settlements as compared with nil in the same period in 2019. The costs in the fourth quarter of
2018 were to settle a lawsuit against the Company from two of its former executives. There were no settlements in 2019.
Net finance income (costs)
Our net finance income for the three-month period ended December 31, 2019 was $0.6 million as compared with a net finance costs of $1.3 million for the
same period in 2018, representing an increase of $1.9 million. This is primarily due to a $2.0 million change in fair value of warrant liability offset by
increased finance costs of $0.1 million. Such a non-cash change in fair value results from the periodic “mark-to-market” revaluation, which occurs through
the application of our pricing model, of our outstanding share purchase warrants.
Net Loss
For the three-month period ended December 31, 2019, we reported a consolidated net loss of $1.0 million, or $0.05 loss per common share (basic), as
compared with a consolidated net loss of $5.1 million, or $0.31 loss per common share (basic), for the three-month period ended December 31, 2018. The
$4.1 million improvement in net results is primarily from a gain in fair value of warrant liability of $2.0 million and a decline in operating expenses of $2.7
million.
Fiscal Year-End
47
Revenues
Our total revenue for the twelve-month period ended December 31, 2019 was $0.5 million as compared with $26.9 million for the same period in 2018,
representing a decline of $26.4 million. The 2019 revenue was comprised of $0.05 million in royalty income (2018 - $0.2 million), $0.1 million in product
sales (2018 - $2.2 million), $0.3 million in supply chain revenue (2018 - $0.1 million) and $0.1 million in licensing revenue (2018 - $24.3 million). There
was no sales commission revenue in 2019. The decline in total revenue in 2019 relates primarily to the one-time $24.0 million cash payment received from
executing the License Agreement in January 2018 and the initial delivery of Macrilen™ (macimorelin) to our licensee.
Operating expenses
Our total operating expense for the twelve-month period ended December 31, 2019 was $10.8 million as compared with $17.0 million for the same period
in 2018, representing a decrease of $6.2 million. This decline arises primarily from a $2.3 million reduction in general and administration expenses, a $1.9
million reduction in selling costs, a $1.7 million decline in cost of sales and a $1.1 million reduction in research and development costs, offset by $0.5
million increase in restructuring costs, $0.02 million impairment in right to use assets and $0.2 million write-off of other current assets. The decline in
general and administrative expenses and in selling expenses reflects the cost control improvements implemented in late 2018, the impact of the
restructuring in June 2019 and the settlement of lawsuits in 2018 (thereby reducing legal expenses). In 2019, our licensee purchased less Macrilen™
(macimorelin) product than they did in 2018.
Settlements
In 2018, $1.4 million was classified as settlements. These were costs to settle a lawsuit against the Company from two of its former executives. There were
no settlements in 2019.
Net finance income
Our net finance income for the twelve-month period ended December 31, 2019 was $4.0 million as compared with $1.2 million for the same period in
2018, representing an increase of $2.8 million. This is primarily due to a $4.3 million increase change in fair value of warrant liability, offset by a reduction
in gain due to foreign currency exchange rates of $0.6 million and a $0.9 million increase in other finance costs. Such a non-cash change in fair value
results from the periodic “mark-to-market” revaluation, which occurs through the application of our pricing model, of our outstanding share purchase
warrants. Increased finance costs result primarily from $0.5 million in transaction costs from the issuance of warrants in the September 2019 financing and
$0.1 million in costs from exploring other potential financings.
Net Loss
For the twelve-month period ended December 31, 2019, we reported a consolidated net loss of $6.0 million, or $0.35 loss per common share (basic), as
compared with a consolidated net income of $4.2 million, or $0.25 income per common share (basic), for the twelve-month period ended December 31,
2018. The $10.2 million decline in net results is primarily from a reduction of $26.3 million in revenue offset by $5.6 million in tax expense, $6.3 million
decline in operating expenses, $2.8 million increase in net finance income and $1.4 million decline in settlements.
2018 compared with 2017
Fourth Quarter
Revenues
Our total revenue for the three-month period ended December 31, 2018 was $1.4 million as compared with $0.2 million for the same period in 2017,
representing an increase of $1.2 million. The 2018 revenue comprised the net impact of $1.4 million in product sales less the $0.2 million reclassification
of the $24.0 million license revenue associated with the Pediatric Indication, to the consolidated statements of financial position. For the same period in
2017, total revenue was comprised of $0.1 million in license fees and $0.1 million in sales commission and other. The increase in product sales in the
fourth quarter of 2018 arises from the sale of Macrilen™ (macimorelin) inventory to our licensee for sale in the U.S.
48
Operating expenses
Our total operating expenses for the three-month period ended December 31, 2018 was $4.4 million as compared with $3.8 million for the same period in
2017, representing an increase of $0.6 million. This net increase arises primarily from a $1.4 million increase of cost of sales for Macrilen™ (macimorelin)
inventory sold under the Supply Arrangement to our licensee for future sales in the U.S., a $0.2 million increase in research and development costs and a
$0.1 million increase in selling expenses, offset by $1.1 million decrease in general and administration expenses.
Settlements
In the three-month period ended December 31, 2018, $1.4 million was classified as settlements as compared with nil in the same period in 2017. These
were costs to settle a lawsuit against the Company from two of its former executives and former sales agent.
Net finance costs
Our net finance loss for the three-month period ended December 31, 2018 was $1.3 million, as compared to $0.4 million for the same period in 2017,
representing an increase of $0.9 million. The increase in net finance costs is primarily due to the change in fair value of warrant liability. Such change in
fair value results from the periodic “mark-to-market” revaluation, via the application of pricing models, of outstanding share purchase warrants. The
closing price of our Common Shares, which, on the NASDAQ, fluctuated from $1.19 to $3.87 during the twelve-month period ended December 31, 2018,
compared to $2.67 to $2.70 during the same period in 2017, also had a direct impact on the change in fair value of warrant liability.
Net loss
For the three-month period ended December 31, 2018, we reported a consolidated net loss of $5.1 million, or $0.31 loss per common share, as compared
with a consolidated net loss of $0.5 million, or $0.03 loss per common share, for the three-month period ended December 31, 2017. The $4.6 million
increase in net loss, as compared with 2017, results primarily from a $2.8 million in tax expense, $1.4 million increase in cost of goods, $0.9 million
increase in finance costs and $1.4 million increase in settlements, offset by $1.2 million increase in total revenues. In the fourth quarter of 2018, unlike in
2017, we earned $0.2 million in royalty income from our licensee, expensed $1.4 million in settlement costs and had actively begun the EMA and FDA
pediatric study for Macrilen™ (macimorelin).
Fiscal Year-End
Revenues
Our total revenue for the year ended December 31, 2018 was $26.9 million as compared with $0.9 million for the same period in 2017, representing an
increase of $26.0 million. The 2018 revenue comprised $24.3 million in license revenue, $2.2 million in product sales and $0.2 million in royalty income
and $0.2 million in sales commissions as compared with $0.4 million in license fee and $0.5 million in sales commission in 2017. The increase in total
revenue in 2018 relates to license fees and product sales associated with executing the License Agreement signed for Macrilen™ (macimorelin) in January
2018.
Operating expenses
Our total operating expenses for the year ended December 31, 2018 was $17.0 million as compared with $24.0 million for the same period in 2017,
representing a decline of $7.0 million. This was primarily due to a $7.8 million decrease in research and development costs and a $2.0 million decrease in
selling expenses, offset by $2.1 million increase in cost of sales and a $0.7 million increase in general and administration expenses.
Our total cost of goods sold for the year ended December 31, 2018 was $2.1 million as compared with nil for the same period in 2017, reflecting the sale of
Macrilen™ (macimorelin) inventory pursuant to the Supply Arrangement under the License Agreement.
49
Research and development
In 2018, our focus was on the PIP Study for Macrilen™ (macimorelin), for which we received $0.4 million from our licensee for their share of such costs.
This study was initiated in the third quarter of 2018 with active screening of patients beginning in early 2019.
In 2017, we spent $2.5 million on third-party costs associated with the ZoptEC pivotal Phase 3 clinical study of Zoptrex™ (zoptarelin doxorubicin) and
$1.2 million on Macrilen™ (macimorelin) third-party costs. In addition, we recorded $2.6 million in severance accruals and other directly related costs and
an onerous lease provision related to the 2017 German Restructuring. This restructuring resulted from the May 2017 announcement that the ZoptEC pivotal
Phase 3 clinical study of Zoptrex™ (zoptarelin doxorubicin) did not achieve its primary endpoint of demonstrating a statistically significant increase in the
median period of overall survival of patients treated with Zoptrex™ (zoptarelin doxorubicin) as compared to patients treated with doxorubicin.
General and administrative expenses
These costs were higher in 2018 than expected as we incurred significant legal costs in the course of reaching settlement agreements for $1.4 million, as
previously discussed in Contingencies Other litigation.
Selling expenses
These costs are in-line with expectations and lower in 2018 than in 2017 due to the first quarter of 2018 termination of our North American sales team and
their co-promotion activities as we shifted our focus to the commercialization of Macrilen™ (macimorelin) in markets in the ROW.
Settlements
In 2018, $1.4 million was expensed for settlements as compared with nil in the same period in 2017. These were costs to settle two lawsuits against the
Company from two of its former executives and from its former sales agent.
Net finance income
Our net finance income for the year ended December 31, 2018 was $1.2 million, as compared to $2.8 million for the same period in 2017, representing a
decrease of $1.6 million. The decline in net finance income is primarily due to the change in fair value of our warrant liability. Such change in fair value
results from the periodic “mark-to-market” revaluation via the application of pricing models to our outstanding share purchase warrants. The closing price
of our Common Shares, which, on the NASDAQ, fluctuated from $1.19 to $3.87 during the twelve-month period ended December 31, 2018, compared to
$2.67 to $2.70 during the same period in 2017, also had a direct impact on the change in fair value of warrant liability.
50
Net Income
For the year ended December 31, 2018, we reported a consolidated net income of $4.2 million, or $0.25 per common share, as compared with a
consolidated net loss of $16.8 million, or $1.12 loss per common share, for the year ended December 31, 2017. The $21.0 million improvement in results,
as compared with 2017, arose primarily from a $23.9 million increase in gross profit and $9.1 million reduction in operating expenses, offset by $8.9
million movement in income taxes from recovery to (expense) and $1.6 million decrease in net finance income.
Selected quarterly financial data
(in thousands, except for per share data)
Revenues
Net (loss) income
Net (loss) income per share [basic]*
Net (loss) income per share [diluted]*
Three months ended
December 31,
2019
$
September 30,
2019
$
June 30,
2019
$
March 31,
2019
$
18
(1,006)
(0.05)
(0.05)
283
(331)
(0.02)
(0.02)
194
206
0.01
0.01
37
(4,911)
(0.30)
(0.30)
(in thousands, except for per share data)
Three months ended
Revenues
Net (loss) income
Net (loss) income per share [basic]*
Net loss per share [basic and diluted]*
December 31,
2018
$
September 30,
2018
$
June 30,
2018
$
March 31,
2018
$
1,392
(5,126)
(0.31)
(0.31)
663
(2,509)
(0.15)
(0.15)
168
(2,602)
(0.16)
(0.16)
24,658
14,424
0.88
0.87
* Net loss per share is based on the weighted average number of shares outstanding during each reporting period, which may differ on a quarter-to-quarter basis. As such, the sum of the quarterly
net loss per share amounts may not equal full-year net loss per share.
Historical quarterly results of operations and net (loss) income cannot be taken as reflective of recurring revenue or expenditure patterns of predictable
trends, largely given the non-recurring nature of certain components of our historical revenues, due most notably to unpredictable quarterly variations in net
finance income, which are impacted by periodic “mark-to-market” revaluations of our warrant liability and of foreign exchange gains and losses. In
addition, we cannot predict what the revenues from royalties will be from the License Agreement.
51
Condensed Consolidated Statement of Financial Position Information
(in thousands)
Cash and cash equivalents
Trade and other receivables and other current assets
Inventory
Restricted cash equivalents
Property, plant and equipment
Right of use assets
Other non-current assets
Total assets
Payables and accrued liabilities and income taxes payable
Current portion of provision for restructuring and other costs
Current portion of deferred revenues
Lease liabilities
Warrant liability
Non-financial non-current liabilities (1)
Total liabilities
Shareholders’ (deficiency) equity
Total liabilities and shareholders’ (deficiency) equity
December 31,
2019
$
2018
$
7,838
1,869
1,203
364
35
582
8,090
19,981
3,596
418
991
903
2,255
14,281
22,444
(2,463)
19,981
14,512
1,504
240
418
65
—
8,272
25,011
4,635
887
74
—
3,634
13,874
23,104
1,907
25,011
1.
Comprised mainly of employee future benefits, provisions for restructuring and other costs and non-current portion of deferred revenues.
Outstanding Share Data
As at March 25, 2020, we had 23,472,771 Common Shares issued and outstanding, as well as 953,557 stock options and Deferred Share Units (“DSUs”)
outstanding. Share purchase warrants outstanding as at March 17, 2020 represented a total of 9,453,174 equivalent common shares.
Recent Accounting Pronouncements
The IASB continues to issue new and revised IFRS. A listing of the recent accounting pronouncements promulgated by the IASB and not yet adopted by
the Company is included in note 5 to the Company’s December 31, 2019 consolidated financial statements which are included in Item 18 of this Annual
Report on Form 20-F.
B.
Liquidity, Cash Flows and Capital Resources
Since inception, we have incurred significant expenses in our efforts to develop and commercialize products. Consequently, the Company has incurred
operating losses and negative cash flow from operations historically and in each of the last several years except for the year ended December 31, 2018,
when the Company earned revenue from the sale of a license for the adult indication of Macrilen™ (macimorelin) in the U.S. and Canada. As at December
31, 2019, the Company had an accumulated deficit of $317 million. The Company also had a net loss of $6 million for the year ended December 31, 2019,
and negative cash flow from operations of $10.7 million.
52
The Company’s principal focus is on the commercialization of Macrilen™ (macimorelin) and it currently does not have any other approved products.
Under the terms of the License Agreement with Novo, Novo is funding 70% of the pediatric clinical trial submitted to the EMA and FDA, the Company’s
sole development activity. In November 2019, Novo contracted AEZS Germany, our wholly owned German subsidiary, to provide supply chain services for
the manufacture of Macrilen™ (macimorelin).
Management has evaluated whether material uncertainties exist relating to events or conditions that may cast substantial doubt about the Company’s ability
to continue as a going concern and has considered the following in making that critical judgment.
The ability of the Company to realize its assets and meet its obligations as they come due is dependent on earning sufficient revenues under the License
Agreement, developing opportunities for Macrilen™ (macimorelin) in the rest of the world, realizing other monetizing transactions, and raising additional
sources of funding, the outcome of which cannot be predicted at this time. The revenue provided under the License Agreement was $45,000 for the year
ended December 31, 2019 and as at December 31, 2019, the Company had cash of $7,838,000. In September 2019, the Company closed an equity
financing which provided $4,193,000 in net cash proceeds. On February 21, 2020, the Company closed an equity financing for approximately $3,920,000
in net cash proceeds.
A significant portion of the Company’s cash is held in AEZS Germany, the Company’s principle operating subsidiary. AEZS Germany is the counter-party
to the License Agreement described above with Novo, and as such, for generating future revenue earned under the License Agreement. As such,
management considers the cash resources available to AEZS Germany in executing its obligations under the License Agreement. In the event the current
and medium term liabilities of AEZS Germany exceeds the fair values ascribed to its assets, under German solvency laws, it may no longer be possible for
AEZS Germany’s operations to continue or for AEZS Germany to transfer cash to Aeterna Zentaris or its U.S. subsidiary. This imposes additional and
material uncertainties on the Company when evaluating liquidity and the going concern assumption.
The Company has some discretion to manage its planned research and development costs, administrative expenses and capital expenditures in order to
manage its cash liquidity, particularly in AEZS Germany. Furthermore, AEZS Germany is focused on opportunities to either license or sell the European or
worldwide rights to Macrilen™ (macimorelin) to third parties. As of the date of issuance of these consolidated financial statements, there are no assurances
that cash will be generated from such arrangements. As such, management may also need to consider other sources of financing in order to continue its
planned operations.
Management has assessed the Company’s ability to continue as a going concern and concluded that additional capital will be required. There can be no
assurance that the Company will be able to execute license or purchase agreements or to obtain equity or debt financing, or on terms acceptable to it.
Factors within and outside the Company’s control could have a significant bearing on its ability to obtain additional financing. As a result, management has
determined that there are material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern.
License Agreement
On January 16, 2018, the Company entered into the License Agreement. Effective December 19, 2018, Strongbridge sold the U.S. and Canadian rights to
Macrilen™ (macimorelin) to Novo.
(i) Adult Indication
Under the terms of the license agreement, and for as long as Macrilen™ (macimorelin) is patent-protected, the Company will be entitled to a 15% royalty
on annual net sales up to $75.0 million and an 18% royalty on annual net sales above $75.0 million. Following the end of patent protection in the U.S. or
Canada for Macrilen™ (macimorelin), the Company will be entitled to a 5% royalty on net sales in that country. In addition, the Company will also receive
one-time payments ranging from $4.0 million to $100.0 million upon the achievement of commercial milestones going from $25.0 million annual net sales
up to $500.0 million annual net sales.
53
(ii) Pediatric Indication
Upon approval by the FDA of a pediatric indication for Macrilen™ (macimorelin), the Company will receive a one-time milestone payment of $5.0
million. This amount will be recognized once it is probable that it will be received.
(iii) PIP Study
We have initiated an open label, single dose trial to investigate the pharmacokinetics, pharmacodynamics, safety and tolerability of macimorelin in pediatric
patients from two to less than 18 years of age with suspected GHD. Under the terms of the License Agreement, the licensee will pay 70% and the Company
will pay the remaining 30% of the research and development costs associate with the PIP. During 2019, the Company invoiced its licensee $979,000 (2018
- $358,000) as its share of the costs incurred by the Company under the PIP; such amounts have been collected in full.
(iv) Supply Arrangement
The Company agreed, in the Supply Arrangement to the License Agreement, to supply ingredients for the manufacture of Macrilen™ (macimorelin) during
an interim period at a price that is set ‘at cost’ without any profit margin. The Company believes the stand-alone selling price of the manufacturing
ingredients to be their cost, as that approximates the amount at which Novo would be able to procure those same goods with other suppliers.
In November 2019, Novo contracted AEZS Germany, to provide supply chain services including API batch production and delivery of certain API and
semi-finished goods, as well as the provision of ongoing support activities. In 2019, the Company invoiced $1,159,000 (2018 – $2,167,000) and has
received payment in full of these invoices.
Registered and Private Offerings
On March 28, 2017, we commenced a new ATM offering pursuant to its existing ATM Sales Agreement, dated April 1, 2016, under which we were able, at
our discretion, from time to time, to sell up to a maximum of 3 million common shares through ATM issuances on the NASDAQ, up to an aggregate
amount of $9.0 million (the “March 2017 ATM Program”). The common shares were to be sold at market prices prevailing at the time of the sale of the
common shares and, as a result, sale prices varied.
Between March 28, 2017 and April 18, 2017, we issued a total of 597,994 common shares under the March 2017 ATM Program at an average issuance
price of $2.97 per share for aggregate gross proceeds of $1.8 million less cash transaction costs of $55,000 and previously deferred financing costs of
$65,000.
On April 27, 2017, we entered into a new ATM Sales Agreement (the “New ATM Sales Agreement”), and filed with the SEC a prospectus supplement (the
“Prospectus Supplement”) related to sales and distributions of up to a maximum of 2,240,000 common shares through ATM issuances on the NASDAQ, up
to an aggregate amount of $6.9 million under the New ATM Sales Agreement. The common shares will be sold at market prices prevailing at the time of
the sale of the common shares and, as a result, prices may vary. The New ATM Sales Agreement and the Prospectus Supplement superseded and replaced
the March 2017 ATM Program, which itself had superseded and replaced the April 2016 ATM Program. The Prospectus Supplement supplements the base
prospectus included in our Shelf Registration Statement on Form F-3, as amended (the “2017 Shelf Registration Statement”), which was declared effective
by the SEC on April 27, 2017. Between May 30, 2017 and December 31, 2017, we issued 1.8 million common shares at an average issuance price of $2.08
per share under the New ATM Sales Agreement.
On September 20, 2019, we entered into a securities purchase agreement (the “2019 Securities Purchase Agreement”) with institutional investors in the
U.S. to purchase approximately $5.0 million of our Common Shares for $1.50 per share in a registered direct offering and warrants to purchase Common
Shares in a concurrent private placement. The gross proceeds from the offering were approximately $5.0 million before deducting the placement agent’s
fees and other estimated offering expenses. Under the terms of the 2019 Securities Purchase Agreement, we sold 3,325,000 Common Shares. In a
concurrent private placement, we issued unregistered warrants to purchase up to approximately 3,325,000 Common Shares. The warrants are exercisable
six months following the date of issuance and have an exercise price of $1.65. The warrants will expire five years from the date of issuance. The Common
Shares described above (but not the warrants or the Common Shares underlying the warrants) were offered by us pursuant to a “shelf” registration
statement on Form F-3, as amended (the “2019 Shelf Registration Statement”), which was declared effective by the SEC on August 15, 2019.
54
Subsequent to 2019, on February 21, 2020, we entered into a securities purchase agreement (the “2020 Securities Purchase Agreement”) with institutional
investors in the U.S. to purchase 3,478,261 Common Shares, at a purchase price of $1.29375 per share, priced at-the-market under the NASDAQ rules.
Under the terms of the 2020 Securities Purchase Agreement, we issued to the investors unregistered warrants to purchase up to an aggregate of 2,608,696
Common Shares in a concurrent private placement. The warrants have an exercise price of $1.20 per common share, are exercisable immediately and will
expire five and one-half years following the date of issuance. The gross proceeds from the offering totaled approximately $4.5 million, before deducting
placement agent fees and offering expenses. The Common Shares described above (but not the warrants or the Common Shares underlying the warrants)
were offered by us pursuant to the 2019 Shelf Registration Statement.
The variations in our liquidity by activity are explained below.
(in thousands)
Cash and cash equivalents - Beginning of period
Cash flows from operating activities:
Net cash (used in) provided by operating activities
Cash flows from financing activities:
Net proceeds from issuance of common shares
Proceeds from exercise of warrants, stock options and
deferred share units
Payments on lease liability
Cash flows from investing activities:
Net cash provided by (used in) investing activities
Three months ended
December 31,
2019
$
2018
$
2019
$
Years ended
December 31,
2018
$
2017
$
10,862
16,800
14,512
7,780
21,999
(2,954)
(2,954)
(2,679)
(2,679)
(10,725)
(10,725)
6,825
6,825
(22,913)
(22,913)
(9)
—
(152)
(161)
—
—
—
—
—
—
—
—
4,193
314
(614)
3,893
50
50
108
7,838
—
—
—
—
(35)
(35)
(58)
14,512
7,788
242
—
8,030
307)
307)
357)
7,780
Effect of exchange rate changes on cash and cash
equivalents
Cash and cash equivalents - End of period
91
7,838
387
14,512
Operating Activities
2019 compared to 2018
Cash (used by) operating activities totaled ($10.7) million for the twelve months ended December 31, 2019, as compared to $6.8 million provided by
operating activities in the same period in 2018. In the twelve-month period ended December 31, 2019, the Company had net loss of $6.0 million as
compared with net income of $4.2 million in the same period in 2018. In 2019, the Company did not have significant royalty or licensing revenues, while,
in the same period in 2018, the Company received a $24.0 million cash payment from executing the License Agreement in January 2018.
55
2018 compared to 2017
Cash provided by operating activities totaled $6.8 million for year ended December 31, 2018, as compared to $22.9 million used by operating activities in
the same period in 2017, which is a net provision of cash from operating activities of $29.7 million. This increase is primarily due to the $24.0 million
license payment received from Strongbridge in January 2018.
Financing Activities
2019 compared to 2018
Cash provided by financing activities totaled $3.9 million for the twelve months ended December 31, 2019, as compared with $nil in the same period in
2018. On September 20, 2019, the Company entered into a securities purchase agreement with U.S. institutional investors to purchase $5.0 million (before
transaction costs of $0.8 million) of our Common Shares for $1.50 per share in a registered direct offering and warrants to purchase Common Shares in a
concurrent private placement. Under the terms of the securities purchase agreement, the Company sold 3,325,000 common shares. In a concurrent private
placement, the Company issued warrants to purchase up to an aggregate of 3,325,000 common shares. The warrants are exercisable commencing six
months from the date of issuance, have an exercise price of $1.65 per share and expire 5 years following the date of issuance. In addition, the Company
received $0.3 million from the exercise of warrants, options and deferred share units and paid $0.6 million in lease liabilities subsequent to adoption of
IFRS 16 in January 2019.
2018 compared to 2017
Cash flows from financing activities were nil for the year ended December 31, 2018, as compared to $8.0 million for the same period in 2017. During
2018, we have focused on commercializing Macrilen™ (macimorelin) though the application of the $24.0 million milestone payment from Strongbridge to
our operating costs and working capital needs. This is a change from the same period in 2017 when we raised capital from certain At-The-Market
programs.
Investing Activities
2019 compared to 2018
Cash provided by investing activities totaled $0.05 million for the twelve months ended December 31, 2019, as compared with ($0.04 million) used by
investing activities in the same period in 2018. In 2019, the Company received $0.05 million in restricted cash when it closed out certain banking
arrangements, while in 2018, the Company sold certain property, plant and equipment for $0.01 million and added $0.05 million in restricted cash.
2018 compared to 2017
Cash flows from investing activities totaled $0.0 million for the year ended December 31, 2018, as compared with $0.3 million for the same period in 2017.
We have reduced our investment in non-current assets over the last number of years.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements as at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017 have
been prepared in accordance with IFRS as issued by the IASB.
The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that
affect the reported amounts of our assets, liabilities, revenues, expenses and related disclosures. Judgments, estimates and assumptions are based on
historical experience, expectations, current trends and other factors that management believes to be relevant when our consolidated financial statements are
prepared.
Management reviews, on a regular basis, the Company’s accounting policies, assumptions, estimates and judgments in order to ensure that the consolidated
financial statements are presented fairly and in accordance with IFRS. Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected.
56
Critical accounting estimates and assumptions, as well as critical judgments used in applying accounting policies in the preparation of our interim
condensed consolidated financial statements were the same as those that applied to our annual consolidated financial statements as of December 31, 2019
and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017.
Capital Disclosures
Our objective in managing capital, consisting of shareholders’ equity, with cash and cash equivalents and restricted cash equivalents being its primary
components, is to ensure sufficient liquidity to fund R&D costs, selling expenses, G&A expenses, working capital and capital expenditures.
Over the past several years, we have increasingly raised capital via public equity offerings and drawdowns and issuances under various ATM sales
programs as our primary source of liquidity.
Our capital management objective remains the same as that in previous periods. The policy on dividends is to retain cash to keep funds available to finance
the activities required to advance our product development portfolio and to pursue appropriate commercial opportunities as they may arise. We are not
subject to any capital requirements imposed by any regulators or by any other external source.
C.
Research and development, patents and licenses, etc.
For a description of our R&D policies for the last three years, see “Item 4.B. Business Overview” and “Key Developments” at the beginning of this Item 5.
Over the past three years, our research and development activities have encompassed a 2017 unsuccessful Phase 3 clinical study of ZoptrexTM (zoptarelin
doxorubicin) and the 2018 initiation of pediatric indication study for MacrilenTM (macimorelin) for which our licensee is paying 70% of the costs. You can
also find relevant information in our consolidated financial statements in Item 18.
57
D.
Trend Information
Subsequent to year end, the COVID-19 pandemic began causing significant financial market declines and social dislocation. The situation is dynamic with
various cities and countries around the world responding in different ways to address the outbreak. The spread of COVID-19 may impact our operations,
including the potential interruption of our clinical trial activities and our supply chain. For example, the COVID-19 outbreak may delay enrollment in our
pediatric clinical trial due to prioritization of hospital resources toward the outbreak, and some patients may be unwilling to enroll in our trials or be unable
to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services, which would delay our ability to conduct
clinical trials or release clinical trial results and could delay our ability to obtain regulatory approval and commercialize our product candidates. The spread
of an infectious disease, including COVID-19, may also result in the inability of our suppliers to deliver components or raw materials on a timely basis or
at all. In addition, hospitals may reduce staffing and reduce or postpone certain treatments in response to the spread of an infectious disease. Such events
may result in a period of business disruption and, in reduced operations, doctors or medical providers may be unwilling to participate in our clinical trials,
any of which could materially affect our business, financial condition or results of operations. The significant spread of COVID-19 within the U.S.,
Canada, Germany and elsewhere resulted in a widespread health crisis and has had adverse effects on local, national and global economies generally, the
markets that we serve, our operations and the market price of our Common Shares.The Company’s impairment test for various assets including goodwill
and intangibles is based on fair value models which are based on cash flows from operations or other market dependent models. Accordingly, as required
by IFRS we have not reflected these subsequent conditions in the recoverable value of the estimate of these assets at December 31, 2019.
Uncertain factors, including the duration of the outbreak, the severity of the disease and the actions to contain or treat its impact, could impair our
operations including, among other things, employee mobility and productivity, availability of our facilities, conduct of our clinical trials and the availability
and the productivity of third-party product and service suppliers.
Financial Risk Factors and Other Instruments
The nature and extent of our exposure to risks arising from financial instruments, including credit risk, liquidity risk and market risk (share price risk) and
how we manage those risks are described in note 24 to the Company’s annual audited consolidated financial statements as at December 31, 2019 and 2018
and for the years ended December 31, 2019, 2018 and 2017.
The consolidated financial statements filed as part of this Annual Report on Form 20-F are presented under “Item 18. – Financial Statements”.
E.
Off-Balance Sheet Arrangements
As at December 31, 2019, we did not have any interests in special purpose entities or any other off-balance sheet arrangements.
F.
Tabular disclosure of contractual obligations
Financial Liabilities, Obligations and Commitments
Expected future payments in connection with service and manufacturing agreements, as at December 31, 2019, are as follows:
(in thousands)
Less than 1 year
1 - 3 years
4 - 5 years
More than 5 years
Total
Item 6. Directors, Senior Management and Employees
A.
Directors and senior management
Service and
manufacturing
$
1,600
11
5
5
1,621
The following table sets forth information about our directors and our senior corporate officers as at December 31, 2019:
Name and Place of Residence
Position with Aeterna Zentaris
Ammer, Nicola
Hessen, Germany
Auld, Leslie
Ontario, Canada
Egbert, Carolyn
Texas, United States
Gagnon, Gilles(1)
Quebec, Canada
Gerlach, Matthias
Hessen, Germany
Grau, Guenther
Hessen, Germany
Guenther, Eckhard
Hessen, Germany
Limoges, Gérard
Québec, Canada
Norton, Brent
Chief Medical Officer, Vice President Clinical Development
Senior Vice President, Chief Financial Officer
Director, Chair of the Board
Director
Vice President Manufacturing and Supply Chain
Vice President Finance
Vice President Business Development & Alliance Management; Managing
Director AEZS Germany
Director
Director
Ontario, Canada
Paulini, Klaus
Hessen, Germany
Smith Hoke, Robin
Ohio, United States
President, Chief Executive Officer, Director; Managing Director AEZS
Germany
Director
(1)
Mr. Gagnon joined the Board on January 1, 2020.
The following is a brief biography of each of our directors and executive officers.1
Nicola Ammer was appointed as our Vice President, Clinical Development and as Chief Medical Officer in January 2018. She serves as one of our
executive officers. Dr. Ammer, who is based in the Frankfurt, Germany office of AEZS Germany, began her career in the pharmaceutical medicine
environment in the CRO business in 2002 and gained experience in all aspects of clinical research & development in various positions with increasing
responsibility, including a Director of Clinical Operations. She joined AEZS Germany in March 2015 as Clinical Program Director and took over the role
of the Head of Clinical Development in January 2016. She possesses numerous skills in the area of pharmaceutical medicine and contributed significantly
to the successful completion of the macimorelin clinical development program in the adult indication. Dr. Ammer obtained the license to practice medicine
in 1995 after completion of her academic studies at the University of Essen. She was awarded a doctorate diploma in medicine by the University of
Münster in 2004 and a Master of Science in Pharmaceutical Medicine by the University Duisburg-Essen in 2009.
Leslie Auld was appointed as our Senior Vice President, Chief Financial Officer in September 2018. She has over twenty-five years of accounting, finance
and pharmaceutical industry experience, with increasingly senior roles at PricewaterhouseCoopers, Helix BioPharma Corp., Luminex Diagnostics
(formerly TM BioScience Corp.), Attwell Capital Inc. (formerly Fralex Therapeutics) and GeneNews Limited. A Chartered Professional Accountant, Ms.
Auld graduated with an Honors Bachelor of Science degree in Pharmacology & Toxicology from the University of Western Ontario and has a Master of
Business Administration degree from the University of Toronto.
Carolyn Egbert has served as a director on our Board since August 2012 and as Chair of our Board since May 2016. After enjoying the private practice of
law as a defense litigator in Michigan and Washington, D.C., she joined Solvay America, Inc. (“Solvay”) (a chemical and pharmaceutical company) in
Houston, Texas. Over the course of a twenty-year career with Solvay, she held the positions of Vice President, Human Resources, President of Solvay
Management Services, Global Head of Human Resources and Senior Executive Vice President of Global Ethics and Compliance. During her tenure with
Solvay, she served as a director on the board of directors of seven subsidiary companies and as Chair of one subsidiary board. After retiring in 2010, she
established a consulting business providing expertise in corporate governance, ethics and compliance, organizational development, executive compensation
and strategic human resources. She holds a Bachelor of Sciences degree in Biological Sciences from George Washington University, Washington D.C. and
a Juris Doctor degree from Seattle University, Seattle, Washington. She also was a Ph.D. candidate in Pharmacology at both Georgetown University
Medical School at Washington, D.C. and Northwestern University Medical School at Chicago, Illinois. She remains an active member of both the Michigan
State Bar and the District of Columbia Bar, Washington, D.C.
58
Gilles Gagnon is currently the President and Chief Executive Officer of Ceapro Inc. Prior to that, he was President and CEO of Aeterna Zentaris Inc.
During the past 35 years, Mr. Gagnon has worked at several management levels within the field of health, especially in the hospital environment and
pharmaceutical industry. Mr. Gagnon has participated in several international committees and strategic advisory boards. He served nine years on the board
of directors of Canada’s Research Based Pharmaceutical Companies (Rx&D—now Innovative Medicine Canada) where he represented members from the
biopharmaceutical sector and pioneered the Rx&D’s Canadian Biopartnering initiative. He is currently a member of the CEO Council of Innovative
Medicine Canada. He is a certified corporate Director having completed the Directors Education Program at the Rotman School of Management at the
University of Toronto and he has served on several boards of both private and publicly listed companies in the biopharmaceutical sector.
Matthias Gerlach was appointed as our Vice President, Manufacturing Operations in June 2014 and as Vice President, Manufacturing and Supply Chain in
January 2018. He serves as one of our executive officers. From December 2011 through May 2014, he was our Vice President, Medicinal Chemistry. Dr.
Gerlach, who is based in the Frankfurt office of AEZS Germany, began his career in the pharmaceutical industry in 1997. He joined our Company in
January 2001, assuming roles of increasing responsibility in areas of medicinal chemistry and preclinical development through product commercialization
during his career. He possesses numerous scientific and business skills and has a long record of successful innovation, drug development and management
and contributed significantly to the successful U.S.-commercialization of macimorelin in the adult indication. Dr. Gerlach obtained a diploma in Chemistry
from the Johann Wolfgang Goethe University in Frankfurt in 1994 and was awarded his doctorate diploma in synthetic organic chemistry by the Johann
Wolfgang Goethe University in 1997.
Guenther Grau was appointed as our Vice President, Finance in February 2018. Mr. Grau, has been part of the Company since 2000. He began his career
in the pharmaceutical industry at ASTA Medica AG, a predecessor of our Company, in 1995, assuming roles of increasing responsibility in areas of internal
and external accounting during his career. Mr. Grau obtained a diploma in Business Administration from the Philipps-University, Marburg, in 1991.
Eckhard Guenther was appointed as Managing Director of AEZS Germany in January 2020, and Vice President of Business Development & Alliance
Management in 2018. Dr. Guenther brings more than 25 years in the pharmaceutical industry, with profound knowledge and expertise in drug discovery
and development in various indication areas like oncology and endocrinology. Additionally, over the course of his career he has gained extensive
experience across research coordination, project management, intellectual properties and business development. After receiving his Ph.D. in organic
chemistry from the Martin-Luther University of Halle-Wittenberg (Germany), he started his industrial career at Fahlberg-List Magdeburg in 1985. In 1990
he joined ASTA Medica AG in Frankfurt where he worked in the department of Medicinal Chemistry. During his time at ASTA Medica, Dr. Guenther was
significantly involved in the preparation and execution for the spin-off of the biotechnology company Zentaris from ASTA Medica. After the founding of
Aeterna Zentaris in 2002 he was appointed to Vice President of Drug Discovery and Preclinical Research. In 2008 he was promoted to Vice President
Alliance Management & Intellectual Property and in 2014 he became Vice President of Business Development at Aeterna Zentaris. Dr. Guenther was
responsible for the initiation and execution of several R&D and licensing deals with midsize and large international pharmaceutical companies, like
Schering Pharma, Solvay, Yakult Honsha, Hikma Pharmaceuticals and Sinopharm A-Think. Dr. Guenther is based in Frankfurt, Germany.
Gérard Limoges, C.M., FCPA, FCA has served as a director on our Board since 2004. Mr. Limoges served as the Deputy Chairman of Ernst & Young
LLP Canada until his retirement in September 1999. After a career of 37 years with Ernst & Young, Mr. Limoges has been devoting his time as a director
of a number of companies. Mr. Limoges began his career with Ernst & Young in Montreal in 1962. After graduating from the Management Faculty of the
Université de Montréal (HEC Montréal) in 1966, he wrote the CICA exams the same year (Honors: Governor General’s Gold Medal for the highest marks
in Canada and Gold Medal of the Ordre des Comptables Agréés du Québec). He became a chartered accountant in 1967 and partner of Ernst & Young in
1971. After practicing as auditor since 1962 and partner since 1971, he was appointed Managing Partner of the Montreal Office in 1979 and Chairman for
Quebec in 1984 when he also joined the National Executive Committee. In 1992, he was appointed Vice Chairman of Ernst & Young Canada and the
following year, Deputy Chairman of the Canadian firm. After retirement from practice at the end of September 1999, he was appointed Trustee of the
School Board of Greater Montreal (1999), member of the Quebec Commission on Health Care and Social Services (2000-2001) and special advisor to the
Rector of the Université de Montréal and affiliate schools (2000-2003). Mr. Limoges, at the request of the board of directors of the Université de Montréal,
participated in the selection of the Dean of the Faculty of Medicine in 2011. Mr. Limoges is also a trustee and chairman of the Audit Committee of
PROREIT (TSX). He is also a board member of various private companies and charities. Mr. Limoges became an FCPA, FCA (Fellow) in 1984 and
received the Order of Canada in 2002.
59
Dr. Brent Norton has served as a director on our Board since 2018. Dr. Norton is a business leader in the life science industry with operational and director
experience across several successful enterprises which have achieved significant product sales and returns for investors. He uses his cross functional
knowledge to develop strategy, raise capital and build important relationships in the academic and business community. Dr. Norton founded PreMD,
completing IPO’s and listings on both the Toronto Stock Exchange and the American Stock Exchange. Operationally, he has research and development and
commercial operations, led transactions with AstraZeneca, Eli Lilly, L’Oreal, Parke Davis/Pfizer, etc., and taken products through the FDA to global out-
licensing with Johnson & Johnson. He is a founding Director of Novadaq Technologies (TSX:NDQ, NASDAQ:NVDQ) and was recently sold to Stryker
Corporation. Dr. Norton has been an active member of several boards in Canada and the U.S. He is a Venture Partner at Lumira Capital, Executive
Chairman & CEO of Ortho RTI, a member of the Research Committee for CAMH, an Advisory BOD member for the Ivey International Centre for Health
Innovation, a Director of Alpine Ontario and Past-President and Director of the Osler Bluff Ski Club.
Dr. Klaus Paulini was appointed President and Chief Executive Officer of the Company in October 2019 and also serves as a director on our Board. Dr.
Paulini is based in Frankfurt, Germany at our subsidiary AEZS Germany, where he was appointed Managing Director in July 2019 and as Vice President
Quality and Regulatory in February 2018. Dr. Paulini began his career in the pharmaceutical industry at ASTA Medica AG in 1997. He had an active role
when Zentaris was formed and spun out of ASTA Medica, and served in various roles with increasing responsibility at the company ever since, including
project responsibility for Cetrotide®. As Head of Quality Assurance, Dr. Paulini successfully managed many of our clinical development projects –
including Macrilen™/Macimorelin – in R&D phase as group leader medicinal chemistry. With his extensive experience and knowledge, he provided
successful oversight and valuable input for our pharmaceutical and clinical development programs, ensuring successful and compliant outcomes, ultimately
leading to regulatory approvals by the US FDA and the EMA. Dr. Paulini obtained his PhD (Dr. Ing.) in chemistry at the Technical University Darmstadt
(Germany) in 1993 and specialized in medicinal chemistry/drug discovery during subsequent postdoctoral fellowships at Strathclyde University (Glasgow,
Scotland) and J.W. Goethe University (Frankfurt, Germany) before joining ASTA Medica AG.
Robin Smith Hoke has served as a director on our Board since 2018. Ms. Hoke is a business and legal executive with over 25 years of healthcare and
pharmaceutical experience in various legal and business roles where she focused on operations, strategy, business development, acquisitions, strategic
relationships, and commercialization. Ms. Hoke currently serves as President & CEO of Leiters, a 503B FDA registered outsourcing service provider with
manufacturing facilities in Denver, Colorado and San Jose, California. She also serves as a member of the board of directors of Camargo Pharmaceutical
Services, LLC, a privately held 505(b)(2) global drug development and regulatory services company in Cincinnati, Ohio. She previously served as a
member of the board of Oncobiologics, Inc., a publicly held clinical stage biopharmaceutical company focused on identifying, developing, manufacturing
and commercializing complex biosimilar therapeutics. She previously served as chair of the board of directors and interim chief executive officer at Ricerca
Biosciences, LLC, a pre-clinical CRO. Prior to Ricerca, Ms. Hoke served as the president of GeneraMedix, Inc., a specialty generic injectable company and
held senior legal and business roles at Cardinal Health, Inc. She also spent time with Abbott Laboratories, Inc., and served as a partner in the business law
firm of Kegler, Brown, Hill & Ritter, Co., L.P.A.
There are no family relationships between any of the persons named above and no arrangement with any customers, major shareholders, suppliers or others
pursuant to which any person above was selected as a director or executive officer.
B.
Compensation
Our directors and executive officers are generally paid in their home country currency. Unless otherwise indicated, all compensation information included
in this document is presented in U.S. dollars and, to the extent a director or officer has been paid in a currency other than U.S. dollars, the amounts have
been converted from such person’s home country currency to U.S. dollars based on the following annual average exchange rates: for the financial year
ended December 31, 2019: €1.000 = U.S.$1.120 and CAN$1.000 = U.S.$0.754; for the financial year ended December 31, 2018: €1.000 = U.S.$1.181 and
CAN$1.000 = U.S.$0.772; and for the financial year ended December 31, 2017: €1.000 = U.S.$1.198 and CAN$1.000 = U.S.$0.797.
60
Compensation of Outside Directors
The compensation paid to members of our Board who are not our employees (our “Outside Directors”) is designed to (i) attract and retain the most
qualified people to serve on the Board and its committees, (ii) align the interests of the Outside Directors with those of our shareholders, and (iii) provide
appropriate compensation for the risks and responsibilities related to being an effective Outside Director. This compensation is recommended to the Board
by the Nominating, Governance and Compensation Committee (the “NGCC”). The NGCC is composed of three Outside Directors, each of whom is
independent, namely Dr. Brent Norton (Chair), Ms. Carolyn Egbert and Ms. Robin Smith Hoke.
Retainers
Our Outside Directors are paid an annual retainer, the amount of which depends on the position held on the Board. Annual retainers are paid on a quarterly
basis to our Outside Directors. Each Outside Director is paid the equivalent value of the payment in his or her home currency, net of any withholdings or
deductions required by applicable law.
Type of Compensation
Chair of the Board Retainer
Board Member Retainer
Audit Committee Chair Retainer
Audit Committee Member Retainer
NGCC Chair Retainer
NGCC Member Retainer
Annual Retainer for the year 2019
80,000
40,000
20,000
5,000
15,000
3,000
All Directors are reimbursed for travel and other out-of-pocket expenses incurred in attending Board or committee meetings.
Outstanding Awards
The following table shows all awards outstanding to each Outside Director as at December 31, 2019:
Name
Egbert, Carolyn
Limoges, Gérard
Norton, Brent
Smith Hoke, Robin
Option-based Awards
Share-based Awards
Number of
Securities
Underlying
Unexercised
Options
Option
Exercise
Price
(#)
($)
Value of
Unexercised
In-the-
money
Options(1)
($)
Option
Expiration
Date
(mm-dd-
yyyy)
10,000
7,850
60,000
—
—
10,000
7,850
60,000
—
—
—
—
—
—
3.48
3.45
2.05
—
—
3.48
3.45
2.05
—
—
—
—
—
—
05-09-
2023
12-06-
2023
08-15-
2024
—
—
05-09-
2023
12-06-
2023
08-15-
2024
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Issuance
Date
(mm-dd-
yyyy)
05-10-
2016
12-06-
2016
08-15-
2017
—
—
05-10-
2016
12-06-
2016
08-15-
2017
—
—
—
—
—
—
Market
or Payout
Value of
Share-
based
Awards
that have
Not
Vested(2)
Market or
Payout
Value of
Vested
Share-
based
Awards
Not Paid
Out or
Distributed
Number
of Shares
or Units
of Shares
that have
Not
Vested
(#)
($)
—
—
—
23,000
30,000
—
—
—
23,000
30,000
23,000
30,000
23,000
30,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,930
27,300
—
—
—
20,930
27,300
20,930
27,300
20,930
27,300
Issuance
Date
(mm-dd-
yyyy)
—
—
—
05-08-
2018
05-22-
2019
—
—
—
05-08-
2018
05-22-
2019
05-08-
2018
05-22-
2019
05-08-
2018
05-22-
2019
(1) Value of unexercised “in-the-money options” at financial year-end is calculated based on the difference between the closing prices of the Common Shares on the NASDAQ on the last trading
day of the fiscal year (December 31, 2019) of $0.91 and the exercise price of the options, multiplied by the number of unexercised options.
(2) The Company used the closing price of its Common Shares on the NASDAQ as at the last trading day of the fiscal year (December 31, 2019) of $0.91
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See “Summary of the Stock Option Plan” for more details on the Company’s second amended and restated stock option plan adopted by the Board on
March 29, 2016 and ratified by the shareholders on May 10, 2016 (“Stock Option Plan”) and see “Summary of Long-Term Incentive Plan” for more details
on the Company’s long-term incentive plan adopted by the Board on March 27, 2018, and ratified by the shareholders on May 8, 2018 (“Long-Term
Incentive Plan”).
Total Compensation of Outside Directors
The table below summarizes the total compensation paid to our Outside Directors during the financial year ended December 31, 2019 (all amounts are in
U.S. dollars). Our Outside Directors are generally paid in their home currency. Mr, Cardiff, Mr. Limoges, Dr. Norton and Mr. Pollack were paid in
Canadian dollars. Ms. Egbert and Ms. Hoke were paid in U.S. dollars and Mr. Ernst was paid in Euros.
Name
Cardiff, Michael(3)
Egbert, Carolyn
Ernst, Juergen(4)
Limoges, Gérard
Norton, Brent
Pollack, Jonathan(5)
Smith Hoke, Robin
Fees
earned(1)
($)
Share-based
Awards(2)
($)
Option-
based
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Pension
Value
($)
All Other
Compensation
($)
9,571
89,417
4,229
60,432
56,705
11,181
42,892
—
87,593
—
87,593
87,593
87,593
87,593
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
9,571
177,010
4,229
148,025
144,298
98,774
130,485
(1) In respect of our financial year ended December 31, 2019, we paid an aggregate amount of $274,427 to all of our Outside Directors for services rendered in their capacity as directors,
excluding reimbursement of out-of-pocket expenses and the value of share-based and option-based awards granted in 2019.
(2) Amounts shown represent the value of the DSUs on the grant date ($3.15). The value of one DSU on the grant date is the closing price of one Common Share on the NASDAQ on the last
trading day preceding the date of grant.
(3) Mr. Cardiff ceased to be a director on March 18, 2019.
(4) Mr. Ernst ceased to be a director on May 7, 2019.
(5) Mr. Pollack ceased to be a director on August 21, 2019.
Compensation of Executive Officers
The following is disclosure of information related to the compensation that we paid to our “Named Executive Officers” during 2019. For the 2019 year, our
“Named Executive Officers” were as follows:
● Mr. Michael Ward, who served as the President and Chief Executive Officer from October 1, 2017 to October 4, 2019;
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● Dr. Klaus Paulini, who, since October 4, 2019, is serving as President and Chief Executive Officer, as well as Managing Director AEZS Germany since
July 2019;
● Ms. Leslie Auld, who, since September 24, 2018, is serving as Senior Vice President, Chief Financial Officer as an independent contractor;
● Dr. Matthias Gerlach, who serves as Vice President Manufacturing and Supply Chain, Mr. Eckhard Guenther, who serves as Vice President Business
Development & Alliance Management and Managing Director AEZS Germany and Ms. Nicola Ammer, who serves as Chief Medical Officer and Vice
President Clinical Development, who were our three most highly compensated executive officers (other than our current and former Chief Executive
Officer and our Chief Financial Officer) employed at the end of 2019; and
● Mr. Brian Garrison, who served as Senior Vice President Global Commercial Operations from December 2017 to September 2019.
Compensation Discussion & Analysis
Compensation Philosophy and Objectives
Our Board, through the NGCC, establishes our executive compensation program that is market-based and at a competitive percentile grouping for both
total cash and total direct compensation. The NGCC has established a compensation program that is designed to attract, motivate and retain high-
performing senior executives, encourage and reward superior performance and align the executives’ interests with those of our shareholders by:
● providing the opportunity for an executive to earn compensation that is competitive with the compensation received by executives serving in the same
or measurably similar positions within comparable companies;
● providing the opportunity for executives to participate in equity-based incentive compensation plans;
● aligning executive compensation with our corporate objectives; and
● attracting and retaining highly qualified individuals in key positions.
Compensation Elements
Our executive compensation is targeted at the 50th percentile for small cap biopharmaceutical companies within both the local and national markets and is
comprised of both fixed and variable components. The variable components include equity and non-equity incentive plans. Each compensation component
is intended to serve a different function, but all elements are intended to work in concert to maximize both corporate and individual performance by
establishing specific, competitive operational and corporate goals and by providing financial incentives to employees based on their level of attainment of
these goals.
Our current executive compensation program is comprised of the following four basic components: (i) base salary; (ii) an annual bonus linked to both
individual and corporate performance; (iii) equity incentives, including stock options, previously granted under our second amended and restated stock
option plan adopted by the Board on March 29, 2016 and ratified by the shareholders of Aeterna Zentaris on May 10, 2016 (the “Stock Option Plan”), and
presently granted under the Company’s long-term incentive plan adopted by the Board on March 27, 2018 and ratified by the shareholders of Aeterna
Zentaris on May 8, 2018 (the “Long-Term Incentive Plan”), established for the benefit of our directors, certain executive officers and other participants as
may be designated from time to time by either the Board or the NGCC; and (iv) other elements of compensation, consisting of benefits, perquisites and
retirement benefits.
Base Salary. Base salaries are intended to provide a steady income to our executive officers regardless of share price. In determining individual base
salaries, the NGCC takes into consideration individual circumstances that may include the scope of an executive’s position, the executive’s relevant
competencies or experience and retention risk. The NGCC also takes into consideration the fulfillment of our corporate objectives, as well as the individual
performance of the executive.
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Short-Term, Non-Equity Incentive Compensation. Our short-term, non-equity incentive compensation plan sets a target cash bonus for each executive
officer, expressed as a percentage of the executive officer’s base salary. The amount of cash bonus paid to an executive officer depends on the extent to
which he or she contributed to the achievement of the annual performance objectives established by the Board for the year. The annual performance
objectives are specific operational, clinical, regulatory, financial, commercial and corporate goals that are intended to advance our product pipeline, to
promote the success of our commercial efforts and to enhance our financial position. The annual performance objectives are set at the end of each financial
year as part of the annual review of corporate strategies. The performance objectives are not established for individual executive officers but rather by
functional area(s), many of which are carried out by or fall within the responsibility of our President and Chief Executive Officer, Chief Financial Officer
(or principal financial officer) and our other executive officers, including our Named Executive Officers. The award of a cash bonus requires the approval
of both the NGCC and the Board and is based upon an assessment of each individual’s performance, as well as our overall performance at a corporate level.
The determination of individual performance does not involve quantitative measures using a mathematical calculation in which each individual
performance objective is given a numerical weight. Instead, the NGCC’s determination of individual performance is a subjective determination as to
whether a particular executive officer substantially achieved the stated objectives or over-performed or under-performed with respect to corporate
objectives that were deemed to be important to our success.
Long-Term Equity Compensation Plan of Executive Officers. The long-term component of the compensation of our executive officers is based exclusively
on the Long Term Incentive Plan, which permits the issuance of a number of equity-based awards based on the contribution of the officers and their
responsibilities. The Board adopted a policy regarding stock option grants in December 2014, which provides that each Named Executive Officer is eligible
to receive options to acquire our Common Shares having a value, based on the Black-Scholes option pricing model, equal to a specified multiple of his or
her salary. The specified multiple for the President and Chief Executive Officer is 1.5. The specified multiple for each other Named Executive Officer is
0.75. To encourage retention and focus management on developing and successfully implementing our continuing growth strategy, stock options vest over
a period of three years, with the first third vesting on the first anniversary of the date of grant. Since the adoption of the Long-Term Incentive Plan in 2018,
we have broadened the types of equity-based awards which we may issue beyond stock options (to include, among other types, restricted stock units,
deferred share units and others).
Other Forms of Compensation. Our executive employee benefits program also includes life, medical, dental and disability insurance to the same extent and
in the same manner as all other employees. Several of our executive officers also receive a car allowance as a perquisite. These benefits and perquisites are
designed to be competitive overall with equivalent positions in comparable North American organizations in the life sciences industry. We also contribute
to our North American employees’ retirement plans up to an annual maximum amount of $19,000 for employees in the U.S. The contribution amounts for
our U.S. employees are subject to limitations imposed by the United States Internal Revenue Service on contributions to our most highly compensated
employees. Employees based in Frankfurt, Germany also benefit from certain employer contributions into the employees’ pension funds. Our executive
officers, including the Named Executive Officers, are eligible to participate in such employer-contribution plans to the same extent and in the same manner
as all other employees.
Positioning
The NGCC is authorized to engage its own independent consultant to advise it with respect to executive compensation matters. While the NGCC may rely
on external information and advice, all of the decisions with respect to executive compensation are made by the Board upon the recommendation of the
NGCC and may reflect factors and considerations other than, or that may differ from, the information and recommendations provided by any external
compensation consultants that may be retained from time to time.
In 2013, the NGCC retained a compensation consultant to benchmark our executive compensation plan in an effort to determine whether we were
achieving our objective of providing market competitive compensation opportunities. The compensation consultant gathered compensation data from
companies that it concluded were of comparable size and/or stage of development as us and from other companies with which we compete for executive
talent and advised the NGCC that our executive compensation should be generally aligned with the 50th percentile, or the mid-point, of the companies
surveyed by the consultant. Furthermore, the consultant advised the NGCC that the total cash target payment (base salary and, if applicable or awarded in
cash, annual bonus) for our executive officers in 2013 generally fell around the 50th percentile of the companies surveyed. The NGCC did not repeat or
update the benchmarking process in 2014 - 2019 because it concluded that doing so would not provide additional meaningful data, considering the expense
of the process. However, the NGCC, as a matter of good governance, annually reviews and assesses the Company’s current compensation program and
makes appropriate adjustments, if any.
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Risk Assessment of Executive Compensation Program
The Board, through the NGCC, oversees the implementation of compensation methods that tie a portion of executive compensation to our short-term and
long-term performance and that of each executive officer and that take into account the advantages and risks associated with such compensation methods.
In addition, the Board oversees the creation of compensation policies that are intended to reward the creation of shareholder value while reflecting a
balance between our short-term and long-term performance and that of each executive officer. The NGCC has considered in general terms the concept of
risk as it relates to our executive compensation program.
Base salaries are fixed in amount to provide a steady income to the executive officers regardless of share price and thus do not encourage or reward risk-
taking to the detriment of other important business, operational, commercial or clinical metrics or milestones. The variable compensation elements (annual
bonuses and equity-based awards) are designed to reward each of short-term, mid-term and long-term performance. For short-term performance, a
discretionary annual bonus may be awarded based on the timing and level of attainment of specific operational and corporate goals that the NGCC believes
to be challenging, yet does not encourage unnecessary or excessive risk-taking. While our bonus payments are generally based on annual performance, a
maximum bonus payment is pre-fixed for each senior executive officer and represents only a portion of each individual’s overall total compensation
opportunities. In exceptional circumstances, a particular executive officer may be awarded a bonus that exceeds his or her maximum pre-fixed or target
bonus amount. Finally, a significant portion of executive compensation is provided in the form of equity-based awards, which is intended to further align
the interests of executives with those of shareholders. The NGCC believes that these awards do not encourage unnecessary or excessive risk-taking since
the ultimate value of the awards is tied to our share price, and in the case of grants under the long-term incentive compensation plan, are generally subject
to mid-term and long-term vesting schedules to help ensure that executives generally have significant value tied to long-term share price performance.
The NGCC believes that the variable compensation elements (annual bonuses and equity-based awards) represent a percentage of overall compensation
that is sufficient to motivate our executive officers to produce superior short-term, mid-term and long-term corporate results, while the fixed compensation
element (base salary) is also sufficient to discourage executive officers from taking unnecessary or excessive risks. The NGCC and the Board also generally
have the discretion to adjust annual bonuses and equity-based awards based on individual performance and any other factors they may determine to be
appropriate in the circumstances. Such factors may include, where necessary or appropriate, the level of risk-taking a particular executive officer may have
engaged in during the preceding year.
Based on the foregoing, the NGCC has not identified any specific risks associated with our executive compensation program that are reasonably likely to
have a material adverse effect on us. The NGCC believes that our executive compensation program does not encourage or reward any unnecessary or
excessive risk-taking behavior.
Our directors, executive officers and employees are prohibited from purchasing, selling or otherwise trading in derivative securities relating to our
Common Shares. Derivative securities are securities whose value varies in relation to the price of our securities. Examples of derivative securities include
warrants to purchase our Common Shares, and put or call options written on our Common Shares, as well as individually arranged derivative transactions,
such as financial instruments, including, for greater certainty, pre-paid variable forward contracts, equity swaps, collars, or units of exchange funds, which
are designed to hedge or offset a decrease in market value of our equity securities granted as executive compensation or directors’ remuneration. Options to
acquire our Common Shares and other equity-based awards issued pursuant to the Stock Option Plan or Long-Term Incentive Plan are not derivative
securities for this purpose.
65
2019 Compensation
Base Salary. The primary element of our compensation program is base salary. Our view is that a competitive base salary is a necessary element for
retaining qualified executive officers. In determining individual base salaries, the NGCC takes into consideration individual circumstances that may include
the scope of an executive’s position, the executive’s relevant competencies or experience and retention risk. The NGCC also takes into consideration the
fulfillment of our corporate objectives, as well as the individual performance of the executive.
Short-Term, Non-Equity Incentive Compensation. The Board, based on the NGCC’s recommendation, adopted the following performance objectives for
2019:
Goal
Result
Upon EMA approval, develop strategy and
implementation plan for commercialization through the
out-licensing of Macrilen™ (macimorelin) for Europe and
ROW
In early 2019, the Company engaged Torreya to assist
in identifying and executing upon such opportunities;
however, the arrangement with Torreya was
terminated in October 2019.
Commercialization of Macrilen™
(macimorelin) in Europe and ROW
Successfully execute the board-approved strategy and
implementation plan.
Not completed. The Board approved a strategy and
implementation plan to pursue commercialization
opportunities for macimorelin for the ROW and to
implement non-macimorelin related opportunities. The
Company continues to explore several potential
opportunities, but none has resulted in a transaction
that was acceptable to the Company.
Provide effective support to Novo in its commercialization
efforts to ensure Macrilen™ (macimorelin) through both
effective support in transition from Strongbridge and in its
commercialization efforts.
Completed. The Company provided annual FDA
reporting, supplies, clinical development as well as
establish key opinion leader advisory board for
Macrilen™ (macimorelin).
Commercialization of Macrilen™
(macimorelin) in the U.S. and Canada
Ensure effective clinical studies are in place to obtain
approval of pediatric indication of Macrilen™
(macimorelin).
In progress. The Company is collaborating with Novo
and is providing appropriate activities with respect to
the ongoing clinical studies that are required to obtain
approval for the pediatric indication of Macrilen™
(macimorelin).
Transition from the Supply Arrangement to a final supply
agreement
Fulfilled by signing the supply agreement with Novo
in November 2019.
Manage costs and control expenses to maximize cash
conservation.
Ensure appropriate capitalization of the Company
In progress. Cost management continues to be an
important objective as demonstrated by the
restructuring of our German operations.
The Company raised approximately $5 million in
September 2019.
Improve operations
Long-Term Equity Compensation
For the financial year ended December 31, 2019, the Board approved an award of 25,000 stock options at an exercise price of $2.15 to Dr. Paulini on
August 7, 2019 and an award of 35,000 stock options at an exercise price of $1.05 to Dr. Paulini on November 7, 2019, each in accordance with the Long-
Term Incentive Plan. Further, the Board approved awards of a total of 125,000 stock options at an exercise price of $0.87 to employees of the Company on
December 4, 2019 in accordance with the Long-Term Incentive Plan.
66
Summary of the Stock Option Plan
We established the Stock Option Plan in order to attract and retain directors, officers, employees and suppliers of ongoing services, who will be motivated
to work towards ensuring our success. The Board has full and complete authority to interpret the Stock Option Plan, to establish applicable rules and
regulations and to make all other determinations it deems necessary or useful for the administration of the Stock Option Plan, provided that such
interpretations, rules, regulations and determinations are consistent with the rules of all stock exchanges and quotation systems on which our securities are
then traded and with all relevant securities legislation.
There were 441 options outstanding under the Stock Option Plan representing approximately 0% of all issued and outstanding Common Shares on March
25, 2020. The proposed number of Common Shares issuable pursuant to the Long-Term Incentive Plan is fixed at 11.4% of the issued and outstanding
Common Shares at any given time less the number of Common Shares issuable pursuant to stock options granted at such time under the Stock Option Plan.
See below for a complete description of the Long-Term Incentive Plan. The Company does not intend on issuing any new stock options under the Stock
Option Plan, and instead will issue any future stock options under the Long-Term Incentive Plan.
Under the Stock Option Plan, (i) the number of securities issuable to insiders, at any time, or issued within any one-year period, under all of our security-
based compensation arrangements, cannot exceed 10% of our issued and outstanding securities and (ii) no single person eligible to receive grants under the
Stock Option Plan (each a “Participant”) may hold options to purchase, from time to time, more than 5% of our issued and outstanding Common Shares. In
addition: (i) the aggregate fair value of options granted under all of our security-based compensation arrangements to any one of our Outside Directors
entitled to receive a benefit under the Stock Option Plan, within any one-year period, cannot exceed $100,000 valued on a Black-Scholes basis and as
determined by the NGCC; and (ii) the aggregate number of securities issuable to all of our Outside Directors entitled to receive a benefit under the Stock
Option Plan, within any one-year period, under all of our security-based compensation arrangements, cannot exceed 1% of its issued and outstanding
securities.
Options granted under the Stock Option Plan may be exercised at any time within a maximum period of seven or ten years following the date of their grant
(the “Outside Expiry Date”), depending on the date of grant. The Board or the NGCC, as the case may be, designates, at its discretion, the specific
Participants to whom stock options are granted under the Stock Option Plan and determines the number of Common Shares covered by each of such option
grants, the grant date, the exercise price of each option, the Outside Expiry Date and any other matter relating thereto, in each case in accordance with the
applicable rules and regulations of the regulatory authorities. The price at which the Common Shares may be purchased may not be lower than the greater
of the closing prices of the Common Shares on the NASDAQ on the last trading day preceding the date of grant of the option. Options granted under the
Stock Option Plan shall vest in equal tranches over a three-year period (one-third each year, starting on the first anniversary of the grant date) or as
otherwise determined by the Board or the NGCC, as the case may be. Participants may not assign their options (nor any interest therein) other than by will
or in accordance with the applicable laws of estates and succession.
Unless the Board or the NGCC decides otherwise, Participants cease to be entitled to exercise their options under the Stock Option Plan: (i) immediately, in
the event a Participant who is an officer or employee resigns or voluntarily leaves his or her employment or his or her employment is terminated with cause
and, in the case of a Participant who is a non-employee director of us or one of our subsidiaries, the date on which such Participant ceases to be a member
of the relevant Board; (ii) six months following the date on which employment is terminated as a result of the death of a Participant who is an officer or
employee and, in the case of a Participant who is an Outside Director, six months following the date on which such Participant ceases to be a member of
the Board by reason of death; (iii) 90 days following the date on which a Participant’s employment is terminated for a reason other than those mentioned in
(i) or (ii) above including, without limitation, upon the disability, long-term illness, retirement or early retirement of the Participant; and (iv) where the
Participant is a service supplier, 30 days following the date on which such Participant ceases to act as such, for any cause or reason (each, an “Early Expiry
Date”).
The Stock Option Plan also provides that, if the expiry date of one or more options (whether an Early Expiry Date or an Outside Expiry Date) occurs
during a “blackout period” or within the seven business days immediately after a blackout period imposed by us, the expiry date will be automatically
extended to the date that is seven business days after the last day of the blackout period. For the purposes of the foregoing, “blackout period” means the
period during which trading in our securities is restricted in accordance with our corporate policies.
67
If (i) we accept an offer to amalgamate, merge or consolidate with any other entity (other than one of our wholly-owned subsidiaries) or to sell or license all
or substantially all of our assets to any other entity (other than one of our wholly-owned subsidiaries); (ii) we sign a support agreement in customary form
pursuant to which the Board agrees to support a takeover bid and recommends that our shareholders tender their Common Shares to such takeover bid; or
(iii) holders of more than 50% of our then outstanding Common Shares tender all of their Common Shares to a takeover bid made to all of the holders of
the Common Shares to purchase all of the then issued and outstanding Common Shares, then, in each case, all of the outstanding options shall, without any
further action required to be taken by us, immediately vest. Each Participant shall thereafter be entitled to exercise all of such options at any time up to and
including, but not after the close of business on that date which is ten days following the Closing Date (as defined below). Upon the expiration of such ten-
day period, all rights of the Participant to such options or to the exercise of same (to the extent not already exercised) shall automatically terminate and
have no further force or effect whatsoever. “Closing Date” is defined to mean (x) the closing date of the amalgamation, merger, consolidation, sale or
license transaction in the case of clause (i) above; (y) the first expiry date of the takeover bid on which each of the offeror’s conditions are either satisfied
or waived in the case of clause (ii) above; or (z) the date on which it is publicly announced that holders of greater than 50% of our then outstanding
Common Shares have tendered their Common Shares to a takeover bid in the case of clause (iii) above.
The Stock Option Plan provides that the following amendments may be made to the plan only upon approval of each of the Board and our shareholders as
well as receipt of all required regulatory approvals:
● any amendment to Section 3.2 of the Stock Option Plan (which sets forth the limit on the number of options that may be granted to insiders) that would
have the effect of permitting, without having to obtain shareholder approval on a “disinterested vote” at a duly convened shareholders’ meeting, the
grant of any option(s) under the Stock Option Plan otherwise prohibited by Section 3.2;
● any amendment to the number of securities issuable under the Stock Option Plan (except for certain permitted adjustments, such as in the case of stock
splits, consolidations or reclassifications);
● any amendment that would permit any option granted under the Stock Option Plan to be transferable or assignable other than by will or in accordance
with the applicable laws of estates and succession;
● the addition of a cashless exercise feature, payable in cash or securities, which does not provide for a full deduction of the number of underlying
securities from the Stock Option Plan reserve;
● the addition of a deferred or restricted share unit component or any other provision that results in employees receiving securities while no cash
consideration is received by us;
● with respect to any Participant, whether or not such Participant is an “insider” and except in respect of certain permitted adjustments, such as in the
case of stock splits, consolidations or reclassifications:
● any reduction in the exercise price of any option after the option has been granted, or
● any cancellation of an option and the re-grant of that option under different terms, or
● any extension to the term of an option beyond its Outside Expiry Date to a Participant who is an “insider” (except for extensions made in the context of
a “blackout period”);
● any amendment to the method of determining the exercise price of an option granted pursuant to the Stock Option Plan;
● the addition of any form of financial assistance or any amendment to a financial assistance provision which is more favorable to employees; and
● any amendment to the foregoing amending provisions requiring Board, shareholder and regulatory approvals.
68
The Stock Option Plan further provides that the following amendments may be made to the Stock Option Plan upon approval of the Board and upon receipt
of all required regulatory approvals, but without shareholder approval:
● amendments of a “housekeeping” or clerical nature or to clarify the provisions of the Stock Option Plan;
● amendments regarding any vesting period of an option;
● amendments regarding the extension of an option beyond an Early Expiry Date in respect of any Participant, or the extension of an option beyond the
Outside Expiry Date in respect of any Participant who is a “non-insider”;
● adjustments to the number of issuable Common Shares underlying, or the exercise price of, outstanding options resulting from a split or a
consolidation of the Common Shares, a reclassification, the payment of a stock dividend, the payment of a special cash or non-cash distribution to our
shareholders on a pro rata basis provided such distribution is approved by our shareholders in accordance with applicable law, a recapitalization, a
reorganization or any other event which necessitates an equitable adjustment to the outstanding options in proportion with corresponding adjustments
made to all outstanding Common Shares;
● discontinuing or terminating the Stock Option Plan; and
● any other amendment which does not require shareholder approval under the terms of the Stock Option Plan.
Summary of the Long-Term Incentive Plan
The purpose of the Long-Term Incentive Plan is to (i) promote our long-term financial interests and growth by attracting and retaining management and
other personnel and key service providers with the training, experience and ability to enable them to make a substantial contribution to the success of our
business; (ii) motivate management personnel by means of growth-related incentives to achieve long-range goals; and (iii) further the alignment of interests
of participants with those of our shareholders through opportunities for increased share ownership in the Company.
The NGCC is the administrator of the Long-Term Incentive Plan (the “Administrator”). At any time, the Board may serve as the Administrator of the Long-
Term Incentive Plan, in lieu of, or in addition, to the NGCC. Except as provided otherwise under the Long-Term Incentive Plan, the Administrator has
plenary authority to grant awards pursuant to the terms of the Long-Term Incentive Plan to eligible individuals, determine the types of awards and the
number of shares to be covered by the awards, establish the terms and conditions for awards and take all other actions necessary or desirable to carry out
the purpose and intent of the Long-Term Incentive Plan.
Participation in the Long-Term Incentive Plan is generally open to all officers, employees and other individuals, including Outside Directors. However, any
individual whose services to the Company or any of its subsidiaries are limited to capital-raising transactions, or the promotion and maintenance of a
market for the Company securities, are ineligible to participate in the Long-Term Incentive Plan. Prospective officers, employees and other service
providers who have accepted offers to provide services to the Company may also participate in the Long-Term Incentive Plan.
The Long-Term Incentive Plan enables the grant of stock options, stock appreciation rights, stock awards, stock unit awards, performance shares, cash-
based performance units and other stock-based awards, each of which may be granted separately or in tandem with other awards.
The maximum number of Common Shares issuable under the Long-Term Incentive Plan is fixed at 11.4% of the issued and outstanding Common Shares at
any given time, less the number of Common Shares issuable pursuant to stock options granted at such time under the Stock Option Plan. There were
953,116 awards outstanding under the Long-Term Incentive Plan representing approximately 4% of all issued and outstanding Common Shares on March
25, 2020. See above for a complete description of the Stock Option Plan.
69
The number of securities issuable to insiders, at any time, or issued within any one-year period, under all of our security-based compensation arrangements,
cannot exceed 10% of our issued and outstanding securities and no single participant may hold options to purchase, from time to time, more than 5% of our
issued and outstanding Common Shares.
The aggregate fair value of options granted under all of our security-based compensation arrangements to any one of our Outside Directors entitled to
receive a benefit under the Long-Term Incentive Plan, within any one-year period, cannot exceed $100,000 valued on a Black-Scholes basis and as
determined by the NGCC; and the aggregate number of securities issuable to all of our Outside Directors entitled to receive a benefit under the Long-Term
Incentive Plan, within any one-year period, under all of our security-based compensation arrangements, cannot exceed 1% of its issued and outstanding
securities.
Except as provided below or within an award agreement, each award granted under the Long-Term Incentive Plan (other than a performance unit that
cannot be paid in shares) will be subject to a minimum vesting period or minimum restriction period as follows: (i) each stock option or SAR will be
subject to a minimum vesting period of 12 months from the date of grant, (ii) each award of stock, stock units, performance shares, performance units
payable in shares and other stock- based awards (“Full Value Awards”) granted to non-employee directors will be subject to a minimum restriction period
of 12 months from the date of grant, and (iii) each Full Value Award granted to a participant other than a non-employee director will be subject to a
minimum restriction period of 12 months from the date of grant if vesting of or lapse of restrictions on such award is based on the satisfaction of
performance goals and a minimum restriction period of 36 months from the date of grant, applied in either pro rata installments or a single installment, if
vesting of or lapse of restrictions on such award is based solely on the participant’s satisfaction of specified service requirements with us (provided that no
such Full Value Awards will vest or have its restrictions lapse during the first 12 months following the date of grant). If the grant of a performance award is
conditioned on satisfaction of performance goals, the performance period must not be less than 12 months’ duration, but no additional minimum restriction
period need apply to such award. The minimum vesting period or minimum restriction period will not apply in the case of death or disability of a
participant or in the event of a change in control. Awards that result in the issuance of an aggregate of up to 5% of the share pool under the Long-Term
Incentive Plan may be granted without regard to such minimum vesting period or minimum restriction period.
Awards granted under the Long-Term Incentive Plan shall not be subject in any manner to alienation, anticipation, sale, transfer, assignment, pledge, or
encumbrance, except as otherwise determined by the Administrator; provided, however, that this restriction shall not apply to the Common Shares received
in connection with an award after the date that the restrictions on transferability of such shares set forth in the applicable award agreement have lapsed.
Except as provided in the applicable award agreement or otherwise determined by the Administrator, and subject to the minimum vesting period or
minimum restriction period described above, upon termination of service (as defined in the Long-Term Incentive Plan):
● Stock options or stock appreciation rights shall be forfeited, to the extent stock options or stock appreciation rights are not vested and exercisable;
● During the applicable restriction period, restricted stock and any accrued but unpaid dividends that are at that time subject to restrictions shall be
forfeited; and
● During the applicable deferral period or portion thereof to which forfeiture conditions apply, or upon failure to satisfy any other conditions precedent to
the delivery of common shares or cash to which RSUs, performance shares or performance units relate, all performance shares, performance units and
RSUs and any other accrued but unpaid dividend equivalents with respect to such RSUs that are then subject to deferral or restriction shall be forfeited.
70
In the event of a change in control (as defined in the Long-Term Incentive Plan) of the Company, outstanding awards will terminate upon the effective time
of the change in control unless provision is made for the continuation, assumption or substitution of awards by the surviving or successor entity or its
parent. Unless an award agreement says otherwise, the following will occur with respect to awards that terminate in connection with a change in control of
the Company:
● stock options and SARs, whether vested or unvested, will become fully exercisable and holders of these awards will be permitted immediately before
the change in control to exercise them;
● restricted stock and RSUs with time-based vesting (i.e., not subject to achievement of performance goals) will become fully vested immediately before
the change in control, and RSUs will be settled as promptly as is practicable in accordance with applicable law; and
● restricted stock, RSUs, performance shares, and performance units that vest based on the achievement of performance goals will become fully vested
and earned based on the target performance level as to the performance goals, such that 100% of the target award is earned as of the date of the change
of control; and the RSUs and performance units will be settled as promptly as is practicable in accordance with applicable law.
The Long-Term Incentive Plan will terminate on the earlier of (i) the earliest date as of which all awards granted under the Long-Term Incentive Plan have
been satisfied in full or terminated and no shares approved for issuance under the Long-Term Incentive Plan remain available to be granted under new
awards, or (ii) the tenth anniversary of date the Long-Term Incentive Plan, as amended and restated, is approved by our shareholders.
The Administrator may amend, alter or discontinue the Long-Term Incentive Plan, but no amendment, alteration or discontinuation will be made that would
materially impair the rights of a participant with respect to a previously granted award without his or her consent, except such an amendment made to
comply with applicable law or rule of any securities exchange or market on which our Common Shares are listed or admitted for trading or to prevent
adverse tax or accounting consequences to the Company or the participant. In no event, however, will an amendment be made without the approval of our
shareholders to the extent such amendment would (i) materially increase the benefits accruing to participants under the Long-Term Incentive Plan, (ii)
increase the number of shares that may be issued under the Long-Term Incentive Plan or to a participant, (iii) materially expand the eligibility for
participation in the Long-Term Incentive Plan, (iv) eliminate or modify the prohibition on repricing of stock options and SARs, (v) lengthen the maximum
term or lower the minimum exercise price or base price permitted for stock options and SARs, (vi) modify the prohibition on the issuance of reload or
replenishment options, (vii) amend the amendment provisions in the Long-Term Incentive Plan, or (viii) amend the Long-Term Incentive Plan to remove or
exceed the 10% insider participation limit.
Outstanding Option-Based Awards and Share-Based Awards
The following table shows all awards outstanding to our Named Executive Officers as of December 31, 2019:
Name
Auld, Leslie
Garrison, Brian(3)
Paulini, Klaus
Ward, Michael V.(4)
Guenther, Eckhard
Gerlach, Matthias
Ammer, Nicola
Option-based Awards
Share-based Awards
Number of
Securities
Underlying
Unexercised
Options(1)
(#)
—
—
2,500
25,000
35,000
150,000
50,000
100,000
5,000
398
10,000
25,000
5,000
15,000
20,000
10,000
25,000
Issuance
Date
(mm-dd-
yyyy)
—
—
12/06/2016
08/15/2019
11/11/2019
08/15/2017
04/02/2018
06/22/2018
12/21/2015
11/08/2016
12/06/2016
12/04/2019
12/21/2015
12/06/2016
12/04/2019
12/06/2016
12/04/2019
Option
Exercise
Price
($)
—
—
3.45
2.15
1.05
2.05
1.46
2.11
4.58
3.50
3.45
0.87
4.58
3.45
0.87
3.45
0.87
Option
Expiration
Date
(mm-dd-
yyyy)
—
—
12/06/2023
08/15/2026
11/11/2022
08/15/2024
04/02/2025
06/22/2025
12/21/2022
11/08/2023
12/06/2023
12/04/2026
12/21/2022
12/06/2023
12/04/2026
12/06/2023
12/04/2026
Value of
Unexercised
In-the-
money
Options(2)
Issuance
Date
Number
of Shares
or Units
of shares
that have
Not
Vested
Market
or Payout
Value of
Share-
based
Awards
that have
Not
Vested
Market or
Payout
Value of
Vested
Share-
based
Awards
Not Paid
Out or
Distributed
($)
(#)
($)
($)
—
—
—
—
—
—
—
—
—
—
—
1,000
—
—
—
—
1,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) The number of securities underlying unexercised options represents all awards outstanding at December 31, 2019.
(2)
“Value of unexercised in-the-money options” at financial year-end is calculated based on the difference between the closing price of the Common Shares on the NASDAQ on the last trading
day of the fiscal year (December 31, 2019) of $0.91 and the exercise price of the options, multiplied by the number of unexercised options.
(3) Mr. Garrison ceased to be the Senior Vice President, Global Commercial Operations on September 13, 2019. All outstanding stock options held by Mr. Garrison were cancelled in
accordance with the provisions of the Stock Option Plan.
(4) Mr. Ward ceased to be the President and Chief Executive Officer on October 4, 2019.
71
There were no share-based awards outstanding to our Named Executive Officers at December 31, 2019.
Incentive Plan Awards - Value Vested or Earned During the Year
The following table shows the incentive plan awards value vested or earned for each Named Executive Officer for the financial year ended December 31,
2019:
Name
Ammer, Nicola
Auld, Leslie
Garrison, Brian
Gerlach, Matthias
Guenther, Eckhard
Paulini, Klaus
Ward, Michael V.
Option-based awards —
Value
vested during the year(1)
($)
Share-based awards —
Value
vested during the year
($)
Non-equity incentive plan
compensation —
Value earned during the year
($)
—
—
—
—
—
—
87,002
—
—
—
—
—
—
—
20,608
—
—
22,400
12,443
22,400
—
(1) Represents the aggregate dollar value that would have been realized if the options had been exercised on the vesting date, based on the difference between the closing price of the Common
Shares on the NASDAQ and the exercise price on such vesting date. If closing price of the Common Shares on the NASDAQ on the vesting date was lower than the exercise price, then $nil
was considered realized.
Summary Compensation Table
The Summary Compensation Table set forth below shows compensation information for each of the Named Executive Officers for services rendered in all
capacities during the financial year ended December 31, 2019. All amounts in the table below are in U.S. dollars. All cash amounts paid to Messrs. Ward
and Garrison were paid in U.S. dollars. Ms. Auld’s cash payments were made in Canadian dollars. All cash amounts paid to Dr. Paulini, Dr. Ammer and
Messrs. Guenther and Gerlach were made in Euros.
72
SUMMARY COMPENSATION TABLE
Name and principal position
Years
Salary
($)
Share
based
awards
($)
Option
based
awards
(1)
($)
Non-equity incentive
plan compensation
Annual
incentive
plan
($)
Long-
term
incentive
plans
($)
Pension
Value
($)
All other
compensation
($)
Total
compensation
($)
Paulini, Klaus(2)
President and Chief Executive
Officer; Managing Director
AEZS Germany
Ward, Michael V.
Former President and Chief
Executive Officer(3)
Auld, Leslie Senior Vice President and Chief Financial Officer
Garrison, Brian
Former Senior Vice President
Global Commercial Operations
Guenther, Eckhard Vice President Business Development and Alliance Management;
Managing Director AEZS Germany
Gerlach, Matthias Vice President Manufacturing and Supply Chain
Ammer, Nicola Chief Medical Officer and Vice President Clinical
Development
2019
197,282
—
66,781
22,400
—
3,213
2019
2019
359,260
194,060
2019
196,350
2019
2019
169,438
159,862
—
—
—
—
—
—
—
—
—
—
—
14,792
11,834
12,443
22,400
2019
139,802
—
14,792
20,608
—
—
—
—
—
—
—
—
3,213
11,355
2,162
—
—
—
—
—
—
289,676
359,260
194,060
196,350
199,886
205,451
177,364
(1) The value of option-based awards represents the closing price of the Common Shares on the NASDAQ on the last trading day preceding the date of grant multiplied by the Black-Scholes
factor as at such date and the number of stock options granted on such date. The following table sets forth the value of the option-based awards and the corresponding Black-Scholes factor:
Date of Grant
November 9, 2016
December 6, 2016
December 16, 2016
August 15, 2017
April 2, 2018
June 22, 2018
August 15, 2019
November 11, 2019
December 4, 2019
$
$
$
$
$
$
$
$
$
Value of Grant
Black-Scholes Factor
3.50
3.45
3.80
2.05
1.46
2.11
2.15
1.05
0.87
80.35%
80.57%
80.68%
78.86%
77.57%
80.86%
79.22%
67.13%
68.01%
(2) Dr. Paulini did not receive any compensation in his role as a director.
(3) Mr. Ward received $75,000 as severance payments subsequent to October 4, 2019, the date that he ceased to be President and Chief Executive Officer. This amount is not included in the
amounts above.
73
Compensation of the Chief Executive Officer
The compensation of our President and Chief Executive Officer is governed by our executive compensation policy described in the section titled
“Compensation of Executive Officers”, and the President and Chief Executive Officer participates, together with the other Named Executive Officers, in all
our incentive plans.
Dr. Paulini’s total earnings during the financial year ended December 31, 2019 was $230,733, including an incentive bonus in the amount of $22,400.
For the financial year ended December 31, 2019, the Board approved an award of 25,000 stock options at an exercise price of $2.15 to Mr. Paulini on
August 7, 2019 and an award of 35,000 stock options at an exercise price of $1.05 to Mr. Paulini on November 7, 2019, each in accordance with the Long-
Term Incentive Plan.
Mr. Ward’s total earnings during the financial year ended December 31, 2019 was $524,478, not including the $75,000 severance payment he received
subsequent to the date that he ceased to be President and Chief Executive Officer. He received no incentive bonus.
See “Long-Term Equity Compensation Plan of Executive Officers - Summary of the Stock Option Plan”, for a complete description of the Stock Option
Plan. See “Long-Term Equity Compensation Plan of Executive Officers - Summary of the Long-Term Incentive Plan”, for a complete description of the
Long-Term Incentive Plan.
Pension, retirement or similar benefits
As at December 31, 2019, the Company and its subsidiaries had accrued pension, retirement or similar benefits obligations amounting to $13.7 million. See
note 18 - Employee future benefits, to the audited consolidated financial statements included in Item 18 of this Annual Report on Form 20-F.
C.
Board practices
Our Articles provide that our Board shall be composed of a minimum of five (5) and a maximum of fifteen (15) directors. Directors are elected annually by
our shareholders, but the directors may from time to time appoint one or more directors, provided that the total number of directors so appointed does not
exceed one-third of the number of directors elected at the last annual meeting of shareholders. Each elected director will remain in office until termination
of the next annual meeting of the shareholders or until his or her successor is duly elected or appointed, unless his or her post is vacated earlier. We do not
have service agreements with our independent directors.
See Item 6A. for information about the period of service of each of our directors and senior corporate officers.
Standing Committees of the Board of Directors
Our Board has established an Audit Committee and a NGCC.
Audit Committee
The Audit Committee assists the Board in fulfilling its oversight responsibilities. The Audit Committee reviews the financial reporting process, the system
of internal control, the audit process, and our process for monitoring compliance with laws and regulations and with our Code of Ethical Conduct. In
performing its duties, the Audit Committee will maintain effective working relationships with the Board, management, and the external auditors. To
effectively perform his or her role, each committee member will obtain an understanding of the detailed responsibilities of committee membership as well
as our business, operations and risks.
The function of the Audit Committee is oversight and while it has the responsibilities and powers set forth in its charter (incorporated by reference to
Exhibit 11.3 to this Annual Report on Form 20-F), it is neither the duty of the committee to plan or to conduct audits or to determine that our financial
statements are complete, accurate and in accordance with generally accepted accounting principles, nor to maintain internal controls and procedures.
The current members of the Audit Committee are Gérard Limoges (Chair), Brent Norton, and Carolyn Egbert.
74
NGCC
The NGCC is responsible for, among other matters, (i) assisting the Board in developing our approach to corporate governance issues, (ii) proposing new
Board nominees, (iii) overseeing the assessment of the effectiveness of the Board and its committees, their respective chairs and individual directors and
(iv) making recommendations to the Board with respect to board member nominees and directors’ compensation, as well as serving in a leadership role for
our corporate governance practices. It is also responsible for taking all reasonable actions to ensure that appropriate human resources policies, procedures
and systems, e.g., recruitment and retention policies, competency and performance metrics and measurements, training and development programs, and
market-based, competitive compensation and benefits structures, are in place so that we can attract, motivate and retain the quality of personnel required to
achieve our business objectives. The NGCC also assists the Board in discharging its responsibilities relating to the recruitment, retention, development,
assessment, compensation and succession planning for our executive and senior management members.
Thus, the NGCC recommends the appointment of senior officers, including the terms and conditions of their appointment and termination, and reviews the
evaluation of the performance of our senior officers, including recommending their compensation and overseeing risk identification and management in
relation to executive compensation policies and practices. The Board, which includes the members of the NGCC, reviews the Chief Executive Officer’s
corporate strategy, goals and performance objectives and evaluates and measures his or her performance and compensation against the achievement of such
goals and objectives.
The NGCC recognizes that the industry, regulatory and competitive environment in which we operate requires a balanced level of risk-taking to promote
and achieve the performance expectations of executives of a specialty biopharmaceutical company. The NGCC is of the view that our executive
compensation program should not encourage senior executives to take inappropriate or unreasonable risk. In this regard, the NGCC recommends the
implementation of compensation methods that appropriately connect a portion of senior executive compensation with our short-term and longer-term
performance, as well as that of each individual executive officer and that take into account the advantages and risks associated with such compensation
methods. The NGCC is also responsible for establishing compensation policies that are intended to reward the creation of shareholder value while
reflecting a balance between our short-term and longer-term performance and that of each executive officer.
The current members of the Compensation Committee are Brent Norton (Chair), Carolyn Egbert and Robin Smith Hoke.
D.
Employees
As at December 31, 2019, we had a total of 11 active employees, of which 10 are based in Frankfurt, Germany. The one remaining employee is based in the
U.S. and our CFO is based in Toronto, Canada. As of December 31, 2018, we had a total of 22 active employees, of which 18 were based in Frankfurt,
Germany, four were based in the U.S. and the CFO was based in Toronto, Canada. As of December 31, 2017, we had a total of 34 active employees, of
which 30 were based in Frankfurt, Germany and the remaining four were based in the U.S.
Our current employees are engaged in the following activities: (i) 3 are engaged in research and development, regulatory affairs and quality assurance; (ii)
3 are involved in commercial operations and business development; and (iii) 5 are involved in various administrative functions, including finance and
accounting. We do not employ any sales representatives. Under the German Restructuring Plan started in 2017, 8 employees left our German subsidiary in
2019 and one was re-employed (22 were terminated in 2017, three of them left in 2017, 14 of them left in 2018. Five of the employees who were
terminated in 2017 were re-employed in 2018). The Managing Director of the German site was replaced during 2018 with Mr. Ward. Mr. Ward resigned as
Managing Director effective July 26, 2019, when Dr. Paulini assumed this role.
We have agreements with our employees covering confidentiality, loyalty, non-competition and assignment of all intellectual property rights developed
during the employment period.
75
E.
Share ownership
The table below sets forth information as of March 11, 2019 provided to us by our current directors and named executive officers concerning their
ownership of Common Shares and stock options of the Company:
Name
Ammer, Nicola
Auld, Leslie
Egbert, Carolyn
Gagnon, Gilles(3)
Gerlach, Matthias
Guenther, Eckhard
Limoges, Gérard
Norton, Brent
Paulini, Klaus
Smith Hoke, Robin
Total
No. of Common Shares
owned or held
Percent(1)
No. of stock options
held(2)
No. of currently
exercisable options
—
—
1,920
-
—
—
1,200
—
—
—
3,120
—
—
*
-
—
—
*
*
—
—
*
35,000
—
77,850
—
40,000
40,398
77,850
—
62,500
—
333,598
—
—
57,850
—
20,000
15,398
57,850
—
2,500
—
153,598
* Less than 1%
(1) Based on 23,472,771 Common Shares outstanding as at March 11, 2019.
(2) For information regarding option expiration dates and exercise price refer to the tables included under the caption “Outstanding Option-Based Awards and Share-Based Awards”.
(3) Mr. Gagnon joined the Board on January 1, 2020.
Item 7.
Major Shareholders and Related Party Transactions
A.
Major shareholders
We are not directly or indirectly owned or controlled by another corporation or by any foreign government. Based on filings with the SEC and the Canadian
securities regulatory authorities, as at March 25, 2020, no individual or entity, other than as set out below, beneficially owned, directly or indirectly, or
exercised control or direction over our Common Shares carrying more than 5% of the voting rights attached to all our Common Shares (to whom we refer
as our major shareholders). The ownership percentages reflected below are based on 23,472,771 Common Shares outstanding as of March 25, 2020. The
shareholders listed below do not have any different voting rights from any of our other shareholders. We know of no arrangements that would, at a
subsequent date, result in a change of control of the Company.
Beneficial Owner
No. of Common Shares
Percentage
5% or Greater Shareholders
Armistice Capital Master Fund, LTD1
Empery Asset Management, LP2
1,213,738
1,673,440
5.2%
4.99%
1 Based solely on a Schedule 13G filed February 28, 2020, with the SEC. Does not include any warrants held, which are subject to a 4.99% blocker. The
business address of Armistice Capital Master Fund, LTD is 510 Madison Ave, Floor 7, New York, NY 10022.
2 Based solely on a Schedule 13G filed January 23, 2020, with the SEC. Represents (i) 12,440 Common Shares and (ii) warrants to purchase 1,661,000
Common Shares at $7.10 per share held by Empery Asset Management, LP (“Empery Asset”). The exercise of the foregoing warrants are subject to a
4.99% blocker. The “No. of Common Shares” column in the table above represents all Common Shares and warrants while the “Percentage” column
represents all Common Shares and only those warrants not subject to the blocker. The business address of Empery Asset is 1 Rockefeller Plaza, Suite 1205,
New York, NY 10020.
76
Changes in Percentage Ownership by Major Shareholders
We had no major shareholders in 2017. During 2018, J. Goldman & Co., L.P. J., Goldman Capital Management, Inc., and Jay G. Goldman (collectively,
“Goldman”) became major shareholders due to the acquisition of over 5% of our outstanding Common Shares, and as of December 31, 2019, Goldman
ceased to be the beneficial owner of more than 5% of our Common Shares, based solely on a Schedule 13G filed February 14, 2020, with the SEC.
United States Shareholders
Based on a review of the information provide to us by our transfer agent, as at March 18, 2020, there were 14 holders of record of our Common Shares, of
which two were registered with an address in the U.S. holding in the aggregate approximately 99.27% of our outstanding Common Shares. We believe that
the number of beneficial owners of our Common Shares is substantially greater than the number of record holders, because the overwhelming majority of
our Common Shares are held in broker “street names”.
B.
Related party transactions
Other than employment agreements and indemnification agreements with our management, there are no related party transactions.
C.
Interests of experts and counsel
Not required.
Item 8.
Financial Information
A.
Consolidated statements and other financial information
The consolidated financial statements filed as part of this Annual Report on Form 20-F are presented under “Item 18. – Financial Statements”.
B.
Significant changes
No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
77
Item 9.
The Offer and Listing
A.
Offer and listing details
Not applicable, except for Item 9A(4). Our Common Shares are listed on both the NASDAQ and the TSX under the symbol “AEZS”. The following table
indicates, for the relevant periods, the high and low closing prices of our Common Shares on the NASDAQ and on the TSX as of December 31, 2019:
NASDAQ (US$)
TSX (CAN$)
High
Low
High
Low
2018
2017
2019
Fourth quarter
Third quarter
Second quarter
First quarter
2018
Fourth quarter
Third quarter
Second quarter
First quarter
2017
Fourth quarter
Third quarter
Second quarter
First quarter
B.
Plan of distribution
Not applicable.
C.
Markets
3.87
3.65
5.57
1.08
2.97
5.43
4.65
3.87
2.03
2.62
2.41
2.70
2.87
3.35
3.65
1.19
0.84
0.76
0.77
1.00
2.04
3.03
1.30
1.60
1.19
1.46
1.87
0.98
0.84
2.45
5.10
4.81
7.43
1.45
3.86
7.26
6.25
5.10
2.69
3.34
3.01
3.48
3.57
4.50
4.81
1.53
1.13
1.01
1.02
1.33
2.73
4.12
1.69
2.10
1.53
1.89
2.38
1.28
1.13
3.24
Our Common Shares are listed and posted for trading on both the NASDAQ and the TSX under the symbol “AEZS”.
D.
Selling shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the issue
Not applicable.
Item 10.
Additional Information
A.
Share capital
Not required.
B.
Memorandum and articles of association
We are governed by our restated articles of incorporation (the “Restated Articles of Incorporation”) under the CBCA and by articles of amendment dated
October 2, 2012, November 17, 2015, and May 9, 2019 (together with the Restated Articles of Incorporation, the “Articles”) and by our bylaws, as
amended and restated on March 21, 2013 (the “bylaws”). Our Articles are on file with Corporations Canada under Corporation Number 264271-9. The
Articles do not include a stated purpose and do not place any restrictions on the business that we may carry on.
78
Inspection Rights of Shareholders
Under the CBCA, shareholders are entitled to be provided with a copy of the list of our registered shareholders. In order to obtain the shareholder list, a
shareholder must provide to us an affidavit including, among other things, a statement that the list will only be used for the purposes permitted by the
CBCA. These permitted purposes include an effort to influence the voting of our shareholders, an offer to acquire our securities and any other matter
relating to our affairs. We are entitled to charge a reasonable fee for the provision of the shareholder list and must deliver that list no more than ten days
after receipt of the affidavit described above.
Under the CBCA, shareholders have the right to inspect certain corporate records, including our Articles and bylaws and minutes of meetings and
resolutions of the shareholders. Shareholders have no statutory right to inspect minutes of meetings and resolutions of our directors. Our shareholders have
the right to certain financial information respecting us. In addition to the annual and quarterly financial statements required to be filed under applicable
securities laws, we are required by the CBCA to place before every annual meeting of shareholders our audited comparative annual financial statements. In
addition, shareholders have the right to examine the financial statements of each of our subsidiaries and any other corporate entity whose accounts are
consolidated in our financial statements.
Directors
The minimum number of directors we must have is five (5) and the maximum number is fifteen (15). In accordance with the CBCA, at least 25% of our
directors must be residents of Canada. In order to serve as a director, a person must be a natural person at least 18 years of age, of sound mind, not
bankrupt, and must not be prohibited by any court from holding the office of director. None of the Articles, the bylaws and the CBCA impose any
mandatory retirement requirements for directors.
The directors are elected by a majority of the votes cast at the annual meeting at which an election of directors is required, to hold office until the election
of their successors, except in the case of resignations or if their offices become vacant by death or otherwise. Subject to the provisions of our bylaws, all
directors may, if still qualified to serve as directors, stand for re-election. The Board is not replaced at staggered intervals but is elected annually.
There is no provision in our bylaws or Articles that requires that a director must be a shareholder.
The directors are entitled to remuneration as shall from time to time be determined by the Board or by a committee to which the Board may delegate the
power to do so. Under the mandate of the NGCC, such committee, comprised of at least a majority of independent directors, is tasked with making
recommendations to the Board concerning director remuneration.
The CBCA provides that a director who is a party to, or who is a director or officer of, or has a material interest in, any person who is a party to a material
contract or transaction or proposed material contract or transaction with us must disclose to us the nature and extent of his or her interest at the time and in
the manner provided by the CBCA, or request that same be entered in the minutes of the meetings of the Board, even if such contract, in connection with
our normal business activity, does not require the approval of either the directors or the shareholders. At the request of the president or any director, the
director placed in a situation of conflict of interest must leave the meeting while the Board discusses the matter. The CBCA prohibits such a director from
voting on any resolution to approve the contract or transaction unless the contract or transaction:
● relates primarily to his or her remuneration as our director, officer, employee or agent or as a director, officer, employee or agent of an affiliate of us;
● is for indemnity or insurance for director’s liability as permitted by the CBCA; or
● is with our affiliate.
The CBCA provides that the Board may, on our behalf and without authorization of our shareholders:
● borrow money upon our credit;
● issue, reissue, sell or pledge our debt obligations;
● give a guarantee on our behalf to secure performance of an obligation of any person; and
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● mortgage, hypothecate, pledge or otherwise create a security interest in all or any of our property, owned or subsequently acquired, to secure any of our
obligations.
The shareholders have the ability to restrict such powers through our Articles or bylaws (or through a unanimous shareholder agreement), but no such
restrictions are in place.
The CBCA prohibits the giving of a guarantee to any of our shareholders, directors, officers or employees or of an affiliated corporation or to an associate
of any such person for any purpose or to any person for the purpose of or in connection with a purchase of a share issued or to be issued by us or our
affiliates, where there are reasonable grounds for believing that we are or, after giving the guarantee, would be unable to pay our liabilities as they become
due, or the realizable value of our assets in the form of assets pledged or encumbered to secure a guarantee, after giving the guarantee, would be less than
the aggregate of our liabilities and stated capital of all classes. These borrowing powers may be varied by our bylaws or Articles. However, our bylaws and
Articles do not contain any restrictions on or variations of these borrowing powers.
Pursuant to the CBCA, our directors manage and administer our business and affairs and exercise all such powers and authority as we are authorized to
exercise pursuant to the CBCA, the Articles and the bylaws. The general duties of our directors and officers under the CBCA are to act honestly and in
good faith with a view to our best interests and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances. Any breach of these duties may lead to liability to us and our shareholders for breach of fiduciary duty. In addition, a breach of certain
provisions of the CBCA, including the improper payment of dividends or the improper purchase or redemption of shares, will render the directors who
authorized such action liable to account to us for any amounts improperly paid or distributed.
Our bylaws provide that the Board may, from time to time, appoint from amongst their number committees of the Board, and delegate to any such
committee any of the powers of the Board except those which pursuant to the CBCA a committee of the Board has no authority to exercise. As such, the
Board has two standing committees: the Audit Committee and the Nominating, Governance and Compensation Committee, or the NGCC.
Subject to the limitations provided by the CBCA, our bylaws provide that we shall, to the full extent provided by law, indemnify a director or an officer, a
former director or officer or a person who acts or acted at our request as a director or officer of a body corporate of which we are or were a shareholder or
creditor, and his or her heirs and legal representatives, against all costs, losses, charges and expenses, including an amount paid to settle an action or satisfy
a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by
reason of having been our director or officer or such body corporate, provided: (a) he or she acted in good faith in our best interests and (b) in the case of a
criminal or an administrative action or proceeding that is enforced by a monetary penalty, he or she had reasonable grounds to believe that his or her
conduct was lawful.
Our directors are authorized to indemnify from time to time any director or other person who has assumed or is about to assume in the normal course of
business any liability for us or for any corporation controlled by us and to secure such director or other person against any loss by the pledge of all or part
of our movable or immovable property through the creation of a hypothec or any other real right in all or part of such property or in any other manner.
We have also agreed to indemnify and save harmless our directors and senior corporate officers as well as the managing directors of our German subsidiary
pursuant to various Director and Officer Indemnification Agreements against certain charges, damages, awards, settlements, liabilities, interest, judgments,
fines, penalties, statutory obligations, professional fees and retainers and other expenses of whatever nature or kind, provided that any such costs, charges,
professional fees and other expenses are reasonable (collectively, “Expenses”) and from and against all Expenses sustained or incurred by the indemnified
party as a result of serving as a director, officer or employee of the Company (or its subsidiary) in respect of any act, matter, deed or thing whatsoever
made, done, committed, permitted, omitted or acquiesced in by the indemnified party as a director, officer or employee of the Company (or its subsidiary).
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Share Capitalization
Our authorized share capital structure consists of an unlimited number of shares of the following classes (all classes are without nominal or par value):
Common Shares; and first preferred shares (the “First Preferred Shares”) and second preferred shares (the “Second Preferred Shares” and, together with the
First Preferred Shares, the “Preferred Shares”), both issuable in series. As at March 25, 2020, there were approximately 23,472,771 million Common
Shares outstanding. No Preferred Shares have been issued to date. We have also issued warrants to acquire Common Shares in connection with certain
equity financings.
Common Shares
The holders of the Common Shares are entitled to one vote for each Common Share held by them at all meetings of shareholders, except meetings at which
only shareholders of a specified class of shares are entitled to vote. In addition, the holders are entitled to receive dividends if, as and when declared by our
Board on the Common Shares. Finally, the holders of the Common Shares are entitled to receive our remaining property upon any liquidation, dissolution
or winding-up of our affairs, whether voluntary or involuntary. Shareholders have no liability to further capital calls as all shares issued and outstanding are
fully paid and non-assessable.
Preferred Shares
The First and Second Preferred Shares are issuable in series with rights and privileges specific to each class. The holders of Preferred Shares are generally
not entitled to receive notice of or to attend or vote at meetings of shareholders. The holders of First Preferred Shares are entitled to preference and priority
to any participation of holders of Second Preferred Shares, Common Shares or shares of any other class of shares of our share capital ranking junior to the
First Preferred Shares with respect to dividends and, in the event of our liquidation, the distribution of our property upon our dissolution or winding-up, or
the distribution of all or part of our assets among the shareholders, to an amount equal to the value of the consideration paid in respect of such shares
outstanding, as credited to our issued and paid-up share capital, on an equal basis, in proportion to the amount of their respective claims in regard to such
shares held by them. The holders of Second Preferred Shares are entitled to preference and priority to any participation of holders of Common Shares or
shares of any other class of shares of our share capital ranking junior to the Second Preferred Shares with respect to dividends and, in the event of our
liquidation, the distribution of our property upon our dissolution or winding-up, or the distribution of all or part of our assets among the shareholders, to an
amount equal to the value of the consideration paid in respect of such shares outstanding, as credited to our issued and paid-up share capital, on an equal
basis, in proportion to the amount of their respective claims in regard to such shares held by them.
Our Board may, from time to time, provide for additional series of Preferred Shares to be created and issued, but the issuance of any Preferred Shares is
subject to the general duties of the directors under the CBCA to act honestly and in good faith with a view to our best interests and to exercise the care,
diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Warrants
For a description of our Warrants, see note 17 - warrant liability, to the audited consolidated financial statements included in Item 18 of this Annual Report
on Form 20-F.
Shareholder Actions
The CBCA provides that our shareholders may, with leave of a court, bring an action in our name and on our behalf for the purpose of prosecuting,
defending or discontinuing an action on our behalf. In order to grant leave to permit such an action, the CBCA provides that the court must be satisfied that
our directors were given adequate notice of the application, the shareholder is acting in good faith and that it appears to be in our best interests that the
action be brought.
Shareholder Rights Plan
The Board of the Company approved an amended and restated shareholder rights plan of the Company on March 29, 2019, which was approved, ratified
and confirmed by the shareholders at the annual and special meeting of shareholders of the Company on May 8, 2019 (the “Rights Plan”). The Rights Plan
amended and restated the Company’s shareholder rights plan originally implemented in 2016 and was implemented to ensure, to the extent possible, that all
shareholders of the Company are treated fairly in connection with any take-over offer or other acquisition of control of the Company.
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Objectives and Background of the Rights Plan
The fundamental objectives of the Rights Plan are to provide adequate time for our Board and shareholders to assess an unsolicited take-over bid for us, to
provide the Board with sufficient time to explore and develop alternatives for maximizing shareholder value if a take-over bid is made, and to provide
shareholders with an equal opportunity to participate in a take-over bid.
The Rights Plan encourages a potential acquiror who makes a take-over bid to proceed either by way of a “Permitted Bid”, as described below, which
requires a take-over bid to satisfy certain minimum standards designed to promote fairness, or with the concurrence of our Board. If a take-over bid fails to
meet these minimum standards and the Rights Plan is not waived by the Board, the Rights Plan provides that holders of Common Shares, other than the
acquiror, will be able to purchase additional Common Shares at a significant discount to market, thus exposing the person acquiring Common Shares to
substantial dilution of its holdings.
Summary of the Rights Plan
The following is a summary of the principal terms of the Rights Plan, which summary is qualified in its entirety by reference to the terms thereof.
Capitalized terms not otherwise defined in this summary shall have the meaning ascribed to such terms in the Rights Plan. A draft of the Rights Plan is
available at the following websites: www.zenataris.com, www.sedar.com and www.sec.gov.
For the purposes of this summary and as set out in the Rights Plan, the term “NI 62-104” refers to National Instrument 62-104-Take-Over Bids and Issuer
Bids adopted by the Canadian securities regulatory authorities, as now in effect or as the same may from time to time be amended, re-enacted or replaced
and including for greater certainty any successor instrument thereto.
Operation of the Rights Plan
Pursuant to the terms of the Rights Plan, one right was issued in respect of each common share outstanding at 5:01 p.m. on March 29, 2016 (the “Record
Time”). In addition, we will issue one right for each additional Common Share issued after the Record Time and prior to the earlier of the Separation Time
(as defined below) and the Expiration Time (as defined below). The rights have an initial exercise price equal to the Market Price (as defined below) of the
Common Shares as determined at the Separation Time, multiplied by five, subject to certain anti-dilution adjustments (the “Exercise Price”), and they are
not exercisable until the Separation Time. Upon the occurrence of a Flip-in Event (as defined below), each right will entitle the holder thereof, other than an
Acquiring Person or any other person whose rights are or become void pursuant to the provisions of the Rights Plan, to purchase from us, effective at the
close of business on the eighth trading day after the Stock Acquisition Date (as defined below), upon payment to us of the Exercise Price, Common Shares
having an aggregate Market Price equal to twice the Exercise Price on the date of consummation or occurrence of such Flip-in Event, subject to certain
anti-dilution adjustments.
Definition of Market Price
Market Price is generally defined in the Rights Plan, on any given day on which a determination must be made, as the volume weighted average trading
price of the Common Shares for the 20 consecutive trading days (i.e. days on which the TSX or another stock exchange or national securities quotation
system on which the Common Shares are traded (including for greater certainty, each of the Nasdaq Global Select Market, the Nasdaq Global Market and
the Nasdaq Capital Market) is open for the transaction of business, subject to certain exceptions), through and including the trading day immediately
preceding such date of determination, subject to certain exceptions.
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Trading of Rights
Until the Separation Time (or the earlier termination or expiration of the rights), the rights trade together with the Common Shares and are represented by
the same share certificates as the Common Shares or an entry in our securities register in respect of any outstanding Common Shares. From and after the
Separation Time and prior to the Expiration Time, the rights are evidenced by rights certificates and trade separately from the Common Shares. The rights
do not carry any of the rights attaching to the Common Shares such as voting or dividend rights.
Separation Time
The rights will separate from the Common Shares to which they are attached and become exercisable at the time (the “Separation Time”) of the close of
business on the eighth business day after the earliest to occur of:
1.
2.
the first date (the “Stock Acquisition Date”) of a public announcement of facts indicating that a person has become an Acquiring Person; and
the date of the commencement of, or first public announcement of the intention of any person (other than us or any of our subsidiaries) to commence a
take-over bid or a share exchange bid for more than 20% of our outstanding Common Shares other than a Permitted Bid or a Competing Permitted Bid
(as defined below), so long as such take-over bid continues to satisfy the requirements of a Permitted Bid or a Competing Permitted Bid, as the case
may be.
The Separation Time can also be such later time as may from time to time be determined by the Board, provided that if any such take-over bid expires, or is
canceled, terminated or otherwise withdrawn prior to the Separation Time, without securities deposited thereunder being taken up and paid for, it shall be
deemed never to have been made and if the Board determines to waive the application of the Rights Plan to a particular Flip-in Event, the Separation Time
in respect of such Flip-in Event shall be deemed never to have occurred.
From and after the Separation Time and prior to the Expiration Time, each right entitles the holder thereof to purchase one Common Share upon payment
of the Exercise Price to us.
Flip-in Event
The acquisition by a person (an “Acquiring Person”), including others acting jointly or in concert with such person, of more than 20% of the outstanding
Common Shares, other than by way of a Permitted Bid, a Competing Permitted Bid or in certain other limited circumstances described in the Rights Plan,
is referred to as a “Flip-in Event”.
In the event that, prior to the Expiration Time, a Flip-in Event that has not been waived occurs (see “Waiver and Redemption” below), each right (other
than those held by or deemed to be held by the Acquiring Person) will thereafter entitle the holder thereof, effective as at the close of business on the eighth
trading day after the Stock Acquisition Date, to purchase from us, upon payment of the Exercise Price and otherwise exercising such right in accordance
with the terms of the Rights Plan, that number of Common Shares having an aggregate Market Price on the date of consummation or occurrence of the
Flip-in Event equal to twice the Exercise Price, for an amount in cash equal to the Exercise Price (subject to certain anti-dilution adjustments described in
the Rights Plan).
A bidder may enter into Permitted Lock-up Agreements with our shareholders (“Locked-up Persons”) who are not affiliates or associates of the bidder and
who are not, other than by virtue of entering into such agreement, acting jointly or in concert with the bidder, whereby such shareholders agree to tender
their Common Shares to the take-over bid (the “Lock-up Bid”) without the bidder being deemed to beneficially own the Common Shares deposited
pursuant to the Lock-up Bid. Any such agreement must include a provision that permits the Locked-up Person to withdraw the Common Shares to tender to
another take-over bid or to support another transaction that will either provide greater consideration to the shareholder than the Lock-up Bid or provide for
a right to sell a greater number of shares than the Lock-up Bid contemplates (provided that the Permitted Lock-up Agreement may require that such greater
number exceed the number of shares under the Locked-up Bid by a specified percentage not to exceed 7%).
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A Permitted Lock-up Agreement may require that the consideration under the other transaction exceed the consideration under the Lock-up Bid by a
specified amount. The specified amount may not be greater than 7%. For greater certainty, a Permitted Lock-up Agreement may contain a right of first
refusal or require a period of delay (or other similar limitation) to give a bidder an opportunity to match a higher price in another transaction as long as the
limitation does not preclude the exercise by the Locked-up Person of the right to withdraw the Common Shares during the period of the other take-over bid
or transaction.
The Rights Plan requires that any Permitted Lock-up Agreement be made available to us and the public. The definition of Permitted Lock-up Agreement
also provides that under a Permitted Lock-up Agreement, no “break up” fees, “topping” fees, penalties, expenses or other amounts that exceed in aggregate
the greater of (i) 2.5% of the price or value of the aggregate consideration payable under the Lock-up Bid, and (ii) 50% of the amount by which the price or
value of the consideration received by a Locked-up Person under another take-over bid or transaction exceeds what such Locked-up Person would have
received under the Lock-up Bid, can be payable by such Locked-up Person if the Locked-up Person fails to deposit or tender Common Shares to the Lock-
up Bid or withdraws Common Shares previously tendered thereto in order to deposit such Common Shares to another take-over bid or support another
transaction.
Permitted Bid Requirements
The requirements of a Permitted Bid include the following:
1.
2.
3.
4.
5.
6.
the take-over bid must be made by means of a take-over bid circular;
the take-over bid must be made to all holders of Common Shares wherever resident, on identical terms and conditions, other than the bidder;
the take-over bid must not permit Common Shares tendered pursuant to the bid to be taken up or paid for:
a)
b)
prior to the close of business on a date that is not less than 105 days following the date of the relevant take-over bid or such shorter minimum
period that a take-over bid (that is not exempt from any of the requirements of Division 5 (Bid Mechanics of NI 62-104)) must remain open for
deposits of securities thereunder, in the applicable circumstances at such time, pursuant to NI 62-104;
then only if at the close of business on the date Common Shares (and/or “Convertible Securities”, as defined in the Rights Plan) are first taken up
or paid for under such take-over bid, outstanding Common Shares and Convertible Securities held by shareholders other than any other Acquiring
Person, the bidder, the bidder’s affiliates or associates, persons acting jointly or in concert with the bidder and any employee benefit plan, deferred
profit-sharing plan, stock participation plan or trust for the benefit of our employees or the employees of any of our subsidiaries, unless the
beneficiaries of such plan or trust direct the manner in which the Common Shares are to be voted or direct whether the Common Shares are to be
tendered to a take-over bid (collectively, “Independent Shareholders”) that represent more than 50% of the aggregate of (I) then outstanding
Common Shares and (II) Common Shares issuable upon the exercise of Convertible Securities, have been deposited or tendered pursuant to the
take-over bid and not withdrawn;
the take-over bid must allow Common Shares and/or Convertible Securities to be deposited or tendered pursuant to such take-over bid, unless such
take-over bid is withdrawn, at any time prior to the close of business on the date Common Shares and/or Convertible Securities are first taken up or
paid for under the take-over bid;
the take-over bid must allow Common Shares and/or Convertible Securities to be withdrawn until taken up and paid for; and
in the event the requirement set forth in clause 3.b) above is satisfied, the bidder must make a public announcement of that fact and the take-over bid
must remain open for deposits and tenders of Common Shares for not less than ten days from the date of such public announcement.
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A Permitted Bid need not be a bid for all outstanding Common Shares not held by the bidder, i.e., a Permitted Bid may be a partial bid. The Rights Plan
also allows a competing Permitted Bid (a “Competing Permitted Bid”) to be made while a Permitted Bid is in existence. A Competing Permitted Bid must
satisfy all the requirements of a Permitted Bid other than the requirement set out in clause 3.a) above and must not permit Common Shares tendered or
deposited pursuant to the bid to be taken up or paid for prior to the close of business on the last day of the minimum initial deposit period that such take-
over bid must remain open for deposits of securities thereunder pursuant to NI 62-104 after the date of the take-over bid constituting the Competing
Permitted Bid; provided, however, that a take-over bid that has qualified as a Competing Permitted Bid shall cease to be a Competing Permitted Bid at any
time and as soon as such time as when such take-over bid ceases to meet any or all of the foregoing provisions of the definition of “Competing Permitted
Bid” and any acquisition of Common Shares and/or Convertible Securities made pursuant to such take-over bid that qualified as a Competing Permitted
Bid, including any acquisition of Common Shares and/or Convertible Securities made before such take-over bid ceased to be a Competing Permitted Bid,
will not be a “Permitted Bid Acquisition” (as defined in the Rights Plan).
Waiver and Redemption
The Board may, prior to the occurrence of a Flip-in Event, waive the dilutive effects of the Rights Plan in respect of, among other things, a particular Flip-
in Event resulting from a take-over bid made by way of a take-over bid circular to all holders of our Common Shares. In such an event, such waiver shall
also be deemed to be a waiver in respect of any other Flip-in Event occurring under a take-over bid made by way of a take-over bid circular to all holders of
Common Shares prior to the expiry of the first mentioned take-over bid.
The Board may, with the approval of a majority of Independent Shareholders (or, after the Separation Time has occurred, holders of rights, other than rights
which are void pursuant to the provisions of the Rights Plan or which, prior to the Separation Time, are held otherwise than by Independent Shareholders),
at any time prior to the occurrence of a Flip-in Event which has not been waived, elect to redeem all, but not less than all, of the then outstanding rights at a
price of CAN$0.00001 each, appropriately adjusted as provided in the Rights Plan (the “Redemption Price”).
Where a take-over bid that is not a Permitted Bid or Competing Permitted Bid is withdrawn or otherwise terminated after the Separation Time has occurred
and prior to the occurrence of a Flip-in Event, the Board may elect to redeem all the outstanding rights at the Redemption Price without the consent of the
holders of the Common Shares or the rights and reissue rights under the Rights Plan to holders of record of Common Shares immediately following such
redemption. Upon the rights being so redeemed and reissued, all the provisions of the Rights Plan will continue to apply as if the Separation Time had not
occurred, and the Separation Time will be deemed not to have occurred and we shall be deemed to have issued replacement rights to the holders of its then
outstanding Common Shares.
Amendment to the Rights Plan
The Rights Plan may be amended to correct any clerical or typographical error or to make such changes as are required to maintain the validity of the
Rights Plan as a result of any change in any applicable legislation, regulations or rules thereunder, without the approval of the holders of the Common
Shares or rights. Prior to the Separation Time, we may, with the prior consent of the holders of Common Shares, amend, vary or delete any of the
provisions of the Rights Plan in order to effect any changes which the Board, acting in good faith, considers necessary or desirable. We may, with the prior
consent of the holders of rights, at any time after the Separation Time and before the Expiration Time, amend, vary or delete any of the provisions of the
Rights Plan.
Protection Against Dilution
The Exercise Price, the number and nature of securities which may be purchased upon the exercise of rights and the number of rights outstanding are
subject to adjustment from time to time to prevent dilution in the event of stock dividends, subdivisions, consolidations, reclassifications or other changes
in the outstanding Common Shares, pro rata distributions to holders of Common Shares and other circumstances where adjustments are required to
appropriately protect the interests of the holders of rights.
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Fiduciary Duty of Board
The Rights Plan will not detract from or lessen the duty of the Board to act honestly and in good faith with a view to our best interests and the best interests
of our shareholders. The Board will continue to have the duty and power to take such actions and make such recommendations to our shareholders as are
considered appropriate.
Exemptions for Investment Advisors
Fund managers, investment advisors (for fully-managed accounts), trust companies (acting in their capacities as trustees and administrators), statutory
bodies whose business includes the management of funds, and administrators of registered pension plans are exempt from triggering a Flip-in Event,
provided that they are not making, or are not part of a group making, a take-over bid.
Term
The Rights Plan will expire on the earlier of (i) the Termination Time; and (ii) the Close of Business on the date on which the annual meeting of the
Company to be held in 2022 and at every third annual meeting of the Company thereafter (each such annual meeting being a “Reconfirmation Meeting”)
occurs and at which the Rights Plan is not reconfirmed or presented for reconfirmation as contemplated in the Rights Plan (the “Expiration Time”).
Action Necessary to Change Rights of Shareholders
In order to change the rights of our shareholders, we would need to amend our Articles to effect the change. Such an amendment would require the
approval of holders of two-thirds of the issued and outstanding shares cast at a duly called special meeting. For certain amendments, a shareholder is
entitled under the CBCA to dissent in respect of such a resolution amending the Articles and, if the resolution is adopted and we implement such changes,
demand payment of the fair value of its shares.
Disclosure of Share Ownership
In general, under applicable securities regulation in Canada, a person or company who beneficially owns, or who directly or indirectly exercises control or
direction over voting securities of a reporting issuer, voting securities of an issuer or a combination of both, carrying more than ten percent of the voting
rights attached to all the issuer’s outstanding voting securities is an insider and must, within ten days of becoming an insider, file a report in the required
form effective the date on which the person became an insider, disclosing any direct or indirect beneficial ownership of, or control or direction over,
securities of the reporting issuer.
Additionally, securities regulation in Canada provides for the filing of a report by an insider of a reporting issuer whose holdings change, which report must
be filed within five days from the day on which the change takes place.
Section 13 of the Exchange Act imposes reporting requirements on persons who acquire beneficial ownership (as such term is defined in the Rule 13d-3
under the Exchange Act) of more than five percent of a class of an equity security registered under Section 12 of the Exchange Act. Our Common Shares
are so registered. In general, such persons must file, within ten days after such acquisition, a report of beneficial ownership with the SEC containing the
information prescribed by the regulations under Section 13 of the Exchange Act. This information is also required to be sent to the issuer of the securities
and to each exchange where the securities are traded.
Meeting of Shareholders
An annual meeting of shareholders is held each year for the purpose of considering the financial statements and reports, electing directors, appointing
auditors and fixing or authorizing the Board to fix their remuneration and for the transaction of other business as may properly come before a meeting of
shareholders. Any annual meeting may also constitute a special meeting to take cognizance and dispose of any matter of which a special meeting may take
cognizance and dispose. Under the bylaws, our Chief Executive Officer or our President has the power to call a meeting of shareholders.
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The CBCA provides that the holders of not less than 5% of our outstanding voting shares may requisition our directors to call a meeting of shareholders for
the purpose stated in the requisition. Except in limited circumstances, including where a meeting of shareholders has already been called and a notice of
meeting already given or where it is clear that the primary purpose of the requisition is to redress a personal grievance against us or our directors, officers
or shareholders, our directors, on receipt of such requisition, must call a meeting of shareholders. If the directors fail to call a meeting of shareholders
within twenty-one days after receiving the requisition, any shareholder who signed the requisition may call the meeting of shareholders and, unless the
shareholders resolve otherwise at the meeting, we shall reimburse the shareholders for the expenses reasonably incurred by them in requisitioning, calling
and holding the meeting of shareholders.
The CBCA also provides that, except in limited circumstances, a resolution in writing signed by all of the shareholders entitled to vote on that resolution at
a meeting of shareholders is as valid as if it had been passed at a meeting of shareholders.
A quorum of shareholders is present at an annual or special meeting of shareholders, regardless of the number of persons present in person at the meeting,
if the holder(s) of shares representing at least 10% of the outstanding voting shares at such meeting are present in person or represented in accordance with
our bylaws. In the case where the CBCA, our Articles or our bylaws require or permit the vote by class of holders of a given class of shares of our share
capital, the quorum at any meeting will be one or more persons representing 10% of the outstanding shares of such class.
Notice of the time and place of each annual or special meeting of shareholders must be given not less than 21 days, nor more than 50 days, before the date
of each meeting to each director, to the auditor and to each shareholder entitled to vote thereat. If the address of any shareholder, director or auditor does
not appear in our books, the notice may be sent to such address as the person sending the notice may consider to be most likely to reach such shareholder,
director or auditor promptly. Every person who, by operation of the CBCA, transfers or by any other means whatsoever, becomes entitled to any share,
shall be bound by every notice given in respect of such share which, prior to the entry of his or her name and address on our register, is given to the person
whose name appears on the register at the time such notice is sent. Notice of meeting of shareholders called for any other purpose other than consideration
of the financial statements and auditor’s report, election of directors and reappointment of the incumbent auditor, must state the nature of the business in
sufficient detail to permit the shareholder to form a reasoned judgment on and must state the text of any special resolution or bylaw to be submitted to the
meeting.
Our bylaws include an advance notice provision (the “Advance Notice Requirement”). The Advance Notice Requirement applies in certain circumstances
where nominations of persons for election to the Board are made by our shareholders other than pursuant to: (a) a requisition of a meeting made pursuant to
the provisions of the CBCA; or (b) a shareholder proposal made pursuant to the provisions of the CBCA.
Among other things, the Advance Notice Requirement fixes a deadline by which shareholders must submit a notice of director nominations to us prior to
any annual or special meeting of shareholders where directors are to be elected and sets forth the information that a shareholder must include in the notice
for it to be valid. In the case of an annual meeting of shareholders, we must be given not less than 30 nor more than 65 days’ notice prior to the date of the
annual meeting; provided, however, that in the event that the annual meeting is to be held on a date that is less than 50 days after the date on which the first
public announcement of the date of the annual meeting was made, notice may be made not later than the close of business on the 10th day following such
public announcement. In the case of a special meeting of shareholders (which is not also an annual meeting), we must be given notice not later than the
close of business on the 15th day following the day on which the first public announcement of the date of the special meeting was made.
The Board may, in its sole discretion, waive any requirement of the Advance Notice Requirement.
Limitations on Right to Own Securities
Neither Canadian law nor our Articles or bylaws limit the right of a non-resident to hold or vote our Common Shares, other than as provided in the
Investment Canada Act (the “Investment Act”).
The Investment Act requires any person that is a “non-Canadian” (as defined in the Investment Act) who acquires “control” (as defined in the Investment
Act) of an existing Canadian business to file either a pre-closing application for review or a post-closing notification with Innovation, Science and
Economic Development Canada.
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As of February 15, 2020, the threshold for review of a direct acquisition of control of a non-cultural Canadian business by a World Trade Organization
member country investor that is not a state-owned enterprise is an enterprise value of assets that exceeds CAN$1.075 billion. For “trade agreement
investors” that are not state-owned enterprises (as defined in the Investment Act), which as of March 2020 include investors ultimately controlled by
nationals of Australia, Chile, Colombia, EU member states, Honduras, Japan, Korea, Mexico, New Zealand, Panama, Peru, Singapore, the U.S. or Vietnam,
the threshold for review of a direct acquisition of control of a non-cultural Canadian business is an enterprise value of assets that exceeds C$1.613 billion.
The enterprise value review thresholds for both World Trade Organization member countries and trade agreement investors are indexed to annual GDP
growth and are adjusted accordingly each year. For purposes of a publicly traded company, the “enterprise value” of the assets of the Canadian business is
equal to the market capitalization of the entity, plus its liabilities (excluding its operating liabilities), minus its cash and cash equivalents.
As such, under the Investment Act, the acquisition of control of us (either through the acquisition of our Common Shares or all or substantially all our
assets) by a non-Canadian who is a World Trade Organization member country investor or a trade agreement investor, including a U.S. investor, would be
reviewable only if the enterprise value of our assets exceeds the specified threshold for review.
Where the acquisition of control is a reviewable transaction, the Investment Act generally prohibits the implementation of the reviewable transaction
unless, after review, the relevant Minister is satisfied or deemed to be satisfied that the acquisition is likely to be of net benefit to Canada.
The acquisition of a majority of the voting interests of an entity is deemed to be acquisition of “control” of that entity. The acquisition of less than a
majority but one-third or more of the total number of votes attached to all of the voting shares of a corporation or of an equivalent undivided ownership
interest in the total number of votes attached to all of the voting shares of the corporation is presumed to be an acquisition of control of that corporation
unless it can be established that, on the acquisition, the corporation is not controlled in fact by the acquiror through the ownership of voting shares. The
acquisition of less than one-third of the total number of votes attached to all of the voting shares of a corporation is deemed not to be acquisition of control
of that corporation subject to certain discretionary rights relative to investments involving state-owned enterprises. Other than in connection with a
“national security” review, discussed below, certain transactions in relation to our Common Shares would be exempt from the Investment Act including:
● the acquisition of our Common Shares by a person in the ordinary course of that person’s business as a trader or dealer in securities;
● the acquisition or control of us in connection with the realization of security granted for a loan or other financial assistance and not for any purpose
related to the provisions of the Investment Act, if the acquisition is subject to approval under the Bank Act, the Cooperative Credit Associations Act,
the Insurance Companies Act or the Trust and Loan Companies Act; and
● the acquisition or control of us by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or
indirect control in fact of us, through the ownership of our voting interests, remains unchanged.
Under the national security regime in the Investment Act, review on a discretionary basis may also be undertaken by the federal government in respect of a
much broader range of investments by a non-Canadian to “acquire, in whole or in part, or to establish an entity carrying on all or any part of its operations
in Canada”. The relevant test is whether such an investment by a non-Canadian could be “injurious to national security”. The Minister of Innovation,
Science and Economic Development has broad discretion to determine whether an investor is a non-Canadian and therefore may be subject to national
security review. Review on national security grounds is at the discretion of the federal government and may occur on a pre or post-closing basis.
There is no law, governmental decree or regulation in Canada that restricts the export or import of capital, or which would affect the remittance of
dividends or other payments by us to non-resident holders of our Common Shares, other than withholding tax requirements.
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C.
Material contracts
Other than as disclosed herein under “Shareholder Rights Plan” and below, and except for contracts entered into in the ordinary course of business, there
are no material contracts to which we or any of our subsidiaries is a party.
License Agreement
On January 16, 2018, the Company, through AEZS Germany, entered into a License Agreement with Strongbridge, to carry out development,
manufacturing, registration and commercialization of Macrilen™ (macimorelin) in the U.S. and Canada.
The Company received a cash payment of $24,000,000 from Strongbridge, and, for as long as Macrilen™ (macimorelin) is patent-protected, the Company
will be entitled to a 15% royalty on net sales up to $75,000,000 and an 18% royalty on net sales above $75,000,000. Following the end of patent protection
in the U.S. or Canada for Macrilen™ (macimorelin), the Company will be entitled to a 5% royalty on net sales in that country. In addition, the Company
will also receive one-time payments from Strongbridge following the first achievement of the following commercial milestone events:
● $4,000,000 on achieving $25,000,000 annual net sales,
● $10,000,000 on achieving $50,000,000 annual net sales,
● $20,000,000 on achieving $100,000,000 annual net sales,
● $40,000,000 on achieving $200,000,000 annual net sales, and
● $100,000,000 on achieving $500,000,000 annual net sales.
Upon approval by the FDA of a pediatric indication for Macrilen™ (macimorelin), the Company will receive a one-time milestone payment of $5,000,000
from the licensee.
The licensee will fund 70% of the costs of a pediatric clinical submitted for approval to the EMA and FDA to be run by the Company with customary
oversight from a JSC. The JSC will be comprised of four persons, two of whom will be appointed by each of Strongbridge and the Company.
The License Agreement will expire at the end of a defined royalty period in each of the U.S. and Canada (the “Territory”), at which time the license that the
Company granted will become irrevocable, fully paid-up, perpetual and royalty-free in such country. The licensee has the right to terminate the License
Agreement if there is a safety concern related to Macrilen™ (macimorelin), withdrawal of regulatory approval for Macrilen™ (macimorelin) in the U.S.
believed to be permanent, two hundred and seventy (270) days’ prior written notice, or if the Company commits a material breach of any term of the
License Agreement that it fails to cure within 90 days after receiving written notice of the breach. The Company has the right to terminate the License
Agreement if the licensee commits a material breach of any term of the License Agreement that it fails to cure within 90 days after receiving written notice
of the breach. If the breach relates to Canada then the Company shall only have the right to terminate the License Agreement in relation to Canada. If the
breach relates to the U.S., then the Company shall have the right to terminate the License Agreement in its entirety.
The License Agreement contains customary provisions related to, among other things, confidentiality and non-disclosure, representations and warranties,
indemnity and dispute resolution. The License Agreement is governed by the laws of the State of New York, United States.
The License Agreement is incorporated by reference as Exhibit 4.3 to this Annual Report on Form 20-F.
Effective December 19, 2018, Strongbridge sold its rights to Macrilen™ (macimorelin) in Canada and the U.S. to Novo and Novo will fund Strongbridge’s
Macrilen™ (macimorelin) field organization as a contract field force to promote the product in the U.S. for up to three years. This service agreement was
terminated as of December 1, 2019.
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Sinopharm Agreements
On December 1, 2014, we entered into an exclusive master collaboration agreement (“Master Collaboration Agreement”), a technology transfer and
technical assistance agreement (“Tech Transfer Agreement”) and a license agreement (“Sinopharm License Agreement”) with Sinopharm A-Think
Pharmaceuticals Co., Ltd. (“Sinopharm”) for the development, manufacture and commercialization of Zoptrex™ in all human uses, in the People’s
Republic of China, including Hong Kong and Macau (collectively, the “Sinopharm Territory”). Under the terms of the Tech Transfer Agreement,
Sinopharm made a one-time, non-refundable payment of $1,101,000 (“Transfer Fee”) to us for the transfer of technical documentation and materials,
know-how and technical assistance services. We will be entitled to receive additional consideration upon achieving certain milestones, including the
occurrence of certain regulatory and commercial events in the Sinopharm Territory. Furthermore, we will be entitled to royalties on future net sales of
Zoptrex™ in the Sinopharm Territory. Sinopharm will be responsible for the development, production, registration and commercialization of Zoptrex™ in
the Sinopharm Territory.
Sinopharm is required to use commercially reasonable efforts to develop, manufacture and commercialize Zoptrex™ in the Sinopharm Territory, in order to
maximize the net sales derived from Zoptrex™ during the royalty term of the Sinopharm License Agreement. In particular, Sinopharm is required to use
commercially reasonable efforts to: (i) develop Zoptrex™ for the indication of endometrial cancer in the Sinopharm Territory in accordance with an agreed
development plan and not to terminate, suspend, halt or delay development, unless there are substantial safety, efficacy, commercial or regulatory reasons
for doing so; (ii) apply for and obtain all required regulatory approvals in the Sinopharm Territory following successful completion of all appropriate
clinical studies; (iii) make the first commercial sale of Zoptrex™ in the Sinopharm Territory within a specified period of time following the approval of
Zoptrex™ for endometrial cancer; (iv) maintain an adequate sales force and provide for relevant staff to manage the pre- and post-launch activities required
to commercialize Zoptrex™ in the Sinopharm Territory; and (v) seek to maximize sales of Zoptrex™ in the Sinopharm Territory. Sinopharm’s failure to
use commercially reasonable efforts to develop, manufacture and commercialize Zoptrex™ would be a material breach of the Sinopharm License
Agreement.
The Sinopharm License Agreement imposes on Sinopharm the responsibility for marketing, promoting and selling Zoptrex™ in the Sinopharm Territory
after all regulatory approvals for commercial sale have been obtained, including pre-launch and post-launch marketing, promoting, conducting market
research, distributing, offering to commercially sell and commercially selling Zoptrex™, importing, exporting or transporting Zoptrex™ for commercial
sale, conducting medical education activities, conducting clinical studies that are not required to obtain or maintain regulatory approval of Zoptrex™ for an
indication, which may include epidemiological studies, modeling and pharmacoeconomic studies, conducting post-marketing surveillance studies,
conducting investigator sponsored studies and health economics studies and regulatory affairs.
The Sinopharm License Agreement will expire at the end of a defined royalty period, at which time the license that we granted to Sinopharm will become a
fully paid-up, perpetual license. Sinopharm has the right to terminate the Sinopharm License Agreement if there are material safety, efficacy, commercial or
regulatory reasons for doing so; if we commit a material breach of any term of the Sinopharm License Agreement that we fail to cure within 90 days after
receiving written notice of the breach; if we file or institute bankruptcy, reorganization, liquidation or receivership proceedings; or if we assign a substantial
portion of our assets for the benefit of our creditors. If Sinopharm has the right to terminate because a third party institutes involuntary bankruptcy
proceedings against us, we will have 90 days to obtain the dismissal of the proceedings, during which time, Sinopharm may not terminate the Agreement.
We have the right to terminate the Sinopharm License Agreement if Sinopharm commits a material breach of any term of the Sinopharm License
Agreement that it fails to cure within 90 days after receiving written notice of the breach; if it files or institutes bankruptcy, reorganization, liquidation or
receivership proceedings, or if it assigns a substantial portion of its assets for the benefit of its creditors. If we have the right to terminate because a third-
party institutes involuntary bankruptcy proceedings against Sinopharm, it will have 90 days to obtain the dismissal of the proceedings, during which time,
we may not terminate the Agreement.
The Sinopharm License Agreement contains customary provisions related to, among other things, our oversight of Sinopharm’s commercialization efforts,
intellectual property, pharmacovigilance, confidentiality and non-disclosure, representations and warranties, indemnity and dispute resolution. The
Sinopharm License Agreement is governed by the laws of Hong Kong.
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We do not anticipate significant revenues from the Sinopharm License Agreement in the future other than the amortization of the remaining deferred
revenue.
The Master Collaboration Agreement, the Sinopharm License Agreement and the Tech Transfer Agreement are incorporated by reference as Exhibits 4.7,
4.8 and 4.9 to this Annual Report on Form 20-F.
Employment and Service Agreements
We had, or one of our subsidiaries had, entered into an employment agreement and, in some cases, a change of control agreement with each of our Named
Executive Officers. Mr. Garrison left the Company effective September 13, 2019 and Mr. Ward’s employment ended effective October 4, 2019.
Michael Ward
We entered into an employment agreement and a change of control agreement in October 2017 with Mr. Michael Ward, Chief Executive Officer. Mr. Ward
left the Company in October 2019, at which time, he received a severance payment in accordance with his employment agreement.
Klaus Paulini
We entered into an employment agreement with Dr. Klaus Paulini, Chief Executive Officer, effective as of October 4, 2019 (the “Employment Agreement”)
and the Company, through AEZS Germany, has entered into a service agreement with Dr. Klaus Paulini effective as of July 26, 2019 (the “Services
Agreement”). The Employment Agreement provides that we will pay Mr. Paulini (the “Executive”) an initial base salary of EUR260,000 per annum.
Additionally, pursuant to the Employment Agreement, in November 2019, we provided the Executive with an initial grant of 35,000 stock options. Under
the terms of the Services Agreement, the Executive will be paid a base salary of EUR164,340 per annum, subsequent grants of stock options at the
discretion of the Board of Directors or Governance Committee, an annual bonus subject to the determination and approval of the Nomination, Governance
and Compensation Committee and participation in an employer sponsored pension scheme.
The Employment Agreement provides that if there is a termination of the Executive’s employment by us without “Cause”, then the Executive will be
entitled to receive a severance payment in the amount equal to €300,000. The Services Agreement provides that upon termination without “Cause” by ether
party, the Executive is entitled to nine months written notice of termination, and a payment in the amount equal to “one annual salary”. The Executive has
no right to receive a cash bonus or any other form of remuneration during the notice period.
The Employment Agreement contains customary confidentiality, intellectual property and non-disparagement covenants.
For the purposes of the Employment Agreement, termination of employment for “Cause” includes (but is not limited to) (i) if the Executive commits any
fraud, theft, embezzlement or other criminal act of a similar nature, or (ii) if the Executive has committed serious misconduct or willful negligence in the
performance of his duties.
Leslie Auld
We entered into a consulting agreement with Leslie Auld, Senior Vice President, Chief Financial Officer, effective as of September 24, 2018 (the
“Consulting Agreement”). The Consulting Agreement provides that Ms. Auld (the “Consultant”) will perform specified services for us for up to 120 hours
per month. The Consultant will be paid CAN$150 per hour (plus HST) (the “base fees”) for these services. Additionally, the Consultant will be paid for up
to eight (8) hours of travel time per round trip, at a rate of CAN$150 per hour.
The Consulting Agreement may be terminated by either party for convenience, upon thirty (30) days written notice. The Consulting Agreement may also
be terminated by us upon the material breach or default of any provision of the Consulting Agreement by the Consultant, immediately upon the Consultants
death or upon the parties’ mutual agreement. In the event of termination, the Consultant will be entitled to receive any outstanding base fees and
reimbursement for incurred expenses to the effective date of termination.
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The Consulting Agreement provides the Consultant indemnifies us from and against any and all claims, costs, liabilities, damages, charges and expenses
arising out of the Consulting Agreement or the services, including in respect of misclassification.
Brian Garrison
We entered into an employment agreement and a change of control agreement with Mr. Garrison, former Senior Vice President, Global Commercial
Operations. Mr. Garrison left the Company in September 2019.
The table below shows estimated incremental payments that would be triggered, pursuant to their individual employment contracts, in the event of a
termination of employment of our Named Executive Officers who remained employed on December 31, 2019. The amounts shown are in U.S. dollars.
Name
Termination Provisions
Value ($)(1) (2)
Ammer, Nicola
Auld, Leslie
Gerlach, Matthias
Guenther, Eckhard
Paulini, Klaus
0
0
0
0
336,000
(1) The termination values assume that the triggering event took place on the last business day of our financial year-end (December 31, 2019).
(2) Value of earned/unused vacation, if applicable, and amounts owing for expense reimbursement are not included as they are not considered as “incremental” payments made in connection
with termination of employment.
D.
Exchange controls
Canada has no system of exchange controls. There are no exchange restrictions on borrowing from foreign countries or on the remittance of dividends,
interest, royalties and similar payments, management fees, loan repayments, settlement of trade debts or the repatriation of capital.
E.
Taxation
THE FOLLOWING SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO
BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER. CONSEQUENTLY, HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS FOR ADVICE AS TO THE TAX CONSEQUENCES OF AN INVESTMENT IN THE COMMON SHARES HAVING REGARD TO THEIR
PARTICULAR CIRCUMSTANCES.
Material Canadian Income Tax Considerations
The following summary describes the principal Canadian federal income tax considerations applicable to a holder of Common Shares and who, for the
purposes of the Canadian federal Income Tax Act, R.S.C. 1985, as amended (the “Tax Act”), and at all relevant times, deals at arm’s length with, and is not
affiliated with, the Company and holds their Common Shares as capital property (a “holder”). Common Shares will generally be considered to be capital
property to a holder for purposes of the Tax Act unless either the holder holds such Common Shares in the course of carrying on a business of trading or
dealing in securities, or the holder has held or acquired such Common Shares in a transaction or transactions considered to be an adventure in the nature of
trade.
This summary is not applicable to a holder (i) that is a “financial institution”, as defined in the Tax Act for purposes of the mark-to- market rules, (ii) that is
a “specified financial institution”, as defined in the Tax Act, (iii) an interest in which would be a “tax shelter investment” as defined in the Tax Act, (iv) that
has made a functional currency reporting election for purposes of the Tax Act, (v) that has entered or will enter into a “derivative forward agreement”, as
defined in the Tax Act, in respect of Common Shares, or (vi) that receives dividends on Common Shares under or as part of a dividend rental arrangement
as defined in the Tax Act. Such holders should consult their own tax advisors.
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Additional considerations, not discussed herein, may be applicable to a holder that is a corporation resident in Canada, and is, or becomes, or does not deal
at arm’s length for purposes of the Tax Act with a corporation resident in Canada that is or becomes, as part of a transaction or series of transactions or
events that includes the acquisition of the Common Shares, controlled by a non-resident person or a group of non-resident persons not dealing with each
other at arm’s length for the purposes of the “foreign affiliate dumping” rules in section 212.3 of the Tax Act. Such holders should consult their tax advisors
with respect to the consequences of acquiring Common Shares.
This summary is based upon the current provisions of the Tax Act and the regulations promulgated thereunder (the “Regulations”) and the Company’s
understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency (“CRA”). It also takes into account
all proposed amendments to the Tax Act and the Regulations publicly released by the Minister of Finance (Canada) prior to the date hereof (“Tax
Proposals”), and assumes that all such Tax Proposals will be enacted as currently proposed. No assurance can be given that the Tax Proposals will be
enacted in the form proposed or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative or assessing
practice or policy of the CRA, whether by legislative, regulatory, judicial or administrative action or interpretation, nor does it address any provincial, local,
territorial or foreign tax considerations.
For purposes of the Tax Act, all amounts, including dividends, adjusted cost base and proceeds of disposition, must generally be determined in Canadian
dollars. Amounts denominated in a foreign currency must be converted to Canadian currency using exchange rates determined in accordance with the Tax
Act. The amount of any capital gain or any capital loss to a holder with respect to the Common Shares may be affected by fluctuations in Canadian dollar
exchange rates.
Holders Not Resident in Canada
The following discussion applies to a holder who, at all relevant times, for purposes of the Tax Act, is neither resident nor deemed to be resident in Canada
and does not, and is not deemed to, use or hold Common Shares in carrying on a business or part of a business in Canada (a “Non-Resident holder”). In
addition, this discussion does not apply to an insurer who carries or is deemed to carry on, an insurance business in Canada and elsewhere.
Disposition of Common Shares
A Non-Resident holder generally will not be subject to tax under the Tax Act in respect of any capital gain realized by such Non- Resident holder on a
disposition or deemed disposition of Common Shares unless such shares constitute “taxable Canadian property” (as defined in the Tax Act) of the Non-
Resident holder at the time of disposition and the gain is not exempt from tax pursuant to the terms of an applicable income tax treaty or convention. As
long as the Common Shares are listed on a designated stock exchange (which currently includes the NASDAQ and the TSX) at the time of their
disposition, the Common Shares generally will not constitute taxable Canadian property of a Non-Resident holder, unless (a) at any time during the 60-
month period immediately preceding the disposition (i) one or any combination of (A) the Non-Resident holder, (B) persons with whom the Non-Resident
holder did not deal at arm’s length, and (C) partnerships in which the Non-Resident holder or a person described in (B) holds a membership interest directly
or indirectly through one or more partnerships, owned 25% or more of the issued shares of any class or series of shares of the Company; and (ii) more than
50% of the fair market value of the shares of the Company was derived directly or indirectly from one or any combination of real or immovable property
situated in Canada, “Canadian resource properties” (as defined in the Tax Act), “timber resource properties” (as defined in the Tax Act) or options in
respect of, or interests in, or for civil law rights in, any such property whether or not such property exists or (b) the Common Shares are otherwise deemed
to be taxable Canadian property to the Non-Resident holder.
A Non-Resident holder’s capital gain (or capital loss) in respect of Common Shares that constitute or are deemed to constitute taxable Canadian property
(and are not “treaty-protected property” as defined in the Tax Act) will generally be computed in the manner described below under the heading “Holders
Resident in Canada - Disposition of Common Shares”. If the Common Shares were to cease being listed on the NASDAQ, the TSX or another “recognized
stock exchange” (as defined in the Tax Act), a Non-Resident holder who disposes of Common Shares that are taxable Canadian property may be required
to fulfill the requirements of section 116 of the Tax Act, unless the Common Shares are “treaty-protected property” (as defined in the Tax Act) of the
disposing Non-Resident holder.
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Non-Resident holders whose Common Shares are taxable Canadian property should consult their own tax advisors.
Taxation of Dividends on Common Shares
Dividends paid or credited or deemed to be paid or credited to a Non-Resident holder by the Company are subject to Canadian withholding tax at the rate
of 25% unless reduced by the terms of an applicable tax treaty or convention. Under the Canada - United States Tax Convention (1980) (the “Convention”)
as amended, the rate of withholding tax on dividends paid or credited to a Non-Resident holder who is the beneficial owner of the dividends, is resident in
the U.S. for purposes of the Convention and entitled to the benefits of the Convention (a “U.S. holder”) is generally limited to 15% of the gross amount of
the dividend (or 5% in the case of a U.S. holder that is a company beneficially owning at least 10% of the Company’s voting shares). Non-Resident holders
should consult their own tax advisors.
Holders Resident in Canada
The following discussion applies to a holder of Common Shares who, at all relevant times, for purposes of the Tax Act, is or is deemed to be resident in
Canada (a “Canadian holder”). Certain Canadian holders whose Common Shares might not otherwise qualify as capital property may, in certain
circumstances, treat the Common Shares and every other “Canadian security” (as defined in the Tax Act) owned by the Canadian holder as capital property
by making an irrevocable election provided by subsection 39(4) of the Tax Act. Canadian holders should consult their own tax advisors for advice as to
whether an election under subsection 39(4) of the Tax Act is available and/or advisable in their particular circumstances.
Taxation of Dividends on Common Shares
Dividends received or deemed to have been received on the Common Shares will be included in a Canadian holder’s income for purposes of the Tax Act.
Such dividends received or deemed to have been received by a Canadian holder that is an individual (other than certain trusts) will be subject to the gross-
up and dividend tax credit rules generally applicable under the Tax Act in respect of dividends received on shares of taxable Canadian corporations.
Generally, a dividend will be eligible for the enhanced gross-up and dividend tax credit if the Company designates the dividend as an “eligible dividend”
(within the meaning of the Tax Act) in accordance with the provisions of the Tax Act. There may be limitations on the ability of the Company to designate
dividends as eligible dividends. A Canadian holder that is a corporation will be required to include such dividends in computing its income and will
generally be entitled to deduct the amount of such dividends in computing its taxable income. In certain circumstances, subsection 55(2) of the Tax Act
may treat a taxable dividend received by a Canadian holder that is a corporation as proceeds of disposition or a capital gain. A Canadian holder that is a
“private corporation” or a “subject corporation” (as such terms are defined in the Tax Act), may be liable under Part IV of the Tax Act to pay a refundable
tax on dividends received or deemed to have been received on the Common Shares to the extent such dividends are deductible in computing the holder’s
taxable income.
Disposition of Common Shares
A disposition, or a deemed disposition, of a Common Share by a Canadian holder will generally give rise to a capital gain (or a capital loss) equal to the
amount by which the proceeds of disposition of the share, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of the
share to the holder. Such capital gain (or capital loss) will be subject to the treatment described below under “Taxation of Capital Gains and Capital
Losses”.
Additional Refundable Tax
A Canadian holder that is a “Canadian-controlled private corporation” (as such term is defined in the Tax Act) may be liable to pay an additional
refundable tax on certain investment income including amounts in respect of “Taxable Capital Gains”, as defined below.
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Taxation of Capital Gains and Capital Losses
In general, one half of any capital gain (a “Taxable Capital Gain”) realized by a Canadian holder in a taxation year will be included in the holder’s income
in the year. Subject to and in accordance with the provisions of the Tax Act, one half of any capital loss (an “Allowable Capital Loss”) realized by a
Canadian holder in a taxation year must be deducted from Taxable Capital Gains realized by the holder in the year and Allowable Capital Losses in excess
of Taxable Capital Gains may be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in any subsequent
taxation year against net Taxable Capital Gains realized in such years. The amount of any capital loss realized by a Canadian holder that is a corporation on
the disposition or deemed disposition of a Common Share may be reduced by the amount of dividends received or deemed to have been received by it on
such Common Share (or on a share for which the Common Share has been substituted) to the extent and under the circumstances prescribed by the Tax Act.
Similar rules may apply where a corporation is a member of a partnership or a beneficiary of a trust that owns Common Shares, directly or indirectly,
through a partnership or a trust.
Alternative Minimum Tax
A Taxable Capital Gain realized and taxable dividends received or deemed to have been received by a Canadian holder who is an individual (including a
trust, other than certain specified trusts) may give rise to liability for alternative minimum tax.
Material U.S. Federal Income Tax Considerations
The following discussion is a summary of the material U.S. federal income tax consequences applicable to the purchase, ownership and disposition of
Common Shares by a U.S. Holder (as defined below), but does not purport to be a complete analysis of all potential U.S. federal income tax effects. This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations promulgated thereunder, IRS rulings and
judicial decisions in effect on the date hereof. All of these are subject to change, possibly with retroactive effect, or different interpretations. This summary
does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive basis.
This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in
this summary.
This summary does not address all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders in light of their specific
circumstances (for example, U.S. Holders subject to the alternative minimum tax or the Medicare contribution tax on net investment income under the
Code) or to holders that may be subject to special rules under U.S. federal income tax law, including:
● dealers in stocks, securities or currencies;
● securities traders that use a mark-to-market accounting method;
● banks and financial institutions;
● insurance companies;
● regulated investment companies;
● real estate investment trusts;
● tax-exempt organizations;
● retirement plans, individual plans, individual retirement accounts and tax-deferred accounts;
● partnerships or other pass-through entities for U.S. federal income tax purposes and their partners or members;
● persons holding Common Shares as part of a hedging or conversion transaction straddle or other integrated or risk reduction transaction;
● persons who or that are, or may become, subject to the expatriation provisions of the Code;
● persons whose functional currency is not the U.S. dollar; and
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● direct, indirect or constructive owners of 10% or more of the total combined voting power of all classes of our voting stock or 10% or more of the total
value of shares of all classes of our stock.
This summary also does not address the tax consequences of holding, exercising or disposing of warrants in the Company. If the Company is a PFIC, as
described below, U.S. Holders of its warrants will be subject to adverse tax rules and will not be able to make the mark-to-market or the QEF election
described below with respect to such warrants. U.S. Holders of warrants should consult their tax advisors with regard to the U.S. federal income tax
consequences of holding, exercising or disposing of warrants in the Company, including in the situation in which the Company is classified as a PFIC.
This summary also does not discuss any aspect of state, local or foreign law, or estate or gift tax law as applicable to U.S. Holders. In addition, this
discussion is limited to U.S. Holders holding Common Shares as capital assets. For purposes of this summary, “U.S. Holder” means a beneficial holder of
Common Shares who or that for U.S. federal income tax purposes is:
● an individual citizen or resident of the U.S.;
● a corporation or other entity classified as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the U.S., any
state thereof or the District of Columbia;
● an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
● a trust, if (a) a court within the U.S. is able to exercise primary supervision over the administration of such trust and one or more “U.S. persons”
(within the meaning of the Code) have the authority to control all substantial decisions of the trust, or (b) a valid election is in effect to be treated as a
U.S. person for U.S. federal income tax purposes.
If a partnership or other entity or arrangement classified as a partnership for U.S. federal income tax purposes holds Common Shares, the U.S. federal
income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. This summary does not address the
tax consequences to any such partner. Such a partner should consult its own tax advisor as to the tax consequences of the partnership purchasing, owning
and disposing of Common Shares.
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE TAX CONSEQUENCES
DESCRIBED BELOW TO THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS.
Tax Consequences if we are a Passive Foreign Investment Company (“PFIC”)
A foreign corporation will be classified as a PFIC for any taxable year in which, after taking into account the income and assets of the corporation and
certain subsidiaries pursuant to applicable “look-through rules”, either (i) at least 75% of its gross income is “passive income” or (ii) at least 50% of the
average quarterly value of its assets is attributable to assets which produce passive income or are held for the production of passive income. Passive income
generally includes dividends, interest, rents and royalties (other than certain rents and royalties derived in the active conduct of a trade or business),
annuities and gains from assets that produce passive income. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the
non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving
directly its proportionate share of the other corporation’s income.
The Company believes it was a PFIC for the 2015 taxable year, but not for the 2016, 2017, 2018 and 2019 taxable years. However, the fair market value of
the Company’s assets may be determined in large part by the market price of the Common Shares, which is likely to fluctuate, and the composition of the
Company’s income and assets will be affected by how, and how quickly, the Company spends any cash that is raised in any financing transaction. Thus, no
assurance can be provided that the Company will not be classified as a PFIC for the 2020 taxable year or any future taxable year. U.S. Holders should
consult their tax advisors regarding the Company’s PFIC status.
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If the Company is classified as a PFIC for any taxable year during which a U.S. Holder owns Common Shares, the U.S. Holder, absent certain elections
(including the mark-to-market and QEF elections described below), will generally be subject to adverse rules (regardless of whether the Company
continues to be classified as a PFIC) with respect to (i) any “excess distributions” (generally, any distributions received by the U.S. Holder on the Common
Shares in a taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder in the three preceding taxable years or, if
shorter, the U.S. Holder’s holding period for the Common Shares) and (ii) any gain realized on the sale or other disposition of the Common Shares.
Under these adverse rules (a) the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period, (b) the amount allocated to the
current taxable year and any taxable year prior to the first taxable year in which the Company is classified as a PFIC will be taxed as ordinary income and
(c) the amount allocated to each of the other taxable years during which the Company was classified as a PFIC will be subject to tax at the highest rate of
tax in effect for the applicable category of taxpayer for that year and an interest charge will be imposed with respect to the resulting tax attributable to each
such other taxable year. A U.S. Holder that is not a corporation will be required to treat any such interest paid as “personal interest”, which is not
deductible.
U.S. Holders can avoid the adverse rules described above in part by making a mark-to-market election with respect to the Common Shares, provided that
the Common Shares are “marketable”. The Common Shares will be marketable if they are “regularly traded” on a “qualified exchange” or other market
within the meaning of applicable U.S. Treasury regulations. For this purpose, the Common Shares generally will be considered to be regularly traded
during any calendar year during which they are traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. The Common
Shares are currently listed on the NASDAQ, which constitutes a qualified exchange; however, there can be no assurance that the Common Shares will be
treated as regularly traded for purposes of the mark-to-market election on a qualified exchange. If the Common Shares were not regularly traded on the
NASDAQ or were delisted from the NASDAQ and were not traded on another qualified exchange for the requisite time period described above, the mark-
to-market election would not be available.
A U.S. Holder that makes a mark-to-market election must include in gross income, as ordinary income, for each taxable year an amount equal to the excess,
if any, of the fair market value of the U.S. Holder’s Common Shares at the close of the taxable year over the U.S. Holder’s adjusted tax basis in the
Common Shares. An electing U.S. Holder may also claim an ordinary loss deduction for the excess, if any, of the U.S. Holder’s adjusted tax basis in the
Common Shares over the fair market value of the Common Shares at the close of the taxable year, but this deduction is allowable only to the extent of any
net mark-to-market gains previously included in income. A U.S. Holder that makes a mark-to-market election generally will adjust such U.S. Holder’s tax
basis in the Common Shares to reflect the amount included in gross income or allowed as a deduction because of such mark-to-market election. Gains from
an actual sale or other disposition of the Common Shares will be treated as ordinary income, and any losses incurred on a sale or other disposition of the
Common Shares will be treated as ordinary losses to the extent of any net mark-to-market gains previously included in income.
If the Company is classified as a PFIC for any taxable year in which a U.S. Holder owns Common Shares but before a mark-to-market election is made, the
adverse PFIC rules described above will apply to any mark-to-market gain recognized in the year the election is made. Otherwise, a mark-to-market
election will be effective for the taxable year for which the election is made and all subsequent taxable years. The election cannot be revoked without the
consent of the IRS unless the Common Shares cease to be marketable, in which case the election is automatically terminated.
If the Company is classified as a PFIC, a U.S. Holder of Common Shares will generally be treated as owning stock owned by the Company in any direct or
indirect subsidiaries that are also PFICs and will be subject to similar adverse rules with respect to distributions to the Company by, and dispositions by the
Company of, the stock of such subsidiaries. A mark-to-market election is not permitted for the shares of any subsidiary of the Company that is also
classified as a PFIC. U.S. Holders should consult their tax advisors regarding the availability of, and procedure for making, a mark-to-market election.
In some cases, a shareholder of a PFIC can avoid the interest charge and the other adverse PFIC consequences described above by making a QEF election
to be taxed currently on its share of the PFIC’s undistributed income. We will endeavor to satisfy the record keeping requirements that apply to a QEF and
to supply requesting U.S. Holders with the information that such U.S. Holders are required to report under the QEF rules. However, there can be no
assurance that the Company will satisfy the record keeping requirements or provide the information required to be reported by U.S. Holders.
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A U.S. Holder that makes a timely and effective QEF election for the first tax year in which its holding period of its Common Shares begins generally will
not be subject to the adverse PFIC consequences described above with respect to its Common Shares. Rather, a U.S. Holder that makes a timely and
effective QEF election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the Company’s net capital gain, which will be
taxed as long-term capital gain to such U.S. Holder, and (b) the Company’s ordinary earnings, which will be taxed as ordinary income to such U.S. Holder,
in each case regardless of which such amounts are actually distributed to the U.S. Holder by the Company. Generally, “net capital gain” is the excess of (i)
net long-term capital gain over (ii) net short-term capital loss, and “ordinary earnings” are the excess of (A) “earnings and profits” over (B) net capital gain.
A U.S. Holder that makes a timely and effective QEF election with respect to the Company generally (a) may receive a tax-free distribution from us to the
extent that such distribution represents “earnings and profits” that were previously included in income by the U.S. Holder because of such QEF election
and (b) will adjust such U.S. Holder’s tax basis in the Common Shares to reflect the amount included in income or allowed as a tax-free distribution
because of such QEF election. In addition, a U.S. Holder that makes a QEF election generally will recognize capital gain or loss on the sale or other taxable
disposition of Common Shares.
The QEF election is made on a shareholder-by-shareholder basis. Once made, a QEF election will apply to the tax year for which the QEF election is made
and to all subsequent tax years, unless the QEF election is invalidated or terminated or the IRS consents to revocation of the QEF election. In addition, if a
U.S. Holder makes a QEF election, the QEF election will remain in effect (although it will not be applicable) during those tax years in which the Company
is not a PFIC.
If the Company is classified as a PFIC and then ceases to be so classified, a U.S. Holder may make an election (a “deemed sale election”) to be treated for
U.S. federal income tax purposes as having sold such U.S. Holder’s Common Shares on the last day of the taxable year of the Company during which it
was a PFIC. A U.S. Holder that made a deemed sale election would then cease to be treated as owning stock in a PFIC by reason of ownership of Common
Shares in the Company. However, gain recognized as a result of making the deemed sale election would be subject to the adverse rules described above and
loss would not be recognized.
If the Company is a PFIC in any year with respect to a U.S. Holder, the U.S. Holder will be required to file an annual information return on IRS Form 8621
regarding distributions received on Common Shares and any gain realized on the disposition of Common Shares.
In addition, if the Company is a PFIC, U.S. Holders will generally be required to file an annual information return with the IRS (also on IRS Form 8621,
which PFIC shareholders are required to file with their U.S. federal income tax or information returns) relating to their ownership of Common Shares.
U.S. Holders should consult their tax advisors regarding the potential application of the PFIC regime and any reporting obligations to which they may be
subject under that regime.
Dividends
Subject to the PFIC rules discussed above, any distributions paid by the Company out of current or accumulated earnings and profits (as determined for
U.S. federal income tax purposes), before reduction for any Canadian withholding tax paid with respect thereto, will generally be taxable to a U.S. Holder
as foreign source dividend income, and generally will not be eligible for the dividends received deduction generally allowed to corporations.
Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s
adjusted tax basis in the Common Shares and thereafter as capital gain. The Company does not, however, intend to calculate its earnings and profits under
U.S. federal income tax principles. Therefore, U.S. Holders should expect that any distribution from the Company generally will be treated for U.S. federal
income tax purposes as a dividend. U.S. Holders should consult their own tax advisors with respect to the appropriate U.S. federal income tax treatment of
any distribution received from the Company.
98
Dividends paid to non-corporate U.S. Holders by the Company in a taxable year in which it is treated as a PFIC, or in the immediately following taxable
year, will not be eligible for the special reduced rates normally applicable to long-term capital gains. In all other taxable years, dividends paid by the
Company should be taxable to a non-corporate U.S. Holder at the special reduced rates normally applicable to long-term capital gains, provided that certain
conditions are satisfied. (including a minimum holding period requirement). The Company believes it was not a PFIC for the 2019 taxable year. However,
no assurance can be provided that the Company will not be classified as a PFIC for 2020 and, therefore, no assurance can be provided that a U.S. Holder
will be able to claim a reduced rate for dividends paid in 2020 or 2021 (if any). Please see the subsection above entitled “Material U.S. Federal Income Tax
Considerations—‘Tax Consequences if we are a Passive Foreign Investment Company’” for a more detailed discussion.
Under current law, payments of dividends by the Company to non-Canadian investors are generally subject to a 25% Canadian withholding tax. The rate of
withholding tax applicable to U.S. Holders that are eligible for benefits under the Canada-United States Tax Convention (the “Convention”) is reduced to a
maximum of 15%. This reduced rate of withholding will not apply if the dividends received by a U.S. Holder are effectively connected with a permanent
establishment of the U.S. Holder in Canada. For U.S. federal income tax purposes, U.S. Holders will be treated as having received the amount of Canadian
taxes withheld by the Company, and as then having paid over the withheld taxes to the Canadian taxing authorities. As a result of this rule, the amount of
dividend income included in gross income for U.S. federal income tax purposes by a U.S. Holder with respect to a payment of dividends may be greater
than the amount of cash actually received (or receivable) by the U.S. Holder from the Company with respect to the payment.
Subject to certain limitations, a U.S. Holder will generally be entitled, at the election of the U.S. Holder, to a credit against its U.S. federal income tax
liability, or a deduction in computing its U.S. federal taxable income, for Canadian income taxes withheld by the Company. This election is made on a year-
by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year. For purposes of the foreign tax
credit limitation, dividends paid by the Company generally will constitute foreign source income in the “passive category income” basket. The foreign tax
credit rules are complex and U.S. Holders should consult their tax advisors concerning the availability of the foreign tax credit in their particular
circumstances.
Dividends paid in Canadian dollars will be included in the gross income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange
rate in effect on the date the U.S. Holder (actually or constructively) receives the dividend, regardless of whether such Canadian dollars are actually
converted into U.S. dollars at that time. If the Canadian dollars received are not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a
tax basis in the Canadian dollars equal to their U.S. dollar value on the date of receipt. Gain or loss, if any, realized on a sale or other disposition of the
Canadian dollars will generally be U.S. source ordinary income or loss to a U.S. Holder.
The Company generally does not pay any dividends and does not anticipate paying any dividends in the foreseeable future.
Sale, Exchange or Other Taxable Disposition of Common Shares
Subject to the PFIC rules discussed above, upon a sale, exchange or other taxable disposition of Common Shares, a U.S. Holder generally will recognize
capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount realized on the sale, exchange or other taxable
disposition and the U.S. Holder’s adjusted tax basis in the Common Shares.
This capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the Common Shares exceeds one year. The
deductibility of capital losses is subject to limitations. Any gain or loss will generally be U.S. source for U.S. foreign tax credit purposes.
99
Information Reporting and Backup Withholding
Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from sales or other dispositions of Common
Shares, generally will be reported to the IRS and to the U.S. Holder as required under applicable regulations. Backup withholding tax may apply to these
payments if the U.S. Holder fails to timely provide in the appropriate manner an accurate taxpayer identification number or otherwise fails to comply with,
or establish an exemption from, such backup withholding tax requirements. Certain U.S. Holders are not subject to the information reporting or backup
withholding tax requirements described herein. U.S. Holders should consult their tax advisors as to their qualification for exemption from backup
withholding tax and the procedure for establishing an exemption.
Backup withholding tax is not an additional tax. U.S. Holders generally will be allowed a refund or credit against their U.S. federal income tax liability for
amounts withheld, provided the required information is timely furnished to the IRS.
Subject to certain exceptions and future guidance, a U.S. Holder that is a “specified individual” or a “specified domestic entity” (as defined in the
instructions to IRS Form 8938) must report annually to the IRS on IRS Form 8938 such U.S. Holder’s interests in stock or securities issued by a non-U.S.
person (such as the Company). U.S. Holders should consult their tax advisors regarding the information reporting obligations that may arise from their
acquisition, ownership or disposition of Common Shares.
F.
Dividends and paying agents
Not required.
G.
Statement by experts
Not required.
H.
Documents on display
In addition to placing our audited consolidated annual financial statements before every annual meeting of shareholders as described above, we are subject
to the information requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file and furnish reports
and other information with the SEC. These materials, including this Annual Report on Form 20-F and the exhibits hereto, may be inspected and copied at
the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the
SEC’s Public Reference Room by calling the SEC in the U.S. at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports,
proxy statements and other information regarding registrants that file electronically with the SEC. Our annual reports and some of the other information we
submitted to the SEC may be accessed through this website. In addition, material we filed can be inspected on the Canadian Securities Administrators’
electronic filing system, SEDAR, accessible at the website www.sedar.com. This material includes our Management Information Circular for our annual
meeting of shareholders to be held in 2020 to be furnished to the SEC on Form 6-K, which provides information including directors’ and officers’
remuneration and indebtedness and principal holders of securities. Additional financial information is provided in our audited annual financial statements
for the year ended December 31, 2019 and our MD&A relating to these statements included elsewhere in this Annual Report on Form 20-F. These
documents are also accessible on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov).
I.
Subsidiary information
Not required.
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
Fair value
The Company classifies its financial instruments in the following categories: “Financial assets at amortized cost”; “Financial liabilities at fair value through
profit or loss (“FVTPL”)”; and “Financial liabilities at amortized cost”.
● The Company’s financial assets at amortized cost are comprised of cash and cash equivalents, trade and other receivables and restricted cash
equivalents.
● Financial liabilities at FVTPL are currently comprised of the Company’s warrant liability.
● Financial liabilities at amortized cost include payables, accrued liabilities, and provision for restructuring costs.
100
The carrying values of all of the aforementioned financial instruments, excluding warrant liability which is stated at fair value, approximate their fair values
due to their short-term maturity or to the prevailing interest rates of these instruments, which are comparable to those of the market.
The Black-Scholes valuation methodology uses “Level 2” inputs in calculating fair value, as defined in IFRS 13, which establishes a hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Financial risk factors
The following provides disclosures relating to the nature and extent of the Company’s exposure to risks arising from financial instruments, including credit
risk, liquidity risk, market risk (share price risk) and foreign exchange risk and how the Company manages those risks.
(a)
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The
Company regularly monitors credit risk exposure and takes steps to mitigate the likelihood of this exposure resulting in losses. The Company’s
exposure to credit risk currently relates to the financial assets at amortized cost in the table above. The Company holds its available cash in amounts
that are readily convertible to known amounts of cash and deposits its cash balances with financial institutions that have an investment grade rating
of at least “P-2” or the equivalent. This information is supplied by independent rating agencies where available and, if not available, the Company
uses publicly available financial information to ensure that it invests its cash in creditworthy and reputable financial institutions. Once there are
indicators that there is no reasonable expectation of recovery, such financial assets are written off but are still subject to enforcement activity.
As at December 31, 2019, trade accounts receivable for an amount of approximately $265,000 were with four counterparties of which $55,000 was
past due and impaired and fully provided for (2018 - $197,000 with four counterparties and $55,000 past due and impaired and fully provided for).
The licensee is obligated to pay its quarterly royalties, 60 days after quarter-end.
Generally, the Company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended
following an evaluation of creditworthiness. In addition, the Company performs ongoing credit reviews of all of its customers and establishes an
allowance for doubtful accounts when accounts are determined to be uncollectible. On this basis, as at December 31, 2019, the Company has
provided for all outstanding and unpaid amounts relating to its operations before its licensing of MacrilenTM (macimorelin). The licensee has paid all
amounts owing within 90 days of invoicing.
The maximum exposure to credit risk approximates the amount recognized in the Company’s consolidated statement of financial position.
(b)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. As indicated in note 23 to the
audited financial statements, the Company manages this risk through the management of its capital structure. It also manages liquidity risk by
continuously monitoring actual and projected cash flows as further discussed in note 1. The Board of Directors reviews and approves the Company’s
operating and capital budgets, as well as any material transactions occurring outside of the ordinary course of business. The Company has adopted
an investment policy in respect of the safety and preservation of its capital to ensure the Company’s liquidity needs are met. The instruments are
selected with regard to the expected timing of expenditures and prevailing interest rates.
All of the Company’s financial liabilities except lease liabilities are current liabilities with expected settlement dates within one year. The maturity
analysis for lease liabilities is disclosed in note 5 to the audited financial statements.
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(c)
Market risk
Share price risk
The change in fair value of the Company’s warrant liability, which is measured at FVTPL, results from the periodic “mark-to-market” revaluation as
further described in note 17 as it applies to its outstanding share purchase warrants. The valuation models are impacted, among other inputs, by the
market price of the Company’s Common Shares. As a result, the change in fair value of the warrant liability, which is reported in the consolidated
statements of comprehensive income (loss), has been and may continue in future periods to be materially affected most notably by changes in the
Company’s common share closing price, which on the NASDAQ ranged from $0.77 to $5.43 during the year ended December 31, 2019.
If variations in the market price of our Common Shares of -30% and +30% were to occur, the impact on the Company’s net loss related to the
warrant liability held at December 31, 2019 would be $771,000 to $(806,000), respectively.
(d)
Foreign exchange risk
Entities using the Euro as their functional currency
The Company is exposed to foreign exchange risk due to its investments in foreign operations whose functional currency is the Euro. As at
December 31, 2019, if the US dollar had increased or decreased by 10% against the Euro, with all variables held constant, net loss for the year ended
December 31, 2019 would have been lower or higher by approximately $841,000 (net income for 2018 - $1,134,000).
Item 12.
Description of Securities Other than Equity Securities
A.
Debt securities
Not required.
B.
Warrants and rights
Not required.
C.
Other securities
Not required.
D.
American depositary shares
Not applicable.
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
None.
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
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Item 15.
Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we have
evaluated the effectiveness of our disclosure controls and procedures as at December 31, 2019. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and procedures were effective as at December 31, 2019.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with IFRS as issued by the IASB.
Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of Aeterna Zentaris; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of Company management; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal
Control – Integrated Framework: 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management has concluded that our internal control over financial reporting was effective as at December 31, 2019.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2019 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events. There can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions, including conditions that are remote.
In accordance with SEC’s rules regarding non-accelerated filers, this Annual Report on Form 20-F does not include an attestation report of the Company’s
independent registered public accounting firm regarding the Company’s internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Our Board has determined that we have at least one audit committee financial expert (as defined in paragraph (b) of Item 16A to Form 20-F). The name of
the audit committee financial expert is Mr. Gérard Limoges, FCPA, FCA, the Audit Committee’s Chairman In accordance with Item 16A, paragraph (d) of
Form 20-F, the designation of Mr. Limoges as our audit committee financial expert does not: (i) make Mr. Limoges an “expert” for any purpose, including
without limitation for purposes of Section 11 of the Securities Act of 1933, as amended, as a result of this designation; (ii) impose any duties, obligations or
liability on Mr. Limoges that are greater than those imposed on him as a member of the Audit Committee and the Board in the absence of such designation;
or (iii) affect the duties, obligations or liability of any other member of the Audit Committee or the Board. The other current members of the Audit
Committee are Brent Norton and Carolyn Egbert each of whom, along with Gérard Limoges (Chair), is independent, as that term is defined in the
NASDAQ listing standards. For a description of their respective education and experience, please refer to “Item 6. – Directors, Senior Management and
Employees”.
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Item 16B. Code of Ethics
On December 16, 2017, the Board adopted a “Code of Conduct and Business Ethics”, which replaced the then existing Code of Ethical Conduct as of
January 1, 2018. The Code of Conduct and Business Ethics was amended on January 24, 2018. The Code of Conduct and Business Ethics expanded on the
previous Code of Ethical Conduct to provide additional details of expected conduct of all employees and directors of the Company, including specific
obligations the Company and its employees has as a member of the healthcare industry. We selected an independent third party supplier to provide a
confidential and anonymous communication channel for reporting concerns about possible violations to our Code of Ethical Conduct as well as financial
and/or accounting irregularities or fraud. A copy of the Code of Ethical Conduct, as amended, is incorporated by reference as Exhibit 11.1 to this Annual
Report on Form 20-F and is also available on our Web site at www.zentaris.com under the Investors - Corporate Governance tab. The Code of Ethical
Conduct is a “code of ethics” as defined in paragraph (b) of Item 16B to Form 20- F. The Code of Ethical Conduct applies to all of our employees, directors
and officers, including our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing
similar functions, and includes specific provisions dealing with integrity in accounting matters, conflicts of interest and compliance with applicable laws
and regulations. On December 4, 2014, our Board adopted a “Code of Business Conduct and Ethics for Members of the Board of Directors”, which is
incorporated by reference as Exhibit 11.2 to this Annual Report on Form 20-F. We will provide these documents without charge to any person or company
upon request to our Corporate Secretary, at our head office at 315 Sigma Drive, Summerville, South Carolina 29486.
Item 16C. Principal Accountant Fees and Services
(All amounts are in U.S. dollars)
(a)
Audit Fees
During the financial years ended December 31, 2019 and 2018, the Company’s principal accountant, PricewaterhouseCoopers LLP, billed $542,825 and
$563,558, respectively, for the audit of the Company’s annual consolidated financial statements and for services rendered in connection with statutory and
regulatory filings.
(b)
Audit-related Fees
During the financial years ended December 31, 2019 and 2018, the Company’s principal accountant, PricewaterhouseCoopers LLP, billed $73,500 and
$37,663, respectively, for audit or attest services not required by statute or regulation, for accounting consultations on proposed transactions, for the review
of prospectuses and prospectus supplements, including the delivery of customary consent and comfort letters in connection therewith.
(c)
Tax Fees
During the financial years ended December 31, 2019 and 2018, the Company’s principal accountants, PricewaterhouseCoopers LLP billed $25,164 and
$36,224, respectively, for services related to tax compliance, tax planning and tax advice.
(d)
All Other Fees
During the financial years ended December 31, 2019 and 2018, the Company’s principal accountant, PricewaterhouseCoopers LLP, did not bill us for
services not included in audit fees, audit-related fees and tax fees.
(e)
Audit Committee Pre-Approval Policies and Procedures
Under applicable Canadian securities regulations, we are required to disclose whether our Audit Committee has adopted specific policies and procedures
for the engagement of non-audit services and to prepare a summary of these policies and procedures. The Audit Committee Charter (incorporated by
reference as Exhibit 11.3 to this Annual Report on Form 20-F) provides that it is such committee’s responsibility to approve all audit engagement fees and
terms as well as reviewing policies for the provision of non-audit services by the external auditors and, when required, the framework for pre-approval of
such services. The Audit Committee delegates to its Chairman the pre-approval of such non-audit fees. The pre-approval by the Chairman is then presented
to the Audit Committee at its first scheduled meeting following such pre-approval.
104
For each of the years ended December 31, 2019 and 2018, there were no non-audit services provided by our external auditor that required the approval from
the Audit Committee.
(f)
Work performed by Full-time, Permanent Employees of Principal Accountant
During the financial year ended December 31, 2019, no person other than the full-time, permanent employees of our principal accountant,
PricewaterhouseCoopers LLP, performed more than 50% of the audit work on our financial statements.
Item 16D. Exemptions from the Listing Standards for Audit Committees
None.
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Change in Registrant’s Certifying Accountant
None.
Item 16G. Corporate Governance
We are generally in compliance with the corporate governance requirements of the NASDAQ except as described below and in the risk factor entitled “Our
Common Shares may be delisted from the NASDAQ or the TSX, which could affect their market price and liquidity. If our Common Shares were to be
delisted, investors may have difficulty in disposing their Common Shares” in Item 3.D above. We are not in compliance with the NASDAQ requirement
that a quorum for a meeting of the holders of our Common Shares be no less than 33 1/3% of such outstanding shares. Our bylaws provide that a quorum
for purposes of any meeting of our shareholders consists of at least 10% of the outstanding voting shares. We benefit from an exemption from the
NASDAQ from this quorum requirement because the quorum provided for in our bylaws complies with the requirements of the CBCA, our governing
corporate statute, and with the rules of the TSX, the home country exchange on which our voting shares are traded. In accordance with applicable current
NASDAQ requirements, we have in the past, and upon request, provided to the NASDAQ letters from outside counsel certifying that these practices are
not prohibited by our home country law.
Item 16H. Mine Safety Disclosure
None.
105
Item 17
Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18.
Financial Statements
The financial statements appear on pages 113 to 161
PART III
106
Aeterna Zentaris Inc.
Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended
December 31, 2019, 2018 and 2017
(presented in thousands of U.S. dollars)
Consolidated Statements of Financial Position
Consolidated Statements of Changes in Shareholders’ (Deficiency) Equity
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
1
3
4
6
7
8
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Aeterna Zentaris Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Aeterna Zentaris Inc. and its subsidiaries (together, the Company) as of
December 31, 2019 and 2018, and the related consolidated statements of changes in shareholders’ (deficiency) equity, comprehensive (loss) income, and
cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as
of December 31, 2019 and 2018, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2019 in
conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
“/s/ PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 30, 2020
We have served as the Company’s auditor since 1993.
2
Aeterna Zentaris Inc.
Consolidated Statements of Financial Position
(in thousands of US dollars)
ASSETS
Current assets
Cash and cash equivalents (note 7)
Trade and other receivables (note 8)
Inventory (note 9)
Prepaid expenses and other current assets (note 10)
Total current assets
Restricted cash equivalents (note 11)
Right of use assets (note 5(a))
Property, plant and equipment (note 12)
Identifiable intangible assets (note 13)
Goodwill (note 14)
Total Assets
LIABILITIES
Current liabilities
Payables and accrued liabilities (note 15)
Provision for restructuring and other costs (note 16)
Income taxes (note 22)
Current portion of deferred revenues (note 6(a)(ii) and 6(a)(iv))
Current portion of lease liabilities (note 5(a))
Current portion of warrant liability (note 17)
Total current liabilities
Deferred revenues (note 6(a)(ii))
Lease liabilities (note 5(a))
Warrant liability (note 17)
Employee future benefits (note 18)
Non-current portion of provision for restructuring and other costs (note 16)
Total liabilities
SHAREHOLDERS’ (DEFICIENCY) EQUITY
Share capital (note 19)
Other capital (note 19)
Deficit
Accumulated other comprehensive income
Total shareholders’ (deficiency) equity
Total liabilities and shareholders’ (deficiency) equity
Going concern (note 1)
Commitments and contingencies (note 27)
Subsequent events (note 29)
December 31, 2019
$
December 31, 2018
$
7,838
658
1,203
1,211
10,910
364
582
35
40
8,050
19,981
2,148
418
1,448
991
648
6
5,659
185
255
2,249
13,788
308
22,444
224,528
89,806
(316,891)
94
(2,463)
19,981
14,512
294
240
1,210
16,256
418
—
65
62
8,210
25,011
2,791
887
1,669
249
—
—
5,596
258
—
3,634
13,205
411
23,104
222,335
89,342
(309,781)
11
1,907
25,011
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
/s/ Carolyn Egbert
Carolyn Egbert
Chair of the Board
/s/ Gérard Limoges
Gérard Limoges
Director
3
Aeterna Zentaris Inc.
Consolidated Statements of Changes in Shareholders’ (Deficiency) Equity
For the years ended December 31, 2019, 2018 and 2017
(in thousands of US dollars)
Balance - January 1, 2019
Net loss
Other comprehensive (loss)
income:
Foreign currency translation
adjustments
Actuarial (loss) on defined benefit
plans (note 18)
Comprehensive loss
Share issuance from the exercise
of warrants, stock options and
deferred share units
Issuance of common shares and
warrants, net (notes 17 and 19)
Share-based compensation costs
Balance - December 31, 2019
1
Issued and paid in full.
Balance - January 1, 2018
Net income
Other comprehensive income
(loss):
Foreign currency translation
adjustments
Actuarial gain on defined benefit
plans (note 18)
Comprehensive income
Share-based compensation costs
Balance - December 31, 2018
1
Issued and paid in full.
Accumulated
other
comprehensive
income
$
Total
$
Common shares
(number of) 1
16,440,760
—
Share capital
Other capital
Deficit
$
222,335
—
$
89,342
—
$
(309,781)
(6,042)
—
—
—
228,750
3,325,000
—
19,994,510
—
—
—
906
1,287
—
224,528
—
—
—
—
(1,068)
(7,110)
(329)
—
—
793
89,806
—
—
(316,891)
11
—
83
—
83
—
—
—
94
Common shares
(number of) 1
16,440,760
—
—
—
—
—
16,440,760
Share capital
Other capital
Deficit
$
222,335
—
$
88,772
—
$
(314,161)
4,187
—
—
—
—
222,335
—
—
—
570
89,342
—
193
4,380
—
(309,781)
Accumulated
other
comprehensive
income
$
271
—
(260)
—
(260)
—
11
The accompanying notes are an integral part of these consolidated financial statements.
4
1,907
(6,042)
83
(1,068)
(7,027)
577
1,287
793
(2,463)
Total
$
(2,783)
4,187
(260)
193
4,120
570
1,907
Common shares
(number of) 1
Share capital
$
12,917,995
—
213,980
—
—
—
—
—
—
—
301,343
977
3,221,422
7,378
—
16,440,760
222,335
Balance - January 1,
2017
Net loss
Other comprehensive
(loss) income:
Foreign currency
translation adjustments
Actuarial gain on
defined benefit plans
(note 18)
Comprehensive loss
Share issuances
pursuant to the exercise
of pre-funded warrants
Share issuances in
connection with “at-the-
market”
drawdowns (note 19)
Share-based
compensation costs
Balance - December
31, 2017
1
Issued and paid in full.
Pre-
funded
warrants
$
Other capital
$
Deficit
$
Accumulated
other
comprehensive
income (loss)
$
Total
$
—
—
—
—
—
—
—
—
—
88,590
—
(298,059)
(16,796)
1,701
—
6,212
(16,796)
—
—
(1,430)
(1,430)
—
—
694
(16,102)
—
(1,430)
694
(17,532)
—
—
—
977
—
182
—
—
—
—
7,378
182
88,772
(314,161)
271
(2,783)
The accompanying notes are an integral part of these consolidated financial statements.
5
Aeterna Zentaris Inc.
Consolidated Statements of Comprehensive (Loss) Income
For the years ended December 31, 2019, 2018 and 2017
(in thousands of US dollars, except share and per share data)
Revenues (note 6)
License fees
Product sales
Royalty income
Sales commission
Supply chain
Total revenues
Operating expenses (note 20)
Cost of sales
Research and development costs
General and administrative expenses
Selling expenses
Restructuring costs (note 16)
Impairment of right of use asset (note 5a)
Impairment of prepaid asset (note 10)
Total operating expenses
(Loss) income from operations
Settlements (note 27)
Gain due to changes in foreign currency exchange rates
Change in fair value of warrant liability (note 17)
Other finance (costs) income
Net finance income
(Loss) income before income taxes
Income tax recovery (expense) (note 22)
Net (loss) income
Other comprehensive (loss) income:
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation adjustments
Items that will not be reclassified to profit or loss:
Actuarial (loss) gain on defined benefit plans
Comprehensive (loss) income
Net (loss) income per share (basic) (note 26)
Net (loss) income per share (diluted) (note 26)
Weighted average number of shares outstanding (note 26)
Basic
Diluted
2019
$
Years Ended December 31,
2018
$
2017
$
74
129
45
—
284
532
410
1,837
6,615
1,214
507
22
169
10,774
(10,242)
—
87
4,518
(593)
4,012
(6,230)
188
(6,042)
83
(1,068)
(7,027)
(0.35)
(0.35)
24,325
2,167
184
110
95
26,881
2,104
2,932
8,894
3,109
—
—
—
17,039
9,842
(1,400)
656
263
278
1,197
9,639
(5,452)
4,187
(260)
193
4,120
0.25
0.24
458
—
—
465
—
923
—
10,704
8,198
5,095
—
—
—
23,997
(23,074)
—
502
2,222
75
2,799
(20,275)
3,479
(16,796)
(1,430)
694
(17,532)
(1.12)
(1.12)
17,494,472
17,494,472
16,440,760
17,034,812
14,958,704
14,958,704
The accompanying notes are an integral part of these consolidated financial statements.
6
Aeterna Zentaris Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2019, 2018 and 2017
(in thousands of US dollars)
Cash flows from operating activities
Net (loss) income for the year
Items not affecting cash and cash equivalents:
Change in fair value of warrant liability (note 17)
Transaction costs of warrants issued, expensed as finance cost
Provision for restructuring and other costs (note 16)
Impairment of right of use asset (note 5(a))
Impairment of prepaid asset (note 10)
Recapture of inventory previously written off
Depreciation and amortization (notes 5,12 and 13)
Deferred income taxes (note 22)
Share-based compensation costs (note 20)
Employee future benefits (note 18)
Amortization of deferred revenues (note 6)
Foreign exchange gain on items denominated in foreign currencies
Loss (gain) on disposal of property, plant and equipment
Other non-cash items
Interest accretion on lease liabilities (note 5)
Changes in operating assets and liabilities (note 21)
Net cash (used in) provided by operating activities
Cash flows from financing activities
Proceeds from issuances of common shares and warrants (note 19)
Transaction costs
Proceeds from exercise of warrants, stock options and deferred share units
Payments on lease liabilities (note 5)
Net cash provided by financing activities
Cash flows from investing activities
Purchase of property, plant and equipment (note 12)
Proceeds for disposals of property, plant and equipment (note 12)
Cash provided by (used in) restricted cash equivalents
Net cash provided by (used in) investing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents – beginning of year (note 7)
Cash and cash equivalents – end of year (note 7)
2019
$
Years Ended December 31,
2018
$
2017
$
(6,042)
(4,518)
550
511
22
169
—
315
—
793
262
(74)
(87)
10
(126)
(66)
(2,444)
(10,725)
4,988
(795)
314
(614)
3,893
—
—
50
50
108
(6,674)
14,512
7,838
4,187
(263)
—
(136)
—
—
—
58
3,479
570
316
(609)
(652)
(9)
35
—
(151)
6,825
—
—
—
—
—
(9)
24
(50)
(35)
(58)
6,732
7,780
14,512
(16,796)
(2,222)
—
3,083
—
—
(643)
94
(3,479)
182
246
(458)
(553)
(136)
(19)
—
(2,212)
(22,913)
8,038
(250)
242
—
8,030
(4)
161
150
307
357
(14,219)
21,999
7,780
The accompanying notes are an integral part of these consolidated financial statements.
7
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
1
Going concern
Aeterna Zentaris Inc. (“Aeterna Zentaris” or the “Company”) has incurred significant expenses in its efforts to develop and co-promote products.
Consequently, the Company has incurred operating losses and negative cash flow from operations historically and in each of the last several years except
for the year ended December 31, 2018 when the Company earned revenue from the sale of a license for the adult indication of Macrilen™ (macimorelin) in
the United States, and Canada (note 6(a)). As at December 31, 2019, the Company had an accumulated deficit of $316,891. The Company also had a net
loss of $6,042 for the year ended December 31, 2019, and negative cash flow from operations of $10,725.
Management has evaluated whether material uncertainties exist relating to events or conditions that may cast substantial doubt about the Company’s ability
to continue as a going concern and has considered the following in making that critical judgment.
The ability of the Company to realize its assets and meet its obligations as they come due is dependent on earning sufficient revenues under the License
Agreement developing opportunities for Macrilen™ (macimorelin) in the rest of the world, realizing other monetizing transactions, and raising additional
sources of funding, the outcome of which cannot be predicted at this time. The revenue provided under the License Agreement was $45 for the year ended
December 31, 2019 and as at December 31, 2019, the Company had cash of $7,838. In September 2019, the Company closed an equity financing which
provided $4,193 in net cash proceeds. On February 21, 2020, the Company closed an equity financing for approximately $3,920 in net cash proceeds.
A significant portion of the Company’s cash is held in AEZS Germany, the Company’s principle operating subsidiary. AEZS Germany is the counter-party
to the License Agreement described above with Novo, and as such, for generating future revenue earned under the License Agreement. As such,
management considers the cash resources available to AEZS Germany in executing its obligations under the License Agreement. In the event the current
and medium term liabilities of AEZS Germany exceeds the fair values ascribed to its assets, under German solvency laws, it may no longer be possible for
AEZS Germany’s operations to continue or for AEZS Germany to transfer cash to Aeterna Zentaris or its U.S. subsidiary. This imposes additional and
material uncertainties on the Company when evaluating liquidity and the going concern assumption.
The Company has some discretion to manage its planned research and development costs, administrative expenses and capital expenditures in order to
manage its cash liquidity, particularly in AEZS Germany. Furthermore, AEZS Germany is focused on opportunities to either license or sell the European or
worldwide rights to Macrilen™ (macimorelin) to third parties. As of the date of issuance of these consolidated financial statements, there are no assurances
that cash will be generated from such arrangements. As such, management may also need to consider other sources of financing in order to continue its
planned operations.
Management has assessed the Company’s ability to continue as a going concern and concluded that additional capital will be required. There can be no
assurance that the Company will be able to execute license or purchase agreements or to obtain equity or debt financing, or on terms acceptable to it.
Factors within and outside the Company’s control could have a significant bearing on its ability to obtain additional financing (note 29). As a result,
management has determined that there are material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern.
8
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
These financial statements have been prepared on a going concern basis, which asserts the Company has the ability in the near term to continue to realize
its assets and discharge its liabilities and commitments in a planned manner giving consideration to the above and expected possible outcomes. Conversely,
if the going concern assumption is not appropriate, adjustments to the carrying amounts of the Company’s assets, liabilities, revenues, expenses and balance
sheet classifications may be necessary, and these adjustments could be material.
2
Business overview
Summary of business
Aeterna Zentaris is a specialty biopharmaceutical company commercializing and developing therapeutics and diagnostic tests. The Company’s lead
product, Macrilen™ (macimorelin), is the first and only United States Food and Drug Administration (“FDA”) and European Commission approved oral
test indicated for the diagnosis of patients with adult growth hormone deficiency (“AGHD”). Macrilen™ (macimorelin) is currently marketed in the U.S.
through a license and assignment agreement (the “License Agreement”) with Novo. Aeterna Zentaris is also pursuing the development of macimorelin for
the diagnosis of child-onset growth hormone deficiency (“CGHD”), an area of significant unmet need. In addition, we are actively pursuing business
development opportunities for the commercialization of macimorelin in Europe and the rest of the world in addition to other non-strategic assets to
monetize their value
The Company’s principal focus is on the commercialization of Macrilen™ (macimorelin) and it currently does not have any other approved products.
Under the terms of License Agreement(as defined below), Novo Nordisk A/S (“Novo”) is funding 70% of the pediatric clinical trial submitted to the EMA
and FDA, the Company’s sole development activity. In November 2019, Novo contracted Aeterna Zentaris GmbH(“AEZS Germany”), our wholly owned
German subsidiary, to provide supply chain services for the manufacture of Macrilen™ (macimorelin).
Reporting entity
The accompanying consolidated financial statements include the accounts of Aeterna Zentaris, an entity incorporated under the Canada Business
Corporations Act, and its wholly-owned subsidiaries (collectively referred to as the “Group”). Aeterna Zentaris is the ultimate parent company of the
Group. The Company currently has three wholly-owned direct and indirect subsidiaries, AEZS Germany, based in Frankfurt, Germany, Zentaris IVF
GmbH, a wholly-owned subsidiary of AEZS Germany, based in Frankfurt, Germany, and Aeterna Zentaris, Inc., an entity incorporated in the state of
Delaware and with offices in Summerville, South Carolina, in the U.S.
The registered office of the Company is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario M5L 1B9, Canada and its principal place
of business is 315 Sigma Drive, Summerville, South Carolina 29486.
The Company’s common shares are listed on both the Toronto Stock Exchange (the “TSX”) and on the NASDAQ Capital Market (the “NASDAQ”).
Basis of presentation
(a)
Statement of compliance
These consolidated financial statements as at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017 have
been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
(“IASB”).
These consolidated financial statements were approved by the Company’s Board of Directors subject to confirmation by the Audit Committee of the Board
of Directors, which confirmation was received on March 27, 2020.
The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates and the exercise of management’s
judgment in applying the Company’s accounting policies. Areas involving a high degree of judgment or complexity and areas where assumptions and
estimates are significant to the Company’s consolidated financial statements are discussed in note 4 - Critical accounting estimates and judgments.
9
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
(b)
Basis of measurement
The consolidated financial statements have been prepared under a historical cost convention except for warrant liability which is measured at fair value
through profit or loss.
(c)
Principles of consolidation
These consolidated financial statements include any entity in which the Company directly or indirectly holds more than 50% of the voting rights or over
which the Company exercises control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns through its power over the entity. An entity is included in the consolidation from the
date that control is transferred to the Company, while any entities that are sold are excluded from the consolidation from the date that control ceases. All
inter-company balances and transactions are eliminated on consolidation.
(d)
Foreign currency
Items included in the financial statements of the Group’s entities are measured using the currency of the primary economic environment in which the
entities operate (the “functional currency”) which is U.S. dollars for the Company and its U.S. subsidiary, Aeterna Zentaris, Inc. and Euro (“EUR”) for its
German subsidiaries.
Assets and liabilities of the German subsidiaries are translated from EUR balances at the period-end exchange rates, and the results of operations are
translated from EUR amounts at average rates of exchange for the period. The resulting translation adjustments are included in accumulated other
comprehensive income within shareholders’ (deficiency) equity.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the underlying transaction.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities not
denominated in the functional currency are recognized in the consolidated statement of comprehensive (loss) income.
3
Summary of significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements except for the
adoption of those standards in 2019 (note 5) and have been applied consistently by all Group entities.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash on hand and balances with banks, as well as short-term interest-bearing deposits, such as money
market accounts, that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value, with a maturity of three
months or less from the date of acquisition.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. The Company’s
policy is to write down inventory that has become obsolete and inventory that has a cost basis in excess of its expected net realizable value. Increases in the
reserve are recorded as charges in cost of sales. For product candidates that have not been approved by the FDA, inventory used in clinical trials is written
down at the time of production and recorded as research and development (“R&D”) costs. For products that have been approved by the FDA, inventory
used in clinical trials is expensed at the time the inventory is packaged for the clinical trial. All direct manufacturing costs incurred after approval are
capitalized into inventory.
10
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Restricted cash equivalents
Restricted cash equivalents are comprised of bank deposits, related to a guarantee for a long-term operating lease obligation and for a corporate credit card
program that cannot be used for current purposes.
Leases
The Company assesses, at the inception of a contract, whether a contract is, or contains, a lease. A lease is a contract in which the right to control the use of
an identified asset is granted for an agreed upon period of time in exchange for consideration. The Company assessed whether a contract conveys the right
to control the use of an identified asset when there is both the right to direct the use of the asset and obtain substantially all the economic benefits from that
use. Effective January 1, 2019, the Company recognizes a right of use and a lease liability at the lease commencement date.
The lease liability is initially measured at the present value of the non-cancellable lease payments over the lease term and discounted at the rate implicit in
the lease. If that rate cannot be determined, the Company’s incremental borrowing rate is used, being the rate that Company would have to pay to borrow
the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Lease payments include fixed
payments and such variable payments that depend on an index or a rate; less any lease incentives receivable.
The lease liability is subsequently measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease
payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual
value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability
is remeasured, a corresponding adjustment is made to the carrying amount of the right of use asset, with any difference recorded in the statement of
comprehensive (loss) income.
The right of use assets are measured at cost which comprises the initial lease liability, lease payments made at or before the lease commencement date,
initial direct costs and restoration obligations less lease incentives. The right of use assets are subsequently measured at amortized cost. The assets are
depreciated over the shorter of the assets’ useful life and the lease terms on a straight-line basis, less any accumulated impairment losses and adjusted for
any remeasurement of the lease liability. The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise
that option. The right of use assets are assessed for impairment in accordance with the requirements of IAS 36 Impairment of Assets.
Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in the statement of
comprehensive (loss) income.
Property, plant and equipment and depreciation
Items of property, plant and equipment are recorded at cost, net of accumulated depreciation and impairment charges. Depreciation is calculated using the
following methods, annual rates and period:
Equipment
Furniture and fixtures
Computer equipment
Leasehold improvements
Methods
Declining balance and straight-line
Declining balance and straight-line
Straight-line
Straight-line
Annual rates and period
20%
10% and 20%
25% and 331/3%
Remaining lease term
Depreciation expense, which is recorded in the consolidated statement of comprehensive (loss) income, is allocated to the appropriate functional expense
categories to which the underlying items of property, plant and equipment relate.
Identifiable intangible assets and amortization
Identifiable intangible assets with finite useful lives consist of in-process R&D acquired in business combinations, patents and trademarks. In-process R&D
acquired in business combinations is recognized at fair value at the acquisition date. Patents and trademarks are comprised of costs, including professional
fees incurred in connection with the filing of patents and the registration of trademarks for product marketing and manufacturing purposes net of related
government grants, impairment losses, where applicable, and accumulated amortization. Identifiable intangible assets with finite useful lives are amortized,
from the time at which the assets are available for use, on a straight-line basis over their estimated useful lives of eight to fifteen years for in-process R&D
and patents and ten years for trademarks. Amortization expense, which is recorded in the consolidated statement of comprehensive (loss) income, is
allocated to the appropriate functional expense categories to which the underlying identifiable intangible assets relate.
11
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Goodwill
Goodwill is recognized as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree,
less the fair value of the net identifiable assets acquired and liabilities assumed, as of the acquisition date. Subsequent to initial recognition, goodwill is
measured at cost less accumulated impairment losses. Goodwill acquired in business combinations is allocated to groups of cash generating units (“CGU”)
that are expected to benefit from the synergies of the combination.
Impairment of assets
Items of property, plant and equipment and identifiable intangible assets with finite lives subject to depreciation or amortization, respectively, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Management is
required to assess at each reporting date whether there is any indication that an asset may be impaired. Where such an indication exists, the asset’s
recoverable amount is compared to its carrying value, and an impairment loss is recognized for the amount by which the asset’s carrying amount exceeds
its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, or CGU. In determining value in use of a given
asset or CGU, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset. Impairment losses are allocated to the appropriate functional expense categories to which the
underlying identifiable intangible assets relate, and are recorded in the consolidated statement of comprehensive (loss) income.
Items of property, plant and equipment and amortizable identifiable intangible assets with finite lives that suffered impairment are reviewed for possible
reversal of the impairment if there has been a change, since the date of the most recent impairment test, in the estimates used to determine the impaired
asset’s recoverable amount. However, an asset’s carrying amount, increased due to the reversal of a prior impairment loss, must not exceed the carrying
amount that would have been determined, net of depreciation or amortization, had the original impairment not occurred.
Goodwill is not subject to amortization and instead is tested for impairment annually or more often if there is an indication that the CGU to which the
goodwill has been allocated may be impaired. Impairment is determined for goodwill by assessing whether the carrying value of a CGU, including the
allocated goodwill, exceeds its recoverable amount, which is the higher of fair value less costs to sell and value in use. In the event that the carrying amount
of goodwill exceeds its recoverable amount, an impairment loss is recognized in an amount equal to the excess. Impairment losses related to goodwill are
not subsequently reversed.
Share purchase warrants
Share purchase warrants are classified as liabilities when the Company does not have the unconditional right to avoid delivering cash to the holders in the
future. Each of the Company’s share purchase warrants contains a written put option, arising upon the occurrence of a fundamental transaction, as that term
is defined in the share purchase warrants, including a change of control. As a result of the existence of these put options, and despite the fact that the
repurchase feature is conditional on a defined contingency, the share purchase warrants are required to be classified as a financial liability, since such
contingency could ultimately result in the transfer of assets by the Company.
12
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
The warrant liability is initially measured at fair value, and any subsequent changes in fair value are recognized as gains or losses through profit or loss.
Any transaction costs related to the share purchase warrants are expensed as incurred.
The warrant liability is classified as non-current, unless the underlying share purchase warrants will expire or be settled within 12 months from the end of a
given reporting period.
Employee benefits
Salaries and other short-term benefits
Salaries and other short-term benefit obligations are measured on an undiscounted basis and are recognized in the consolidated statement of comprehensive
(loss) income over the related service period or when the Company has a present legal or constructive obligation to make payments as a result of past
events and when the amount payable can be estimated reliably.
Post-employment benefits
AEZS Germany maintains defined contribution and unfunded defined benefit plans, as well as other benefit plans for its employees. For defined benefit
pension plans and other post-employment benefits, net periodic pension expense is actuarially determined on a quarterly basis using the projected unit
credit method. The cost of pension and other benefits earned by employees is determined by applying certain assumptions, including discount rates, the
projected age of employees upon retirement, the expected rate of future compensation and employee turnover.
The employee future benefits liability is recognized at its present value, which is determined by discounting the estimated future cash outflows using
interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity
approximating the terms of the related future benefit liability. Actuarial gains and losses that arise in calculating the present value of the defined benefit
obligation are recognized in other comprehensive (loss) income, net of tax, and simultaneously reclassified in the deficit in the consolidated statement of
financial position in the year in which the actuarial gains and losses arise and without recycling to the consolidated statement of comprehensive (loss)
income in subsequent periods.
For defined contribution plans, expenses are recorded in the consolidated statement of comprehensive (loss) income as incurred–namely, over the period
that the related employee service is rendered.
Termination benefits
Termination benefits are recognized in the consolidated statement of comprehensive (loss) income when the Company is demonstrably committed, without
the realistic possibility of withdrawal, to a formal detailed plan to terminate employment earlier than originally expected. Termination benefit liabilities
expected to be settled after 12 months from the end of a given reporting period are discounted to their present value, where material.
Financial instruments
The Company classifies its financial instruments in the following categories: “Financial assets at fair value through profit or loss (“FVTPL”); “Financial
assets at amortized cost”; “Financial liabilities at “FVTPL”; and “Financial liabilities at amortized cost”.
Financial assets at FVTPL: Financial assets carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statement of
comprehensive (loss) income. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets held at FVTPL are
included in the statement of comprehensive (loss) income in the period in which they arise.
13
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Financial liabilities at FVTPL: These financial liabilities are initially recognized at fair value, and transaction costs directly attributable to issuing the
warrants are expensed in the statement of comprehensive (loss) income. Financial liabilities that are required to be measured at FVTPL have all fair value
movements, excluding those related to changes in the credit risk of the liability which are recorded in other comprehensive (loss) income, recognized in the
statement of comprehensive (loss) income.
Financial assets at fair value through other comprehensive income (FVTOCI): Investments in equity instruments at FVTOCI are initially recognized at
fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses arising from changes in fair value recognized in other
comprehensive income (loss) in the period in which they arise.
Financial assets at amortized cost: A financial asset is measured at amortized cost if the objective of the business model is to hold the financial asset for
the collection of contractual cash flows, and the asset’s contractual cash flows are comprised solely of payments of principal and interest. They are
classified as current assets or non-current assets based on their maturity date, and are initially recognized at fair value and subsequently carried at amortized
cost less any impairment.
Impairment of financial assets at amortized cost: The Company recognizes a loss allowance for expected credit losses on financial assets that are
measured at amortized cost.
Share capital
Common shares are classified as equity. Incremental costs that are directly attributable to the issuance of common shares and stock options are recognized
as a deduction from equity, net of any tax effects.
Where offerings result in the issuance of units (where each unit is comprised of a common share of the Company and a share purchase warrant, exercisable
in order to purchase a common share or fraction thereof), proceeds received in connection with those offerings are allocated between share capital and
share purchase warrants based on the residual method. Proceeds are allocated to warrant liability based on the fair value of the share purchase warrants, and
the residual amount of proceeds is allocated to share capital. Transaction costs in connection with such offerings are allocated to the liability and equity unit
components in proportion to the allocation of proceeds.
Provisions
Provisions represent liabilities to the Company for which the amount or timing is uncertain. Provisions are recognized when the Company has a present
legal or constructive obligation as a result of past events, such as organizational restructuring, when it is probable that an outflow of resources will be
required to settle the obligation and where the amount can be reliably estimated. Provisions are not recognized for future operating losses.
Provisions are made for any contracts which are deemed onerous. A contract is onerous if the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it. Provisions for onerous contracts are measured at the present value of the lower of
the expected cost of terminating the contract and the expected net cost of continuing with the contract. Present value is determined based on expected future
cash flows that are discounted at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The
unwinding of the discount is recognized in finance costs.
Revenue recognition
Effective January 1, 2018, the Company adopted IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). The standard was applied using a
modified retrospective approach. The adoption of IFRS 15 did not have a significant impact on the timing or measurement of the Company’s revenue and
no adjustment to the opening balance of deficit as at January 1, 2018 has been recorded as result of adopting IFRS 15.
License fees
License fees represent non-refundable payments received at the time of executing the license agreements. The Company’s promise to grant a license
provides its customer with either a right to access the Company’s intellectual property (“IP”) or a right to use the Company’s IP. Revenue from a license
that provides a customer the right to use the Company’s IP is recognized at a point in time when the transfers to the licensee is completed and the license
period begins. Revenue from a license that provides access to the Company’s IP over a license term is considered to be a performance obligation satisfied
over time and, therefore, revenue is recognized over the term of the license arrangement.
14
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Royalty and milestone income
Royalty income earned through a license is recognized when the underlying sales have occurred. Milestone income is recognized at the point in time when
it is highly probable that the respective milestone event criteria are met, and the risk of reversal of revenue recognition is remote.
The Company has not recognized any such milestone revenue in these consolidated financial statements
Product sales
The Company recognizes revenue from the sale of certain active pharmaceutical ingredients (“API”) and semi-finished goods upon delivery of such items
to its customer.
Supply chain revenue
The Company also provides oversight support services for supervision of stability studies and/or development activities with respect to the API batch
production as specified in related contracts with customers. These services are contracted with fixed-fees and are provided over a period of time equal to
one year. The Company recognizes revenue on a straight-line basis over time as it best represents the pattern of performance of the services. Amounts are
invoiced on a quarterly basis in accordance with agreed upon contractual terms
While providing services, the Company incurs certain direct costs for subcontractors and other expenses that are recoverable directly from its customers.
The recoverable amounts of these direct costs are included in the Company’s operating expenses as the Company controls the services before they are
transferred to the customer and acts as a principal in these arrangements.
Where the Company incurs costs to fulfil the contract, such costs are capitalized if all of the following criteria are met:
● the costs relate directly to a contract or a specifically-anticipated contract;
● the costs generate or enhance company resources that will be used in satisfying future performance obligations; and
● the costs are expected to be recovered.
The Company amortizes any asset recognized from capitalizing costs to fulfil a contract on a systematic basis that is consistent with the transfer to the
customer of the goods or services to which the asset relates.
Sales commission revenue
Revenues from sales commission are recognized when the products are sold and the related performance obligation is complete as defined in the contract
for the promotion of certain products, there is certainty about receipt of the consideration and all related costs have been incurred. The customer contracts
for sales commission were terminated in 2017 and 2018.
Share-based compensation costs
The Company operates an equity-settled share-based compensation plan under which the Company receives services from directors, senior executives,
employees and other collaborators as consideration for equity instruments of the Company.
The Company accounts for all forms of share-based compensation using the fair value-based method. Fair value of stock options is determined at the date
of grant using the Black-Scholes option pricing model, which includes estimates of the number of awards that are expected to vest over the vesting period.
Where granted share options vest in installments over the vesting period (defined as graded vesting), the Company treats each installment as a separate
share option grant. Share-based compensation expense is recognized over the vesting period, or as specified vesting conditions are satisfied, and credited to
other capital.
Any consideration received by the Company in connection with the exercise of stock options is credited to share capital. Any other capital component of
the share-based compensation is transferred to share capital upon the issuance of shares.
15
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Current and deferred income tax
Income tax on profit or loss comprises current and deferred tax. Tax is recognized in profit or loss, except that a change attributable to an item of income or
expense recognized as other comprehensive (loss) income or directly in equity is also recognized directly in other comprehensive (loss) income or directly
in equity. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to
interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
The current income tax charge is calculated in accordance with tax rates and laws that have been enacted or substantively enacted by the reporting date in
the countries where the Company’s subsidiaries operate and generate taxable income.
Deferred income tax is recognized on temporary differences (other than, where applicable, temporary differences associated with unremitted earnings from
foreign subsidiaries and associates to the extent that the investment is essentially permanent in duration, and temporary differences associated with the
initial recognition of goodwill) arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements and
on unused tax losses or R&D non-refundable tax credits in the Group. Deferred income tax is determined using tax rates and laws that have been enacted or
substantively enacted by the reporting date.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary
differences can be utilized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and
when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or
different taxable entities where there is an intention to settle the balances on a net basis.
Research and development costs
Research costs are expensed as incurred. Development costs are expensed as incurred, except for those that meet the criteria for deferral, in which case the
costs are capitalized and amortized to operations over the estimated period of benefit. No development costs have been capitalized during any of the
periods presented.
Net (loss) income per share
Basic net (loss) income per share is calculated using the weighted average number of common shares outstanding during the year.
Diluted net (loss) income per share is calculated based on the weighted average number of common shares outstanding during the year, plus the effects of
dilutive common share equivalents, such as stock options and share purchase warrants. This method requires that diluted net (loss) income per share be
calculated using the treasury stock method, as if all common share equivalents had been exercised at the beginning of the reporting period, or period of
issuance, as the case may be, and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of the
common shares during the period.
16
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
4
Critical accounting estimates and judgments
The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that
affect the reported amounts of the Company’s assets, liabilities, revenues, expenses and related disclosures. Judgments, estimates and assumptions are
based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which the Company’s
consolidated financial statements are prepared.
Management reviews, on a regular basis, the Company’s accounting policies, assumptions, estimates and judgments in order to ensure that the consolidated
financial statements are presented fairly and in accordance with IFRS. Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected.
(a)
Critical accounting estimates and assumptions
Critical accounting estimates and assumptions are those that have a significant risk of causing material adjustment and are often applied to matters or
outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and expectations
and that estimates routinely require adjustment.
The following discusses the most significant accounting estimates and assumptions that the Company has made in the preparation of the consolidated
financial statements.
Going concern assessment
Management has evaluated whether material uncertainty exists relating to events or conditions that may cast substantial doubt about the Company’s ability
to continue as a going concern and has made critical judgements as described in note 1.
Accounting for the Macrilen™ License Agreement
See the performance obligations further described in note 6 - Licensing arrangements.
Fair value of the warrant liability and stock options
Determining the fair value of the warrant liability and stock options requires judgment related to the selection of the most appropriate pricing model, the
estimation of stock price volatility and the expected term of the underlying instruments. Any changes in the estimates or inputs utilized to determine fair
value could result in a significant impact on the Company’s future operating results, liabilities or other components of shareholders’ equity. Fair value
assumptions used are described in note 17 - Warrant liability and 19 - Share and other capital.
Impairment of goodwill
The annual impairment assessment related to goodwill requires management to estimate the recoverable amount, which has been determined using fair
value less cost of disposal. The Company has one reportable segment, and management monitors goodwill based on an overall entity basis. The carrying
amount of its consolidated net deficit is compared to its overall market capitalization. Based on this calculation, and given the Company has a net deficit,
management determined that goodwill was not impaired. Future events could cause the assumptions utilized in the impairment tests to change, resulting in
a potentially adverse effect on the Company’s future results due to increased impairment charges.
Employee future benefits
The determination of expenses and obligations associated with employee future benefits requires the use of assumptions, such as the discount rate to
measure obligations, the projected age of employees upon retirement, the expected rate of future compensation and estimated employee turnover. Because
the determination of the cost and obligations associated with employee future benefits requires the use of various assumptions, there is measurement
uncertainty inherent in the actuarial valuation process. Actual results will differ from results that are estimated based on the aforementioned assumptions.
Additional information is included in note 18 - Employee future benefits.
17
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Income taxes
The estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of Group entities’ ability to utilize the
underlying future tax deductions against future taxable income prior to expiry of those deductions. Management assesses whether it is probable that some
or all of the deferred income tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income, which in turn is dependent upon the successful commercialization of the Company’s products. To the extent that management’s assessment
of any Group entity’s ability to utilize future tax deductions changes, the Company would be required to recognize more or fewer deferred tax assets, and
future income tax provisions or recoveries could be affected. Additional information is included in note 22 - Income taxes.
5
Recent accounting pronouncements
Impact of adoption of significant new IFRS standards in 2019
The following new IFRS standards have been adopted by the Company effective January 1, 2019:
(a) IFRS 16, Leases
The Company has adopted IFRS 16 on a modified retrospective basis from January 1, 2019 with no restatement of comparatives, as permitted under the
specific transitional provisions in the standard.
Overall impact from adoption
The change in accounting policy affected the following items in the balance sheet on January 1, 2019:
● Right of use assets - increase by $859
● Provision of onerous lease contracts - decrease by $663
● Lease liabilities - increase by $1,522
(Loss) income per share for the three and twelve months to December 31, 2019 was not affected as a result of the adoption of IFRS 16.
(ii) Practical expedients applied
In applying IFRS 16 for the first time, the Company has used the following practical expedients permitted by the standard:
● the use of a single discount rate to a portfolio of leases with reasonably similar characteristics
● reliance on previous assessments on whether leases are onerous
● the exclusion of initial direct costs for the measurement of the right of use asset at the date of initial application; and
● the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Company has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into
before the transition date, the Company relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a
Lease.
(iii) The Company’s leasing activities and how these are accounted for
The Company leases various office and lab premises (building), cars and equipment. The building lease was originally for 10 years with one five-year
extension, such extension is ending on April 30, 2021. Car lease contracts are typically made for fixed periods of three to four years while the equipment
lease is for five years ending April 30, 2020. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.
and the lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.
Until the 2018 financial year, leases of property, plant and equipment were classified as operating leases. Payments made under operating leases (net of any
incentives received from the lessor) were charged to statement of comprehensive (loss) income on a straight-line basis over the period of the lease.
18
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
(iv) Adjustments recognized on adoption of IFRS 16
Lease liabilities
The Company has operating leases for building, cars and equipment leases at its location in Frankfurt. Upon adoption of IFRS 16, the Company recognized
lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. Under IFRS 16, these
liabilities were measured at the present value of the remaining lease payments excluding renewal options as they are not expected to be exercised,
discounted using the Company’s incremental borrowing rate as of January 1, 2019. The Company’s incremental annual borrowing rate applied to the lease
liabilities on January 1, 2019 were:
● Building lease 5.5%
● Vehicle leases ranging from 4.84% to 5.32%
● Equipment leases 3.88%
The weighted average incremental borrowing rate applied to lease liabilities recognized in the statement of financial position at January 1, 2019 was 5.45%.
Operating lease commitments disclosed as at December 31, 2018 (revised)
Discounted using the lessee’s incremental borrowing rate of at the date of initial application:
Lease liability recognized as at January 1, 2019
Current lease liabilities
Non-current lease liabilities
During the year ended December 31, 2019
Interest paid as charged to comprehensive (loss) income as other finance income
Payment against lease liabilities
Foreign exchange
Lease liability recognized as at December 31, 2019
Current lease liabilities
Non-current lease liabilities
The Company’s lease liabilities come due, as at December 31, 2019, as follows:
Less than 1 year
1 - 3 years
4 - 5 years
More than 5 years
Total
19
2019
$
1,669
(147)
1,522
629
893
66
614
62
903
648
255
648
253
2
—
903
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Right of use assets
The Company’s related right of use assets were measured at the amount equal to the lease liability at the date of initial application. Only the building right
of use asset was further adjusted by the application of $663 in related onerous lease provision to the value at inception.
Cost
At January 1, 2019
Additions
Disposals
Impact of foreign exchange rate changes
At December 31, 2019
Accumulated Depreciation
At January 1, 2019
Disposals
Depreciation
Impairment
Impact of foreign exchange rate changes
At December 31, 2019
Carrying amount
At December 31, 2019
Building
$
Vehicles and
equipment
$
Building
$
735
45
(7)
(16)
757
—
(2)
227
22
(5)
242
Vehicles and
equipment
$
124
32
(43)
(7)
106
—
(12)
51
—
—
39
Total
$
Total
$
859
77
(50)
(23)
863
—
(14)
278
22
(5)
281
Building
$
Vehicles and
equipment
$
Total
$
515
67
582
During the three-month period ended March 31, 2019, management continued its search for a sub-lessee. However, there were delays which led to a
reassessment of its onerous lease provision as the Company has determined that its plan to exit its building lease, in full, as at December 31, 2019 was not
probable. As such, the Company recognized an impairment of its right of use building asset of $337 in the statement of comprehensive (loss) income
during the first quarter of 2019. In light of the June 2019 restructuring of the German operations (note 16), management recognized an additional
impairment of $64 as office and lab space was expected to become vacant or underutilized. During the third quarter of 2019, a new sub-lessee signed a 6-
month lease for certain lab and office space; management reversed the impairment of its building right of use asset by $125. During the fourth quarter of
2019, an existing sub-lease agreement was renewed, and the amount of rented space was expanded; management then reversed the impairment of its
building right of use asset by $254.
The Company had $31 in short term lease payments which were not capitalized.
(b) IFRIC 23, “Uncertainty over Income Tax Treatment” (“IFRIC 23”)
In June 2017, IFRIC 23, was issued and it provides guidance on how to value uncertain income tax positions based on the probability of whether the
relevant tax authorities will accept the company’s tax treatments. A company is to assume that a taxation authority with the right to examine any amounts
reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is effective for annual periods
beginning on or after January 1, 2019. The adoption of this interpretation did not have a significant impact on the Company’s consolidated financial
statements.
20
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2018 and December 31, 2017 and for the years ended December 31, 2018, 2017 and 2016
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
(c) Amendments in Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)
In June 2015, the IASB published ED/2015/5 Remeasurement on a Plan Amendment, Curtailment or Settlement/Availability of a Refund from a Defined
Benefit Plan (Proposed amendments to IAS 19 and IFRIC 14) combining two issues submitted separately to the IFRS Interpretations Committee into a
single package of narrow-scope amendments to IAS 19 Employee Benefits and IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction. However, in April 2017 the IASB decided to pursue the amendments to IAS 19 and in September 2017 confirmed it
would do so despite putting off the amendments to IFRIC 14. The amendments in Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)
are: (i) if a plan amendment, curtailment or settlement occurs, it is now mandatory that the current service cost and the net interest for the period after the
remeasurement are determined using the assumptions used for the remeasurement and (ii) amendments have been included to clarify the effect of a plan
amendment, curtailment or settlement on the requirements regarding the asset ceiling. An entity applies the amendments to plan amendments, curtailments
or settlements occurring on or after the beginning of the first annual reporting period that begins on or after January 1, 2019. The adoption of these
amendments did not have a significant impact on the Company’s consolidated financial statements.
Accounting standards issued but not yet adopted
(d) IAS 1 Presentation of Financial Statements and IAS 8 Accounting policies, changes in accounting estimates and errors (amendment)
In October 2018, the IASB issued Definition of Material (Amendments to IAS 1 and IAS 8) to clarify the definition of ‘material’ and to align the definition
used in the Conceptual Framework and the standards themselves. The amendments are effective annual reporting periods beginning on or after January 1,
2020. The Company is currently evaluating the new guidance and does not expect it to have a significant impact on its consolidated financial statements.
(e) Conceptual Framework for Financial Reporting
Together with the revised Conceptual Framework published in March 2018, the IASB also issued Amendments to References to the Conceptual
Framework in IFRS Standards. The amendments are effective for annual periods beginning on or after January 1, 2020. The Company is currently
evaluating the new guidance and does not expect it to have a significant impact on its consolidated financial statements.
6
Licensing arrangements
(a) Macrilen™ License Agreement
On January 16, 2018, the Company, through AEZS Germany, entered into License Agreement with Strongbridge Ireland Limited (“Strongbridge”) to carry
out development, manufacturing, registration, regulatory and supply chain services for the commercialization of Macrilen™ (macimorelin) in the U.S. and
Canada, which provides for (i) the “right to use” license relating to the Adult Indication; (ii) the sale of the right to acquire a license of a future FDA-
approved Pediatric Indication; (iii) the licensee to fund 70% of the costs of a pediatric clinical trial submitted for approval to the EMA and FDA to be run
by the Company with customary oversight from a joint steering committee; and (iv) for a Supply Arrangement. Effective December 19, 2018, Strongbridge
sold the entity which owned the License Agreement for the U.S. and Canadian rights to Macrilen™ (macimorelin) to Novo. In 2019, the Supply
Arrangement was concluded and Novo contracted AEZS Germany to provide supply chain services for the manufacture of Macrilen™ (macimorelin).
(i) Adult Indication
Under the terms of the License Agreement, and for as long as Macrilen™ (macimorelin) is patent-protected, the Company will be entitled to a 15% royalty
on annual net sales up to $75,000 and an 18% royalty on annual net sales above $75,000. Following the end of patent protection in United States or Canada
for Macrilen™ (macimorelin), the Company will be entitled to a 5% royalty on net sales in that country. In addition, the Company will also receive one-
time payments ranging from $4,000 to $100,000 upon the achievement of commercial milestones going from $25,000 annual net sales up to $500,000
annual net sales.
21
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2018 and December 31, 2017 and for the years ended December 31, 2018, 2017 and 2016
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
In January 2018, the Company received a cash payment of $24,000 from Strongbridge and on July 23, 2018, Strongbridge launched product sales of
Macrilen™ (macimorelin) in the U.S.
Royalty income earned under the License Agreement for the year ended December 31, 2019 was $45 (2018- $184).
(ii) Pediatric Indication
Upon approval by the FDA of a pediatric indication for Macrilen™ (macimorelin), the Company will receive a one-time milestone payment of $5,000.
This amount will be recognized once it is probable that it will be received.
Transaction price
Analysis of the total discounted cash flows of both the $24,000 payment and the $5,000 payment upon FDA approval of the Pediatric Instance
demonstrates that 84% of the future revenue streams would be derived from the Adult Indication and 16% from the Pediatric Indication. On a relative fair
value basis, the Company has allocated the transaction price to the performance obligations resulting in $23.600 being allocated to the Adult Indication and
being recognized as license fee revenue in the consolidated statements of comprehensive (loss) income effective January 2018, and $400 being allocated to
the right to a future Pediatric Indication, which is recognized as deferred revenue on the consolidated statements of financial position and amortized
monthly beginning January 2018, over a period of 5.4 years, into the consolidated statements of comprehensive (loss) income.
(iii) PIP Study
During 2019, the Company invoiced its licensee $979 (2018 – $358) as its share of the costs incurred by the Company under the PIP. The Company
considers the funding arrangement under the PIP to be a collaboration arrangement under IFRS 11 and has accounted for the invoicing as a reduction of
costs incurred during the period. This amount is presented in the consolidated statement of financial position as trade and other receivables and has been
fully collected.
(iv) Supply Chain Arrangement
The Company agreed, in the Interim Supply Arrangement to the License Agreement, to supply ingredients for the manufacture of Macrilen™
(macimorelin) during an interim period at a price that is set ‘at cost’ without any profit margin. The Company believes the stand-alone selling price of the
manufacturing ingredients to be their cost, as that approximates the amount at which Novo would be able to procure those same goods with other suppliers.
In November 2019, Novo contracted with AEZS Germany, to provide supply chain services including provision of supervision of stability studies (support
services) as well as API batch production and delivery of certain API and semi-finished goods. The Company has determined the stand-alone selling price
of the support services and API batch production and delivery to be their respective cost, as those approximate the amount at which Novo would be able to
procure those same goods and services with other suppliers.
For all supply arrangement activities, either under the Interim Supply Agreement or the Supply Agreement with Novo, in 2019, the Company invoiced
$1,159 (2018 – $2,167) and has received payment in full for these invoices. These items are presented in the consolidated statements of comprehensive
(loss) income as product sales; supply chain, sales commissions and other revenue and as cost of sales when the performance obligations have been met
and deferred revenue on the consolidated statements of financial position when payments have been received in advance of revenue recognition.
22
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2018 and December 31, 2017 and for the years ended December 31, 2018, 2017 and 2016
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
(b) Zoptrex™ License Agreement
On December 1, 2014, the Company entered into an exclusive master collaboration agreement, a technology transfer and technical assistance agreement
(“TTA”) and a license agreement with Sinopharm A-Think Pharmaceuticals Co., Ltd. (“Sinopharm”) for the development, manufacture and
commercialization of Zoptrex™ in all human uses, in the People’s Republic of China, including Hong Kong and Macau. Under the terms of the TTA,
Sinopharm made a one-time, non-refundable payment of $1,000 to the Company in consideration for the transfer of technical documentation and materials,
know-how and technical assistance services. At December 31, 2017, the Company had deferred revenues net of amortization of $541 relating to non-
refundable upfront payments and, due to events that occurred in 2017, the Company does not anticipate development of Zoptrex™ under the licensing
agreements. In the first quarter of 2018, the Company recognized this amount as revenue.
7
Cash and cash equivalents
Cash on hand and balances with banks
Interest-bearing deposits with maturities of three months or less
8
Trade and other receivables
Trade accounts receivable (net of expected credit losses of $55 (2018 - $55))
Value added tax
Other receivables
See note 24 - Financial instruments and financial risk management for discussion of credit losses.
2019
$
2019
$
December 31,
4,801
3,037
7,838
December 31,
210
254
194
658
9
Inventory
Raw Materials
Work in process
December 31,
2019
$
2018
$
204
999
1,203
The Company recognized $101 of inventory costs and $106 as impairment in drug product for the European market as cost of sales in the consolidated
statements of comprehensive (loss) income for the year ended December 31, 2019 (2018 - $2,087 and $nil and 2017 - $nil and $nil).
10
Prepaid expenses and other current assets
Prepaid insurance
Prepaid inventory
Other
23
December 31,
2019
$
2018
$
791
175
245
1,211
832
175
203
1,210
3,501
11,011
14,512
2018
$
2018
$
142
49
103
294
—
240
240
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
During 2019, the Company evaluated the recoverability of $169 paid in a prior year to the Company’s change partner for the serialization of Macrilen™
(macimorelin) sachet and packaging subject to a repayment arrangement. As the timing and amount of such partner’s future ability to repay could not be
reasonably estimated, the full amount was written off and the Company expects to recognize any associated revenues in the period in which cash, if any, is
received.
11
Restricted cash equivalents
The Company had restricted cash equivalents amounting to $364 at December 31, 2019 (2018 - $418). These balances consist of certificates of deposit that
are used as collateral for corporate credit cards and leases.
12
Property, plant and equipment
Components of the Company’s property, plant and equipment are summarized below.
Equipment
$
Furniture and
fixtures
$
Cost
Computer
equipment
$
Leasehold
improvements
$
Total
$
At January 1, 2018
Additions
Disposals / Retirements
Reclassifications
Impact of foreign exchange rate changes
At December 31, 2018
Disposals / Retirements
Impact of foreign exchange rate changes
At December 31, 2019
At January 1, 2018
Disposals / Retirements
Depreciation expense
Impact of foreign exchange rate changes
At December 31, 2018
Disposals / Retirements
Depreciation expense
Impact of foreign exchange rate changes
At December 31, 2019
2,268
1
(758)
11
(64)
1,458
(1,019)
(17)
422
Equipment
$
2,210
(752)
19
(63)
1,414
(1,009)
9
(14)
400
24
19
—
—
(11)
(1)
7
—
—
7
790
8
(137)
—
(24)
637
(311)
(12)
314
42
—
—
—
(2)
40
(5)
(1)
34
Furniture and
fixtures
Accumulated depreciation
Computer
equipment
Leasehold
improvements
$
$
$
4
—
1
—
5
—
2
—
7
769
(137)
14
(22)
624
(311)
6
(12)
307
35
—
1
(2)
34
(5)
—
(1)
28
3,119
9
(895)
—
(91)
2,142
(1,335)
(30)
777
Total
$
3,018
(889)
35
(87)
2,077
(1,325)
17
(27)
742
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
At December 31, 2018
At December 31, 2019
Equipment
$
Furniture and
fixtures
$
Carrying amount
Computer
equipment
$
Leasehold
improvements
$
44
22
2
—
13
7
Total
$
65
35
6
6
Depreciation of $17 ($35 in 2018 and $100 in 2017) is presented in the consolidated statement of comprehensive (loss) income as follows: $10 ($20 in 2018 and $69 in
2017) in R&D costs, $7 ($10 in 2018 and $10 in 2017) in general and administrative (“G&A”) expenses and $nil ($5 in 2018 and $21 in 2017) in selling expenses. During
2019, the Company recognized net loss on disposal of $5 (2018 - $nil and 2017 - $nil) in the consolidated statement of comprehensive (loss) income.
13
Identifiable intangible assets
Identifiable intangible assets with finite useful lives consist entirely of in-process R&D costs, patents and trademarks with such assets expected to be fully
amortized by 2021. Changes in the carrying value of the Company’s identifiable intangible assets with finite useful lives are summarized below.
Balances – Beginning of the year
Additions
Retirement
Recurring amortization expense
Impact of foreign exchange rate changes
Balances – End of the year
Carrying
value
$
Year ended December 31, 2019
Accumulated
amortization
$
(32,581)
—
466
(20)
753
(31,382)
Cost
$
32,643
—
(466)
—
(755)
31,422
62
—
—
(20)
(2)
40
Carrying
value
$
Year ended December 31, 2018
Accumulated
amortization
$
(34,156)
—
—
(23)
1,598
(32,581)
Cost
$
34,246
—
—
—
(1,603)
32,643
90
—
—
(23)
(5)
62
During 2019, the Company recognized a retirement of $466 on expired patents and trademarks (2018 - $nil).
14
Goodwill
The change in carrying value is as follows:
At January 1, 2018
Impact of foreign exchange rate changes
At December 31, 2018
Impact of foreign exchange rate changes
At December 31, 2019
Cost
$
Accumulated
impairment loss
$
Carrying amount
$
8,613
(403)
8,210
(160)
8,050
—
—
—
—
—
8,613
(403)
8,210
(160)
8,050
Management’s evaluation of impairment in goodwill is based on fair value less costs of disposal based on the Company’s market capitalization at
December 31, 2019, its issued and outstanding common shares less estimated cost of disposal of approximately $1,100. In the prior year the Company’s
methodology incorporated estimates of its licensee’s projected sales of Macrilen™ (both units and selling price), annual revenue growth rate, growth in
operating expenses, the effect of future costs of the PIP and discount rate for generating the Company’s net present value. There was no impairment
assessed at December 31, 2019.
25
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
15
Payables and accrued liabilities
Trade accounts payable
Accrued research and development costs
Salaries, employment taxes and benefits
Financing of insurance premiums
PIP study payables
Accrued severance
Other accrued liabilities
16
Provision for restructuring and other costs
December 31,
2019
$
2018
$
1,087
—
64
4
118
427
448
2,148
1,282
26
183
738
—
148
414
2,791
In the third quarter of 2017, AEZS Germany and its Works Council approved a restructuring program (the “2017 German Restructuring”), which was rolled
out as a part of the continued strategy to transition into a commercially operating specialty biopharmaceutical organization focused on the
commercialization of Macrilen™ (macimorelin). On June 6, 2019, the Company announced that it was further reducing the size of its German workforce to
more closely reflect the Company’s ongoing commercial activities in Frankfurt. AEZS Germany and its Works Council approved a restructuring that affects
8 employees and was completed on January 31, 2020.
26
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
The changes in the Company’s provision for restructuring and other costs can be summarized as follows:
Other
provision
Cetrotide(R)
onerous
contracts
$
2017 German
Restructuring:
onerous lease
$
German
Restructuring:
severance
$
Total
$
January 1, 2018
Provision recognized
Utilization of provision
Change in the provision
Unwinding of discount and impact of foreign
exchange rate changes
December 31, 2018
Adoption of IFRS 16 (note 5a)
Provision recognized
Utilization of provision
Change in the provision
Unwinding of discount and impact of foreign
exchange rate changes
December 31, 2019
Less: current portion
Non-current portion
9
—
(9)
—
—
—
—
—
—
—
—
—
—
—
473
317
(222)
—
(21)
547
—
—
(137)
4
(18)
396
(88)
308
1,208
—
(467)
(21)
(57)
663
(663)
—
—
—
—
—
—
—
1,807
—
(1,202)
(432)
(85)
88
—
507
(252)
—
(13)
330
(330)
—
17
Warrant liability
The change in the Company’s warrant liability can be summarized as follows:
Balance – Beginning of the year
Share purchase warrants issued during the year (note 19)
Share purchase warrants exercised during the year
Change in fair value of share purchase warrants
Balance - End of the year
Less: current portion
Non-current portion
2019
$
Years ended December 31,
2018
$
2017
$
3,634
3,457
(318)
(4,518)
2,255
(6)
2,249
3,897
—
—
(263)
3,634
—
3,634
27
3,497
317
(1,900)
(453)
(163)
1,298
(663)
507
(389)
4
(31)
726
(418)
308
6,854
—
(735)
(2,222)
3,897
—
3,897
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
A summary of the activity related to the Company’s share purchase warrants is provided below.
Balance – Beginning of the year
Issued (note 19)
Exercised
Expired (note 19)
Balance – End of the year
Years ended December 31,
2019
2018
2017
Weighted
average
exercise
price ($)
6.23
1.65
1.07
—
4.00
Number
3,417,840
—
—
(25,996)
3,391,844
Weighted
average
exercise
price ($)
7.59
—
—
185.00
6.23
Number
3,779,245
—
(331,730)*
(29,675)
3,417,840
Number
3,391,844
3,325,000
(87,700)
—
6,629,144
Weighted
average
exercise
price ($)
9.66
—
1.07
345.00
7.59
* portion of the Series A warrants was exercised using the cashless feature. Therefore, the total number of equivalent shares issued was 301,343.
The warrants issued in March 2015 expired unexercised on March 10, 2020.See note 29, for warrants issued after December 31, 2019.
The table presented below shows the inputs and assumptions applied to the Black-Scholes option pricing model in order to determine the fair value of all
warrants outstanding as at December 31, 2019.
March 2015 Series A Warrants (e)
December 2015 Warrants
November 2016 Warrants (f)
September 2019 Warrants (g)
Market-
value
per
share
price
($)
Weighted
average
exercise
price
($)
Risk-
free
annual
interest
rate
(a)
0.91
0.91
0.91
0.91
1.07
7.10
4.70
1.65
1.58%
1.58%
1.58%
1.67%
Number of
equivalent
shares
28,144
2,331,000
945,000
3,325,000
Expected
volatility
(b)
53.18%
78.30%
75.89%
117.60%
Expected
life
(years)
(c)
Expected
dividend
yield
(d)
0.19
0.96
0.33
4.73
0.00%
0.00%
0.00%
0.00%
(a) Based on United States Treasury Government Bond interest rates with a term that is consistent with the expected life of the warrants.
(b) Based on the historical volatility of the Company’s stock price over the most recent period consistent with the expected life of the warrants, as well as on future expectations.
(c) Based upon time to expiry from the reporting period date.
(d) The Company has not paid dividends and it does not intend to pay dividends in the foreseeable future.
(e)
(f)
For the March 2015 Series A Warrants, the inputs and assumptions applied to the Black-Scholes option pricing model have been further adjusted to take into consideration the
value attributed to certain anti-dilution provisions. Specifically, the weighted average exercise price is subject to adjustment (note 19).
For the November 2016 Warrants, the Company reduced the fair value of these warrants to take into consideration the fair value of the $10 call option, which was also calculated
using the Black-Scholes pricing model. (note 19).
(g) For the September 2019 Warrants, the Company, used the Black-Scholes pricing model to fair value the warrants and allocated the gross proceeds. The remaining gross proceeds
were allocated to share capital (note 19)
28
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
18
Employee future benefits
AEZS Germany provides unfunded defined benefit pension plans and unfunded post-employment benefit plans for certain groups of employees. Provisions
for pension obligations are established for benefits payable in the form of retirement, disability and surviving dependent pensions.
The unfunded defined benefit pension plans are final salary pension plans, which provide benefits to members (or to their surviving dependents) in the
form of a guaranteed level of pension payable for life. The level of benefits provided depends on the member’s length of service and on his or her base
salary in the final years leading up to retirement. Current pensions vary in accordance with applicable statutory requirements, which foresee an adjustment
every three years on an individual basis that is based on inflationary increases or in relation to salaries of comparable groups of active employees in the
Company. An adjustment may be denied by the Company if the Company’s financial situation does not allow for an increase in pensions. These plans are
unfunded, and the Company meets benefit payment obligations as they fall due.
The change in the Company’s accrued benefit obligations is summarized as follows:
Pension benefit plans
Years ended December 31,
2018
$
2019
$
2017
$
Balances – Beginning of the year
Current service cost
Interest cost
Actuarial loss (gain) arising from changes in financial
assumptions
Benefits paid
Impact of foreign exchange rate changes
Balances – End of the year
Amounts recognized:
In net loss
In other comprehensive (loss) income
13,100
41
239
1,068
(483)
(261)
13,704
14,145
66
224
(193)
(492)
(650)
13,100
13,197
107
237
(694)
(485)
1,783
14,145
(280)
(807)
(290)
843
(344)
(1,089)
Other benefit plans
Years ended December 31,
2019
2018
$
105
8
2
(28)
—
(3)
84
18
(3)
$
84
6
1
19
(2)
(3)
105
(26)
3
2017
$
217
14
3
(115)
(66)
31
84
98
(31)
The cumulative amount of actuarial net losses recognized in other comprehensive (loss) income as at December 31, 2019 is $5,143 ($4,084 as at December
31, 2018 and $4,277 as at December 31, 2017).
The significant actuarial assumptions applied to determine the Company’s accrued benefit obligations are as follows:
Actuarial assumptions
Discount rate
Pension benefits increase
Rate of compensation increase
Pension benefit plans
Years ended December 31,
2018
%
1.90
1.80
2.00
2019
%
1.10
1.50
2.00
2017
%
1.70
1.80
2.00
Other benefit plans
Years ended December 31,
2019
%
1.90
1.50
2.00
2018
%
1.90
1.80
2.00
2017
%
1.70
1.80
2.00
29
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
The calculation of the pension benefit obligation is sensitive to the discount rate assumption. Throughout 2019, management has reduced the discount rate
assumption on a quarterly basis from 1.9% at December 31, 2018 to 1.1% as at December 31, 2019.
Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in Germany. These
assumptions translate into an average remaining life expectancy in years for a pensioner retiring at age 65:
Retiring at the end of the reporting period:
Male
Female
Retiring 20 years after the end of the reporting period:
Male
Female
2019
2018
2017
20
24
28
31
20
24
28
31
20
24
22
26
The most recent actuarial reports give effect to the pension and post-employment benefit obligations as at December 31, 2019. The next actuarial reports
are planned for December 31, 2020.
In accordance with the assumptions used as at December 31, 2019, undiscounted defined pension benefits expected to be paid, in Euro, are as follows:
2020
2021
2022
2023
2024
Thereafter
$
456
459
462
469
478
12,583
14,907
The weighted average duration of the defined benefit obligation is 15.6 years.
Total expenses for the Company’s defined contribution plan in its German subsidiary amounted to approximately $54 for the year ended December 31,
2019 (2018 - $75 and 2017 - $119).
If variations in the following assumptions had occurred during 2018, the impact on the Company’s pension benefit obligation of $13,704 as at December
31, 2019 would have been as follows:
Assumption
Change interest rate by 0.25%
Change salary rate by 0.25%
Change pension by 0.25%
Change mortality by 1 year
Increase
Decrease
(506)
17
391
519
538
(17)
(374)
(518)
30
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
19 Share and other capital
The Company has an unlimited number of authorized common shares (being voting and participating shares) with no par value, as well as an unlimited
number of preferred, first and second ranking shares, issuable in series, with rights and privileges specific to each class, with no par value.
On September 20, 2019, the Company entered into a securities purchase agreement with U.S. institutional investors to purchase $4,988 (before total
transaction costs of $795) of its common shares in a registered direct offering and warrants with a cashless exercise feature (see note 17) to purchase
common shares in a concurrent private placement (together, the “Offering”). The combined purchase price for one common share and one warrant was
$1.50. Under the terms of the securities purchase agreement, the Company sold 3,325,000 common shares. The gross proceeds of $4,988 was allocated as
$3,457 to warrants based on the ascribed fair value (note 17) and the remaining gross proceeds of $1,531 were allocated to share capital. The transaction
costs of $795 were allocated between share capital and warrants based on their relative fair values. The fair value of the share capital was recorded within
equity net of the allocated transaction costs. The transaction costs of $550 allocated to the warrant liability were recorded as expense in the statement of
comprehensive (loss) income.
In April 2019, there were 87,850 stock options, 23,000 deferred share units and 87,700 warrants exercised for gross proceeds of $314 with 191,650
common shares issued. In September 2019, 53,000 deferred share units were exercised with 37,100 common shares being issued.
Common shares issued in connection with “At-the-Market” (“ATM”) drawdowns
March 2017 ATM Program
On March 28, 2017, the Company commenced a new ATM offering pursuant to its existing ATM Sales Agreement, dated April 1, 2016, under which the
Company was able, at its discretion, from time to time, to sell up to a maximum of 3 million common shares through ATM issuances on the NASDAQ, up
to an aggregate amount of $9.0 million (the “March 2017 ATM Program”). The common shares were to be sold at market prices prevailing at the time of
the sale of the common shares and, as a result, sale prices varied.
Between March 28, 2017 and April 18, 2017, the Company issued a total of 597,994 common shares under the March 2017 ATM Program at an average
issuance price of $2.97 per share for aggregate gross proceeds of $1,780,000 less cash transaction costs of $55 and previously deferred financing costs of
$65.
April 2017 ATM Program
On April 27, 2017, the Company entered into a New ATM Sales Agreement and filed with the SEC a prospectus supplement (the “April 2017 ATM
Prospectus Supplement” or “April 2017 ATM Program”) related to sales and distributions of up to a maximum of 2.24 million common shares through
ATM issuances on the NASDAQ, up to an aggregate amount of $6.9 million under the New ATM Sales Agreement. The common shares will be sold at
market prices prevailing at the time of the sale of the common shares and, as a result, prices may vary. The New ATM Sales Agreement and the April 2017
ATM Program superseded and replaced the March 2017 ATM Program, which itself superseded and replaced the April 2016 ATM Program. The April
2017 ATM Prospectus Supplement supplements the base prospectus included in the Company’s Shelf Registration Statement on Form F-3, as amended (the
“2017 Shelf Registration Statement”), which was declared effective by the SEC on April 27, 2017. The 2017 Shelf Registration Statement allowed the
Company to offer up to $50 million of common shares and is effective for a three-year period.
Between May 30, 2017 and December 31, 2017, the Company issued a total of 1,805,758 common shares under the April 2017 ATM Program at an
average issuance price of $2.08 per share for aggregate gross proceeds of $3,761,000 less cash transaction costs of $115 and previously deferred financing
costs of $285. Because of these issuances, the exercise price of the Series A warrants issued in March 2015 was adjusted to $1.07 pursuant to the anti-
dilution provisions contained in such warrants.
31
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Shareholder rights plan
Effective May 8, 2019, the shareholders re-approved the Company’s shareholder rights plan (the “Rights Plan”) that provides the board of directors and the
Company’s shareholders with additional time to assess any unsolicited take-over bid for the Company and, where appropriate, to pursue other alternatives
for maximizing shareholder value. Under the Rights Plan, one right has been issued for each currently issued common share, and one right will be issued
with each additional common share that may be issued from time to time.
Other capital
The Company accounts for costs associated with share-based compensation from security grants under its long-term incentive plan and stock option plans
as other capital in its consolidated statements of changes in shareholders’ (deficiency) equity and as general and administrative expenses in its consolidated
statements of comprehensive (loss) income.
Long-term incentive plan
At the 2018 annual and special meeting of shareholders, the Company’s shareholders approved the adoption of the 2018 long-term incentive plan (the
“LTIP”), which allows the Board of Directors to issue up to 11.4% of the total issued and outstanding common shares at any given time to eligible
individuals at an exercise price to be determined by the Board of Directors at the time of the grant, subject to a ceiling, as stock options, stock appreciation
rights, stock awards, stock units, performance shares, performance units, and other stock-based awards. This LTIP replaces the stock option plan (the
“Stock Option Plan”) for its directors, senior executives, employees and other collaborators who provide services to the Company. The Company’s Board
of Directors amended the Stock Option Plan on March 20, 2014 and the Company’s Shareholders approved, ratified and confirmed the Stock Option Plan
on May 10, 2016. Options granted under the Stock Option Plan prior to the 2014 amendment expire after a maximum period of 10 years following the date
of grant. Options granted after the 2014 amendment expire after a maximum period of seven years following the date of grant.
During 2019 and 2018, the Company granted Deferred Share Units (“DSU”) and stock options under the LTIP, and stock options under the Stock Option
Plan in 2017, as follows:
Years ended December 31,
2018
2017
2019
Weighted
average
exercise
Weighted
average
exercise
US dollar-denominated grants
Balance – Beginning of the year
Granted
Exercised
Canceled/Forfeited
Expired
Balance – End of period
Number
888,816
335,000
(163,850)
(6,000)
(100,850)
953,116
price (US$) Number
3.66
2.00
2.42
13.39
2.24
3.38
712,415
426,000
—
(249,599)
—
888,816
price (US$) Number
4.66
1.74
—
3.23
—
3.66
966,539
390,000
—
(643,271)
(853)
712,415
32
Weighted
average
exercise
price (US$)
7.23
2.05
—
6.02
704.88
4.66
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
2019
Years ended December 31,
2018
2017
Canadian dollar-denominated stock options
Balance – Beginning of the year
Forfeited
Expired
Balance – End of the year
Range of US dollar-denominated options
exercise price
0.87 to 1.45
1.46 to 1.79
1.80 to 2.11
2.12 to 3.50
3.51 to 1,044.00
Exercise price
(CAN$)
0 to 912.00
Weighted
average
exercise
price
(CAN$)
Number
Number
Weighted
average
exercise
price
(CAN$)
869
—
(428)
441
743.56
—
570.00
912.00
1,503
(104)
(530)
869
Number
1,858
—
(355)
1,503
605.84
668.65
367.70
743.56
Options outstanding
Weighted
average
remaining
contractual
life
(years)
Number (#)
Weighted
average
exercise
price
($)
Options exercisable
Weighted
average
remaining
contractual
life
(years)
Number (#)
Weighted
average
exercise
price
(CAN$)
820.27
—
1,728.15
605.84
Weighted
average
exercise
price
($)
160,000
142,000
370,000
253,948
27,168
953,116
7.57
7.26
5.67
7.03
2.79
6.50
0.91
1.67
2.07
3.18
46.56
3.38
—
108,667
213,334
228,948
27,168
578,117
—
7.88
5.23
6.74
2.79
6.21
—
1.74
2.06
3.30
46.56
4.58
Canadian dollar options outstanding and exercisable as at December
31, 2019
Weighted average
remaining
contractual life
(years)
Weighted average
exercise price
(CAN$)
Number
441
441
0.87
0.87
912.00
912.00
As at December 31, 2019, the total compensation cost related to unvested US dollar stock options not yet recognized amounted to $101 (2018 - $198). This
amount is expected to be recognized over a weighted average period of 1.21 years (2018 - 1.15 years).
The Company settles stock options exercised through the issuance of new common shares as opposed to purchasing common shares on the market to settle
stock option exercises.
Fair value input assumptions for US dollar-denominated grants
The table below shows the assumptions, or weighted average parameters, applied to the Black-Scholes option pricing model in order to determine share-
based compensation costs over the life of the awards.
33
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Expected dividend yield
Expected volatility
Risk-free annual interest rate
Expected life (years)
Weighted average share price
Weighted average exercise price
Weighted average grant date fair value
Years ended December 31,
2019
2018
0.00%
110.02%
1.86%
5.94
2.00
2.00
1.73
$
$
$
0.00%
129.23%
2.51%
3.6
1.74
1.74
1.39
(a)
(b)
(c)
(d)
$
$
$
(a) The Company has not paid dividends and it does not intend to pay dividends in the foreseeable future.
(b) Based on the historical volatility of the Company’s stock price over the most recent period consistent with the expected life of the stock options, as well
as on future expectations.
(c) Based on United States Treasury Government Bond interest rates with a term that is consistent with the expected life of the stock options.
(d) Based upon historical data related to the exercise of stock options, on post-vesting employment terminations and on future expectations related to
exercise behavior.
34
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
20 Operating expenses
The nature of the Company’s operating expenses from continuing operations include the following:
2019
$
Years ended December 31,
2018
$
2017
$
Key management personnel compensation(1)
Salaries and short-term employee benefits
Consultants fees
Termination benefits
Post-employment benefits
Share-based compensation costs
Other employees compensation:
Salaries and short-term employee benefits
Termination benefits
Post-employment benefits
Share-based compensation costs
Cost of inventory used and services provided
Write down of inventory
Professional fees
Insurance
Third-party R&D
Consulting fees
Restructuring costs
Contracted sales force
Travel
Marketing services
Laboratory supplies
Other goods and services
Leasing costs, net of sublease receipts of $214 in 2019, $121 in 2018(2)
and $359 in 2017(2)
Impairment of prepaid asset
Depreciation and amortization of property, equipment and intangibles
Depreciation - right to use assets
Impairment losses
Operating foreign exchange losses (gains)
1,705
194
503
257
784
3,443
1,257
—
78
9
1,344
309
101
2,599
890
322
144
507
—
154
18
23
137
247
169
37
278
22
30
5,987
10,774
2,388
62
356
147
462
3,415
1,325
—
275
108
1,708
2,104
—
6,421
1,303
498
—
—
256
256
176
139
342
344
—
60
—
—
17
9,812
17,039
2,081
—
—
59
87
2,227
3,584
1,806
441
95
5,926
—
—
7,153
949
3,758
—
—
22
831
698
2
162
2,247
—
138
—
(44)
(72)
15,844
23,997
(1) Key management includes the Company’s executive management team and directors.
(2) Leasing costs also include changes in the onerous lease provision in 2018 and 2017 (note 16) other than those costs attributable to the unwinding of the
discount.
35
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Most of the employment agreements entered into between the Company and its executive officers include termination provisions, whereby the executive
officers would be entitled to receive benefits that would be payable if the Company were to terminate the executive officers’ employment without cause or
if their employment is terminated following a change of control. Separation benefits generally are calculated based on an agreed-upon multiple of
applicable base salary and incentive compensation and, in certain cases, other benefit amounts.
21 Supplemental disclosure of cash flow information
Changes in operating assets and liabilities:
Trade and other receivables
Inventory
Prepaid expenses and other current assets
Other non-current assets
Payables and accrued liabilities
Taxes payable
Deferred revenues
Provision for restructuring and other costs (note 16)
Employee future benefits (note 18)
22 Income taxes
2019
$
Years ended December 31,
2018
$
2017
$
(371)
(971)
(170)
—
(615)
(188)
743
(389)
(483)
(2,444)
(95)
314
448
150
(586)
1,669
400
(1,957)
(494)
(151)
Significant components of current and deferred income tax recovery (expense) are as follows:
Current income tax recovery (expense)
Deferred tax:
Origination and reversal of temporary differences
Adjustments in respect of prior years
Change in unrecognized tax assets
Total income tax recovery (expense)
2019
$
Years ended December 31,
2018
$
2017
$
—
2,943
-
(2,755)
188
—
(4,003)
742
(2,191)
(5,452)
36
158
—
(343)
39
(1,080)
—
—
(435)
(551)
(2,212)
—
6,395
(149)
(2,767)
3,479
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
The reconciliation of the combined Canadian federal and provincial income tax rate to the income tax expense is provided below:
Combined Canadian federal and provincial statutory income tax rate
Income tax (expense) recovery based on combined statutory income
tax rate
Change in unrecognized tax assets
Change in unrecognized tax assets related to OCI
Share issuance costs
Permanent difference attributable to the use of local currency for tax
reporting
Change in enacted rates used
Permanent difference attributable to net change in fair value of warrant
liability
Share-based compensation costs
Difference in statutory income tax rate of foreign subsidiaries
Adjustments in respect of prior years
Other
Years ended December 31,
2018
2017
26.5%
26.8%
26.9%
Years ended December 31,
2018
$
2017
$
2019
2019
$
1,615
(3,160)
340
65
35
(27)
1,197
(210)
321
—
12
188
(2,574)
(1,963)
(188)
(40)
792
(58)
70
(152)
(917)
(372)
(50)
(5,452)
5,434
(2,701)
(228)
164
(71)
(358)
595
(49)
768
(149)
74
3,479
Deferred income tax assets are recognized to the extent that the realization of the related tax benefit through reversal of temporary differences and future
taxable profits is probable.
(Loss) income before income taxes
(Loss) income before income taxes is attributable to the Company’s tax jurisdictions as follows:
Germany
Canada
United States
2019
$
Years ended December 31,
2018
$
2017
$
(6,010)
812
(1,032)
(6,230)
16,297
(5,504)
(1,154)
9,639
(13,950)
(5,592)
(733)
(20,275)
37
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Significant components of deferred tax assets and liabilities are as follows:
December 31,
2019
$
2018
$
Deferred tax assets
Current:
Operating losses carried forward
Non-current:
Operating losses carried forward
Intangible assets
Deferred tax liabilities
Current:
Deferred revenues
Restricted cash
Payables and accrued liabilities
Non-current:
Property, plant and equipment
Deferred revenues
Other
Deferred tax assets (liabilities), net
Significant components of unrecognized deferred tax assets are as follows:
Deferred tax assets
Current:
Deferred revenues and other provisions
Non-current:
Deferred revenues
Operating losses carried forward
SR&ED Pool
Unused tax credits
Employee future benefits
Property, plant and equipment
Share issuance expenses
Other
Unrecognized deferred tax assets
38
—
691
2,639
3,330
—
52
—
52
184
3,047
47
3,278
3,330
—
December 31,
2019
$
2018
$
550
550
—
83,699
9,138
5,149
2,303
480
342
272
101,383
101,933
—
764
3,646
4,410
38
153
95
286
3
4,074
47
4,124
4,410
—
649
649
—
81,731
9,148
5,894
2,048
448
467
241
99,977
100,626
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
As at December 31, 2019, amounts and expiry dates of tax attributes to be deferred for which no deferred tax asset was recognized were as follows:
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
Canada
Federal
$
Provincial
$
8,008
4,791
4,104
1,753
4,250
3,721
4,153
10,418
10,592
7,343
6,557
3,501
69,191
6,622
4,773
4,089
1,737
4,250
3,721
4,153
10,452
10,592
7,343
6,557
3,501
67,790
The Company has non-refundable R&D investment tax credits of approximately $7,005 which can be carried forward to reduce Canadian federal income
taxes payable and which expire at dates ranging from 2019 to 2035. Furthermore, the Company has unrecognized tax assets in respect of operating losses to
be carried forward in Germany and in the U.S. The federal tax losses amount to approximately $200,707 in Germany (EUR 178,883) for which there is no
expiry date, and to $4,044 in the U.S., which expire as follows:
2028
2029
2034
2035
2036
2037
2038
2039
United States
$
369
178
151
447
195
709
1,224
771
4,044
The operating loss carryforwards and the tax credits claimed are subject to review, and potential adjustment, by tax authorities. Other deductible temporary
differences for which tax assets have not been booked are not subject to a time limit, except for share issuance expenses which are amortizable over five
years.
23 Capital disclosures
The Company’s objective in managing capital, consisting of shareholders’ (deficiency) equity, with cash and cash equivalents and restricted cash
equivalents being its primary components, is to ensure sufficient liquidity to fund R&D costs, selling expenses, G&A expenses and working capital
requirements.
Over the past several years, the Company has raised capital via public equity offerings and issuances under various ATM sales programs as its primary
source of liquidity, as discussed in note 19 - share and other capital.
39
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
The capital management objective of the Company remains the same as that in previous periods. The policy on dividends is to retain cash to keep funds
available to finance the activities required to advance the Company’s product development portfolio and to pursue appropriate commercial opportunities as
they may arise.
The Company is not subject to any capital requirements imposed by any regulators or by any other external source.
24 Financial instruments and financial risk management
Financial assets (liabilities) as at December 31, 2019 and December 31, 2018 are presented below.
December 31, 2019
Cash and cash equivalents (note 7)
Trade and other receivables (note 8)
Restricted cash equivalents (note 11)
Payables and accrued liabilities (note 15)
Lease liability (note 5)
Warrant liability (note 17)
December 31, 2018
Cash and cash equivalents (note 7)
Trade and other receivables (note 8)
Restricted cash equivalents (note 11)
Payables and accrued liabilities (note 15)
Warrant liability (note 17)
Fair value
Financial assets
at amortized cost
$
Financial
liabilities at
FVTPL
$
Financial
liabilities at
amortized cost
$
Total
$
7,838
404
364
—
—
—
8,606
—
—
—
—
—
2,255
2,255
—
—
—
2,148
903
—
3,051
7,838
404
364
2,148
903
2,255
3,300
Financial assets
at amortized cost
$
Financial
liabilities at
FVTPL
$
Financial
liabilities at
amortized cost
$
Total
$
14,512
245
418
—
—
15,175
—
—
—
—
3,634
3,634
—
—
—
2,791
—
2,791
14,512
245
418
2,791
3,634
8,750
The Black-Scholes valuation methodology uses “Level 2” inputs in calculating fair value, as defined in IFRS 13, which establishes a hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The input levels discussed in IFRS 13 are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
40
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Level 2 –
Inputs other than quoted prices included within Level 1 that are observable for an asset or liability, either directly (i.e. prices) or indirectly (i.e.
derived from prices).
Level 3 –
Inputs for an asset or liability that are not based on observable market data (unobservable inputs).
The carrying values of the Company’s cash and cash equivalents, trade and other receivables, restricted cash equivalents, payables and accrued liabilities
and provision for restructuring and other costs approximate their fair values due to their short-term maturities or to the prevailing interest rates of the
related instruments, which are comparable to those of the market.
Financial risk factors
The following provides disclosures relating to the nature and extent of the Company’s exposure to risks arising from financial instruments, including credit
risk, liquidity risk, market risk (share price risk) and foreign exchange risk and how the Company manages those risks.
(a) Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company
regularly monitors credit risk exposure and takes steps to mitigate the likelihood of this exposure resulting in losses. The Company’s exposure to credit risk
currently relates to the financial assets at amortized cost in the table above. The Company holds its available cash in amounts that are readily convertible to
known amounts of cash and deposits its cash balances with financial institutions that have an investment grade rating of at least “P-2” or the equivalent.
This information is supplied by independent rating agencies where available and, if not available, the Company uses publicly available financial
information to ensure that it invests its cash in creditworthy and reputable financial institutions. Once there are indicators that there is no reasonable
expectation of recovery, such financial assets are written off but are still subject to enforcement activity.
As at December 31, 2019, trade accounts receivable for an amount of approximately $265 were with four counterparties of which $55 was past due and
impaired and fully provided for (2018 - $197 with four counterparties and $55 past due and impaired and fully provided for). The licensee is obligated to
pay its quarterly royalties, 60 days after quarter-end.
Generally, the Company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended following an
evaluation of creditworthiness. In addition, the Company performs ongoing credit reviews of all of its customers and determines expected credit losses. On
this basis, as at December 31, 2019, the Company has provided for all outstanding and unpaid amounts relating to its operations before its licensing of
MacrilenTM(macimorelin). The licensee has paid all amounts owing within 90 days of invoicing.
The maximum exposure to credit risk approximates the amount recognized in the Company’s consolidated statement of financial position.
(b) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. As indicated in note 23, the Company
manages this risk through the management of its capital structure. It also manages liquidity risk by continuously monitoring actual and projected cash flows
as further discussed in note 1. The Board of Directors reviews and approves the Company’s operating and capital budgets, as well as any material
transactions occurring outside of the ordinary course of business. The Company has adopted an investment policy in respect of the safety and preservation
of its capital to ensure the Company’s liquidity needs are met. The instruments are selected with regard to the expected timing of expenditures and
prevailing interest rates.
41
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
All of the Company’s financial liabilities except lease liabilities are current liabilities with expected settlement dates within one year. The maturity analysis
for lease liabilities is disclosed in note 5.
(c) Market risk
Share price risk
The change in fair value of the Company’s warrant liability, which is measured at FVTPL, results from the periodic “mark-to-market” revaluation as further
described in note 17 as it applies to its outstanding share purchase warrants. The valuation models are impacted, among other inputs, by the market price of
the Company’s common shares. As a result, the change in fair value of the warrant liability, which is reported in the consolidated statements of
comprehensive income (loss), has been and may continue in future periods to be materially affected most notably by changes in the Company’s common
share closing price, which on the NASDAQ ranged from $0.77 to $5.43 during the year ended December 31, 2019.
If variations in the market price of our common shares of -30% and +30% were to occur, the impact on the Company’s net loss related to the warrant
liability held at December 31, 2019 would be $771 to $(806), respectively.
(d) Foreign exchange risk
Entities using the Euro as their functional currency
The Company is exposed to foreign exchange risk due to its investments in foreign operations whose functional currency is the Euro. As at December 31,
2019, if the US dollar had increased or decreased by 10% against the Euro, with all variables held constant, net loss for the year ended December 31, 2019
would have been lower or higher by approximately $841 (net income for 2018 - $1,134).
25 Segment information
The Company operates in a single operating segment, being the biopharmaceutical segment.
42
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Geographical information
Revenues by geographical area are detailed as follows:
Ireland
United States
China
Denmark
British Virgin Islands
Other
Years ended December 31,
2018
$
2019
$
2017
$
74
—
—
413
—
45
532
24,910
1,416
275
—
280
—
26,881
—
452
262
—
206
3
923
Revenues have been allocated to geographic regions based on the country of residence of the Company’s external customers or licensees.
Non-current assets include restricted cash equivalents, right of use assets, property, plant and equipment, identifiable intangible assets and goodwill and are detailed by
geographical area as follows:
Germany
United States
Canada
December 31,
2019
$
2017
$
8,969
101
1
9,071
Major customers representing 10% or more of the Company’s revenues in each of the last three years are as follows:
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Years ended December 31,
2018
$
2019
$
2017
$
74
458
—
—
—
—
26,127
—
275
—
—
280
43
8,599
153
3
8,755
—
—
262
323
129
206
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
26 Net (loss) income per share
The following table sets forth pertinent data relating to the computation of basic and diluted net (loss) income per share attributable to common
shareholders.
Net (loss) income
Basic weighted average number of shares outstanding
Diluted weighted average number of shares outstanding
Items excluded from the calculation of diluted net (loss) income
per share because the exercise price was greater than the
average market price of the common shares or due to their anti-
dilutive effect
Stock options and DSUs
Share purchase warrants
Years ended December 31,
2018
$
2019
$
(6,042)
17,494,472
17,494,472
4,187
16,440,760
17,034,812
2017
$
(16,796)
14,958,704
14,958,704
953,557
6,629,144
889,685
3,391,844
713,918
3,417,840
Net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of shares outstanding during the relevant period.
Diluted weighted average number of shares reflects the dilutive effect of equity instruments, such as any “in the money” stock options, DSUs and share
purchase warrants. In periods with reported net losses, all stock options and share purchase warrants are deemed anti-dilutive such that basic net loss per
share and diluted net loss per share are equal, and thus “in the money” stock options and share purchase warrants have not been included in the
computation of net loss per share because to do so would be anti-dilutive.
27 Commitments and contingencies
Less than 1 year
1 - 3 years
4 - 5 years
More than 5 years
Total
Contingencies
Service and
manufacturing
$
1,600
11
5
5
1,621
In the normal course of operations, the Company may become involved in various claims and legal proceedings related to, for example, contract
terminations and employee-related and other matters.
44
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017
(amounts in thousands of US dollars, except share/option/warrant/DSU and per share/option/warrant/DSU data and as otherwise noted)
Securities class action lawsuit
On March 9, 2020, the Company settled the previously disclosed class-action lawsuit against it pending in the U.S. District Court for New Jersey. The
settlement payment of $6,500 will be funded entirely by the Company’s insurers. The class-action lawsuit alleged that the Company and certain of its
former officers and directors violated the Securities Exchange Act of 1934 in connection with certain public statements between August 30, 2011 and
November 6, 2014, regarding the safety and efficacy of Macrilen™ (macimorelin) and the prospects for the approval of the Company’s NDA for the
product by the FDA. This settlement remains subject to execution of final settlement documents and approval by the U.S. District Court for the District of
New Jersey.
Previously settled lawsuits
On December 21, 2018, the Company settled a dispute with its former President and Chief Executive Officer and with its former Senior Vice President,
Chief Administrative Officer, General Counsel and Corporate Secretary with the Company agreeing to make a payment in the amount of $775.
On November 5, 2018, the Company settled a dispute with Cogas Consulting, LLC with the Company agreeing to make a payment of $625.
28 Reclassifications on comparative figures
To consolidate the presentation of similar items, during 2019, the Company reclassified certain of its prior year comparative balance sheet items as follows:
Payables and accrued liabilities and current portion of deferred revenues
The $175 in payables and accrued liabilities has been reclassified to deferred revenue to be recognized on the sale of inventory to our licensee in 2020.
29 Subsequent events
(a) On February 21, 2020, the Company closed a registered direct offering for 3,478,261 common shares, at a purchase price of $1.29 per share,
priced at-the-market. Additionally, the Company issued to the investors unregistered warrants to purchase up to an aggregate of 2,608,696
common shares in a concurrent private placement. The warrants have an exercise price of $1.20 per common share, are exercisable
immediately and will expire five and one-half years following the date of issuance. The gross proceeds of the offering were $4,500. The net
cash proceeds to the Company from the offering totaled approximately $3,920. The Company also issued 243,478 warrants to the placement
agent with an exercise price of $1.61719 per common share, which are exercisable immediately and will expire five years following the date
of issuance.
(b) Subsequent to year end, the COVID-19 pandemic began causing significant financial market declines and social dislocation. The situation is
dynamic with various cities and countries around the world responding in different ways to address the outbreak. The spread of COVID-19
may impact our operations, including the potential interruption of our clinical trial activities and our supply chain. For example, the COVID-
19 outbreak may delay enrollment in our pediatric clinical trial due to prioritization of hospital resources toward the outbreak, and some
patients may be unwilling to enroll in our trials or be unable to comply with clinical trial protocols if quarantines impede patient movement or
interrupt healthcare services, which would delay our ability to conduct clinical trials or release clinical trial results and could delay our ability
to obtain regulatory approval and commercialize our product candidates. The spread of an infectious disease, including COVID-19, may also
result in the inability of our suppliers to deliver components or raw materials on a timely basis or at all. In addition, hospitals may reduce
staffing and reduce or postpone certain treatments in response to the spread of an infectious disease. Such events may result in a period of
business disruption and, in reduced operations, doctors or medical providers may be unwilling to participate in our clinical trials, any of which
could materially affect our business, financial condition or results of operations. The significant spread of COVID-19 within the U.S.,
Canada, Germany and elsewhere resulted in a widespread health crisis and has had adverse effects on local, national and global economies
generally, the markets that we serve, our operations and the market price of our Common Shares.The Company’s impairment test for various
assets including goodwill and intangibles is based on fair value models which are based on cash flows from operations or other market
dependent models. Accordingly, as required by IFRS we have not reflected these subsequent conditions in the recoverable value of the
estimate of these assets at December 31, 2019.
Uncertain factors, including the duration of the outbreak, the severity of the disease and the actions to contain or treat its impact, could impair
our operations including, among other things, employee mobility and productivity, availability of our facilities, conduct of our clinical trials
and the availability and the productivity of third-party product and service suppliers.
45
Item 19. Exhibits
Exhibit Index
1.1
1.2
1.3
1.4
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Restated Certificate of Incorporation and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 99.2 to the Registrant’s report on Form
6-K furnished to the Commission on May 25, 2011)
Certificate of Amendment and Articles of Amendment of the Registrant (incorporated by reference to Exhibit 99.2 to the Registrant’s report on Form 6-K furnished to the
Commission on October 3, 2012)
Certificate of Amendment and Articles of Amendment of the Registrant (incorporated by reference to Exhibit 99.1 to the Registrant’s report on Form 6-K furnished to the
Commission on November 17, 2015)
Amended and Restated By-Law One of the Registrant (incorporated by reference to Exhibit 1.3 of the Registrant’s Annual Report on Form 20-F for the financial year
ended December 31, 2012 filed with the Commission on March 22, 2013)
Amended and Restated Shareholder Rights Plan Agreement between the Registrant and Computershare Trust Company of Canada, as Rights Agent, dated as of May 8,
2019 (incorporated by reference to Exhibit 99.2 to the Registrant’s report on Form 6-K furnished to the Commission on May 9. 2019)
Second Amended and Restated Stock Option Plan of the Registrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Annual Report on Form 20-F for the
financial year ended December 31, 2013 filed with the Commission on March 21, 2014)
2018 Long-Term Incentive Plan of the Registrant (incorporated by reference to Exhibit 4.7 of the Registrant’s Form S-8 filed with the Commission on May 8, 2018)
License and Assignment Agreement, dated January 16, 2018 by and between Aeterna Zentaris GmbH and Strongbridge Ireland Limited (incorporated by reference to
Exhibit 99.2 of the Registrant’s report on Form 6-K furnished to the Commission on January 19, 2018)
Employment Agreement dated October 1, 2017 between Michael Ward and the Registrant (incorporated by reference to Exhibit 4.3 of the Registrant’s Annual Report on
Form 20-F for the financial year ended December 31, 2017 filed with the Commission on March 28, 2018)
Change of Control Agreement dated October 1, 2017 between Michael Ward and the Registrant (incorporated by reference to Exhibit 4.4 of the Registrant’s Annual
Report on Form 20-F for the financial year ended December 31, 2017 filed with the Commission on March 28, 2018)
Independent Contractor Agreement dated September 18, 2018 between Leslie Auld and the Registrant (incorporated by reference to Exhibit 4.8 of the Registrant’s
Annual Report on Form 20-F for the financial year ended December 31, 2018 filed with the Commission on April 1, 2019)
Master Collaboration Agreement by and between Aeterna Zentaris GmbH, a subsidiary of the Registrant, and Sinopharm A-think Pharmaceuticals Co., Ltd, dated as of
December 1, 2014 (incorporated by reference to Exhibit 99.2 of the Registrant’s report on Form 6-K furnished to the Commission on December 11, 2014)
License Agreement by and between Aeterna Zentaris GmbH, a subsidiary of the Registrant, and Sinopharm A-think Pharmaceuticals Co., Ltd, dated as of December 1,
2014 (incorporated by reference to Exhibit 99.3 of the Registrant’s report on Form 6-K furnished to the Commission on December 11, 2014)
Technology Transfer and Technical Assistance, Agreement by and between Aeterna Zentaris GmbH, a subsidiary of the Registrant, and Sinopharm A-think
Pharmaceuticals Co., Ltd, dated as of December 1, 2014 (incorporated by reference to Exhibit 99.4 of the Registrant’s report on Form 6-K furnished to the Commission
on December 11, 2014)
Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 99.1 of the Registrant’s report on Form 6-K furnished to the Commission on
October 21, 2016)
Form of Warrant Agreement (incorporated by reference to Exhibit 99.1 of the Registrant’s report on Form 6-K furnished to the Commission on September 20, 2019)
Placement Agency Agreement between the Registrant and Maxim Group LLC, dated as of September 20, 2019 (incorporated by reference to Exhibit 99.2 of the
Registrant’s report on Form 6-K furnished to the Commission on September 20, 2019)
4.13
Form of Securities Purchase Agreement by and between the Registrant and certain institutional investors, dated as of September 20, 2019 (incorporated by reference to
Exhibit 99.3 of the Registrant’s report on Form 6-K furnished to the Commission on September 20, 2019)
4.14
4.15
Form of Investor Warrant (incorporated by reference to Exhibit 99.1 of the Registrant’s report on Form 6-K furnished to the Commission on February 21, 2020)
Form of Securities Purchase Agreement by and between the Registrant and certain institutional investors, dated as of February 21, 2020 (incorporated by reference to
Exhibit 99.2 of the Registrant’s report on Form 6-K furnished to the Commission on February 21, 2020)
4.16
Engagement Agreement by and between the Registrant and H.C. Wainwright & Co., LLC, dated as of February 18, 2020 (incorporated by reference to Exhibit 99.3 of the
Registrant’s report on Form 6-K furnished to the Commission on February 21, 2020)
4.17
8.1
Form of Placement Agent Warrant (incorporated by reference to Exhibit 99.4 of the Registrant’s report on Form 6-K furnished to the Commission on February 21, 2020)
Subsidiaries of the Registrant
107
11.1
11.2
11.3
12.1
12.2
13.1
13.2
15.1
Code of Conduct and Business Ethics of the Registrant (incorporated by reference to Exhibit 11.1 of the Registrant’s Annual Report on Form 20-F for the financial year
ended December 31, 2017 filed with the Commission on March 28, 2018)
Code of Business Conduct and Ethics for Members of the Board of Directors (incorporated by reference to Exhibit 11.2 of the Registrant’s Annual Report on Form 20-F
for the financial year ended December 31, 2014 filed with the Commission on March 17, 2015)
Audit Committee Charter of the Registrant (incorporated by reference to Exhibit 11.3 of the Registrant’s Annual Report on Form 20-F for the financial year ended
December 31, 2014 filed with the Commission on March 17, 2015)
Certification of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of the Independent Registered Public Accounting Firm
Exhibit Index
101. INS XBRL Instance Document
101. SCH XBRL Taxonomy Extension Schema
101. CAL XBRL Taxonomy Extension Schema Calculation Linkbase
101. DEF XBRL Taxonomy Extension Schema Definition Linkbase
101. LAB XBRL Taxonomy Extension Schema Label Linkbase
101. PRE XBRL Taxonomy Extension Schema Presentation Linkbase
108
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
SIGNATURES
Date: March 30, 2020
AETERNA ZENTARIS INC.
/s/ Klaus Paulini
Klaus Paulini
President and Chief Executive Officer
109
SUBSIDIARIES OF THE REGISTRANT
AETERNA ZENTARIS INC.
Exhibit 8.1
Exhibit 12.1
Certification of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002 Certification
I, Klaus Paulini, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Aeterna Zentaris Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as at, and for, the periods presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure 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 this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as at the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: March 30, 2020
/s/ Klaus Paulini
Klaus Paulini
President and Chief Executive Officer
Exhibit 12.2
Certification of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002 Certification
I, Leslie Auld, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Aeterna Zentaris Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as at, and for, the periods presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure 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 this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as at the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: March 30, 2020
/s/ Leslie Auld
Leslie Auld
Chief Financial Officer
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 13.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Aeterna Zentaris Inc. (the “Company”) on Form 20-F for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Klaus Paulini, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: March 30, 2020
/s/ Klaus Paulini
Klaus Paulini
President and Chief Executive Officer
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 13.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Aeterna Zentaris Inc. (the “Company”) on Form 20-F for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Leslie Auld, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: March 30, 2020
/s/ Leslie Auld
Leslie Auld
Chief Financial Officer
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-224737, No. 333-210561 and No. 333-200834)
and Form F-3 (No.333-232935) of Aeterna Zentaris Inc. of our report dated March 30, 2020 relating to the consolidated financial statements, which appears
in this Annual Report on Form 20-F.
Exhibit 15.1
“/s/ PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 30, 2020