UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For fiscal year ended December 31, 2011 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ____ to ____ | ||
OR | ||
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Date of event requiring this shell company report: | ||
Commission file number: 000-31062
ONCOLYTICS BIOTECH INC.
(Exact name of Registrant as specified in its charter)
Province of Alberta, Canada
(Jurisdiction of incorporation or organization)
Suite 210, 1167 Kensington Crescent, N.W. Calgary, Alberta, T2N 1X7
(Address of principal executive offices)
Doug Ball
Suite 210, 1167 Kensington Crescent, N.W. Calgary, Alberta, T2N 1X7
Tel: (403) 670-7377
E-mail: info@oncolytics.ca
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of each exchange on which registered |
Common Shares, no par value | NASDAQ Capital Market |
Securities 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 Registrant’s classes of capital or common stock as of the close of the period covered by the annual report: 71,251,335 common shares as at December 31, 2011
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
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 o No ý
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 ý No o
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 ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP | International Financial Reporting Standards as issued by the International Accounting Standards Board | Other |
o | x | o |
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 o Item 18 o
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 o No ý
ONCOLYTICS BIOTECH INC.
FORM 20-F
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
All references in this annual report on Form 20-F to the terms “we”, “our”, “us”, “the Company” and “Oncolytics” refer to Oncolytics Biotech Inc.
Certain statements in this annual report on Form 20-F and the documents attached as exhibits to this annual report, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Oncolytics Biotech Inc., or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are statements that are not historical facts, and include, but are not limited to, estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to the efficacy of our technologies; the timing and results of clinical studies related to our technologies; future operations, products and services; the impact of regulatory initiatives on our operations; the size of and opportunities related to the markets for our technologies; general industry and macroeconomic growth rates; expectations related to possible joint and/or strategic ventures and statements regarding future performance. Forward-looking statements generally, but not always, are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “projects”, “potential”, “possible” and similar expressions, or that events or conditions “will,” “may,” “could” or “should” occur.
The forward-looking statements in this annual report are subject to various risks and uncertainties, most of which are difficult to predict and generally beyond our control, including without limitation:
• | risks related to all of our products, including REOLYSIN®, being in the research and development stage and requiring further development and testing before they can be marketed commercially; |
• | risks inherent in pharmaceutical research and development; |
• | risks related to timing and possible delays in our clinical trials; |
• | risks related to some of our clinical trials being conducted in, and subject to the laws of foreign countries; |
• | risks related to our pharmaceutical products being subject to intense regulatory approval processes in the United States and other foreign jurisdictions; |
• | risks related to the extremely competitive biotechnology industry and our competition with larger companies with greater resources; |
• | risks related to our reliance on patents and proprietary rights to protect our technology; |
• | risks related to potential products liability claims; |
• | risks related to our limited manufacturing experience and reliance on third parties to commercially manufacture our products, if and when developed; |
• | risks related to our new products not being accepted by the medical community or consumers; |
• | risks related to our technologies becoming obsolete; |
• | risks related to our dependence on third party relationships for research and clinical trials; |
• | risks related to our lack of operating revenues and history of losses; |
• | uncertainty regarding our ability to obtain third-party reimbursement for the costs of our product; |
• | risks related to our ability to obtain additional financing to fund future research and development of our products and to meet ongoing capital requirements; |
• | risks related to potential increases in the cost of director and officer liability insurance; |
• | risks related to our dependence on key employees and collaborators; |
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• | risks related to Barbados law; |
• | risks related to the effect of changes in the law on our corporate structure; |
• | risks related to expenses in foreign currencies and our exposure to foreign currency exchange rate fluctuations; |
• | risks related to our status as a foreign private issuer; |
• | risks related to our compliance with the Sarbanes-Oxley Act of 2002, as amended; |
• | risk related to possible “passive foreign investment company” status; |
• | risks related to fluctuations in interest rates; |
• | and risks related to our common shares. |
This list is not exhaustive of the factors that may affect any of the Company’s forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the section heading “Item 3. Key Information – D. Risk Factors” below. If one or more of these risks or uncertainties materializes, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Forward-looking statements in this document are not a prediction of future events or circumstances, and those future events or circumstances may not occur. Given these uncertainties, users of the information included herein, including investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Investors should consult our quarterly and annual filings with the Canadian and U.S. securities commissions for additional information on risks and uncertainties relating to forward-looking statements. We do not assume responsibility for the accuracy and completeness of these statements.
Forward-looking statements are based on our beliefs, opinions and expectations at the time they are made, and we do not assume any obligation to update our forward-looking statements if those beliefs, opinions, or expectations, or other circumstances, should change, except as required by applicable law.
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CURRENCY AND EXCHANGE RATES
Canadian Dollars Per U.S. Dollar
The following table sets out the exchange rates for one United States dollar (“US$”) expressed in terms of one Canadian dollar (“Cdn$”) in effect at the end of the following periods, and the average exchange rates (based on the average of the exchange rates on the last day of each month in such periods) and the range of high and low exchange rates for such periods.
Canadian Dollars Per One U.S. Dollar | |||||
2011 | 2010 | 2009 | 2008 | 2007 | |
Average for the period | 0.9893 | 1.0299 | 1.1420 | 1.0660 | 1.0748 |
For the Month of | ||||||
February 2012 | January 2012 | December 2011 | November 2011 | October 2011 | September 2011 | |
High for the period | 1.0158 | 1.0034 | 0.9948 | 0.9945 | 1.0109 | 1.0271 |
Low for the period | 0.9960 | 0.9713 | 0.9594 | 0.9504 | 0.9383 | 0.9540 |
Exchange rates are based on the Bank of Canada nominal noon exchange rates. The nominal noon exchange rate on March 22, 2012 as reported by the Bank of Canada for the conversion of United States dollars into Canadian dollars was US$1.00 = Cdn$1.00. Unless otherwise indicated, in this annual report on Form 20-F, all references herein are to Canadian Dollars.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. | Selected Financial Data |
Prior to January 1, 2011, we prepared our financial statements in accordance with Canadian generally accepted accounting principles as defined in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and to require publicly accountable enterprises to apply these standards effective for the years beginning on or after January 1, 2011. Accordingly, the 2011 financial statements are our first annual consolidated financial statements prepared in accordance with IFRS as issued by the IASB. The term “Canadian GAAP” as used in this 20F refers to Canadian GAAP before the adoption of IFRS.
The 2011 and 2010 consolidated financial statements have been prepared in compliance with IFRS. Subject to certain transition elections and exceptions disclosed in Note 3 to our consolidated financial statements for the year ended December 31, 2011, we have also consistently applied the accounting policies used in preparation of our opening IFRS statement of financial position at January 1, 2010. Note 3 to our consolidated financial statements for the year ended December 31, 2011, discloses the impact of our transition to IFRS on our reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in our consolidated financial statements for the year ended December 31, 2010 prepared under Canadian GAAP.
The selected financial data presented below for the two years ended December 31, 2011 is presented in Canadian dollars and is derived from our consolidated financial statements in Canadian dollars and in accordance with IFRS. The information set forth below should be read in conjunction with our consolidated financial statements (including notes thereto) included under Item 18 and "Operating and Financial Review and Prospects" included under Item 5. For exchange rate data please see the section heading
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“Currency and Exchange Rates” above.
2011 | 2010 | |||
$ | $ | |||
Revenues | — | — | ||
Net loss(1), (3), (4) | (29,044,701 | ) | (24,659,061 | ) |
Net comprehensive loss | (29,005,542 | ) | (24,815,721 | ) |
Basic and diluted loss per share(2) | (0.41 | ) | (0.39 | ) |
Total assets(2) | 36,024,617 | 44,432,442 | ||
Shareholders’ equity(2) | 29,520,379 | 36,394,960 | ||
Cash dividends declared per share(5) | Nil | Nil | ||
Weighted average number of common shares outstanding | 70,911,526 | 62,475,403 | ||
Notes:
1) | Included in net loss and net loss per share is stock based compensation expense of $1,805,503 (2010 - $3,251,041). |
2) | We issued 3,293,033 common shares for net cash proceeds of $14,824,658 in 2011 (2010 - 6,408,333 common shares for net cash proceeds of $27,288,132). |
3) | Included in net loss and net loss per share is change in fair value of warrant liability gain of $36,000 in 2011 (2010 - change in fair value of warrant liability loss of $4,841,949). |
4) | Included in net loss and net loss per share is a write down of asset available for sale of $735,681 (2010 - $nil). |
5) | We have not declared or paid any dividends since incorporation. |
B. | Capitalization and Indebtedness |
Not Applicable
C. | Reasons for the Offer and Use of Proceeds |
Not Applicable
D. | Risk Factors |
Investment in shares of our Common Shares involves a degree of risk. These risks should be carefully considered before any investment decision is made. The following are some of the key risk factors generally associated with our business. However, the risks described below are not the only ones that we face. Additional risks not currently known to us, or that we currently deem immaterial, may also impair our business operations.
All of our potential products, including REOLYSIN®, are in the research and development stage and will require further development and testing before they can be marketed commercially.
Prospects for companies in the biotechnology industry generally may be regarded as uncertain given the nature of the industry and, accordingly, investments in biotechnology companies should be regarded as speculative. We are currently in the research and development stage on one product, REOLYSIN®, for human application, the riskiest stage for a company in the biotechnology industry. It is not possible to predict, based upon studies in animals and early stage human clinical trials, whether REOLYSIN® will prove to be safe and effective in humans. REOLYSIN® will require additional research and development, including extensive additional clinical testing, before we will be able to obtain the approvals of the relevant regulatory authorities in applicable countries to market REOLYSIN® commercially. There can be no assurance that the research and development programs we conduct will result in REOLYSIN® or any other products becoming commercially viable products, and in the event that any product or products result from the research and development program, it is unlikely they will be commercially available for a number of years.
To achieve profitable operations we, alone or with others, must successfully develop, introduce and market our products. To obtain regulatory approvals for products being developed for human use, and to achieve commercial success, human clinical trials must demonstrate that the product is safe for human use and that the product shows efficacy. Unsatisfactory results obtained from a particular study relating to a program may cause us to abandon our commitment to that program or the product being tested. No assurances can be provided that any current or future animal or human test, if undertaken, will yield favourable results. If we are unable to establish that REOLYSIN® is a safe, effective treatment for cancer, we may be required to abandon further development
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of the product and develop a new business strategy.
There are inherent risks in pharmaceutical research and development.
Pharmaceutical research and development is highly speculative and involves a high and significant degree of risk. The marketability of any product we develop will be affected by numerous factors beyond our control, including but not limited to:
• | the discovery of unexpected toxicities or lack of sufficient efficacy of products which make them unattractive or unsuitable for human use; |
• | preliminary results as seen in animal and/or limited human testing may not be substantiated in larger, controlled clinical trials; |
• | manufacturing costs or other production factors may make manufacturing of products ineffective, impractical and non-competitive; |
• | proprietary rights of third parties or competing products or technologies may preclude commercialization; |
• | requisite regulatory approvals for the commercial distribution of products may not be obtained; and |
• | other factors may become apparent during the course of research, up-scaling or manufacturing which may result in the discontinuation of research and other critical projects. |
Our products under development have never been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in a quantity to render such products commercially viable. Production and utilization of our products may require the development of new manufacturing technologies and expertise. The impact on our business in the event that new manufacturing technologies and expertise are required to be developed is uncertain. There can be no assurance that we will successfully meet any of these technological challenges or others that may arise in the course of development.
Any failure or delay in clinical trials for our products, including REOLYSIN®, may cause us to incur additional costs or delay or prevent the commercialization of our products and could severely harm our business.
We must conduct extensive clinical trials to demonstrate the safety and efficacy of our products in humans. Clinical testing, in particular, is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process, which could delay or prevent us from receiving marketing approval or commercializing our product candidates, including the following:
• | Our clinical trials may produce negative or inconclusive results, and we may decide, or regulatory authorities may require us, to conduct additional clinical trials or we may abandon projects that we expect to be promising; |
• | The number of subjects required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower than we anticipate, or participants may drop out of our clinical trials at a higher rate than we anticipate; |
• | We might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks; |
• | Regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or our clinical protocols; |
• | Regulators may refuse to accept or consider data from clinical trials for various reasons, including noncompliance with regulatory requirements or our clinical protocols; |
• | The cost of our clinical trials may be greater than we anticipate; and |
• | The supply or quality of our products or other materials necessary to conduct our clinical trials may be insufficient or inadequate. |
Additionally, subject enrollment, which is a significant factor in the timing of clinical trials, is affected by a variety of factors, including the following:
• | The size and nature of the subject population; |
• | The proximity of subjects to clinical sites; |
• | The eligibility criteria for the trial; |
• | The design of the clinical trial; |
• | Competing clinical trials; and |
• | Clinicians’ and subjects’ perceptions as to the potential advantages of the medication being studied in relation to other available therapies, including any new medications that may be approved for the indications we are investigating. |
Furthermore, we plan to rely on clinical trial sites to ensure the proper and timely conduct of our clinical trials, and while we have
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agreements governing their committed activities, we have limited influence over their actual performance. Any delays or unanticipated problems during clinical testing, such as enrollment in our clinical trials being slower than we anticipate or participants dropping out of our clinical trials at a higher rate than we anticipate, could increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues.
Pharmaceutical products are subject to intense regulatory approval processes.
The regulatory process for pharmaceuticals, which includes preclinical studies and clinical trials of each compound to establish its safety and efficacy, takes many years and requires the expenditure of substantial resources. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Failure to comply with applicable regulatory requirements can, among other things, result in suspension of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Further, government policy may change, and additional government regulations may be established that could prevent or delay regulatory approvals for our products. In addition, a marketed drug and its manufacturer are subject to continual review. Later discovery of previously unknown problems with the product or manufacturer may result in restrictions on such product or manufacturer, including withdrawal of the product from the market.
The United States Food and Drug Administration (“FDA”) and similar regulatory authorities in other countries may deny approval of a new drug application if required regulatory criteria are not satisfied, or may require additional testing. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. The FDA and similar regulatory authorities in other countries may require further testing and surveillance programs to monitor the pharmaceutical product that has been commercialized. Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions, including product withdrawals, product seizures, injunction actions and criminal prosecutions.
In addition to our own pharmaceuticals, we may supply active pharmaceutical ingredients and advanced pharmaceutical intermediates for use in our customers’ drug products. The final drug products in which the pharmaceutical ingredients and advanced pharmaceutical intermediates are used, however, are subject to regulation for safety and efficacy by the FDA and possibly other regulatory authorities in other jurisdictions. Such products must be approved by such agencies before they can be commercially marketed. The process of obtaining regulatory clearance for marketing is uncertain, costly and time consuming. We cannot predict how long the necessary regulatory approvals will take or whether our customers will ever obtain such approval for their products. To the extent that our customers do not obtain the necessary regulatory approvals for marketing new products, our product sales could be adversely affected.
The FDA and other governmental regulators have increased requirements for drug purity and have increased environmental burdens upon the pharmaceutical industry. Because pharmaceutical drug manufacturing is a highly regulated industry, requiring significant documentation and validation of manufacturing processes and quality control assurance prior to approval of the facility to manufacture a specific drug, there can be considerable transition time between the initiation of a contract to manufacture a product and the actual initiation of manufacture of that product. Any lag time in the initiation of a contract to manufacture product and the actual initiation of manufacture could cause us to lose profits or incur liabilities.
The pharmaceutical regulatory regime in Europe and other countries is generally similar to that of the United States. We could face similar risks in these other jurisdictions as the risks described above.
Our operations and products may be subject to other government manufacturing and testing regulations.
Securing regulatory approval for the marketing of therapeutics by the FDA in the United States and similar regulatory agencies in other countries is a long and expensive process, which can delay or prevent product development and marketing. Approval to market products may be for limited applications or may not be received at all.
The products we anticipate manufacturing will have to comply with the FDA’s current Good Manufacturing Practices (“cGMP”) and other FDA and local government guidelines and regulations, including other international regulatory requirements and guidelines. Additionally, certain of our customers may require the manufacturing facilities contracted by us to adhere to additional manufacturing standards, even if not required by the FDA. Compliance with cGMP regulations requires manufacturers to expend time, money and effort in production and to maintain precise records and quality control to ensure that the product meets applicable specifications and other requirements. The FDA and other regulatory bodies periodically inspect drug-manufacturing facilities to ensure compliance with applicable cGMP requirements. If the manufacturing facilities contracted by us fail to comply with the cGMP requirements, the facilities may become subject to possible FDA or other regulatory action and manufacturing at the facility could consequently be suspended. We may not be able to contract suitable alternative or back-up manufacturing facilities on terms acceptable to us or at all.
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The FDA or other regulatory agencies may also require the submission of any lot of a particular product for inspection. If the lot product fails to meet the FDA requirements, then the FDA could take any of the following actions: (i) restrict the release of the product; (ii) suspend manufacturing of the specific lot of the product; (iii) order a recall of the lot of the product; or (iv) order a seizure of the lot of the product.
We are subject to regulation by governments in many jurisdictions. If we do not comply with healthcare, drug, manufacturing and environmental regulations, among others, in such jurisdiction, our existing and future operations may be curtailed, and we could be subject to liability.
In addition to the regulatory approval process, we may be subject to regulations under local, provincial, state, federal and foreign law, including, but not limited to, requirements regarding occupational health, safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulations.
The biotechnology industry is extremely competitive and we must successfully compete with larger companies with substantially greater resources.
Technological competition in the pharmaceutical industry is intense and we expect competition to increase. Other companies are conducting research on therapeutics involving the Ras pathway as well as other novel treatments or therapeutics for the treatment of cancer which may compete with our product. Many of these competitors are more established, benefit from greater name recognition and have substantially greater financial, technical and marketing resources than us. In addition, many of these competitors have significantly greater experience in undertaking research, preclinical studies and human clinical trials of new pharmaceutical products, obtaining regulatory approvals and manufacturing and marketing such products. In addition, there are several other companies and products with which we may compete from time to time, and which may have significantly better and larger resources than we do. Accordingly, our competitors may succeed in manufacturing and/or commercializing products more rapidly or effectively, which could have a material adverse effect on our business, financial condition or results of operations.
We anticipate that we will face increased competition in the future as new products enter the market and advanced technologies become available. There can be no assurance that existing products or new products developed by our competitors will not be more effective, or be more effectively manufactured, marketed and sold, than any that may be developed or sold by us. Competitive products may render our products obsolete and uncompetitive prior to recovering research, development or commercialization expenses incurred with respect to any such products.
We rely on patents and proprietary rights to protect our technology.
Our success will depend, in part, on our ability to obtain patents, maintain trade secret protection and operate without infringing the rights of third parties. We have received Granted Patents in countries throughout the world, including the United States, Canada, Europe, and Japan. We file our Applications for Patent in the United States and under the PCT, allowing us to subsequently file in other jurisdictions. See “Narrative Description—Patent and Patent Application Summary”. Our success will depend, in part, on our ability to obtain, enforce and maintain patent protection for our technology in Canada, the United States and other countries. We cannot be assured that patents will issue from any pending applications or that claims now or in the future, if any, allowed under issued patents will be sufficiently broad to protect our technology. In addition, no assurance can be given that any patents issued to, or licensed by us, will not be challenged, invalidated, infringed or circumvented, or that the rights granted there under will provide continuing competitive advantages to us.
The patent positions of pharmaceutical and biotechnology firms, including us, are generally uncertain and involve complex legal and factual questions. In addition, it is not known whether any of our current research endeavours will result in the issuance of patents in Canada, the United States, or elsewhere, or if any patents already issued will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States and Canada may be maintained in secrecy until at least 18 months after filing of the original priority application, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we or any licensor were the first to create inventions claimed by pending patent applications or that we or the licensor were the first to file patent applications for such inventions. Loss of patent protection could lead to generic competition for these products, and others in the future, which would materially and adversely affect our financial prospects for these products.
Similarly, since patent applications filed before November 29, 2000 in the United States may be maintained in secrecy until the patents issue or foreign counterparts, if any, publish, we cannot be certain that we or any licensor were the first creator of inventions covered by pending patent applications or that we or such licensor were the first to file patent applications for such inventions. There is no assurance that our patents, if issued, would be held valid or enforceable by a court or that a competitor’s technology
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or product would be found to infringe such patents.
Accordingly, we may not be able to obtain and enforce effective patents to protect our proprietary rights from use by competitors. If other such parties obtain patents for certain information relied on by us in conducting our business, then we may be required to stop using, or pay to use, certain intellectual property, and as such, our competitive position and profitability could suffer as a result.
In addition, we may be required to obtain licenses under patents or other proprietary rights of third parties. No assurance can be given that any licenses required under such patents or proprietary rights will be available on terms acceptable to us. If we do not obtain such licenses, we could encounter delays in introducing one or more of our products to the market while we attempt to design around such patents, or we could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. In addition, we could incur substantial costs in defending ourselves in suits brought against us on such patents or in suits in which our attempts to enforce our own patents against other parties.
Our products may fail or cause harm, subjecting us to product liability claims.
Use of our product during current clinical trials may entail risk of product liability. We maintain clinical trial liability insurance; however, it is possible this coverage may not provide full protection against all risks. Given the scope and complexity of the clinical development process, the uncertainty of product liability litigation, and the shrinking capacity of insurance underwriters, it is not possible at this time to assess the adequacy of current clinical trial coverage, nor the ability to secure continuing coverage at the same level and at reasonable cost in the foreseeable future. While we carry, and intend to continue carrying amounts believed to be appropriate under the circumstances, it is not possible at this time to determine the adequacy of such coverage.
In addition, the sale and commercial use of our product entails risk of product liability. We currently do not carry any product liability insurance for this purpose. There can be no assurance that we will be able to obtain appropriate levels of product liability insurance prior to any sale of our pharmaceutical products. An inability to obtain insurance on economically feasible terms or to otherwise protect against potential product liability claims could inhibit or prevent the commercialization of products developed by us. The obligation to pay any product liability claim or a recall of a product could have a material adverse effect on our business, financial condition and future prospects.
We have limited manufacturing experience and intend to rely on third parties to commercially manufacture our products, if and when developed.
To date, we have relied upon a contract manufacturer to manufacture small quantities of REOLYSIN®. The manufacturer may encounter difficulties in scaling up production, including production yields, quality control and quality assurance. Only a limited number of manufacturers can supply therapeutic viruses and failure by the manufacturer to deliver the required quantities of REOLYSIN® on a timely basis at a commercially reasonable price may have a material adverse effect on us. We have completed a program for the development of a commercial process for manufacturing REOLYSIN® and have filed a number of patent applications related to the process. There can be no assurance that we will successfully obtain sufficient patent protection related to our manufacturing process.
New products may not be accepted by the medical community or consumers.
Our primary activity to date has been research and development and we have no experience in marketing or commercializing products. We will likely rely on third parties to market our products, assuming that they receive regulatory approvals. If we rely on third parties to market our products, the commercial success of such product will be subject to a number of risks that may be outside of our control, including:
• | competition in relation to alternative treatments, including efficacy advantages and cost advantages; |
• | perceived ease of use; |
• | the availability of coverage or reimbursement by third-party payors; |
• | uncertainties regarding marketing and distribution support; |
• | distribution or use restrictions imposed by regulatory authorities. |
Moreover, there can be no assurance that physicians, patients or the medical community will accept our product, even if it proves to be safe and effective and is approved for marketing by Health Canada, the FDA and other regulatory authorities. A failure to successfully market our product would have a material adverse effect on our revenue.
Our technologies may become obsolete.
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The pharmaceutical industry is characterized by rapidly changing markets, technology, emerging industry standards and frequent introduction of new products. The introduction of new products embodying new technologies, including new manufacturing processes and the emergence of new industry standards may render our products obsolete, less competitive or less marketable. The process of developing our products is extremely complex and requires significant continuing development efforts and third party commitments. Our failure to develop new technologies and products and the obsolescence of existing technologies could adversely affect our business.
We may be unable to anticipate changes in our potential customer requirements that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our existing technologies, develop new technology that addresses the increasing sophistication and varied needs of the market, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary technology entails significant technical and business risks. We may not be successful in using our new technologies or exploiting our niche markets effectively or adapting our businesses to evolving customer or medical requirements or preferences or emerging industry standards.
We are highly dependent on third-party relationships for research and clinical trials.
We rely upon third party relationships for assistance in the conduct of research efforts, pre-clinical development and clinical trials, and manufacturing. In addition, we expect to rely on third parties to seek regulatory approvals for and to market our product. Although we believe that our collaborative partners will have an economic motivation to commercialize our product included in any collaborative agreement, the amount and timing of resources diverted to these activities generally is expected to be controlled by the third party. Furthermore, if we cannot maintain these relationships, our business may suffer.
We have no operating revenues and a history of losses.
To date, we have not generated sufficient revenues to offset our research and development costs and accordingly have not generated positive cash flow or made an operating profit. As of December 31, 2011, we had an accumulated deficit of $171.4 million and we incurred net losses of $29.0 million and $24.7 million, for the years ended December 31, 2011 and 2010, respectively. We anticipate that we will continue to incur significant losses during 2012 and in the foreseeable future. We do not expect to reach profitability at least until after successful and profitable commercialization of one or more of our products. Even if one or more of our products are profitably commercialized, the initial losses incurred by us may never be recovered.
We may not be able to obtain third-party reimbursement for the cost of our product.
Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Uncertainty exists regarding the reimbursement status of newly-approved pharmaceutical products and reimbursement may not be available for REOLYSIN®. Any reimbursements granted may not be maintained or limits on reimbursements available from third-party payors may reduce the demand for, or negatively affect the price of, these products. If REOLYSIN® does not qualify for reimbursement, if reimbursement levels diminish, or if reimbursement is denied, our sales and profitability would be adversely affected.
Third-Party Risk
In the normal course of our business, we have entered into contractual arrangements with third parties which subject us to the risk that such parties may default on their obligations. Oncolytics may be exposed to third party credit risk through our contractual arrangements with our current contract manufacturer, the institutions which operate our clinical trials, or our contract research organizations and other parties. In the event such entities fail to meet their contractual obligations to Oncolytics, such failures could have a material adverse effect on Oncolytics and our operations.
We may need additional financing in the future to fund the research and development of our products and to meet our ongoing capital requirements.
As of December 31, 2011, we had cash and cash equivalents (including short-term investments) of $34.9 million and working capital of approximately $29.1 million. We anticipate that we will need additional financing in the future to fund research and development and to meet our ongoing capital requirements. The amount of future capital requirements will depend on many factors, including continued scientific progress in our drug discovery and development programs, progress in our pre-clinical and clinical evaluation of drug candidates, time and expense associated with filing, prosecuting and enforcing our patent claims and
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costs associated with obtaining regulatory approvals. In order to meet such capital requirements, we will consider contract fees, collaborative research and development arrangements, and additional public or private financings (including the incurrence of debt and the issuance of additional equity securities) to fund all or a part of particular programs as well as potential partnering or licensing opportunities.
As a result of the weakened global economic situation, Oncolytics, along with all other pharmaceutical research and development entities, may have restricted access to capital, bank debt and equity, and is likely to face increased borrowing costs. Although our business and asset base have not changed, the lending capacity of all financial institutions has diminished and risk premiums have increased. As future operations will be financed out of funds generated from financing activities, our ability to do so is dependent on, among other factors, the overall state of capital markets and investor appetite for investments in the pharmaceutical industry and our securities in particular.
Should we elect to satisfy our cash commitments through the issuance of securities, by way of either private placement or public offering or otherwise, there can be no assurance that our efforts to raise such funding will be successful, or achieved on terms favourable to us or our existing shareholders. If adequate funds are not available on terms favorable to us, we may have to reduce substantially or eliminate expenditures for research and development, testing, production and marketing of our proposed product, or obtain funds through arrangements with corporate partners that require us to relinquish rights to certain of our technologies or product. There can be no assurance that we will be able to raise additional capital if our current capital resources are exhausted.
The cost of director and officer liability insurance may increase substantially and may affect our ability to retain quality directors and officers.
We carry liability insurance on behalf of our directors and officers. Given a number of large director and officer liability insurance claims in the U.S. equity markets, director and officer liability insurance has become increasingly more expensive with increased restrictions. Consequently, there is no assurance that we will continue to be offered this insurance or be able to obtain adequate coverage. The inability to acquire the appropriate insurance coverage may limit our ability to attract and maintain directors and officers as required to conduct our business.
We are dependent on our key employees and collaborators.
Our ability to develop the product will depend, to a great extent, on our ability to attract and retain highly qualified scientific personnel and to develop and maintain relationships with leading research institutions. Competition for such personnel and relationships is intense. We are highly dependent on the principal members of our management staff as well as our advisors and collaborators, the loss of whose services might impede the achievement of development objectives. The persons working with us are affected by a number of influences outside of our control. The loss of key employees and/or key collaborators may affect the speed and success of product development.
Barbados law differs from the laws in effect in Canada and the United States and may afford less protection to holders of our securities.
Certain of our assets and intellectual property are held by our wholly-owned subsidiary, Oncolytics Barbados, which is organized under the laws of Barbados. It may not be possible to enforce court judgments obtained in Canada or the United States against Oncolytics Barbados in Barbados based on the civil liabilities provisions of applicable securities laws. In addition, there is some doubt as to whether the courts of Barbados would recognize or enforce judgments of courts in Canada or the United States obtained against us or our directors or officers based on the civil liabilities provisions of Canadian and United States securities laws or hear actions against us or those persons based on such laws.
Changes in law could adversely affect our business and corporate structure.
There can be no assurances that changes will not occur in corporate, tax, property and other laws in Canada and/or Barbados (or the interpretation thereof by regulatory or tax authorities) which may materially and adversely affect our businesses and corporate structure.
We incur some of our expenses in foreign currencies and therefore we are exposed to foreign currency exchange rate fluctuations.
We incur some of our manufacturing, clinical, collaborative and consulting expenses in foreign currencies, primarily the U.S. dollar, the Euro and the British pound (“GBP”). We are therefore exposed to foreign currency rate fluctuations. Also, as we expand to other foreign jurisdictions there may be an increase in our foreign exchange exposure.
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We earn interest income on our excess cash reserves and are exposed to changes in interest rates.
We invest our excess cash reserves in investment vehicles that provide a rate of return with little risk to principal. As interest rates change the amount of interest income we earn will be directly impacted.
The Company may fail to achieve and maintain adequate internal control over financial reporting pursuant to the requirements of the Sarbanes-Oxley Act and equivalent Canadian legislation.
The Company documented and tested during its most recent fiscal year its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act (“SOX”) and equivalent Canadian legislation. SOX requires an annual assessment by management of the effectiveness of the Company’s internal controls over financial reporting and an attestation report by the Company’s independent auditors addressing this assessment. The Company may fail to achieve and maintain the adequacy of its internal controls over financial reporting as such standards are modified, supplemented, or amended from time to time, and the Company may not be able to ensure that it can conclude, on an ongoing basis, that it has effective internal controls over financial reporting in accordance with Section 404 of SOX. The Company’s failure to satisfy the requirements of Section 404 of SOX on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its financial statements, which in turn could harm the Company’s business and negatively impact the trading price of the common shares or the market value of its other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause it to fail to meet its reporting obligations. Future acquisitions of companies, if any, may provide the Company with challenges in implementing the required processes, procedures and controls in its acquired operations. No evaluation can provide complete assurance that the Company’s internal controls over financial reporting will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be reported. The effectiveness of the Company’s processes, procedures and controls could also be limited by simple errors or faulty judgments. In addition, if the Company expands, the challenges involved in implementing appropriate internal controls over financial reporting will increase and will require that the Company continue to improve its internal controls over financial reporting.
Because the Company is a Canadian Company and the majority of its directors and officers are resident in Canada, it may be difficult for investors in the United States to enforce civil liabilities against the Company based solely upon the federal securities laws of the United States.
The Company is a Canadian company, with its principal place of business in Canada. A majority of the Company’s directors and officers are residents of Canada and a significant portion of the Company’s assets and the assets of a majority of the Company’s directors and officers are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon the Company or its directors or officers or such experts who are not residents of the United States, or to realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the U.S. Securities Act of 1933, as amended. Investors should not assume that Canadian courts (1) would enforce judgments of U.S. courts obtained in actions against the Company 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 United States or (2) would enforce, in original actions, liabilities against the Company or such directors, officers or experts predicated upon the U.S. federal securities laws or any such state securities or “blue sky” laws. In addition, the protections afforded by Canadian securities laws may not be available to investors in the United States.
As a foreign private issuer, our shareholders may have less complete and timely data.
The Company is a “foreign private issuer” as defined in Rule 3b-4 under the United States Securities Exchange Act of 1934, as amended (the “U.S. Exchange Act”). Equity securities of the Company are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the U.S. Exchange Act pursuant to Rule 3a12-3 of the U.S. Exchange Act. Therefore, the Company is not required to file a Schedule 14A proxy statement in relation to its annual meeting of shareholders. The submission of proxy and annual meeting of shareholder information on Form 6-K may result in shareholders having less complete and timely information in connection with shareholder actions. The exemption from Section 16 rules regarding reports of beneficial ownership and purchases and sales of common shares by insiders and restrictions on insider trading in our securities may result in shareholders having less data and there being fewer restrictions on insiders’ activities in our securities.
The Company is likely a "passive foreign investment company" which will likely have adverse U.S. federal income tax consequences for U.S. shareholders
U.S. shareholders of the Common Shares should be aware that the Company believes it was classified as a passive foreign investment
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company (“PFIC”) during the tax year ended December 31, 2011, and based on current business plans and financial expectations, the Company anticipates that it may qualify as a PFIC for subsequent taxable years. If the Company is a PFIC for any year during a U.S. shareholder’s holding period, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of Common Shares, or any so-called “excess distribution” received on its common shares, as ordinary income, and to pay an interest charge on a portion of such gain or distributions, unless the shareholder makes a timely and effective "qualified electing fund" election (“QEF Election”) or a "mark-to-market" election with respect to the Common Shares. A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the Company's net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. For each taxable year that the Company qualifies as a PFIC, the Company will make available to each U.S. Holder that has made a QEF Election, upon written request, a "PFIC Annual Information Statement" as described in Treasury Regulation Section 1.1295-1(g) (or any successor Treasury Regulation) and use commercially reasonable efforts to provide all additional information that such U.S. Holder is required to obtain in connection with maintaining such QEF Election with regard to the Company. A U.S. shareholder who makes the mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the common shares over the taxpayer’s basis therein. This paragraph is qualified in its entirety by the discussion below under the heading “Certain United States Federal Income Tax Considerations.” Each U.S. shareholder should consult its own tax advisor regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.
Our share price may be highly volatile.
Market prices for securities of biotechnology companies generally are volatile. This increases the risk of securities litigation. Factors such as announcements (publicly made or at scientific conferences) of technological innovations, new commercial products, patents, the development of proprietary rights, results of clinical trials, regulatory actions, publications, quarterly financial results, our financial position, public concern over the safety of biotechnology, future sales of shares by us or our current shareholders and other factors could have a significant effect on the market price and volatility of the common shares.
Potential dilution of present and prospective shareholdings.
In order to finance future operations and development efforts, the Company may raise funds through the issue of common shares or the issue of securities convertible into common shares. The Company cannot predict the size of future issues of common shares or the issue of securities convertible into common shares or the effect, if any, that future issues and sales of the Company’s common shares will have on the market price of its common shares. Any transaction involving the issue of previously authorized but unissued shares, or securities convertible into shares, would result in dilution, possibly substantial, to present and prospective holders of shares.
The Company does not intend to pay cash dividends in the foreseeable future.
The Company has not declared or paid any dividends since its incorporation. The Company intends to retain earnings, if any, to finance the growth and development of its business and does not intend to pay cash dividends on the common shares in the foreseeable future. Any return on an investment in the common shares will come from the appreciation, if any, in the value of the common shares. The payment of future cash dividends, if any, will be reviewed periodically by the board of directors and will depend upon, among other things, conditions then existing including earnings, financial condition and capital requirements, restrictions in financing agreements, business opportunities and conditions and other factors.
ITEM 4. INFORMATION ON THE COMPANY
A. | History and Development of the Company |
Oncolytics Biotech Inc. was formed under the Business Corporations Act (Alberta) on April 2, 1998 as 779738 Alberta Ltd. On April 8, 1998, we changed our name to Oncolytics Biotech Inc.
Our principal executive office is located at 210, 1167 Kensington Cres. NW, Calgary, Alberta, Canada, T2N 1X7, telephone (403) 670-7377. Our agent for service in the U.S. is CT Corporation, 111 Eighth Avenue, 13th Floor, New York, New York 10011.
A description of our principal capital expenditures and divestitures and a description of acquisitions of material assets can be found in our MD&A and in the notes to our financial statements included elsewhere in this annual report.
B. | Business Overview |
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Since our inception in April of 1998, Oncolytics Biotech Inc. has been a development stage company and we have focused our research and development efforts on the development of REOLYSIN®, our potential cancer therapeutic. We have not been profitable since our inception and expect to continue to incur substantial losses as we continue research and development efforts. We do not expect to generate significant revenues until, if and when, our cancer product becomes commercially viable.
Our Business
Our potential product for human use, REOLYSIN®, is developed from the reovirus. This virus has been demonstrated to replicate specifically in tumour cells bearing an activated Ras pathway. Activating mutations of Ras occur in approximately 30% of all human tumours directly, but considering its central role in signal transduction, activation of the Ras pathway has been shown to play a role in approximately two-thirds of all tumours.
The functionality of the product is based upon the finding that tumours bearing an activated Ras pathway are deficient in their ability to activate the anti-viral response mediated by the host cellular protein, PKR. Since PKR is responsible for preventing reovirus replication, tumour cells lacking the activity of PKR are susceptible to reovirus infections. As normal cells do not possess Ras activations, these cells are able to thwart reovirus infections by the activity of PKR. In a tumour cell with an activated Ras pathway, reovirus is able to freely replicate and hence kill the host tumour cell. The result of this replication is progeny viruses that are then free to infect surrounding cancer cells. This cycle of infection, replication and cell death is believed to be repeated until there are no longer any tumour cells carrying an activated Ras pathway available.
The following schematic illustrates the molecular basis of how the reovirus kills cancer cells.
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Scientific Background
The Ras protein is a key regulator of cell growth and differentiation. It transmits signals from the cell's surface, via growth factor receptors, to downstream elements, which are in turn relayed to the nucleus. This transmission of signals from the cell surface to the cell's nucleus is collectively referred to as "signal transduction." The transmission of these signals results in cell growth, division, and in some instances cellular differentiation. In normal cells, cell growth occurs only in the presence of factors stimulating the cells to grow. Mutations in Ras itself, or any of the elements along the Ras pathway, often lead to activation of the pathway in the absence of the appropriate growth stimuli, leading to the uncontrolled growth of these cells and ultimately to the development of a cancerous state. In fact, approximately 30% of all cancers are known to be due to mutations in Ras itself. The frequency of these Ras mutations, as well as their etiology in a given tumour is, however, tissue specific. Activating mutations in Ras are found in many types of human malignancies but are highly represented in pancreatic (90%), sporadic colorectal (50%), lung carcinomas (40%), and myeloid leukemia (30%). Because Ras is a regulator of key mitogenic signals, aberrant function of upstream elements such as receptor tyrosine kinases (RTKs) can also result in Ras activation in the absence of mutations in Ras itself. Indeed, over-expression of these RTKs such as HER2/neu/ErbB2 or the epidermal growth factor receptor is common in breast cancer (25-30%), and over-expression of the platelet-derived growth factor receptor (“PDGFR”) is common in glioblastomas and gliomas, all of which are tumour types in which Ras mutations are relatively rare. Although activating mutations of Ras itself are thought to occur in only about 30% of all tumours, it is expected that approximately two-thirds of all tumours have activated Ras signaling pathways as a result of mutations in genes that lie upstream of Ras. With this in mind, Ras becomes a significant therapeutic target in oncology.
All available scientific evidence developed or reviewed by us to date supports the premise that the reovirus only actively infects and replicates in cells with an activated Ras pathway. This naturally occurring virus is believed to cause only mild infections of the respiratory and gastrointestinal tract and in general, reovirus infections in humans are asymptomatic and usually sub-clinical. Research has indicated this virus replicates in, and therefore kills, only cancer cells (i.e. cancer cells with an activated Ras pathway), but does not replicate in normal cells. It has been demonstrated that reovirus replication is restricted in "normal" cells due to the activation of the double stranded RNA-activated protein kinase (“PKR”). PKR is a crucial element in protecting cells from reovirus infection and is capable of blocking viral protein translation. Activated Ras (or an activated element of the Ras pathway) prevents PKR activation, and thus allows viral replication to ensue only in this subset of cancer cells. To prove that reovirus could be used as a potential cancer therapeutic, a number of animal models were developed. Experiments using this virus to treat mouse tumours, expanded animal models as well as human brain, breast, and prostate tumours implanted in immuno-compromised mice have yielded promising results. In animals where tumour regression was noted, a single injection of reovirus is often enough to cause complete tumour regression. More importantly, it was demonstrated that this treatment is effective in causing tumour regression in immune competent animals. We believe that the nature of this virus, combined with its selective replication makes it an attractive candidate as a cancer therapy.
We also believe that this research may have broad utility in the treatment of tumours with an activated Ras pathway as well as a potential use as an adjuvant therapy following surgical tumour resection or as an adjuvant therapy to conventional chemotherapeutic or radiation therapies.
The Potential Cancer Product
Cancer is a group of related diseases characterized by the aberrant or uncontrolled growth of cells and the spread of these cells to other sites in the body. These cancer cells eventually accumulate and form tumours that can disrupt and impinge on normal tissue and organ function. In many instances, cells from these tumours can break away from the original tumour and travel through the body to form new tumours through a process referred to as metastasis.
Our cancer product is a potential therapeutic for tumours possessing an activated Ras pathway. In tumour cells with this type of activation, the virus is cytotoxic but may have no effect on the surrounding normal tissue. Activating mutations of Ras are believed to account for approximately 30% of all human tumours directly. It is also possible to activate Ras through mutation of proteins that control its activity rather than through direct mutations of Ras itself. This suggests that approximately two thirds of tumours may respond to this treatment.
Clinical Trial Program
We are directing a broad clinical trial program with the objective of developing REOLYSIN® as a human cancer therapeutic. The clinical program includes clinical trials which we sponsor directly along with Third Party Clinical Trials. Third Party Clinical Trials are clinical trials that are being sponsored by other institutions. As of the end of 2011, the U.S. National Cancer Institute (“NCI”), the University of Leeds and the Cancer Therapy & Research Center at the University of Texas Health Center in San Antonio (“CTRC”) were sponsoring part of our clinical trial program. Our clinical trial program has included human trials using
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REOLYSIN® alone, and in combination with radiation and chemotherapy, and delivered via local administration and/or intravenous administration.
Clinical Trial Chart
The following chart shows our clinical trials along with the status for each as at December 31, 2011:
Trial number | Delivery Method | Trial Program and Cancer Indication | Location | Status |
Pending (NCI Trial) | Intravenous Administration of REOLYSIN | Phase I Relapsed Multiple Myeloma | United States | US Announced |
OSU-10045 (NCI Trial) | REOLYSIN® in Combination with Paclitaxel and Carboplatin | Phase II Metastatic Pancreatic Cancer | United States | US Ongoing |
COG-ADVL1014 (NCI / COG Trial) | Intravenous Administration of REOLYSIN® in Combination with Cyclophosphamide | Phase I Pediatric Patients with Relapsed or Refractory Solid Tumors | United States | US Ongoing |
GOG-0186H (NCI / GOG Trial) | Intravenous Administration of REOLYSIN in Combination with Paclitaxel for Patients with Persistent or Recurrent Ovarian Cancer | Phase II ovarian cancer | United States | US Ongoing |
REO 022 | Intravenous administration in combination with FOLFIRI | Phase I colorectal cancer | United States | Ongoing |
REO 021 | Intravenous administration in combination with paclitaxel and carboplatin (sponsored by the CTRC) | Phase II squamous cell carcinoma lung cancer | United States | Ongoing |
REO 020 | Intravenous administration in combination with paclitaxel and carboplatin (sponsored by the CTRC) | Phase II metastatic melanoma | United States | Ongoing |
REO 018 | Intravenous administration in combination with paclitaxel and carboplatin | Phase III squamous cell carcinoma of the head and neck | 12 countries including the United States, U.K., and Canada. | Ongoing |
REO 017 | Intravenous administration in combination with gemcitabine (sponsored by the CTRC) | Phase II advanced pancreatic cancer | United States | Ongoing |
REO 016 | Intravenous administration in combination with paclitaxel and carboplatin | Phase II non-small cell lung with K-RAS or EGFR-activated tumours | United States | Ongoing |
REO 015 | Intravenous administration in combination with paclitaxel and carboplatin | Phase II head and neck | United States | Ongoing |
REO 014 | Intravenous administration monotherapy | Phase II sarcoma | United States | Complete |
REO 013 | Intravenous administration monotherapy (sponsored by University of Leeds) | Translational metastatic colorectal | United Kingdom | Ongoing |
NCI Trial | Intravenous administration monotherapy (NCI) | Phase II melanoma | United States | Ongoing |
NCI Trial | Intravenous and intraperitoneal administration monotherapy (NCI) | Phase I/II ovarian | United States | Ongoing |
REO 012 | Intravenous administration in combination with cyclophosphamide | Phase I/II pancreatic, lung, ovarian | United Kingdom | Ongoing |
REO 011 | Intravenous administration in combination with paclitaxel and carboplatin | Phase I/II melanoma, lung, ovarian | United Kingdom | Complete |
REO 010 | Intravenous administration in combination with docetaxel | Phase I/II bladder, prostate, lung, upper gastro-intestinal | United Kingdom | Complete |
REO 009 | Intravenous administration in combination with gemcitabine | Phase I/II pancreatic, lung, ovarian | United Kingdom | Complete |
REO 008 | Local therapy in combination with radiation | Phase II various metastatic tumours, including head & neck | United Kingdom | Complete |
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Trial number | Delivery Method | Trial Program and Cancer Indication | Location | Status |
REO 007 | Infusion monotherapy | Phase I/II recurrent malignant gliomas | United States | Complete |
REO 006 | Local therapy in combination with radiation | Phase I various metastatic tumours | United Kingdom | Complete |
REO 005 | Intravenous administration monotherapy | Phase I various metastatic tumours | United Kingdom | Complete |
REO 004 | Intravenous administration monotherapy | Phase I various metastatic tumours | United States | Complete |
REO 003 | Local monotherapy | Phase I recurrent malignant gliomas | Canada | Complete |
REO 002 | Local monotherapy | T2 prostate cancer | Canada | Complete |
REO 001 | Local monotherapy | Phase I trial for various subcutaneous tumours | Canada | Complete |
Patents and Trade Secrets
The patent positions and proprietary rights of pharmaceutical and biotechnology firms, including us, are generally uncertain and involve complex legal and factual questions. We believe there will continue to be significant litigation in the industry regarding patent and other intellectual property rights.
Currently, we have over 319 issued patents including 45 issued U.S. patents. We also have numerous patent applications filed in the U.S., Canada, and other jurisdictions, but we cannot be certain whether any given patent application filed by us will result in the issuance of a patent or if any given patent issued to us will later be challenged and invalidated. Nor can we be certain whether any given patent that may be issued to us will provide any significant proprietary protection to our product and business.
Litigation or other proceedings may also be necessary to enforce or defend our proprietary rights and patents. To determine who was first to make an invention claimed in a United States patent application or patent and thus be entitled to a patent, the United States Patent and Trademark Office, or USPTO, can declare an interference proceeding. In Europe, patents can be revoked through opposition or nullity proceedings. In the United States patents may be revoked or invalidated in court actions or in re-examination proceedings in the USPTO. Such litigation or proceedings could result in substantial cost or distraction to us, or result in an adverse decision as to our or our licensors’ patent applications and patents.
Our commercial success depends, in part, on not infringing the patents or proprietary rights of others and not breaching licenses granted that may be granted to us. Competitors may have filed patent applications and obtained patents and may in the future file patent applications and obtain patents relevant to our product and technologies. We are not aware of competing intellectual property relating to our REOLYSIN® project. While we currently believe that we have the necessary freedom to operate in these areas, there can be no assurance that others will not challenge our position in the future. Litigation to defend our position could be costly and time consuming. We also cannot be certain that we will be successful. We may be required to obtain a license from a prevailing party in order to continue the portion of our business that relates to the proceeding. We may also be required to obtain licenses to other third-party technologies necessary in order to market our products. Such licenses may not be available to us on acceptable terms or on any terms and we may have to discontinue that portion of our business. Any failure to license any technologies required to commercialize our technologies or products at reasonable cost may have a material adverse effect on our business, results of operations, financial condition, cash flow and future prospects. We are not currently involved in any litigation concerning our competitors’ patent applications and patents. We may be involved in such litigation in the future.
We also rely on unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our rights to our unpatented trade secrets.
We require our employees and consultants to execute confidentiality agreements upon the commencement of employment and consulting relationships with us. These agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship generally must be kept confidential. In the case of employees, the agreements provide that all inventions conceived by the individual, while employed by us, relating to our business are our exclusive property. While we have implemented reasonable business measurements to protect confidential information,
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these agreements may not provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.
Business Strategy
Our business strategy is to develop and market REOLYSIN® in an effective and timely manner, and access additional technologies at a time and in a manner that we believe is best for our development. We intend to achieve our business strategy by focusing on these key areas:
• | Develop REOLYSIN® by continuing to progress the product through our clinical trial program assessing the safety and efficacy in human subjects; |
• | Establish collaborations with experts to assist us with scientific and clinical developments of this new potential pharmaceutical product; |
• | Implement strategic alliances with selected pharmaceutical and biotechnology companies and selected laboratories, at a time and in a manner where such alliances may complement and expand our research and development efforts on the product and provide sales and marketing capabilities; |
• | Utilize our broadening patent base and collaborator network as a mechanism to meet our strategic objectives; and |
• | Develop relationships with companies that could be instrumental in assisting us to access other innovative therapeutics. |
Our business strategy is based on attaining a number of commercial objectives, which, in turn, are supported by a number of product development goals. Our new product development presently being conducted is primarily of a research and development nature. In the context of this Annual Report, statements of our "belief" are based primarily upon our results derived to date from our research and development program with animals, and early stage human trials, and upon which we believe that we have a reasonable scientific basis to expect the particular results to occur. It is not possible to predict, based upon studies in animals, or early stage human trials, whether a new therapeutic will ultimately prove to be safe and effective in humans. There are no assurances that the particular result expected by us will occur.
At this time we do not intend to become a fully integrated pharmaceutical company with substantial in-house research and development, marketing and distribution or manufacturing capabilities. We are pursuing a strategy of establishing relationships with larger companies as strategic partners. We intend to partner or joint venture with larger pharmaceutical companies that have existing and relevant marketing capability for our products. It is anticipated that future clinical development into large international or pivotal trials would generally occur in conjunction with a strategic partner or partners, who would contribute expertise and financial assistance. In exchange for certain product rights and commitments to market our products, the strategic partners would be expected to share in gross proceeds from the sale of our product or products and potentially share in various market or manufacturing opportunities. The proceeds generated from partnering or joint venturing projects are expected to be distributed on the basis of relative risk taken and resources contributed by each party to the partnership or joint venture.
Regulatory Requirements
The development of new pharmaceuticals is strongly influenced by a country's regulatory environment. The drug approval process in Canada is regulated by Health Canada. The primary regulatory body in the United States is the FDA and in the UK is the Medicines and Healthcare Products Regulatory Agency (the “MHRA”). Similar processes are conducted in other countries by equivalent regulatory bodies. Regulations in each jurisdiction require the licensing of manufacturing facilities and mandate strict research and product testing standards. Companies must establish the safety and efficacy of their products, comply with current Good Manufacturing Practices and submit marketing materials before being allowed to market pharmaceutical products. While we plan to pursue or support the pursuit of the approval of our product, success in acquiring regulatory approval for any product is not assured.
In order to market our pharmaceutical product in Canada, the United States, Europe and other jurisdictions, we must successfully meet the requirements of those jurisdictions. The requirements of the Appropriate Regulatory Authority will generally include the following stages as part of the regulatory process:
• | Pre-Pharmacological Studies - Pre-Pharmacological studies involve extensive testing on laboratory animals to determine if a potential therapeutic product has utility in an in vivo disease model and has any adverse toxicology in a |
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disease model.
• | Investigational New Drug Application - An Investigational New Drug ("IND") Submission, or the equivalent, must be submitted to the appropriate regulatory authority prior to conducting Pharmacological Studies. |
• | Pharmacological Studies (or Phase I Clinical Trials) - Pharmacological studies are designed to assess the potential harmful or other side effects that an individual receiving the therapeutic compound may experience. These studies, usually short in duration, are often conducted with healthy volunteers or actual patients and use up to the maximum expected therapeutic dose. |
• | Therapeutic Studies (or Phase II and III Clinical Trials) - Therapeutic studies are designed primarily to determine the appropriate manner for administering a drug to produce a preventive action or a significant beneficial effect against a disease. These studies are conducted using actual patients with the condition that the therapeutic is designed to remedy. Prior to initiating these studies, the organization sponsoring the program is required to satisfy a number of requirements via the submission of documentation to support the approval for a clinical trial. |
• | New Drug Submission - After all three phases of a clinical trial have been completed, the results are submitted with the original IND Submission to the appropriate regulatory authority for marketing approval. Once marketing approval is granted, the product is approved for commercial sales. |
Marketing Approvals
The results of the preclinical and clinical testing, together with manufacturing and controls information, are submitted to regulatory agencies in order to obtain approval to commence commercial sales. In responding to such an application, regulatory agencies may grant marketing approval, request additional information or further research, or deny the application if they determine that the application does not satisfy their regulatory approval criteria. Approval for a pharmaceutical or biologic product may not be granted on a timely basis, if at all, or if granted may not cover all the clinical indications for which approval is sought, or may contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use.
Satisfaction of pre-market approval requirements for new drugs and biologics typically takes several years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or targeted disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. Success in early stage clinical trials or with prior versions of products does not assure success in later stage clinical trials. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.
Post-Marketing Regulations
Once approved, regulatory agencies may withdraw the product approval if compliance with pre- and/or post-marketing regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, they may require post-marketing studies, referred to as Phase 4 studies, to monitor the effect of an approved product, and may limit further marketing of the product based on the results of these post-market studies. The FDA and other foreign regulatory agencies have broad post-market regulatory and enforcement powers, including the ability to levy fines and penalties, suspend or delay issuance of approvals, seize or recall products, or withdraw approvals.
Manufacturing Regulations
We use contract toll manufacturers to produce REOLYSIN®. Our toll manufacturers are subject to periodic inspection by the FDA, the United States Drug Enforcement Administration, or DEA, and other domestic and foreign authorities where applicable, and must comply with cGMP regulations. Manufacturers of biologics also must comply with general biological product standards. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product, or mandatory or voluntary recall of a product. Adverse experiences with the product must be reported to the FDA and foreign agencies and could result in the imposition of market restrictions through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.
Advertising and Promotion Regulations
With respect to both pre- and post-market product advertising and promotion, the FDA and similar foreign agencies impose a number of complex regulations on entities that advertise and promote pharmaceuticals and biologics, which include, among other
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things, standards and regulations relating to direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the Internet. These agencies have very broad enforcement authority and failure to abide by these regulations can result in penalties including the issuance of a warning letter directing the entity to correct deviations from requisite standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA or relevant foreign agencies, and foreign, state and federal civil and criminal investigations and prosecutions.
Other Government Regulations
We are subject to various laws and regulations regarding laboratory practices, the experimental use of animals, and the use and disposal of hazardous or potentially hazardous substances in connection with our research. In each of these areas, as above, the government has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a material adverse effect upon us.
Market and Competition
According to estimates for 2011 from the American Cancer Society, 1.60 million Americans are expected to be diagnosed with cancer in the year, and 571,950 Americans are forecast to die of cancer. In the United States cancer accounts for 25% of all deaths, second only to heart disease. In the United States, the relative lifetime risk of a male developing cancer is 1 in 2, while for women, this risk is 1 in 3.
The costs of this disease state are also significant. In the United States, the National Institute of Health estimated the 2010 cost for cancer treatment were $263.8 billion. Of this figure, $102.8 billion can be attributed to direct patient costs.
It has been estimated that approximately 30% of all tumours are a result of activating mutations of Ras itself. Since Ras can be activated by mechanisms other than direct mutations it is believed that the number of tumours with activated Ras (either through direct activating mutation or mutation or over-expression of elements upstream of Ras) is approximately two thirds.
We face substantial competition in the development of products for cancer and other diseases. This competition from other manufacturers of the same types of products and from manufacturers of different types of products designed for the same uses is expected to continue in both U.S. and international markets. Oncolytic virus therapies, our primary focus area, are rapidly evolving areas in the biotechnology industry and are expected to undergo many changes in the coming years as a result of technological advances. We are currently aware of a number of groups that are developing oncolytic virus therapies including early-stage and established biotechnology companies, pharmaceutical companies, academic institutions, government agencies and research institutions. We face competition from all of these groups in areas such as recruiting employees, acquiring technologies that might enhance our ability to commercialize products, establishing relationships with certain research and academic institutions, enrolling patients in clinical trials and seeking program partnerships and collaborations with larger pharmaceutical companies. It is possible that our competitors could achieve earlier market commercialization, could have superior patent protection, or could have safer, more effective or more cost-effective products. These factors could render our potential products less competitive, which could adversely affect our business.
Product Marketing Strategy
The markets for the cancer product being developed by us may be large and could require substantial sales and marketing capability. Before or upon successful completion of the development of a cancer product, we intend to enter into one or more strategic partnerships or other collaborative arrangements with a pharmaceutical company or other company with marketing and distribution expertise to address this need. If necessary, we will establish arrangements with various partners for different geographical areas or specific applications at various times in the development process. Our management and consultants have relevant experience with the partnering process.
Seasonality of Business
Our results of operations have not been materially impacted by seasonality.
C. | Organizational Structure |
On December 31, 2011, we had two wholly-owned subsidiaries; Oncolytics Biotech (Barbados) Inc. (“OBB”), a Barbados company, and Valens Pharma Ltd. As well, Oncolytics Biotech (US) Inc., a Delaware corporation and Oncolytics Biotech (U.K.)are wholly owned subsidiaries of OBB.
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D. Property, Plants and Equipment
We currently lease our head office in Calgary, Alberta, Canada. We do not own or lease any other office space, manufacturing facilities or equipment and do not have any current plans to construct or acquire any facilities.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Our Management Discussion and Analysis (“MD&A”) contains forward-looking statements, including our belief as to the potential of REOLYSIN®, a therapeutic reovirus, as a cancer therapeutic and our expectations as to the success of our research and development and manufacturing programs in 2012 and beyond, future financial position, business strategy and plans for future operations, and statements that are not historical facts, involve known and unknown risks and uncertainties, which could cause our actual results to differ materially from those in the forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”.
With respect to the forward-looking statements made within our MD&A, we have made numerous assumptions regarding among other things: our ability to obtain financing to fund our development program, our ability to receive regulatory approval to commence enrollment in our clinical trial program, the final results of our co-therapy clinical trials, our ability to maintain our supply of REOLYSIN® and future expense levels being within our current expectations. Investors are cautioned against placing undue reliance on forward-looking statements. We do not undertake to update these forward-looking statements except as required by applicable law.
A. | Operation Results |
Please see our 2011 Management Discussion and Analysis in Exhibit 15.1, which is incorporated herrein by reference.
B. | Liquidity and Capital Resources |
Please see our 2011 Management Discussion and Analysis in Exhibit 15.1, which is incorporated herrein by reference.
C. | Research and Development, Patents, and Licenses, etc. |
Please see the disclosure in Item 4. Information on the Company B. Business Overview for information on the Company’s research and development policies. Our research and development expenses were $23,386,685, and $13,882,565 for 2011 and 2010, respectively.
D. | Trend Information |
It is important to note that historical patterns of expenditures cannot be taken as an indication of future expenditures. The amount and timing of expenditures and availability of capital resources vary substantially from period to period, depending on the level of research and development activity being undertaken at any one time and the availability of funding from investors and prospective commercial partners. In 2011, our level of expenditures increased due to the continued start up efforts and patient enrollment in our global randomized Phase III head and neck clinical trial. Our expenditures in 2010 increased, as expected, as we commenced the start up activities and enrollment in our Phase III study and expanded our clinical program. We expect 2012 expenditures to continue to increase as we focus on completing enrollment in our Phase III head and neck trial, support our other clinical trials, and incur manufacturing costs to supply this clinical program. As well, we expect to incur additional costs associated with the validation and commercial scale up of our manufacturing process.
Except as disclosed elsewhere in our annual report, we know of no trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our liquidity or capital resources or that would cause reported financial information not necessarily to be indicative of future operating results or financial conditions.
E. | Off-Balance Sheet Arrangements |
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As at December 31, 2011, we had not entered into any off-balance sheet arrangements.
F. | Tabular Disclosure of Contractual Obligations |
We have the following contractual obligations as at December 31, 2011:
Contractual Obligations | Payments Due by Period | |||||||||
Total $ | Less than 1 year $ | 2 -3 years $ | 4 - 5 years $ | After 5 years $ | ||||||
Alberta Heritage Foundation(1) | 150,000 | — | — | — | 150,000 | |||||
Capital lease obligations | Nil | — | — | — | — | |||||
Operating lease (2) | 413,035 | 88,792 | 186,220 | 138,023 | — | |||||
Purchase obligations | 3,933,730 | 3,933,730 | — | — | — | |||||
Other long term obligations | Nil | — | — | — | — | |||||
Total contractual obligations | 4,496,765 | 4,022,522 | 186,220 | 138,023 | 150,000 | |||||
Note:
(1) | Our Alberta Heritage Foundation obligation requires repayments equal to the lesser of 5% of gross sales generated by the Company or $15,000 per annum (see notes of our audited 2011 consolidated financial statements). |
(2) | Our operating lease is comprised of our office lease and exclude our portion of operating costs. |
We expect to fund our capital expenditure requirements and commitments with existing working capital.
G. | Safe Harbor |
We seek safe harbor for our forward-looking statements contained in Items 5.E and F. See “Cautionary Note Regarding Forward-Looking Statements”.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. | Directors and Senior Management |
The following table sets forth the names and municipalities of residence of all our directors and officers as at the date hereof, as well as the positions and offices held by such persons and their principal occupations.
Name and Municipality of Residence | Position with the Company | Principal Occupation | Director of the Company Since |
Bradley G. Thompson Ph.D Calgary, Alberta | Chief Executive Officer and Chairman of the Board | Executive Chairman of the Board, President and Chief Executive Officer of Oncolytics since April 1999. | April 21, 1999 |
Douglas A. Ball C.A. Calgary, Alberta | Chief Financial Officer | Chief Financial Officer of the Company since May 2000. | N/A |
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Name and Municipality of Residence | Position with the Company | Principal Occupation | Director of the Company Since |
William A. Cochrane, OC, M.D.(3)Calgary, Alberta | Director | President of W.A. Cochrane & Associates, Inc. (a consulting company) since 1989 and from April 2003 to December 2010, Chairman of Resverlogix Corp. (a public biopharmaceutical company) and is a Director of Immunovaccine Inc. Dr. Cochrane was formerly Chairman of QSV Biologics Ltd. (biologics contract manufacturer) from 2003 to 2009 and was a director of Sernova Corp. from 2005 to 2008, and a former chairman of University Technologies International Inc. (UTI) at the University of Calgary. | October 31, 2002 |
Matthew C. Coffey Ph.D. Calgary, Alberta | Chief Operating Officer and Director | Chief Operating Officer of the Corporation since December 2008. Since April 1999 to December 2008, Dr. Coffey held other senior management positions with the Company and is a co-founder of Oncolytics. | May 11, 2011 |
George M. Gill, M.D. Arlington, VA | Senior Vice President, Clinical and Regulatory Affairs | Dr. Gill has been a consultant in clinical research and regulatory affairs to the pharmaceutical and biotechnology industries since he retired from Ligand Pharmaceuticals in 1999. During his 38 years in the industry, he also served in senior executive positions with ICI Pharmaceuticals (now AstraZeneca), Bristol-Myers Squibb, and Hoffmann-La Roche. Dr. Gill holds a B.Sc. in chemistry from Dickinson College in Pennsylvania and an M.D. from the School of Medicine of the University of Pennsylvania in Philadelphia. | N/A |
Robert B. Schultz, F.C.A. (1), (4)Toronto, Ontario | Lead Director | Former Chairman and Director of Rockwater Capital Corporation, formerly McCarvill Corporation (a financial services company) from 2001 to 2007. Mr. Schultz has held a variety of senior positions, and has participated on various industry-related boards and committees including Director and Chairman of the Investment Dealers Association of Canada. | June 30, 2000 |
Fred A. Stewart, Q.C.(1) Calgary, Alberta | Director | Former practising lawyer in Calgary; President of Fred Stewart & Associates Inc., consultant in commercialization of technology. Mr Stewart has served in a number of positions of corporate governance, in both private and public organizations | August 27, 1999 |
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Name and Municipality of Residence | Position with the Company | Principal Occupation | Director of the Company Since |
J. Mark Lievonen, F.C.A.(1), (3) Markham, Ontario | Director | President of Sanofi Pasteur Limited, a vaccine development, manufacturing and marketing company, since October 1998. Mr. Lievonen serves on a number of industry and not-for-profit boards including Rx&D, BIOTECanada, the Ontario Institute for Cancer Research and York University, and is a past Chair of BIOTECanada and the Ontario Genomics Institute. | April 5, 2004 |
Jim Dinning(2) Calgary, Alberta | Director | Chair of Western Financial Group since September 2004. Mr. Dinning was Executive Vice President of TransAlta Corporation (power generation and wholesale marketing company) from 1997 to 2004. Mr. Dinning is the Chair of Export Development Canada and Canada West Foundation and serves as a director of other public and private companies. He is the Chancellor of the University of Calgary. | March 24, 2004 |
Ger van Amersfoort,(2)Oakville, Ont | Director | President and Chief Executive Officer of Novartis Canada, a pharmaceutical company, until his retirement in 2001. | June 15, 2006 |
Ed Levy, Ph.D, (2), (3) Lund, BC | Director | Adjunct professor at the W. Maurice Young Centre for Applied Ethics at the University of British Columbia since retiring from QLT Inc. in late 2002. | May 17, 2006 |
Mary Ann Dillahunty, JD, MBA Half Moon Bay, CA | Vice President, Intellectual Property | Ms. Dillahunty has been our VP-Intellectual Property since 2007. Prior to joining Oncolytics, Ms. Dillahunty was a principal in the law firm of Fish & Richardson, a leading intellectual property firm in the U.S. | N/A |
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Name and Municipality of Residence | Position with the Company | Principal Occupation | Director of the Company Since |
Gerard T. Kennealey, MD Wilmington, DE | Senior Vice President, Clinical Development & Chief Medical Officer | Dr. Kennealey worked as a practicing medical oncologist for ten years before moving into the life sciences industry where he worked for eighteen years in varying capacities for AstraZeneca, including Vice President, US Medical Affairs; Vice President, Oncology Clinical Research; and Global Product Director for Faslodex®. Dr. Kennealey subsequently held an array of progressively senior positions with other companies in the life sciences industry, including Eximias Pharmaceuticals, MGI Pharma, and Cephalon Inc. Most recently, Dr. Kennealey was Vice President of Scientific Affairs at Cephalon Inc. Dr. Kennealey holds a BS in Biology from Boston College, an MA in History from the University of Delaware as well as an MD from the Yale University School of Medicine. | N/A |
Notes:
1) | These persons are members of the Audit Committee. Mr. Stewart is the Chair of the Audit Committee. |
2) | These persons are members of the Compensation Committee. Mr. Dinning is the Chair of the Compensation Committee. |
3) | These persons are members of the Corporate Governance and Nominating Committee. Mr. Lievonen is the Chair of the Corporate Governance and Nominating Committee. |
4) | As Lead Director, Mr. Schultz is an ex-officio member of the Compensation and Nominating Committees. |
As at March 23, 2012, the directors and senior officers as a group beneficially owned, directly or indirectly, 1,138,851 of our common shares, representing 1.49% of the issued and outstanding common shares.
Certain of our directors are associated with other companies, which may give rise to conflicts of interest. In accordance with the ABCA, directors who have a material interest in any person who is a party to a material contract or a proposed material contract with us are required, subject to certain exceptions, to disclose that interest and abstain from voting on any resolution to approve that contract. In addition, the directors are required to act honestly and in good faith with a view to the best interests of Oncolytics Biotech Inc.
None of our directors have been a director or officer of a company that went bankrupt in the last 10 years except for Dr. William Cochrane who was a director of QSV Biologics (“QSV”) a private company. QSV was a private contract manufacturing company that started in 2004. Its customers were other biotechnology companies in Canada and the USA. In 2008, as a result of the economic recession, these biotechnology companies were unable to raise capital and consequently were forced to discontinue clinical trials resulting in a loss of customers for QSV. QSV sought financing from private investors and governments but was unsuccessful. Consequently, QSV went bankrupt and had to terminate its employees and close the company in August 2009. Dr. Cochrane was a director from 2004 and chairman from 2006 to 2009.
None of our directors or officers are related by blood, marriage or adoption to any other director or officer.
We are not aware of any arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or officer.
B. | Compensation |
Directors
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The following table sets forth information concerning the total compensation paid in 2011 to each director.
Name | Fees & Retainers Earned ($) | Share- Based Awards ($) | Option- Based Awards(1) ($) | Non-Equity Incentive Plan Compensation ($) | Pension Value ($) | All Other Compensation ($) | Total ($) |
Dr. W. Cochrane | 39,000 | N/A | 46,200 | None | N/A | None | 85,200 |
Mr. J. Dinning | 43,750 | N/A | 53,900 | None | N/A | None | 97,650 |
Dr. E. Levy | 42,500 | N/A | 46,200 | None | N/A | None | 88,700 |
Mr. M. Lievonen | 48,500 | N/A | 53,900 | None | N/A | None | 102,400 |
Mr. R. Schultz | 64,500 | N/A | 124,540 | None | N/A | None | 189,040 |
Mr. F. Stewart | 57,500 | N/A | 101,440 | None | N/A | None | 158,940 |
Mr. G. van Amersfoort | 37,250 | N/A | 46,200 | None | N/A | None | 83,450 |
Note:
(1) | Option based awards include grants from July and December 2011. The options granted on December 14, 2011 have an estimated grant date fair value of $1.54 per option using the following respective grant date assumptions: expected life of option, 3 years; volatility 58.13%; risk free interest rate 1.14%; dividend yield 0%. The options granted on July 27, 2011 have an estimated grant date fair value of $1.84 per option using the following respective grant date assumptions: expected life of option, 3 years; volatility 53.25%; risk free interest rate 2.15%; dividend yield 0%. |
Officers
Summary Compensation Table
The following table sets forth information concerning the total compensation paid to our officers in 2011.
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Name and principal position | Year | Salary $ | Share- based awards $ | Option- based awards (3) $ | Bonus | Non-equity incentive plan compensation $ | Pension value $ | All other compensation ($)(1) | Total compensation ($) |
Dr. Bradley G. | 2011 | 489,500 | N/A | 403,080 | 200,000 | N/A | N/A | 62,834 | 1,155,414 |
Thompson | 2010 | 444,996 | N/A | 709,500 | 150,163 | N/A | N/A | 50,712 | 1,355,371 |
Chief Executive Officer | 2009 | 444,996 | N/A | 59,500 | 106,800 | N/A | N/A | 40,200 | 651,496 |
Douglas A. Ball | 2011 | 283,800 | N/A | 219,620 | 57,500 | N/A | N/A | 45,864 | 606,784 |
Chief Financial | 2010 | 257,567 | N/A | 643,500 | 46,362 | N/A | N/A | 36,649 | 984,078 |
Officer | 2009 | 257,567 | N/A | 35,700 | 46,000 | N/A | N/A | 34,654 | 373,921 |
Dr. Matt C. | 2011 | 330,139 | N/A | 225,980 | 100,000 | N/A | N/A | 49,686 | 705,805 |
Coffey | 2010 | 326,224 | N/A | 379,500 | 88,080 | N/A | N/A | 42,913 | 836,717 |
Chief Operating Officer | 2009 | 326,224 | N/A | 35,700 | 46,000 | N/A | N/A | 38,520 | 446,444 |
Dr. Karl | 2011 | 163,782 | N/A | — | — | N/A | N/A | 408,318 | 572,100 |
Mettinger(2), (4) | 2010 | 316,551 | N/A | 132,000 | 30,076 | N/A | N/A | 38,686 | 517,313 |
Chief Medical Officer | 2009 | 333,101 | N/A | 35,700 | 38,000 | N/A | N/A | 40,709 | 447,510 |
Mary Ann | 2011 | 159,012 | N/A | 69,300 | 40,680 | N/A | N/A | 19,496 | 288,488 |
Dillahunty(2) | 2010 | 153,665 | N/A | 82,500 | 19,467 | N/A | N/A | 19,066 | 274,698 |
VP Intellectual Property | 2009 | 161,700 | N/A | 17,850 | 24,720 | N/A | N/A | 20,063 | 224,333 |
Dr. George Gill(2) | 2011 | 305,100 | N/A | 53,900 | 30,510 | N/A | N/A | 25,171 | 414,681 |
Senior Vice President, | 2010 | 100,349 | N/A | 82,500 | 32,378 | N/A | N/A | — | 215,227 |
Clinical and Regulatory Affairs | 2009 | 114,364 | N/A | 17,850 | 13,323 | N/A | N/A | — | 145,537 |
Dr. Gerard T. | 2011 | 52,111 | N/A | 431,000 | — | N/A | N/A | 4,299 | 487,410 |
Kennealey(2), (5) | 2010 | — | N/A | — | — | N/A | N/A | — | — |
Senior Vice President, Clinical Development & Chief Medical Officer | 2009 | — | N/A | — | — | N/A | N/A | — | — |
Notes:
(1) | The dollar amounts set forth under this column are related to contributions to the officer's respective retirement savings plan and amounts provided for health care benefits by the Company. |
(2) | U.S. Employees are paid salaries, bonuses and other compensation in U.S. Dollars. These amounts have been converted to the Canadian dollar using the year end exchange rate of U.S.$1.00 = $1.017 in 2011. |
(3) | The value of option based awards are based on the grant date assumptions as disclosed in note 10 "Share Based Payments" in our 2011 audited consolidated financial statements. |
(4) | Included in "All Other Compensation" is a severance payment of US$394,198. Effective June 30, 2011, Dr. Mettinger was no longer employed by the Company. |
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(5) | Dr. Kinnealey commenced employment in November 2011. |
Narrative Discussion
We have entered into employment agreements with each of the following Executive Officers (each an "Employment Agreement"). Pursuant to the terms of the Employment Agreements,
Name and principal position | Year | Salary | |
Dr. Bradley G. Thompson | 2012 | 506,143 | |
Chief Executive Officer | |||
Douglas A. Ball | 2012 | 293,449 | |
Chief Financial Officer | |||
Dr. Matt C. Coffey | 2012 | 341,363 | |
Chief Operating Officer | |||
Mary Ann Dillahunty (1) | 2012 | 161,670 | |
VP Intellectual Property | |||
Dr. George Gill, MD (1) | 2012 | 310,200 | |
Senior Vice President, Clinical and | |||
Regulatory Affairs | |||
Gerard T. Kennealey, MD (1) | 2012 | 365,000 | |
Senior Vice President, Clinical Development & Chief Medical Officer | |||
Note 1: U.S. Employees are paid in U.S. Dollars and are presented in U.S. dollars.
Further, each Executive Officer is entitled to additional benefits and performance-based bonuses. As well, the Employment Agreements provide that each Executive Officer is subject to certain confidentiality and non-competition restrictions during and following the course of their respective employment with the Company. Each Employment Agreement shall continue until terminated by either party in accordance with the notice provisions thereof.
There are no long term incentive, benefit or actuarial plans in place. The Company does not currently have a stock appreciation rights plan.
Termination of Employment or Change of Control
The following table reflects amounts payable to the Executive Officers based on each Executive Officer's employment agreement assuming that their employment was terminated on December 31, 2012 without cause or due to a change of control of the Company.
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Termination without Cause (1) | Change of Control (2) | |||
Name | Severance ($) | Severance ($) | ||
Dr. Bradley G. Thompson Chief Executive Officer | 1,141,740 | 3,425,220 | ||
Douglas A. Ball, C.A. Chief Financial Officer | 340,629 | 681,258 | ||
Dr. Matt C. Coffey Chief Operating Officer | 392,495 | 784,990 | ||
Mary Ann Dillahunty, J.D. M.B.A., VP Intellectual Property(2) | 180,840 | 361,680 | ||
Dr. George Gill, MD | — | — | ||
Senior Vice President, Clinical and | ||||
Regulatory Affairs | ||||
Gerard T. Kennealey, MD(3) | 395,113 | 790,226 | ||
Senior Vice President, Clinical Development & Chief Medical Officer | ||||
Notes:
(1) | As at December 31, 2011, all options granted to Officers had fully vested. As a result, all Officers shall be entitled to exercise all or any part of their Options, within the period ending on the earlier of the date of expiration of the Option and the ninetieth (90th) day after the date such Officer is terminated. |
(2) | On a change of control of the Company, the Officers shall be entitled to exercise all or a part of their Options, whether vested or not, within the period ending on the earlier of the date of expiration of the Option and the ninetieth (90th) day after the date such Officer is terminated. |
(3) | If employment is terminated within the first year of employment, these payments would be reduced by 50%. |
C. | Board Practices |
Our directors are elected by the shareholders at each Annual General Meeting (or Annual Special Meeting) and typically hold office until the next meeting, at which time they may be re-elected or replaced. Casual vacancies on the board are filled by the remaining directors and the persons filling those vacancies hold office until the next Annual General Meeting (or Annual Special Meeting), at which time they may be re-elected or replaced. The officers are appointed by the Board of Directors and hold office indefinitely at the pleasure of the Board of Directors.
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Name and Municipality of Residence | Position with the Corporation | Director of the Corporation Since | Date of Expiration of Current Term of Office |
Bradley G. Thompson Ph.D Calgary, Alberta | President, Chief Executive Officer and Chairman of the Board | April 21, 1999 | Date of 2012 Annual General Meeting of the Shareholders |
Matthew C. Coffey Ph.D. Calgary, Alberta | Chief Operating Officer | May 11, 2011 | Date of 2012 Annual General Meeting of the Shareholders |
William A. Cochrane, OC, M.D.(3) Calgary, Alberta | Director | October 31, 2002 | Date of 2012 Annual General Meeting of the Shareholders |
Robert B. Schultz, F.C.A. (1), (4) Toronto, Ontario | Lead Director | June 30, 2000 | Date of 2012 Annual General Meeting of the Shareholders |
Fred A. Stewart, Q.C.(1) Calgary, Alberta | Director | August 27, 1999 | Date of 2012 Annual General Meeting of the Shareholders |
J. Mark Lievonen, F.C.A.(1),(3) Markham, Ontario | Director | April 5, 2004 | Date of 2012 Annual General Meeting of the Shareholders |
Jim Dinning(2) Calgary, Alberta | Director | March 24, 2004 | Date of 2012 Annual General Meeting of the Shareholders |
Ger van Amersfoort,(2) Oakville, Ont | Director | June 15, 2006 | Date of 2012 Annual General Meeting of the Shareholders |
Ed Levy, Ph.D, (2), (3) Lund, BC | Director | May 17, 2006 | Date of 2012 Annual General Meeting of the Shareholders |
Notes:
1) | These persons are members of the Audit Committee. Mr. Stewart is the Chair of the Audit Committee. |
2) | These persons are members of the Compensation Committee. Mr. Dinning is the Chair of the Compensation Committee. |
3) | These persons are members of the Corporate Governance and Nominating Committee. Mr. Lievonen is the Chair of the Corporate Governance and Nominating Committee. |
4) | As Lead Director, Mr. Schultz is an “ex officio” member of the Corporate Governance and Compensation Committees. |
Directors’ Contracts
We receive a director’s consent from each of the independent directors upon their acceptance of their director’s position. We also enter into an Indemnity Agreement and Directors Confidentiality and Intellectual Property Assignment Agreement with each director.
The Company does not have any contracts with any of its directors which provide for benefits upon the termination of employment.
Compensation of Directors
Each director who is not a salaried employee of the Company was entitled to a fee of $1,750 per Board and committee meeting attended. An annual retainer fee of $25,000 was paid for service during 2011 and the lead director, Mr. Schultz was entitled to an additional annual $15,000 retainer. Mr. Stewart, the chair of the audit committee, received an additional retainer of $12,000. Mr. Dinning, as chair of the compensation committee, received an additional retainer of $6,000. Mr. Lievonen, as chair of the corporate governance and nominating committee, received an additional retainer of $6,000. We also grant to directors, from time to time, stock options in accordance with the Stock Option Plan and the reimbursement of any reasonable expenses incurred by them while acting in their directors' capacity. In the aggregate, a total of $333,000 in directors’ fees was paid to the Board of Directors during the fiscal year ended December 31, 2011. During the fiscal year ended December 31, 2011, there were 303,000 options granted to these directors in accordance with the Compensation Committee recommendation.
Compensation Committee
The Company has formed a compensation committee (the “Compensation Committee”) consisting of three outside directors: Mr. Dinning, Mr. van Amersfoort and Dr. Levy, none of whom are nor have been employees or officers of the Corporation or any of its affiliates. Mr. Dinning is presently the Chair of the Compensation Committee. Mr. Schultz, lead director, serves as an ex officio member of the Compensation Committee.
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The objectives of the Corporation’s compensation arrangements are: (i) to attract and retain key personnel; (ii) to encourage commitment to the Corporation and its goals; (iii) to align executive interests with those of its shareholders; and (iv) to reward executives for performance in relation to overall corporate progress goals.
The key elements of the compensation program are the base salary, health benefits, payments allocated to employees to be directed by them to their personal retirement accounts, as well as bonuses and the granting of options, both based on corporate and personal performance. Performance goals are determined based on the strategic planning and budgeting process, which is conducted at least annually. The balance of performance during the year is assessed by the board of directors of Oncolytics (the “Board” or “Board of Directors”) and is normally the key determinant for the allocation of bonuses and options. The elements of the compensation plan are intended to reward performance, and the various elements are intended to provide a blend of short-term and long-term incentives to align the interests of management and the shareholders.
In arriving at its recommendations for compensation, the Compensation Committee considers the long-term interests of the Corporation as well as its current stage of development and the economic environment within which it operates. The market for biotechnology companies in the development phase has been extremely challenging, and was exacerbated by the deterioration of the capital markets late in 2008 and 2009. Based on these factors, the Compensation Committee recognized the need to strike a balance between compensation to retain employees and resources expended to maintain operations. In the past, the Compensation Committee has engaged Lane Caputo Compensation Inc., executive compensation specialists (the ‘Specialist”), to assist in benchmarking its compensation practices, and provide recommendations to the committee with respect to compensation for directors and officers.
For 2011, the following guidelines were employed by the Board in granting bonuses and stock option grants to the Corporation’s executive and senior officers. For 2012, similar guidelines are expected to be applied.
The Chief Executive Officer of the Corporation is eligible for a cash bonus of up to 40% of his base salary, the Chief Operating Officer is eligible for a cash bonus of up to 30% of his base salary and the other senior officers are eligible for a cash bonus of up to 20% of their base salary. In addition, when available, the Chief Executive Officer of the Corporation is eligible for an option grant of up to 15% of base salary with such numbers of options calculated using the estimated grant date fair value, and the other officers are eligible for an option grant of up to 10% of salary based upon a similar calculation. The actual bonus provided and the number of options granted hereunder is based upon the overall performance of the Corporation as assessed by the committee and approved by the Board. In the event that the Corporation is operating in a challenging environment (as in 2008), these guidelines could result in the Board reducing the bonus awards and grants of stock options and in some circumstances result in no bonuses or stock options being granted to executive and senior officers. However, the guidelines referenced above can also be exceeded at the discretion of the Board. Upon completion of their review, the Compensation Committee then provided their specific recommendations to the Board with respect to compensation paid to the Corporation’s executive and senior officers.
Compensation Committee Mandate
This Mandate was reviewed, amended and approved by the Company’s board of directors on March 14, 2012.
1. | Policy Statement |
It is the policy of Oncolytics Biotech Inc. (the "Corporation") to establish and maintain a Compensation Committee (the "Committee"), composed entirely of independent directors, to assist the Board of Directors of the Corporation (the "Board") in carrying out its responsibility for the Corporation's human resources and compensation policies and processes. The Committee will be provided with resources commensurate with the duties and responsibilities assigned to it by the Board, including administrative support. If determined necessary by the Committee, it will have the discretion to investigate and conduct reviews of any human resource or compensation matter including the standing authority to retain experts and, with approval of the Board, special counsel.
2. | Composition of Committee |
(a) | The Committee shall consist of a minimum of two (2) directors, at least half of whom shall be resident Canadians. The Board shall appoint the members of the Committee and may seek the advice and assistance of the Corporate Governance and Nominating Committee in identifying qualified candidates. The Board shall appoint one member of the Committee to be the Chair of the Committee, |
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or delegate such authority to appoint the Chair of the Committee to the Committee.
(b) | The Chair of the Committee shall be responsible for the leadership of the Committee, including preparing or approving the agenda, presiding over the meetings, and making committee assignments. |
(c) | Each director appointed to the Committee by the Board shall be an outside director who is unrelated. An outside, unrelated director is a director who meets the requirements of NASDAQ Rule 5605 and National Instrument 58-101 who is independent of management and is free from any interest, any business or other relationship which could, or could reasonably be perceived, to materially interfere with the director's ability to act with a view to the best interests of the Corporation, other than interests and relationships arising from shareholding. In determining whether a director is independent of management, the Board shall make reference to the then current legislation, rules, policies and instruments of applicable regulatory authorities. |
(d) | Each member shall be appointed by the Board annually at the next scheduled meeting of the Board following the AGM. |
(e) | The Lead Director shall be an ex officio member of the committee. |
3. | Meetings of the Committee |
(a) | The Committee shall convene a minimum of once per year at such time and place as may be designated by the Chair of the Committee and whenever a meeting is requested by the Board, a member of the Committee, or the Chief Executive Officer of the Corporation (the "CEO"). |
(b) | Notice of each meeting of the Committee shall be given to each member of the Committee and the CEO, who shall each be entitled to attend each meeting of the Committee and shall attend whenever requested to do so by a member of the Committee. |
(c) | Notice of a meeting of the Committee shall: |
(i) | be in writing, including by electronic communication facilities; |
(ii) | state the nature of the business to be transacted at the meeting in reasonable detail; |
(iii) | to the extent practicable, be accompanied by copies of documentation to be considered at the meeting; and |
(iv) | be given at least two business days prior to the time stipulated for the meeting or such shorter period as the members of the Committee may permit. |
(d) | A quorum for the transaction of business at a meeting of the Committee shall consist of a majority of the members of the Committee. |
(e) | A member or members of the Committee may participate in a meeting of the Committee by means of such telephonic, electronic or other communication facilities, as permits all persons participating in the meeting to communicate adequately with each other. A member participating in such a meeting by any such means is deemed to be present at the meeting. |
(f) | In the absence of the Chair of the Committee, the members of the Committee shall choose one of the members present to be Chair of the meeting. In addition, the members of the Committee shall choose one of the persons present to be the Secretary of the meeting. |
(g) | Minutes shall be kept of all meetings of the Committee and shall be signed by the Chair and the Secretary of the meeting. |
4. | Duties and Responsibilities of the Committee |
(a) | The Committee shall, at the earliest opportunity after each meeting, report to the Board the results of its activities and any reviews undertaken and make recommendations to the Board as deemed appropriate. |
(b) | The Committee's primary duties and responsibilities are to review and make recommendations to the Board in respect of: |
(i) | human resource policies, practices and structures (to monitor consistency with the Corporation's goals and near and long-term strategies, support of operational effectiveness and efficiency, and maximization of human resources potential); |
(ii) | compensation policies and guidelines; |
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(iii) | management incentive and perquisite plans and any non-standard remuneration plans; |
(iv) | senior management, executive and officer appointments and their compensation; |
(v) | management succession plans, management training and development plans, termination policies and termination arrangements; and |
(vi) | Board compensation matters. |
(c) | In carrying out its duties and responsibilities, the Committee shall: |
(i) | annually assess and make a recommendation to the Board with regard to the competitiveness and appropriateness of the compensation package of the CEO, all other officers of the Corporation and such other key employees of the Corporation or any subsidiary of the Corporation as may be identified by the CEO and approved by the Committee (collectively, the "Designated Employees"); |
(ii) | annually review the performance goals and criteria for the CEO and evaluate the performance of the CEO against such goals and criteria and recommend to the Board the amount of regular and incentive compensation to be paid to the CEO; |
(iii) | annually, review and make a recommendation to the Board regarding the CEO's performance evaluation of Designated Employees and his recommendations with respect to the amount of regular and incentive compensation to be paid to such Designated Employees; |
(iv) | review and make a recommendation to the Board regarding any employment contracts or arrangements with each of the Designated Employees, including any retiring allowance arrangements or any similar arrangements to take effect in the event of a termination of employment; |
(v) | periodically, review the compensation philosophy statement of the Corporation and make recommendations for change to the Board as considered necessary; |
(vi) | from time to time, review and make recommendations to the Board in respect of the design, benefit provisions, investment options and text of applicable pension, retirement and savings plans or related matters; |
(vii) | annually, in conjunction with the Corporation's general and administrative budget, review and make recommendations to the Board regarding compensation guidelines for the forthcoming budget period; |
(viii) | when requested by the CEO, review and make recommendations to the Board regarding short term incentive or reward plans and, to the extent delegated by the Board, approve awards to eligible participants; |
(ix) | review and make recommendations to the Board regarding incentive stock option plans or any other long term incentive plans and to the extent delegated by the Board, approve grants to participants and the magnitude and terms of their participation; |
(x) | as required, fulfill the obligations assigned to the Committee pursuant to any other employee benefit plans approved by the Board; |
(xi) | annually, prepare or review the report on executive compensation required to be disclosed in the Corporation's information circular or any other human resource or compensation matter required to be publicly disclosed by the Corporation; |
(xii) | periodically, but at least every third year, review and make a recommendation to the Board regarding the compensation of the Board of Directors; |
(xiii) | as required, retain independent advice in respect of human resources and compensation matters and, if deemed necessary by the Committee, meet separately with such advisors; |
(xiv) | review and consider the implications of the risks associated with the company's compensation policies and practices, specifically, situations that could potentially encourage an insider to expose the company to inappropriate or excessive risks; and |
(xv) | assess, on an annual basis, the adequacy of this Mandate and the performance of the Committee. |
(d) | In addition to the foregoing, the Committee shall undertake on behalf of the Board such other initiatives as may be necessary or desirable to assist the Board in discharging its responsibility to ensure that appropriate human resources development, performance evaluation, compensation and succession planning programs are in place and operating effectively. |
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5. | Date of Mandate |
This Mandate was last reviewed, amended and approved by the Board on March 14, 2012
Audit Committee
The Corporation has formed an Audit Committee in accordance with Section 3(a)(58)(A) of the U.S. Securities and Exchange Commission of 1934, as amended, consisting of three independent directors pursuant to the Rule 5605(a)(2) of the NASDAQ Capital Market and Rule 10A-3 of the United States Securities Exchange Act of 1934, as amended: Mr. Fred Stewart, Mr. Jim Dinning and Mr. Robert Schultz, none of whom are nor have been employees or officers of the Company or any of its affiliates. Mr. Stewart is presently the Chair of the Audit Committee. Each Audit Committee member is financially literate.
Mandate of the Audit Committee
This Mandate was reviewed and approved by the Company’s board of directors on March 14, 2012.
1. | Policy Statement |
It is the policy of Oncolytics Biotech Inc. (the "Corporation") to establish and maintain an Audit Committee, composed entirely of independent directors, to assist the Board of Directors (the "Board") in carrying out their oversight responsibility for the Corporation's internal controls, financial reporting and risk management processes. The Audit Committee will be provided with resources commensurate with the duties and responsibilities assigned to it by the Board including administrative support. If determined necessary by the Audit Committee, it will have the discretion to institute investigations of improprieties, or suspected improprieties within the scope of its responsibilities, including the standing authority to retain special counsel or experts.
2. | Composition of the Committee |
(a) | The Audit Committee shall consist of a minimum of three (3) directors, at least half of whom shall be resident Canadians. The Board shall appoint the members of the Audit Committee and may seek the advice and assistance of the Corporate Governance and Nominating Committee in identifying qualified candidates. The Board shall appoint one member of the Audit Committee to be the Chair of the Audit Committee, or delegate such authority to appoint the Chair of the Audit Committee to the Audit Committee. |
(b) | The Chair of the Committee shall be responsible for leadership of the Committee, including preparing or approving the agenda, presiding over the meetings, and making committee assignments. |
(c) | Each director appointed to the Audit Committee by the Board shall be an outside director who is unrelated and independent. An outside, unrelated and independent director is a director who meets the requirements of NASDAQ Rule 5605(a)(2) and National Instrument 52-110. A director appointed to the audit committee shall also meet the requirements of NASDAQ Rule 5605(c)(2) and Rule 10A-3(b)(1) of the United States Securities Exchange Act of 1934, as amended. Such director shall be independent of management and free from any interest, any business or other relationship which could, or could reasonably be perceived, to materially interfere with the director's ability to act with a view to the best interests of the Corporation, other than interests and relationships arising from shareholding. In determining whether a director is independent of management, the Board shall make reference to the abovementioned rules and any applicable revisions thereto, and any additional relevant and then current legislation, rules, policies and instruments of applicable regulatory authorities. |
(d) | Each member of the Audit Committee shall be financially literate. In order to be financially literate, a director must be, at a minimum, able to read and understand financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation's financial statements. At least one member shall have accounting or related financial management expertise, meaning the ability to analyze and interpret a full set of financial statements, including the notes attached thereto, in accordance with generally accepted accounting principles and shall be a “financial expert” as defined in Item 407 of Regulation S-K promulgated by the U.S. Securities and Exchange |
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Commission and “financially sophisticated” as defined in NASDAQ Rule 5605(c)(2).
(e) | . In determining whether a member of the Audit Committee is financially literate or has accounting or related financial expertise, reference shall be made to the then current legislation, rules, policies and instruments of applicable regulatory authorities, which for further clarification, shall include but not be limited to the definition of A director appointed by the Board to the Audit Committee shall be a member of the Audit Committee until replaced by the Board or until his or her resignation. |
3. | Meetings of the Committee |
(a) | The Audit Committee shall convene a minimum of four times each year at such times and places as may be designated by the Chair of the Audit Committee and whenever a meeting is requested by the Board, a member of the Audit Committee, the auditors, or senior management of the Corporation. Scheduled meetings of the Audit Committee shall correspond with the review of the year-end and quarterly financial statements and management discussion and analysis. |
(b) | Notice of each meeting of the Audit Committee shall be given to each member of the Audit Committee and to the auditors, who shall be entitled to attend each meeting of the Audit Committee and shall attend whenever requested to do so by a member of the Audit Committee. |
(c) | Notice of a meeting of the Audit Committee shall: |
(i) | be in writing, including by electronic communication facilities; |
(ii) | state the nature of the business to be transacted at the meeting in reasonable detail; |
(iii) | to the extent practicable, be accompanied by copies of documentation to be considered at the meeting; and |
(iv) | be given at least two business days prior to the time stipulated for the meeting or such shorter period as the members of the Audit Committee may permit. |
(d) | A quorum for the transaction of business at a meeting of the Audit Committee shall consist of a majority of the members of the Audit Committee. However, it shall be the practice of the Audit Committee to require review, and, if necessary, approval of certain important matters by all members of the Audit Committee. |
(e) | A member or members of the Audit Committee may participate in a meeting of the Audit Committee by means of such telephonic, electronic or other communication facilities, as permits all persons participating in the meeting to communicate adequately with each other. A member participating in such a meeting by any such means is deemed to be present at the meeting. |
(f) | In the absence of the Chair of the Audit Committee, the members of the Audit Committee shall choose one of the members present to be Chair of the meeting. In addition, the members of the Audit Committee shall choose one of the persons present to be the Secretary of the meeting. |
(g) | A member of the Board, senior management of the Corporation and other parties may attend meetings of the Audit Committee; however the Audit Committee (i) shall, at each meeting, meet with the external auditors independent of other individuals other than the Audit Committee and (ii) may meet separately with management. |
(h) | Minutes shall be kept of all meetings of the Audit Committee and shall be signed by the Chair and the Secretary of the meeting. |
4. | Duties and Responsibilities of the Committee |
(a) | The Audit Committee's primary duties and responsibilities are to: |
(i) | identify and monitor the management of the principal risks that could impact the financial reporting of the Corporation; |
(ii) | monitor the integrity of the Corporation's financial reporting process and system of internal controls regarding financial reporting and accounting compliance; |
(iii) | monitor the independence and performance of the Corporation's external auditors. This will include receipt, review and evaluation, at least annually, of a formal written statement from the independent auditors confirming their independence, and qualifications, including their compliance with the requirements of the relevant oversight boards and actively engage in a |
36
dialogue with the auditors with respect to any disclosed relationships or services that may impact objectivity and independence of the auditors and take, or recommend that the full board take, appropriate action to oversee the independence of the external auditors;
(iv) | deal directly with the external auditors to pre-approve external audit plans, other services (if any) and fees; |
(v) | directly oversee the external audit process and results (in addition to items described in Section 4(d) below); |
(vi) | provide an avenue of communication among the external auditors, management and the Board; |
(vii) | carry out a review designed to ensure that an effective "whistle blowing" procedure exists to permit stakeholders to express any concerns regarding accounting, internal controls, auditing matters or financial matters to an appropriately independent individual; |
(viii) | pre-approve any related party transactions to be entered into by the Company, and ensure appropriate disclosure thereof; |
(ix) | ensure financial disclosure incorporates inclusion of any material correcting adjustments required by the external auditors; and |
(x) | require and ensure that the external auditors are directly responsible to the Audit Committee, to whom they report. |
(b) | The Audit Committee shall have the authority to: |
(i) | inspect any and all of the books and records of the Corporation and its affiliates; |
(ii) | discuss with the management of the Corporation and its affiliates, any affected party and the external auditors, such accounts, records and other matters as any member of the Audit Committee considers necessary and appropriate; |
(iii) | engage independent counsel and other advisors as it determines necessary to carry out its duties; |
(iv) | communicate directly with the external auditors; and |
(v) | to set and pay the compensation for (i) any external auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services for the Corporation, (ii) any advisors employed by the Audit Committee, and (iii) ordinary administrative expenses of the Audit Committee. |
(c) | The Audit Committee shall, at the earliest opportunity after each meeting, report to the Board the results of its activities and any reviews undertaken and make recommendations to the Board as deemed appropriate. |
(d) | The Audit Committee shall: |
(i) | review the audit plan with the Corporation's external auditors and with management; |
(ii) | review with the independent auditors the matters required to be discussed relating to the conduct of the audit, including (a) the proposed scope of their examination, with emphasis on accounting and financial areas where the Committee, the independent auditors or management believes special attention should be directed; (b) the results of their audit, including their audit findings report and resulting letter, if any, of recommendations for management; (c) their evaluation of the adequacy and effectiveness of the Company's internal controls over financial reporting; (d) significant areas of disagreement, if any, with management; (e) co-operation received from management in the conduct of the audit; (f) significant accounting, reporting, regulatory or industry developments affecting the Company; and (g) review any proposed changes in major accounting policies or principles proposed or contemplated by the independent auditors or management, the presentation and impact of material risks and uncertainties and key estimates and judgements of management that may be material to financial reporting; |
(iii) | review with management and with the external auditors material financial reporting issues arising during the most recent fiscal period and the resolution or proposed resolution of such issues; |
(iv) | review any problems experienced or concerns expressed by the external auditors in performing |
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an audit, including any restrictions imposed by management or material accounting issues on which there was a disagreement with management;
(v) | review with senior management the process of identifying, monitoring and reporting the principal risks affecting financial reporting; |
(vi) | review audited annual financial statements (including management discussion and analysis) and related documents in conjunction with the report of the external auditors and obtain an explanation from management of all material variances between comparative reporting periods. Without restricting the generality of the foregoing, the committee will discuss with management and the independent auditors to the extent required, any issues and disclosure requirements regarding (a) the use of “pro forma” or “adjusted” non-GAAP information, as well as financial information and earnings guidance provided to analysts and rating agencies, (b) any off balance sheet arrangements, and (c) any going concern qualification. |
(vii) | consider and review with management, the internal control memorandum or management letter containing the recommendations of the external auditors and management's response, if any, including an evaluation of the adequacy and effectiveness of the internal financial controls of the Corporation and subsequent follow-up to any identified weaknesses; |
(viii) | review with financial management and the external auditors the quarterly unaudited financial statements, management discussion and analysis, letter to shareholders and press release (all to be considered the “Quarterly Financial Reports”) and recommend the Quarterly Financial Reports to the Board for approval by the Board before release to the public; |
(ix) | before release, review and if appropriate, recommend for approval by the Board, all public disclosure documents containing audited or unaudited financial information, including any prospectuses, financial statements, including the notes thereto, annual reports, annual information forms, management discussion and analysis and press releases; and |
(x) | oversee, any of the financial affairs of the Corporation or its affiliates, and, if deemed appropriate, make recommendations to the Board, external auditors or management. |
(e) | The Audit Committee shall: |
(i) | evaluate the independence and performance of the external auditors and annually recommend to the Board the appointment of the external auditor or the discharge of the external auditor when circumstances are warranted and monitor the audit partners' rotation as required by law.; |
(ii) | consider the recommendations of management in respect of the appointment of the external auditors; |
(iii) | pre-approve all non-audit services to be provided to the Corporation or its subsidiary entities by its external auditors', or the external auditors of affiliates of the Corporation subject to the over-riding principle that the external auditors not being permitted to be retained by the Corporation to perform specifically listed categories of non-audit services as set forth by the Securities and Exchange Commission as well as internal audit outsourcing services, financial information systems work and expert services. Notwithstanding, the foregoing the pre-approval of non-audit services may be delegated to a member of the Audit Committee, with any decisions of the member with the delegated authority reporting to the Audit Committee at the next scheduled meeting; |
(iv) | approve the engagement letter for non-audit services to be provided by the external auditors or affiliates, together with estimated fees, and considering the potential impact of such services on the independence of the external auditors; |
(v) | when there is to be a change of external auditors, review all issues and provide documentation related to the change, including the information to be included in the Notice of Change of Auditors and documentation required pursuant to the then current legislation, rules, policies and instruments of applicable regulatory authorities and the planned steps for an orderly transition period; and |
(vi) | review all reportable events, including disagreements, unresolved issues and consultations, as defined by applicable securities policies, on a routine basis, whether or not there is to be a change of external auditors. |
(f) | The Audit Committee shall enquire into and determine the appropriate resolution of any conflict of |
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interest in respect of audit or financial matters, which are directed to the Audit Committee by any member of the Board, a shareholder of the Corporation, the external auditors, or senior management.
(g) | The Audit Committee shall periodically review with management the need for an internal audit function. |
(h) | The Audit Committee shall review the Corporation's accounting and reporting of costs, liabilities and contingencies. |
(i) | The Audit Committee shall establish and maintain procedures for: |
(i) | the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal controls, or auditing matters; and |
(ii) | the confidential, anonymous submission by employees of the Corporation or concerns regarding questionable accounting or auditing matters. |
(j) | The Audit Committee shall review and approve the Corporation's hiring policies regarding partners and employees and former partners and employees of the present and former external auditors. |
(k) | The Audit Committee shall review with the Corporation's legal counsel, on no less than an annual basis, any legal matter that could have a material impact on the Corporation's financial statements, and any enquiries received from regulators, or government agencies. |
(l) | The Audit Committee shall review with management and the Corporation's external auditors, on no less than an annual basis, any taxation matters that could have a material impact on the Corporation's financial statements. |
(m) | The Audit Committee shall assess, on an annual basis, the adequacy of this Mandate and the performance of the Audit Committee. |
5. | Date of Mandate |
This Mandate was last reviewed and approved by the Board on March 14, 2012
D. | Employees |
The following table sets out the number of our employees at the end of each of the last three fiscal years by activity and geographic location.
Activity | 2011 | 2010 | 2009 |
Research and development | 17 | 13 | 9 |
Operating | 8 | 4 | 5 |
Total | 25 | 17 | 14 |
Geographic location | 2011 | 2010 | 2009 |
Canada | 18 | 15 | 12 |
United States of America | 5 | 2 | 2 |
Other | 2 | — | — |
Total | 25 | 17 | 14 |
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E. | Share Ownership |
The following table sets out the share ownership and options held of our directors and officers as of March 23, 2012.
Common Shares | Percentage of Ownership(1) | Options(2) | Exercise Price | Expiry Date | Percentage of Outstanding (3) | |||||
Officers | ||||||||||
Bradley Thompson | 662,900 | ** | 50,000 | 2.70 | May 16, 2012 | |||||
59,000 | 3.33 | August 5, 2013 | ||||||||
80,000 | 4.50 | December 11, 2013 | ||||||||
30,000 | 8.10 | May 28, 2014 | ||||||||
350,000 | 5.00 | December 9, 2014 | ||||||||
149,160 | 2.22 | December 12, 2017 | ||||||||
50,000 | 3.06 | December 8, 2019 | ||||||||
215,000 | 6.72 | December 14, 2020 | ||||||||
18,000 | 4.31 | July 27, 2021 | ||||||||
240,000 | 3.89 | December 14, 2021 | ||||||||
1,241,160 | 2.26 | % | ||||||||
Matthew Coffey | 288,550 | ** | 37,500 | 2.70 | May 16, 2012 | |||||
10,000 | 2.00 | December 13, 2012 | ||||||||
53,500 | 3.33 | August 5, 2013 | ||||||||
40,000 | 4.50 | December 11, 2013 | ||||||||
20,000 | 8.10 | May 28, 2014 | ||||||||
180,000 | 5.00 | December 9, 2014 | ||||||||
33,333 | 2.22 | December 12, 2017 | ||||||||
30,000 | 3.06 | December 8, 2019 | ||||||||
115,000 | 6.72 | December 14, 2020 | ||||||||
18,000 | 4.31 | July 27, 2021 | ||||||||
125,000 | 3.89 | December 14, 2021 | ||||||||
662,333 | 1.13 | % | ||||||||
Douglas Ball | 8,000 | ** | 37,500 | 2.70 | May 16, 2012 | |||||
10,000 | 2.00 | December 13, 2012 | ||||||||
37,000 | 3.33 | August 5, 2013 | ||||||||
40,000 | 4.50 | December 11, 2013 | ||||||||
20,000 | 8.10 | May 28, 2014 | ||||||||
180,000 | 5.00 | December 9, 2014 | ||||||||
33,333 | 2.22 | December 12, 2017 | ||||||||
30,000 | 3.06 | December 8, 2019 | ||||||||
250,000 | 3.13 | July 28, 2020 | ||||||||
95,000 | 6.72 | December 14, 2020 | ||||||||
27,000 | 4.31 | July 27, 2021 | ||||||||
110,000 | 3.89 | December 14, 2021 | ||||||||
869,833 | 1.04 | % | ||||||||
Mary Ann Dillahunty | 2,201 | ** | 100,000 | 3.28 | February 1, 2017 | |||||
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Common Shares | Percentage of Ownership(1) | Options(2) | Exercise Price | Expiry Date | Percentage of Outstanding (3) | |||||
16,667 | 2.22 | December 12, 2017 | ||||||||
15,000 | 3.06 | December 8, 2019 | ||||||||
25,000 | 6.72 | December 14, 2020 | ||||||||
45,000 | 3.89 | December 14, 2021 | ||||||||
201,667 | ** | |||||||||
George Gill | — | ** | 87,000 | 1.85 | October 10, 2012 | |||||
17,000 | 3.33 | August 5, 2013 | ||||||||
40,000 | 4.50 | December 11, 2013 | ||||||||
7,500 | 8.10 | May 28, 2014 | ||||||||
12,500 | 5.00 | December 9, 2014 | ||||||||
16,667 | 2.22 | December 12, 2017 | ||||||||
15,000 | 3.06 | December 8, 2019 | ||||||||
25,000 | 6.72 | December 14, 2020 | ||||||||
35,000 | 3.89 | December 14, 2021 | ||||||||
255,667 | ** | |||||||||
Gerard Kennealey | 500 | ** | 200,000 | 4.68 | November 10, 2021 | ** | ||||
200,000 | ||||||||||
Directors | ||||||||||
Robert Schultz | 10,000 | ** | 7,500 | 2.70 | May 16, 2012 | |||||
10,000 | 2.00 | December 13, 2012 | ||||||||
34,000 | 3.33 | August 5, 2013 | ||||||||
10,000 | 4.50 | December 11, 2013 | ||||||||
5,000 | 8.10 | May 28, 2014 | ||||||||
22,500 | 5.00 | December 9, 2014 | ||||||||
10,000 | 2.25 | December 15, 2016 | ||||||||
17,500 | 2.22 | December 12, 2017 | ||||||||
17,500 | 3.06 | December 8, 2019 | ||||||||
50,000 | 3.13 | July 28, 2020 | ||||||||
60,000 | 6.72 | December 14, 2020 | ||||||||
9,000 | 4.31 | July 27, 2021 | ||||||||
70,000 | 3.89 | December 31, 2021 | ||||||||
323,000 | ** | |||||||||
Fred Stewart | 63,500 | ** | 21,000 | 3.33 | August 5, 2013 | |||||
10,000 | 4.50 | December 11, 2013 | ||||||||
5,000 | 8.10 | May 28, 2014 | ||||||||
22,500 | 5.00 | December 9, 2014 | ||||||||
10,000 | 2.25 | December 15, 2016 | ||||||||
17,500 | 2.22 | December 12, 2017 | ||||||||
17,500 | 3.06 | December 8, 2019 | ||||||||
45,000 | 6.72 | December 14, 2020 | ||||||||
9,000 | 4.31 | July 27, 2021 | ||||||||
55,000 | 3.89 | December 14, 2021 | ||||||||
212,500 | ** | |||||||||
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Common Shares | Percentage of Ownership(1) | Options(2) | Exercise Price | Expiry Date | Percentage of Outstanding (3) | |||||
Jim Dinning | 20,000 | ** | 50,000 | 6.90 | March 29, 2014 | |||||
5,000 | 8.10 | May 28, 2014 | ||||||||
22,500 | 5.00 | December 9, 2014 | ||||||||
10,000 | 2.25 | December 15, 2016 | ||||||||
17,500 | 2.22 | December 12, 2017 | ||||||||
17,500 | 3.06 | December 8, 2019 | ||||||||
30,000 | 6.72 | December 14, 2020 | ||||||||
35,000 | 3.89 | December 14, 2021 | ||||||||
187,500 | ** | |||||||||
Mark Lievonen | 3,000 | ** | 50,000 | 9.38 | April 5, 2014 | |||||
5,000 | 8.10 | May 28, 2014 | ||||||||
22,500 | 5.00 | December 9, 2014 | ||||||||
10,000 | 2.25 | December 15, 2016 | ||||||||
17,500 | 2.22 | December 12, 2017 | ||||||||
17,500 | 3.06 | December 8, 2019 | ||||||||
30,000 | 6.72 | December 14, 2020 | ||||||||
35,000 | 3.89 | December 14, 2021 | ||||||||
187,500 | ** | |||||||||
William Cochrane | 54,700 | ** | 4,000 | 3.33 | August 5, 2013 | |||||
10,000 | 4.50 | December 11, 2013 | ||||||||
5,000 | 8.10 | May 28, 2014 | ||||||||
22,500 | 5.00 | December 9, 2014 | ||||||||
10,000 | 2.25 | December 15, 2016 | ||||||||
17,500 | 2.22 | December 12, 2017 | ||||||||
17,500 | 3.06 | December 8, 2019 | ||||||||
30,000 | 6.72 | December 14, 2020 | ||||||||
30,000 | 3.89 | December 14, 2021 | ||||||||
146,500 | ** | |||||||||
Ed Levy | 15,300 | ** | 50,000 | 4.10 | May 16, 2016 | |||||
10,000 | 2.25 | December 15, 2016 | ||||||||
17,500 | 2.22 | December 12, 2017 | ||||||||
17,500 | 3.06 | December 8, 2019 | ||||||||
30,000 | 6.72 | December 14, 2020 | ||||||||
30,000 | 3.89 | December 14, 2021 | ||||||||
155,000 | ** | |||||||||
Ger van Amersfoort | 10,200 | ** | 50,000 | 3.60 | June 15, 2016 | |||||
10,000 | 2.25 | December 15, 2016 | ||||||||
17,500 | 2.22 | December 12, 2017 | ||||||||
17,500 | 3.06 | December 8, 2019 | ||||||||
30,000 | 6.72 | December 14, 2020 | ||||||||
30,000 | 3.89 | December 14, 2021 | ||||||||
155,000 | ** | |||||||||
TOTAL: | 1,138,851 | 4,797,660 | ||||||||
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** Less than 1% ownership
Notes:
1) | Based on 71,251,335 common shares issued and outstanding on December 31, 2011. |
2) | Options exercisable to acquire common shares. |
3) | Ownership percentage assumes aggregate beneficial ownership of common shares, common shares acquirable upon exercise of options and fully diluted share outstanding of 84,398,717. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. | Major Shareholders |
We are not directly or indirectly owned or controlled by another corporation(s) or by any foreign government. To the knowledge of our directors and senior officers, at March 23, 2012, we have the following shareholder who beneficially owns, directly or indirectly, or exercises control or direction over, our common shares carrying more than 5% of the voting rights attached to all our outstanding common shares:
Name of Shareholder | Total Number of Common Shares Held | Percentage of Outstanding % |
Acuity Investment Management Inc. (1) | 11,943,750 | 16.77 |
Note:
1) Based on the Schedule 13G/A filed by Acuity Investment Management Inc. dated April 29, 2011.
Changes in ownership by major shareholders
To the best of the Company’s knowledge there have been no changes in the ownership of the Company’s shares other than disclosed herein.
Voting Rights
There are no differences between the voting rights of Acuity Investment Management Inc. and all other common shareholders.
Shares Held in the United States
The following table indicates, as of March 22, 2012, the total number of common shares issued and outstanding, the approximate total number of holders of record of common shares, the number of holders of record of common shares with U.S. addresses, the portion of the outstanding common shares held by U.S. holders of record, and the percentage of common shares held by U.S. holders of record. This table does not indicate beneficial ownership of common shares.
Total Number of Holders of Record | Total Number of Common Shares Issued and Outstanding | Number of U.S. Holders of Record | Number of Common Shares Held by U.S. Holders of Record | Percentage of Common Shares Held by U.S. Holders of Record |
199 | 76,424,251 | 56 | 6,198,746 | 8.11% |
Change of Control
As of March 23, 2012, there were no arrangements known to the Company which may, at a subsequent date, result in a change of control of the Company.
Control by Others
To the best of the Company’s knowledge, the Company is not directly or indirectly owned or controlled by another corporation, any foreign government, or any other natural or legal person, severally or jointly.
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B. | Related Party Transactions |
We have entered into employment contracts with each of our officers (see Item 6). Since the beginning of the fiscal year ended December 31, 2011 up to March 23, 2012, we did not enter into any other related party transactions and we do not have any loans outstanding with any officer, director or major shareholder.
C. | Interests of Experts and Council |
Not Applicable
ITEM 8. FINANCIAL INFORMATION
A. | Consolidated Statements and Other Financial Statements |
Financial Statements
The consolidated financial statements filed as part of this annual report are filed under Item 18.
Legal Proceedings
The directors and the management of the Company do not know of any material, active or pending, legal proceedings against them; nor is the Company involved as a plaintiff in any material proceeding or pending litigation.
The directors and the management of the Company know of no active or pending proceedings against anyone that might materially adversely affect an interest of the Company.
Dividend Policy
The Company has not paid any dividends on its common shares. The Company may pay dividends on its common shares in the future if it generates profits. Any decision to pay dividends on common shares in the future will be made by the board of directors on the basis of the earnings, financial requirements and other conditions existing at such time.
B. | Significant Changes |
There have been no significant changes to our annual financial statements.
ITEM 9. THE OFFER AND LISTING
A. | Offering and Listing Details |
Our Common Shares are traded on the TSX and on the NASDAQ Capital Market under the symbol "ONC" and “ONCY”, respectively. The last reported sales price of our common shares on March 22, 2012 on the TSX was Cdn$ and on the NASDAQ Capital Market was US$. The following table sets forth the high and low per share sales prices for our common shares on the NASDAQ and TSX for the periods indicated.
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Common Shares | ||||
NASDAQ | TSX | |||
High | Low | High | Low | |
2007 | 2.90 | 1.46 | 3.40 | 1.50 |
2008 | 2.31 | 1.06 | 2.50 | 1.23 |
2009 | 3.80 | 1.14 | 4.10 | 1.41 |
2010 | 7.00 | 2.15 | 6.95 | 2.05 |
2011 | 6.70 | 3.35 | 6.65 | 3.42 |
2010 | ||||
Quarter 1 | 3.63 | 2.05 | 3.70 | 3.57 |
Quarter 2 | 3.25 | 2.44 | 3.40 | 2.68 |
Quarter 3 | 4.98 | 2.40 | 5.09 | 2.53 |
Quarter 4 | 6.95 | 4.27 | 7.00 | 4.36 |
2011 | ||||
Quarter 1 | 6.70 | 5.65 | 6.65 | 5.60 |
Quarter 2 | 6.38 | 5.20 | 6.24 | 5.12 |
Quarter 3 | 5.49 | 3.40 | 5.50 | 3.42 |
Quarter 4 | 4.85 | 3.35 | 4.85 | 3.51 |
September | 4.52 | 3.48 | 4.60 | 3.56 |
October | 4.85 | 3.35 | 4.79 | 3.51 |
November | 4.80 | 3.97 | 4.85 | 4.14 |
December | 4.22 | 3.45 | 4.28 | 3.52 |
2012 | ||||
January | 4.82 | 3.55 | 4.63 | 4.05 |
February | 5.58 | 4.94 | 5.59 | 4.94 |
March (1 – 22) | 5.07 | 4.12 | 5.02 | 4.06 |
Market Price Volatility of Common Shares
Market prices for the securities of biotechnology companies, including our securities, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors, such as fluctuations in our operating results, the aftermath of our public announcements, and general market conditions, can have an adverse effect on the market price of our common shares and other securities.
B. | Plan of Distribution |
Not Applicable
C. | Markets |
Our Common Shares, no par value, are traded on the NASDAQ Capital Market and the TSX under the symbol “ONCY" and “ONC”, respectively.
D. | Selling Shareholders |
Not Applicable
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E. | Dilution |
Not Applicable
F. | Expenses of the Issue |
Not Applicable
ITEM 10. ADDITIONAL INFORMATION
A. | Share Capital |
Not Applicable
B. | Memorandum and Articles of Association |
Articles of Continuance
We are governed by our amended articles of incorporation (the "Articles") under the Business Corporations Act of Alberta (the “Act”) and by our by-laws (the "By-laws"). Our Alberta corporate access number is 207797382. Our Articles provide that there are no restrictions on the business we may carry on or on the powers we may exercise. Companies incorporated under the Act are not required to include specific objects or purposes in their articles or by-laws.
Directors
Subject to certain exceptions, including in respect of voting on any resolution to approve a contract that relates primarily to the director's remuneration, directors may not vote on resolutions to approve a material contract or material transaction if the director is a party to such contract or transaction. The directors are entitled to remuneration as shall from time to time be determined by the Board of Directors with no requirement for a quorum of independent directors. The directors have the ability under the Act to exercise our borrowing power, without authorization of the shareholders. The Act permits shareholders to restrict this authority through a company's articles or by-laws (or through a unanimous shareholder agreement), but no such restrictions are in place for us. Our Articles and By-laws do not require directors to hold shares for qualification.
Rights, Preferences and Dividends Attaching to Shares
The holders of common shares have the right to receive dividends if and when declared. Each holder of common shares, as of the record date prior to a meeting, is entitled to attend and to cast one vote for each common share held as of such record date at such annual and/or special meeting, including with respect to the election or re-election of directors. Subject to the provisions of our By-laws, all directors may, if still qualified to serve as directors, stand for re-election. The numbers of our Board of Directors are not replaced at staggered intervals but are elected annually.
On a distribution of assets on a winding-up, dissolution or other return of capital (subject to certain exceptions) the holders of common shares shall have a right to receive their pro rata share of such distribution. There are no sinking fund or redemption provisions in respect of the common shares. Our shareholders have no liability to further capital calls as all shares issued and outstanding are fully paid and non-assessable.
No other classes of shares are currently permitted to be issued.
Action Necessary to Change the Rights of Shareholders
The rights attaching to the different classes of shares may be varied by special resolution passed at a meeting of that class's shareholders.
Annual and Special Meetings of Shareholders
Under the Act and our By-laws, we are required to mail a Notice of Meeting and Management Information Circular to registered shareholders not less than 21 days and not more than 50 days prior to the date of the meeting. Such materials must be filed concurrently with the applicable securities regulatory authorities in Canada and the U.S. Subject to certain provisions of the By-laws, a quorum of two or more shareholders in person or represented by proxy holding or representing by proxy not less than five
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(5%) percent of the total number of issued and outstanding shares enjoying voting rights at such meeting is required to properly constitute a meeting of shareholders. Shareholders and their duly appointed proxies and corporate representatives are entitled to be admitted to our annual and/or special meetings.
Limitations on the Rights to Own Shares
The Articles do not contain any limitations on the rights to own shares. Except as described below, there are currently no limitations imposed by Canadian federal or provincial laws on the rights of non-resident or foreign owners of Canadian securities to hold or vote the securities held. There are also no such limitations imposed by the Articles and By-laws with respect to our common shares.
Disclosure of Share Ownership
In general, under applicable securities regulation in Canada, a person or company who beneficially owns, directly or indirectly, voting securities of an issuer or who exercises control or direction over voting securities of an issuer or a combination of both, carrying more than 10% of the voting rights attached to all the issuer's outstanding voting securities is an insider and must, within 10 days of becoming an insider, file a report in the required form effective the date on which the person became an insider. The report must disclose 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 10 days from the day on which the change takes place.
The rules in the U.S. governing the ownership threshold above which shareholder ownership must be disclosed are more stringent than those discussed above. Section 13 of the Exchange Act imposes reporting requirements on persons who acquire beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act) of more than 5% of a class of an equity security registered under Section 12 of the Exchange Act. In general, such persons must file, within 10 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.
Other Provisions of Articles and By-laws
There are no provisions in the Articles or By-laws:
• | delaying or prohibiting a change in control of our company that operate only with respect to a merger, acquisition or corporate restructuring; |
• | discriminating against any existing or prospective holder of shares as a result of such shareholder owning a substantial number of shares; |
• | requiring disclosure of share ownership; or |
• | governing changes in capital, where such provisions are more stringent than those required by law. |
C. | Material Contracts |
We have employment contracts with each of our officers as summarized in Item 6B. Other than these employment contracts, we have not entered into any other contract other than in the ordinary course of business over the last two years.
D. | Exchange Controls |
Canada has no system of exchange controls. There are no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors. There are no laws in Canada or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments to non-resident holders of our securities, except as discussed below in Section E, Taxation.
Restrictions on Share Ownership by Non-Canadians
There are no limitations under the laws of Canada or in our organizational documents on the right of foreigners to hold or vote securities of our company, except that the Investment Canada Act (the "Investment Canada Act") may require review and approval by the Minister of Industry (Canada) of certain acquisitions of "control" of our Company by a "non-Canadian."
Investment Canada Act
Under the Investment Canada Act, transactions exceeding certain financial thresholds, and which involve the acquisition of control
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of a Canadian business by a non-Canadian, are subject to review and cannot be implemented unless the Minister of Industry and/or, in the case of a Canadian business engaged in cultural activities, the Minister of Canadian Heritage, are satisfied that the transaction is likely to be of "net benefit to Canada". If a transaction is subject to review (a "Reviewable Transaction"), an application for review must be filed with the Investment Review Division of Industry Canada and/or the Department of Canadian Heritage prior to the implementation of the Reviewable Transaction. The responsible Minister is then required to determine whether the Reviewable Transaction is likely to be of net benefit to Canada taking into account, among other things, certain factors specified in the Investment Canada Act and any written undertakings that may have been given by the applicant. The Investment Canada Act contemplates an initial review period of up to 45 days after filing; however, if the responsible Minister has not completed the review by that date, the Minister may unilaterally extend the review period by up to 30 days (or such longer period as may be agreed to by the applicant and the Minister) to permit completion of the review. Direct acquisitions of control of most Canadian businesses by or from World Trade Organization ("WTO") investors are reviewable under the Investment Canada Act only if, in the case of an acquisition of voting securities, the value of the worldwide assets of the Canadian business or, in the case of an acquisition of substantially all the assets of a Canadian business, the value of those assets exceed C$295 million for the year 2008 (this figure is adjusted annually to reflect inflation). Indirect acquisitions (e.g., an acquisition of a U.S. corporation with a Canadian subsidiary) of control of such businesses by or from WTO investors are not subject to review, regardless of the value of the Canadian businesses' assets. Significantly lower review thresholds apply where neither the investor nor the Canadian business is WTO investor controlled or where the Canadian business is engaged in uranium mining, certain cultural businesses, financial services or transportation services.
Even if the transaction is not reviewable because it does not meet or exceed the applicable financial threshold, the non-Canadian investor must still give notice to Industry Canada and, in the case of a Canadian business engaged in cultural activities, Canadian Heritage, of its acquisition of control of a Canadian business within 30 days of its implementation.
Competition Act
The Competition Act (Canada) (the "Competition Act") requires that a pre-merger notification filing be submitted to the Commissioner of Competition (the "Commissioner") in respect of proposed transactions that exceed certain financial and other thresholds. If a proposed transaction is subject to pre-merger notification, a pre-merger notification filing must be submitted to the Commissioner and a waiting period must expire or be waived by the Commissioner before the transaction may be completed. The parties to a proposed transaction may choose to submit either a short-form filing (in respect of which there is a 14-day statutory waiting period) or a long-form filing (in respect of which there is a 42-day statutory waiting period). However, where the parties choose to submit a short-form filing, the Commissioner may, within 14 days, require that the parties submit a long-form filing, in which case the proposed transaction generally may not be completed until 42 days after the long-form filing is submitted by the parties.
The Commissioner may, upon request, issue an advance ruling certificate ("ARC") in respect of a proposed transaction where she is satisfied that she would not have sufficient grounds on which to apply to the Competition Tribunal for an order under the merger provisions of the Competition Act. If the Commissioner issues an ARC in respect of a proposed transaction, the transaction is exempt from the pre-merger notification provisions. In addition, if the transaction to which the ARC relates is substantially completed within one year after the ARC is issued, the Commissioner cannot seek an order of the Competition Tribunal under the merger provisions of the Competition Act in respect of the transaction solely on the basis of information that is the same or substantially the same as the information on the basis of which the ARC was issued.
If the Commissioner is unwilling to issue an ARC, she may nevertheless issue a "no action" letter waiving notification and confirming that she is of the view that grounds do not then exist to initiate proceedings before the Competition Tribunal under the merger provisions of the Competition Act with respect to the proposed transaction, while preserving, during the three years following completion of the proposed transaction, her authority to initiate proceedings should circumstances change.
Regardless of whether pre-merger notification is required, the Commissioner may apply to the Competition Tribunal (a special purpose tribunal) for an order under the merger provisions of the Competition Act. If the Competition Tribunal finds that the transaction is or is likely to prevent or lessen competition substantially, it may order that the parties not proceed with the transaction or part of it or, in the event that the transaction has already been completed, order its dissolution or the disposition of some of the assets or shares involved. In addition, the Competition Tribunal may, with the consent of the person against whom the order is directed and the Commissioner, order that person to take any other action as is deemed necessary to remedy any substantial lessening or prevention of competition that the Competition Tribunal determines would or would likely result from the transaction.
E. | Taxation |
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS [To be reviewed by Dorsey]
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The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of common shares.
This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local tax, and foreign tax consequences relating to the acquisition, ownership and disposition of common shares.
No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares. 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. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary.
Scope of this Summary
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective basis which could affect the U.S. federal income tax considerations described in this summary. 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 or prospective basis.
U.S. Holders
For purposes of this summary, the term "U.S. Holder" means a beneficial owner of common shares that is for U.S. federal income tax purposes:
• | an individual who is a citizen or resident of the U.S.; |
• | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any state thereof or the District of Columbia; |
• | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
• | a trust that (1) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. |
Non-U.S. Holders
For purposes of this summary, a “non-U.S. Holder” is a beneficial owner of common shares that is not a U.S. Holder. This summary does not address the U.S. federal income tax consequences to non-U.S. Holders arising from and relating to the acquisition, ownership, and disposition of common shares. Accordingly, a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local tax, and foreign tax consequences (including the potential application of and operation of any income tax treaties) relating to the acquisition, ownership, and disposition of common shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including the following U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial institutions,
49
underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S. dollar; (e) U.S. Holders that own common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (f) U.S. Holders that acquired common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) U.S. Holders that hold common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) partnerships and other pass-through entities (and investors in such partnerships and entities); or (j) U.S. Holders that own or have owned (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the outstanding shares of the Company. This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are (a) U.S. expatriates or former long-term residents of the U.S. subject to Section 877 of the Code, (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the Tax Act; (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold common shares in connection with carrying on a business in Canada; (d) persons whose common shares constitute “taxable Canadian property” under the Tax Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local tax, and foreign tax consequences relating to the acquisition, ownership and disposition of common shares.
If an entity that is classified as a partnership for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to such partnership and the partners of such partnership generally will depend on the activities of the partnership and the status of such partners. Partners of entities that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisor regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of common shares.
Tax Consequences Not Addressed
This summary does not address the U.S. state and local, U.S. federal estate and gift, U.S. federal alternative minimum tax or foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of common shares. Each U.S. Holder should consult its own tax advisor regarding the U.S. state and local, U.S. federal estate and gift, U.S. federal alternative minimum tax and foreign tax consequences of the acquisition, ownership, and disposition of common shares.
Passive Foreign Investment Company Rules
If the Company is considered a “passive foreign investment company” under the meaning of Section 1297 of the Code (a “PFIC”) at any time during a U.S. Holder’s holding period, the following sections will generally describe the U.S. federal income tax consequences to the U.S. Holder of the acquisition, ownership, and disposition of common shares. In addition, in any year in which the Company is classified as a PFIC, such holder would be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file a IRS Form 8621.
PFIC Status of the Company
The Company generally will be a PFIC if, for a tax year, (a) 75% or more of the gross income of the Company for such tax year is passive income or (b) 50% or more of the value of the Company’s assets either produce passive income (the “income test”) or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the “asset test”). “Gross income” generally includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources and “passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.
Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all of a foreign corporation’s commodities are (a) stock in trade of such foreign corporation or other property of a kind which would properly be included in inventory of such foreign corporation, or property held by such foreign corporation primarily for sale to customers in the ordinary course of business, (b) property used in the trade or business of such foreign corporation that would be subject to the allowance for depreciation under Section 167 of the Code, or (c) supplies of a type regularly used or consumed by such foreign corporation in the ordinary course of its trade or business.
For purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In
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addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by the Company from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.
In addition, under certain attribution rules, if the Company is a PFIC, U.S. Holders will be deemed to own their proportionate share of any subsidiary of the Company which is also a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income tax on their proportionate share of (i) a distribution on the shares of a Subsidiary PFIC and (ii) a disposition or deemed disposition of shares of a Subsidiary PFIC, both as if such U.S. Holders directly held the shares of such Subsidiary PFIC.
The Company believes that it qualified as a PFIC for the taxable year ended December 31, 2011, and based on current business plans and financial expectations, the Company anticipates that it may qualify as a PFIC for subsequent taxable years. The determination of whether a corporation was, or will be, a PFIC for a tax year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether a corporation will be a PFIC for any tax year depends on the assets and income of such corporation over the course of each such tax year and, as a result, cannot be predicted with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any determination made by the Company (or a Subsidiary PFIC) concerning its PFIC status. Each U.S. Holder should consult its own tax advisor regarding the PFIC status of the Company and each Subsidiary PFIC.
Default PFIC Rules Under Section 1291 of the Code
If the Company is a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of common shares will depend on whether such U.S. Holder makes an election to treat the Company and each Subsidiary PFIC, if any, as a “qualified electing fund” or “QEF” under Section 1295 of the Code (a “QEF Election”) or a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”
A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code with respect to (a) any gain recognized on the sale or other taxable disposition of common shares and (b) any excess distribution received on the common shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. Holder’s holding period for the common shares, if shorter).
Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of common shares, and any “excess distribution” received on common shares, must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for the respective common shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income. The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible.
If the Company is a PFIC for any tax year during which a Non-Electing U.S. Holder holds common shares, the Company will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more subsequent tax years. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if such common shares were sold on the last day of the last tax year for which the Company was a PFIC.
QEF Election
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 rules of Section 1291 of the Code discussed above with respect to its common shares. However, a U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the net capital gain of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) and the ordinary earnings of the Company, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain” is the excess of (a) net long-term capital gain over (b) 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 QEF Election will be subject to U.S. federal income tax on such amounts for each tax year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company. However, for any tax year in which the Company is a PFIC and has no net income or gain, U.S. Holders that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S.
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Holder that made a QEF Election has an income inclusion, such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible.
A U.S. Holder that makes a QEF Election generally (a) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” of the Company 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 procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as “timely” if such QEF Election is made for the first year in the U.S. Holder’s holding period for the common shares in which the Company was a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year.
A QEF Election will apply to the tax year for which such QEF Election is made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, the Company ceases to be a PFIC, 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. Accordingly, if the Company becomes a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which the Company qualifies as a PFIC.
For each taxable year that the Company qualifies as a PFIC, the Company will make available to each U.S. Holder that has made a QEF Election, upon written request, a "PFIC Annual Information Statement" as described in Treasury Regulation Section 1.1295-1(g) (or any successor Treasury Regulation) and use commercially reasonable efforts to provide all additional information that such U.S. Holder is required to obtain in connection with maintaining such QEF Election with regard to the Company.
Mark-to-Market Election
A U.S. Holder may make a Mark-to-Market Election only if the common shares are marketable stock. The common shares generally will be “marketable stock” if the common shares are regularly traded on (a) a national securities exchange that is registered with the Securities and Exchange Commission, (b) the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such foreign exchange has trading volume, listing, financial disclosure, and meets other requirements and the laws of the country in which such foreign exchange is located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced and (ii) the rules of such foreign exchange ensure active trading of listed stocks. If such stock is traded on such a qualified exchange or other market, such stock generally will be “regularly traded” for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.
A U.S. Holder that makes a Mark-to-Market Election with respect to its common shares generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to such common shares. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax year of such U.S. Holder’s holding period for the common shares or such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, the common shares.
A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each tax year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares, as of the close of such tax year over (b) such U.S. Holder’s tax basis in such common shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the excess, if any, of (i) such U.S. Holder’s adjusted tax basis in the common shares, over (ii) the fair market value of such common shares (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election for prior tax years).
A U.S. Holder that makes a Mark-to-Market Election generally also 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. In addition, upon a sale or other taxable disposition of common shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or ordinary loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over (b) the amount allowed as a deduction because of such Mark-to-Market Election
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for prior tax years).
A Mark-to-Market Election applies to the tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless the common shares cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.
Although a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to the common shares, no such election may be made with respect to the stock of any Subsidiary PFIC that a U.S. Holder is treated as owning, because such stock is not marketable. Hence, the Mark-to-Market Election will not be effective to eliminate the interest charge described above with respect to deemed dispositions of Subsidiary PFIC stock or distributions from a Subsidiary PFIC.
Other PFIC Rules
Under Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize gain (but not loss) upon certain transfers of common shares that would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to a U.S. Holder may vary based on the manner in which common shares are transferred.
Certain additional adverse rules will apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example under Section 1298(b)(6) of the Code, a U.S. Holder that uses common shares as security for a loan will, except as may be provided in Treasury Regulations, be treated as having made a taxable disposition of such common shares.
Special rules also apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to such special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. The rules relating to distributions by a PFIC and their eligibility for the foreign tax credit are complicated, and a U.S. Holder should consult with their own tax advisor regarding the availability of the foreign tax credit with respect to distributions by a PFIC.
In addition, a U.S. Holder who acquires common shares from a decedent will not receive a “step up” in tax basis of such common shares to fair market value.
The PFIC rules are complex, and each U.S. Holder should consult its own tax advisor regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares.
U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Common Shares
The following discussion is subject to the rules described above under "Passive Foreign Investment Company Rules."
General Taxation of Distributions
Subject to the PFIC rules discussed above, a U.S. Holder that receives a distribution, including a constructive distribution, with respect to a Common Share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current or accumulated “earnings and profits” of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares. (See “ Sale or Other Taxable Disposition of common shares” below). However, the Company may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should therefore assume that any distribution by the Company with respect to the common shares will constitute ordinary dividend income. Dividends received on common shares generally will not be eligible for the “dividends received deduction”. In addition, the Company does not anticipate that its distributions will be eligible for the preferential tax rates applicable to long-term capital gains. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
Sale or Other Taxable Disposition of Common Shares
Subject to the PFIC rules discussed above, upon the sale or other taxable disposition of common shares, a U.S. Holder generally
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will recognize capital gain or loss in an amount equal to the difference between the amount of cash plus the fair market value of any property received and such U.S. Holder's tax basis in such common shares sold or otherwise disposed of. Subject to the PFIC rules discussed above, gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, the common shares have been held for more than one year.
Preferential tax rates apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.
Additional Tax on Passive Income
For tax years beginning after December 31, 2012, certain individuals, estates and trusts whose income exceeds certain thresholds will be required to pay a 3.8% Medicare surtax on “net investment income” including, among other things, dividends and net gain from dispositions of property (other than property held in a trade or business). U.S. Holders should consult with their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of common shares.
Receipt of Foreign Currency
The amount of any distribution paid to a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). If the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who receives payment in foreign currency and engages in a subsequent conversion or other disposition of the foreign currency may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.
Foreign Tax Credit
Subject to the PFIC rules discussed above, a U.S. Holder who pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. 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.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and if an election is properly made under the Code. However, the amount of a distribution with respect to the Common Shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. The foreign tax credit rules are complex, and each U.S. Holder should consult its own tax advisor regarding the foreign tax credit rules.
Backup Withholding and Information Reporting
Under U.S. federal income tax law and Treasury Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, recently enacted legislation generally imposes new U.S. return disclosure obligations (and related penalties) on individuals who are U.S. Holders that hold certain specified foreign financial assets in excess of $50,000. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U.S. Holders may be subject to these reporting requirements
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unless their common shares are held in an account at a domestic financial institution. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult with their own tax advisors regarding the requirements of filing information returns under these rules, including the requirement to file an IRS Form 8938.
Payments made within the U.S. or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, common shares will generally be subject to information reporting and backup withholding tax, at the rate of 28% (and increasing to 31% for payments made after December 31, 2012), if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons, such as corporations, generally are excluded from these information reporting and backup withholding rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner. Each U.S. Holder should consult its own tax advisor regarding the information reporting and backup withholding rules.
F. | Dividends and Paying Agents |
Not Applicable
G. | Statements by Experts |
Not Applicable
H. | Documents on Display |
We are subject to the informational requirements of the Exchange Act and file reports and other information with the SEC. You may read and copy any of our reports and other information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. In addition, the SEC maintains a Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We are required to file reports and other information with the securities commissions in Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval ("SEDAR") (http://www.sedar.com), the Canadian equivalent of the SEC's electronic document gathering and retrieval system.
We "incorporate by reference" information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this Form 20-F and more recent information automatically updates and supersedes more dated information contained or incorporated by reference in this Form 20-F.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements to shareholders.
We will provide without charge to each person, including any beneficial owner, to whom a copy of this annual report has been delivered, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this annual report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: Oncolytics Biotech Inc., 210 – 1167 Kensington Crescent, NW, Calgary, Alberta, Canada, T2N 1X7, Attention: Doug Ball. Telephone (403) 670 - 7377. Facsimile (403) 283-0858 EMAIL: info@oncolytics.ca.
I. | Subsidiary Information |
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Risk
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We operate primarily in Canada, the U.S., the U.K. and Europe. Therefore, we are exposed to foreign currency risk associated with our expenses outside of Canada. We do not use financial derivative instruments to manage this market risk.
Interest Rate Risk
The primary objective of our policy for the investment of temporary cash surpluses is the protection of principal, and, accordingly, we generally invest in investment-grade debt securities with varying maturities. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate risk.
We do not currently have any long-term debt, nor do we currently utilize interest rate swap contracts to hedge against interest rate risk.
We do not use financial instruments for trading purposes and are not parties to any leverage derivatives. We do not currently engage in hedging transactions. See “Currency and Exchange Rates” and Item 4 – “Information on the Company”.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
A. | Debt Securities |
Not Applicable
B. | Warrants and Rights |
Not Applicable
C. | Other Securities |
Not Applicable
D. | American Depository Shares |
The Company’s Common Shares are not represented by American Depository Receipts.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
A. | Modification of Instruments Defining Rights of Security Holders |
None
B. | Modification or Issuance of Other Class of Securities |
None
C. | Withdrawal or Substitution of Security |
None
D. | Change of Trustee or Paying Agent |
None
E. | Use of Proceeds |
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There has been no change to the information provided in our first annual report on Form 20-F.
ITEM 15. CONTROLS AND PROCEDURES
A. | Evaluation of Disclosures and Procedures |
It is the conclusion of our Chief Executive Officer and Chief Financial Officer that our Company's disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)), based on their evaluation of these controls and procedures as of the end of the period covered by this annual report, are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
B. | Management's Annual Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Reporting Standards as issued by the International Accounting Standards Board ("IFRS"), and 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 our assets; (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 our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2011, the Company’s internal control over financial reporting was effective based on those criteria.
The Company is required to provide an auditor’s attestation report on internal control over financial reporting for the fiscal year ended December 31, 2011. In this report, the Company’s independent registered auditor, Ernst & Young LLP, must state its opinion as to the effectiveness of the Company’s internal control over financial reporting for the fiscal year ended December 31, 2011. Ernst & Young LLP has audited the Company’s financial statements included in this annual report on Form 20-F and has issued an attestation report on the Company’s internal control over financial reporting.
C. | Attestation Report of the Register Public Accounting Firms |
The Auditor Attestation Report is included in the Ernst & Young LLP Independent Auditor’s Report, included in the Company’s financial statements, beginning on page F-1 of this annual report on Form 20-F.
D. | Changes in Internal Controls over Financial Reporting |
There were no changes in our internal controls over financial reporting that occurred during the period that is covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 16 . [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that each of the Audit Committee members, Fred Stewart, Robert Schultz and Mark Lievonen,
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is a financial expert and each is independent pursuant to pursuant to the Rule 5605(a)(2) of the NASDAQ Capital Market and Rule 10A-3 of the Exchange Act.
ITEM 16B. CODE OF ETHICS
Our Board of Directors has adopted a Code of Ethics for our CEO, CFO and Accounting Officer that applies to our CEO, CFO, and Controller. A copy of this Code of Ethics may be found on the Company’s website at http://www.oncolyticsbiotech.com. Requests for such copies should be directed to us at the following address: Oncolytics Biotech Inc., 210 – 1167 Kensington Crescent, NW, Calgary, Alberta, Canada, T2N 1X7, Attention: Doug Ball. Telephone (403) 670 - 7377. Facsimile (403) 283-0858 EMAIL: info@oncolyticsbiotech.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees and Services
During the financial years ended December 31, 2011, 2010 and 2009, Ernst & Young LLP received the following fees:
2011 | 2010 | 2009 | ||||
Item | $ | $ | $ | |||
Audit fees | 181,709 | 190,448 | 177,396 | |||
Audit-related fees (1),(3) | 107,085 | 65,994 | 107,654 | |||
Tax fees (2) | 32,147 | 26,041 | 21,626 | |||
All other fees (4) | — | 23,675 | 2,098 | |||
Notes:
1) | Includes review of interim financial statements, accounting consultations and subscription to on-line accounting services. |
2) | Comprised of tax return preparation, scientific research and development return and other tax consultation fees. |
3) | Includes fees associated with matters relating to the provision of a consent letter for various filings. |
4) | Includes fees associated with the adoption of International Financial Reporting Standards and the expansion of our corporate structure. |
Audit Fees
Audit fees were for professional services rendered by Ernst & Young, LLP for the audit of our annual financial statements and services provided in connection with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-related fees were for assurance and related services reasonably related to the performance of the audit or review of the annual statements and are not reported under the heading Audit Fees above. These services consisted of accounting consultations, assistance with prospectus filings and assistance with preparations for compliance with section 404 of the Sarbanes-Oxley Act of 2002.
Tax Fees
Tax fees were for tax compliance and professional tax consultations.
All Other Fees
Other fees are for products and services other than those described under the headings Audit Fees, Audit-Related Fees and Tax Fees above.
The Audit Committee pre-approves all audit services to be provided to us by our independent auditors. The Audit Committee’s policy regarding the pre-approval of non-audit services to be provided to us by our independent auditors is that all such services shall be pre-approved by the Audit Committee or by the Chairman of the Audit Committee, who must report all such pre-approvals
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to the Audit Committee at their next meeting following the granting thereof. Non-audit services that are prohibited to be provided to us by our independent auditors may not be pre-approved. In addition, prior to the granting of any pre-approval, the Audit Committee or the Chairman, as the case may be, must be satisfied that the performance of the services in question will not compromise the independence of the independent auditors.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES
The Company did not repurchase any common shares in the fiscal year ended December 31, 2011.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTS
None
ITEM 16G. CORPORATE GOVERNANCE
NASDAQ CORPORATE GOVERNANCE
Our common shares are quoted for trading on the NASDAQ Capital Market. Section 5615(a)(3) of the NASDAQ Marketplace Rules permits NASDAQ to grant exemptions to a foreign private issuer for the provisions of the Rule 5600 series, Rule 5250 (d), and Rules 5210(c) and 5255 related to qualitative listing requirements. We are organized under the laws of the Province of Alberta and our common shares are listed for trading on The Toronto Stock Exchange. We comply with the laws of the Province of Alberta and rules and regulations of The Toronto Stock Exchange, including rules related to corporate governance practices. A description of the significant ways in which our governance practices differ from those followed by domestic companies pursuant to the NASDAQ Marketplace Rules is as follows:
Shareholder Meeting Quorum Requirement: The NASDAQ minimum quorum requirement for a shareholder meeting under Section 5620(c) of the NASDAQ Marketplace Rules is one-third of the outstanding shares of common stock. In addition, a company listed on NASDAQ is required to state our quorum requirement in our bylaws. Our quorum requirement is set forth in our corporate bylaws. A quorum for our shareholder meeting is two persons present and being, or representing by proxy, members holding not less than 5% of the issued shares entitled to be voted at such meeting.
The foregoing is consistent with the laws, customs and practices in Canada and the rules of The Toronto Stock Exchange.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18 FINANCIAL STATEMENTS
The financial statements appear on pages F-1 through F-25.
59
ITEM 19. EXHIBITS.
The following exhibits are filed as part of this annual report:
EXHIBIT NUMBER | DESCRIPTION |
Constating Documents | |
1.1* | Articles of Incorporation |
1.2* | By-laws |
Material Contracts | |
4.1** | Services Agreement, dated October 16, 2002, between the Company and its Senior Vice President, Clinical and Regulatory Affairs, George Gill |
4.2*** | Amending Agreement No. 1, dated January 6, 2005, to the Services Agreement between the Company and its Senior Vice President, Clinical and Regulatory Affairs, George Gill, dated October 16, 2001 |
4.3*** | Employment Agreement, dated January 12, 2007, between the Company and its Vice President, Intellectual Property, Mary Ann Dillahunty |
4.4*** | Executive Employment Agreement, dated May 29, 2007, between the Company and its Chief Scientific Officer, Matthew Coffey |
4.5*** | Executive Employment Agreement, dated May 29, 2007, between the Company and its Chief Medical Officer, Dr. Karl Mettinger |
4.6*** | Executive Employment Agreement, dated May 30, 2007, between the Company and its Chief Financial Officer, Douglas Ball |
4.7*** | Executive Employment Agreement, dated June 6, 2007, between the Company and its Chief Executive Officer, Bradley Thompson |
4.8*** | Amending Agreement No. 1, dated December 3, 2007, to the Employment Agreement between the Company and its Vice President, Intellectual Property, Mary Ann Dillahunty, dated January 12, 2007 |
4.9**** | Amendment No. 1, dated March 7, 2008, to the Executive Employment Agreement between the Company and its Chief Financial Officer, Douglas Ball, dated May 30, 2007 |
4.10**** | Amendment No.1, dated March 7, 2008, between the Company and its Chief Scientific Officer, Matthew Coffey, dated May 29, 2007 |
4.11**** | Amendment No. 1, dated March 7, 2008, to the Executive Employment Agreement between the Company and its Chief Executive Officer, Bradley Thompson, dated June 6, 2007 |
4.12**** | Amendment No. 1, dated March 20, 2008, to the Employment Agreement between the Company and its Vice President, Intellectual Property, Mary Ann Dillahunty, dated January 12, 2007 |
4.13**** | Amendment No. 1, dated March 28, 2008, to the Executive Employment Agreement between the Company and its Chief Medical Officer, Dr. Karl Mettinger, dated May 29, 2007 |
4.14**** | Amendment No. 2, dated March 31, 2008, to the Services Agreement between the Company and its Senior Vice President, Clinical and Regulatory Affairs, George Gill, dated October 16, 2001 |
4.15**** | Executive Employment Agreement, dated January 26, 2009, between the Oncolytics Biotech (U.S.) Inc. and its Chief Medical Officer, Dr. Karl Mettinger |
4.16**** | Executive Employment Agreement, dated January 22, 2009 between the Company and its Vice President, Intellectual Property, Mary Ann Dillahunty. |
4.17***** | Amendment No. 2, dated January 1, 2011, to the Executive Employment Agreement between the Company and its Chief Executive Officer, Bradley Thompson, dated June 6, 2007 |
4.18 | Employment Agreement, dated January 1, 2011 between the Company and its Senior Vice President, Clinical and Regulatory Affairs, George Gill. |
4.19 | Executive Employment Agreement, dated November 10, 2011 between the Company and its Senior Vice President of Clinical Development and Chief Medical Officer, Gerard T. Kennealey. |
Subsidiaries | |
8.0 | List of subsidiaries |
Certifications | |
12.1 | Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
12.2 | Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
13.1 | Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
13.2 | Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Other Exhibits | |
15.1 | The Registrant's Management's Discussion and Analysis for the Year Ended December 31, 2011 |
15.2 | Consent of Ernst & Young LLP |
(*) Previously filed with the SEC on Form 20-F dated June 14, 2002
(**) Previously filed with the SEC on Form 20-F dated June 27, 2003
(***) Previously filed with the SEC on Form 20-F dated March 23, 2008
(****) Previously filed with the SEC on Form 20-F dated March 6, 2009.
(*****) Previously filed with the SEC on Form 20-F dated March 24, 2011.
60
SIGNATURE
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.
Date: March 23, 2012
ONCOLYTICS BIOTECH INC.
/s/ Brad Thompson | /s/ Doug Ball |
Brad Thompson, Ph.D | Doug Ball, CA |
Chief Executive Officer | Chief Financial Officer |
61
Consolidated Financial Statements
Oncolytics Biotech® Inc.
December 31, 2011 and 2010
STATEMENT OF MANAGEMENT’S RESPONSIBILITY
Management is responsible for the preparation and presentation of the consolidated financial statements, Management’s Discussion and Analysis (“MD&A”) and all other information in the Annual Report.
In management’s opinion, the accompanying consolidated financial statements have been properly prepared within reasonable limits of materiality and in accordance with the appropriately selected International Financial Reporting Standards as issued by the International Accounting Standards Board consistently applied and summarized in the consolidated financial statements.
The MD&A has been prepared in accordance with the requirements of securities regulators as applicable to Oncolytics Biotech Inc.
The consolidated financial statements and information in the MD&A generally include estimates that are necessary when transactions affecting the current accounting period cannot be finalized with certainty until future periods. Based on careful judgments by management, such estimates have been properly reflected in the accompanying consolidated financial statements and MD&A. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources and risks and uncertainty. Actual results in the future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected.
Systems of internal controls, including organizational and procedural controls and internal controls over financial reporting, assessed as reasonable and appropriate in the circumstances, are designed and maintained by management to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable records for financial purposes.
We, as the Chief Executive Officer and Chief Financial Officer, will certify to our annual filings with the CSA and the SEC as required in Canada by National Instrument 52-109 (Certification of Disclosure in Issuers’ Annual Interim Filings) and in the United States by the Sarbanes-Oxley Act.
The external auditors conducted an independent examination of corporate and accounting records in accordance with generally accepted auditing standards to express their opinion on the consolidated financial statements. Their examination included such tests and procedures as they considered necessary to provide reasonable assurance that the consolidated financial statements are presented fairly. The external auditors have full and free access to our Board of Directors and its Committees to discuss audit, financial reporting and related matters.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board exercises this responsibility through the Audit Committee of the Board. This Committee meets with management and the external auditors to satisfy itself that management’s responsibilities are properly discharged and to review the consolidated financial statements and MD&A before they are presented to the Board of Directors for approval.
/s/ Brad Thompson | /s/ Doug Ball |
Brad Thompson, Ph.D | Doug Ball, CA |
Chief Executive Officer | Chief Financial Officer |
F-1
INDEPENDENT AUDITORS' REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Oncolytics Biotech Inc.
We have audited the accompanying consolidated financial statements of Oncolytics Biotech Inc., which comprise the consolidated statements of financial position as at December 31, 2011 and 2010 and January 1, 2010, and the consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Oncolytics Biotech Inc. as at December 31, 2011 and 2010 and January 1, 2010, and the results of its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Other matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Oncolytics Biotech Inc.'s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2012 expressed an unqualified opinion on Oncolytics Biotech Inc.'s internal control over financial reporting.
 | |
Calgary, Canada March 14, 2012 | Chartered Accountants |
F-2
Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States)
To the Shareholders of
Oncolytics Biotech Inc.
We have audited Oncolytics Biotech Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Oncolytics Biotech Inc's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's 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 generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's 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.
In our opinion, Oncolytics Biotech Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Oncolytics Biotech Inc. as at December 31, 2011 and 2010, and January 1, 2010, and the consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information, and our report dated March 14, 2012, expressed an unqualified opinion thereon.
| |
Calgary, Canada March 14, 2012 | Chartered Accountants |
F-3
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, | December 31, | January 1, | |||||
Notes | 2011 $ | 2010 $ | 2010 $ | ||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | 6 | 32,918,751 | 39,296,682 | 32,448,939 | |||
Short-term investments | 6 | 1,936,787 | 3,609,246 | 1,679,937 | |||
Accounts receivable | 21 | 55,392 | 284,988 | 64,787 | |||
Prepaid expenses | 721,576 | 278,934 | 507,408 | ||||
Total current assets | 35,632,506 | 43,469,850 | 34,701,071 | ||||
Non-current assets | |||||||
Property and equipment | 7 | 392,111 | 226,911 | 208,320 | |||
Long term investment | 8 | — | — | 684,000 | |||
Total non-current assets | 392,111 | 226,911 | 892,320 | ||||
Asset held for sale | 8 | — | 735,681 | — | |||
Total assets | 36,024,617 | 44,432,442 | 35,593,391 | ||||
Liabilities And Shareholders’ Equity | |||||||
Current Liabilities | |||||||
Accounts payable and accrued liabilities | 6,504,238 | 2,500,682 | 4,226,933 | ||||
Warrant liability | 9 | — | 5,536,800 | 1,023,051 | |||
Total current liabilities | 6,504,238 | 8,037,482 | 5,249,984 | ||||
Commitments and contingencies | 12, 13, 18 and 19 | ||||||
Shareholders’ equity | |||||||
Share capital Authorized: unlimited Issued: December 31, 2011 – 71,251,335 December 31, 2010 – 67,958,302 January 1, 2010 – 61,549,969 | 9 | 177,282,566 | 155,439,610 | 131,908,274 | |||
Warrants | 9 | 2,653,627 | 4,108,652 | 2,437,460 | |||
Contributed surplus | 9, 10 | 21,142,519 | 19,399,489 | 13,734,743 | |||
Accumulated other comprehensive loss | (117,501 | ) | (156,660 | ) | — | ||
Accumulated deficit | (171,440,832 | ) | (142,396,131 | ) | (117,737,070 | ) | |
Total shareholders’ equity | 29,520,379 | 36,394,960 | 30,343,407 | ||||
Total liabilities and equity | 36,024,617 | 44,432,442 | 35,593,391 | ||||
See accompanying notes
On behalf of the Board: | |
/s/ Fred Stewart | /s/ Bob Schultz |
Director | Director |
F-4
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
For the years ending December 31, | Notes | 2011 $ | 2010 $ | |||||
Expenses | ||||||||
Research and development | 10, 22, 23 | 23,386,685 | 13,882,565 | |||||
Operating | 10, 22, 23 | 5,334,582 | 6,003,870 | |||||
Loss before the following | (28,721,267 | ) | (19,886,435 | ) | ||||
Write down of asset available for sale | 8 | (735,681 | ) | — | ||||
Change in fair value of warrant liability | 36,000 | (4,841,949 | ) | |||||
Interest | 416,247 | 76,934 | ||||||
Loss before income taxes | (29,004,701 | ) | (24,651,450 | ) | ||||
Income tax expense | 14 | (40,000 | ) | (7,611 | ) | |||
Net loss | (29,044,701 | ) | (24,659,061 | ) | ||||
Other comprehensive gain (loss) - translation adjustment | 39,159 | (156,660 | ) | |||||
Net comprehensive loss | (29,005,542 | ) | (24,815,721 | ) | ||||
Basic and diluted loss per common share | 11 | (0.41 | ) | (0.39 | ) | |||
Weighted average number of shares (basic and diluted) | 70,911,526 | 62,475,403 | ||||||
See accompanying notes
F-5
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated Other Comprehensive Income | ||||||||||||
Share Capital | Warrants | Contributed Surplus | Accumulated Deficit | Total | ||||||||
$ | $ | $ | $ | $ | $ | |||||||
As at January 1, 2010 | 131,908,274 | 2,437,460 | 13,734,743 | — | (117,737,070 | ) | 30,343,407 | |||||
Net loss and comprehensive loss | — | — | — | (156,660 | ) | (24,659,061 | ) | (24,815,721 | ) | |||
Issue of common shares, public offering | 22,639,719 | 4,120,201 | — | — | — | 26,759,920 | ||||||
Exercise of warrants | 787,508 | (11,009 | ) | — | — | — | 776,499 | |||||
Exercise of stock options | 104,109 | — | (24,295 | ) | — | — | 79,814 | |||||
Expired warrants | — | (2,438,000 | ) | 2,438,000 | — | — | — | |||||
Share based compensation | — | — | 3,251,041 | — | — | 3,251,041 | ||||||
As at December 31, 2010 | 155,439,610 | 4,108,652 | 19,399,489 | (156,660 | ) | (142,396,131 | ) | 36,394,960 | ||||
Net loss and comprehensive income | — | — | — | 39,159 | (29,044,701 | ) | (29,005,542 | ) | ||||
Exercise of warrants | 21,487,080 | (1,455,025 | ) | — | — | — | 20,032,055 | |||||
Exercise of stock options | 355,876 | — | (62,473 | ) | — | — | 293,403 | |||||
Share based compensation | — | — | 1,805,503 | — | — | 1,805,503 | ||||||
As at December 31, 2011 | 177,282,566 | 2,653,627 | 21,142,519 | (117,501 | ) | (171,440,832 | ) | 29,520,379 | ||||
See accompanying notes
F-6
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ending December 31, | Notes | 2011 $ | 2010 $ | |||||
Operating Activities | ||||||||
Net loss for the year | (29,044,701 | ) | (24,659,061 | ) | ||||
Amortization - property and equipment | 92,590 | 63,156 | ||||||
Share based compensation | 10, 22, 23 | 1,805,503 | 3,251,041 | |||||
Change in fair value of warrant liability | (36,000 | ) | 4,841,949 | |||||
Write down of asset available for sale | 735,681 | — | ||||||
Unrealized foreign exchange loss | 115,234 | 343,821 | ||||||
Net change in non-cash working capital | 17 | 3,790,510 | (1,717,978 | ) | ||||
Cash used in operating activities | (22,541,183 | ) | (17,877,072 | ) | ||||
Investing Activities | ||||||||
Acquisition of property and equipment | (257,790 | ) | (81,846 | ) | ||||
Acquisition of investment | 8 | — | (51,681 | ) | ||||
Redemption (purchase) of short-term investments | 1,672,459 | (1,929,309 | ) | |||||
Cash provided by (used in) investing activities | 1,414,669 | (2,062,836 | ) | |||||
Financing Activities | ||||||||
Proceeds from exercise of stock options and warrants | 14,824,658 | 528,211 | ||||||
Proceeds from public offering | — | 26,759,921 | ||||||
Cash provided by financing activities | 14,824,658 | 27,288,132 | ||||||
Increase (decrease) in cash | (6,301,856 | ) | 7,348,224 | |||||
Cash and cash equivalents, beginning of year | 39,296,682 | 32,448,939 | ||||||
Impact of foreign exchange on cash and cash equivalents | (76,075 | ) | (500,481 | ) | ||||
Cash and cash equivalents, end of year | 32,918,751 | 39,296,682 | ||||||
See accompanying notes
F-7
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Note 1: Incorporation and Nature of Operations
Oncolytics Biotech Inc. was incorporated on April 2, 1998 under the Business Corporations Act (Alberta) as 779738 Alberta Ltd. On April 8, 1998, we changed our name to Oncolytics Biotech Inc.
Our consolidated financial statements for the year ended December 31, 2011, were authorized for issue in accordance with a resolution of the Board of Directors (the "Board") on March 14, 2012. We are a limited company incorporated and domiciled in Canada. Our shares are publicly traded and our registered office is located at 210, 1167 Kensington Crescent NW, Calgary, Alberta, Canada.
We are a development stage biopharmaceutical company that focuses on the discovery and development of pharmaceutical products for the treatment of cancers that have not been successfully treated with conventional therapeutics. Our product being developed may represent a novel treatment for Ras mediated cancers which can be used as an alternative to existing cytotoxic or cytostatic therapies, as an adjuvant therapy to conventional chemotherapy, radiation therapy, or surgical resections, or to treat certain cellular proliferative disorders for which no current therapy exists.
Note 2: Basis of Financial Statement Presentation
Our consolidated financial statements include our financial statements and the financial statements of our subsidiaries and are presented in Canadian dollars, our functional currency.
The accounts are prepared on the historical cost basis, except for certain assets and liabilities which are measured at fair value as explained in the notes to these financial statements.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRS 1 First-time Adoption of International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB").
Basis of consolidation
Our accounts include the accounts of Oncolytics Biotech Inc. and our subsidiaries. Subsidiaries are entities over which we have control, being the power to govern the financial and operating policies of the investee entity so as to obtain benefits from its activities. Accounting policies of subsidiaries are consistent with our accounting policies and all intra-group transactions, balances, income and expenses are eliminated on consolidation.
A change in ownership interest of a subsidiary, without a change in control, is accounted for as an equity transaction.
Note 3: Adoption of IFRS
Effective January 1, 2011, all Canadian publicly accountable enterprises were required to prepare their financial statements using International Financial Reporting Standards ("IFRS"), issued by the IASB and adopted by the Accounting Standards Board of Canada. IFRS 1 First-time Adoption of International Financial Reporting Standards ("IFRS 1") requires that an entity's accounting policies used in its opening statement of financial position and throughout all periods presented in its first IFRS financial statements comply with IRFS effective at the end of its first IFRS reporting period.
Our accounting policies outlined in Note 4 have been applied in preparing our consolidated financial statements as at and for the year ended December 31, 2011, the comparative information presented as at and for the year ended December 31, 2010 and in the preparation of our opening IFRS balance sheet at January 1, 2010 (our date of transition).
In preparing our opening balance sheet, we have adjusted amounts reported previously in our consolidated financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles in place prior to the adoption of IFRS (“CGAAP”). An explanation of how the transition from CGAAP to IFRS has affected our financial position, financial performance and cash flows is set out in the tables below and in the respective notes.
F-8
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Total equity | December 31, 2010 $ | January 1, 2010 $ | ||
Total equity under CGAAP | 41,931,760 | 31,366,458 | ||
Adjustment required to conform to IFRS: | ||||
Warrant liability | (5,536,800 | ) | (1,023,051 | ) |
Total equity under IFRS | 36,394,960 | 30,343,407 | ||
Comprehensive loss for the period | For the year ending December 31, 2010 $ | |
Comprehensive loss under CGAAP | 19,973,772 | |
Adjustment required to conform to IFRS: | ||
Revaluation of warrant liability | 4,841,949 | |
Comprehensive loss under IFRS | 24,815,721 | |
Basic and diluted loss per common share, CGAAP | 0.32 | |
Basic and diluted loss per common share, IFRS | 0.39 | |
Weighted average number of common shares | 62,475,403 | |
Consolidated Statement of Cash Flows
In transitioning to IFRS, there was no impact on our net change in cash or cash flow statement presentation for the year ending December 31, 2010.
IFRS Transitional Arrangements
When preparing our consolidated statement of financial position under IFRS at January 1, 2010, our date of transition, the following optional exemption from full retrospective application of IFRS accounting policies has been adopted:
Cumulative translation differences - cumulative translation differences resulting from the translation of our net investment in our U.S. subsidiary and the financial statements of our U.S. subsidiary have been set to zero at January 1, 2010.
Effects of IFRS
Warrants
IFRS requires warrants with an exercise price denominated in a currency other than the entity's functional currency to be treated as a liability measured at fair value. Changes in fair value are to be recorded in the consolidated statement of loss and comprehensive loss.
Classification of expenses within the statement of loss and comprehensive loss
Under IFRS, we have chosen to present our expenses based on the function of each expense rather than the nature of each expense. As a result, share based compensation, depreciation of capital assets, and foreign currency gains and losses are no longer separately presented on the statement of loss and comprehensive loss. There is no impact on our net loss or comprehensive loss as a result of these classifications.
Foreign currency translation
Under IFRS, we record the impact of fluctuations in foreign currency exchange rates relating to our net investment in our U.S.
F-9
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
subsidiary and any foreign currency effects on the translation of our U.S. subsidiary's financial statements as a separate component of equity and other comprehensive income. Under CGAAP we treated our U.S. subsidiary as an integrated subsidiary with foreign currency translation differences recorded as part of our statement of loss. The result of the transition to IFRS is a reclassification of the related foreign currency gains and losses from net loss to other comprehensive income. There is no impact on our net comprehensive loss as a result of these re-classifications.
Note 4: Summary of Significant Accounting Policies
The consolidated financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided on bases and at rates designed to amortize the cost of the assets over their estimated useful lives. Depreciation is recorded using the declining balance method at the following annual rates:
Office equipment and furniture | 20% |
Medical equipment | 20% |
Computer equipment | 30% |
Leasehold improvements | Straight-line over the term of the lease |
Intellectual property
Intellectual property acquired through our investment in BCBC was included in Asset Held for Sale on the December 31, 2010 balance sheet, at cost. During the year ended December 31, 2011, this amount was written off.
Foreign currency translation
The financial statements for each of our subsidiaries are prepared using their functional currency. Our presentation currency is the Canadian dollar which is also Oncolytics Biotech Inc.'s functional currency. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Exchange differences resulting from the settlement of such transactions and from the translation at exchange rates ruling at the statement of financial position date of monetary assets and liabilities denominated in currencies other than the functional currency are recognized directly in the consolidated statement of loss and comprehensive loss.
Exceptions to this are where the monetary items form part of the net investment in a foreign operation and the foreign operation's functional currency is the local currency. These exchange differences are initially recognized in equity. The statement of financial position of foreign operations is translated into Canadian dollars using the exchange rate at the statement of financial position date and the income statements are translated into Canadian dollars using the average exchange rate for the period. Where this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, the exchange rate on the transaction date is used. Exchange differences on translation into Canadian dollars are recognized as a separate component of equity. On disposal of a foreign operation, any cumulative exchange differences held in equity are transferred to the consolidated statement of loss and comprehensive loss.
Research and development costs
Research costs are expensed as incurred. Development costs that meet specific criteria related to technical, market and financial feasibility will be capitalized. To date, all development costs have been expensed.
Investment tax credits and government assistance
Investment tax credits and government assistance relating to qualifying scientific research and experimental development expenditures that are recoverable in the current period are accounted for as a reduction in research and development expenditures.
F-10
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Investment tax credits not recoverable in the current period are accrued provided there is reasonable assurance that the credits will be realized.
Loss per common share
Basic loss per common share is determined using the weighted average number of common shares outstanding during the period.
We use the treasury stock method to calculate diluted loss per common share. Under this method, diluted loss per common share is computed in a manner consistent with basic loss per common share except that the weighted average common shares outstanding are increased to include additional common shares from the assumed exercise of options and warrants, if dilutive. The number of additional common shares is calculated by assuming that any outstanding “in the money” options and warrants were exercised at the later of the beginning of the period or the date of issue and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period.
Share based payments
Stock option plan
We have one stock option plan (the “Plan”) available to officers, directors, employees, consultants and suppliers with grants under the Plan approved from time to time by our Board of Directors (the “Board”). Under the Plan, the exercise price of each option equals the trading price of our stock on the date of grant in accordance with Toronto Stock Exchange guidelines. Vesting is provided for at the discretion of the Board and the expiration of options is to be no greater than 10 years from the date of grant. Exercised stock options are settled with common shares issued from treasury.
Officers, directors and employees
We use the fair value based method of accounting for employee awards granted under the Plan. We calculate the fair value of each stock option grant using the Black Scholes Option Pricing Model and the fair value is recorded over the option's vesting period.
Non-employees
Share based payments to non-employees is recorded at the fair value of the goods received or the services rendered. The fair value is measured at the date we obtain the goods or the date the counterparty renders the service. If the fair value of the goods or services cannot be reliably valued the fair value of the options granted will be used.
Financial instruments
Financial assets
Financial assets are comprised of cash and cash equivalents, accounts receivable, short-term investments and long term investment. Financial assets are initially recorded at fair market value and are classified as follows:
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and interest bearing deposits with our bank and have been designated as held for trading.
Accounts receivable
Accounts receivable have been classified as loans and receivables.
Short-term investments
We determine the appropriate classification of our short-term investments at the time of purchase and re-evaluate such classification as of each reporting date. We classify our short-term investments as held-to-maturity as we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at original cost, adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest rate method. Such amortization and interest on securities classified as held-to-maturity are included in interest income.
Long term investment
We classified our long term investment as available-for-sale.
F-11
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Impairment of financial assets
We assess at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
Financial liabilities
Trade accounts payable
Trade accounts payable are non interest-bearing and recorded at fair market value. They are classified as other financial liabilities and are subsequently measured at amortized cost using the effective interest rate method.
Warrant liability
Warrants with an exercise price denominated in a foreign currency are recorded as a Warrant Liability and classified as fair value through profit and loss. The Warrant Liability is initially measured at estimated fair value with subsequent changes in fair value recorded as a gain or loss in the consolidated statement of loss and comprehensive loss. These warrants have not been listed on an exchange and therefore do not trade on an active market.
Fair Value Measurement
The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3 - Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
The fair value of our Warrant Liability is based on level 2 (significant observable inputs).
Transaction Costs
Transaction costs are expensed as incurred for financial instruments designated as held for trading. Transaction costs for other financial instruments are recognized as part of the financial instrument's carrying value.
Asset held for sale
Assets are classified as held for sale if their carrying amount is expected to be recovered primarily through a sale as opposed to continued use. Assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Depreciation ceases when an asset is classified as held for sale.
Deferred income taxes
We follow the liability method of accounting for income taxes. Under the liability method, deferred income taxes are recognized for the difference between financial statement carrying values and the respective income tax basis of assets and liabilities (temporary differences). Deferred income tax assets and liabilities are measured using substantively enacted income tax rates and laws expected to apply in the years in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is charged or credited to income, except when it is related to items charged or credited to either other comprehensive income or directly to equity.
F-12
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Accounting Standards and Interpretations Issued but Not Yet Effective
Financial Instruments
In November 2009, the International Accounting Standard Board (“IASB”) issued IFRS 9 Financial Instruments which replaced the classification and measurement requirements in IAS 39 Financial Instruments: Recognition and Measurement for financial assets. In October 2010, the IASB issued additions to IFRS 9 regarding financial liabilities. The new standard is effective for annual periods beginning on or after January 1, 2015 with earlier adoption permitted. We do not anticipate that there will be a material impact on our financial position or results of operations.
Fair Value Measurements
In June 2011, the IASB issued IFRS 13 Fair Value Measurements, which establishes a single source of guidance for all fair value measurements required by other IFRS; clarifies the definition of fair value; and enhances disclosures about fair value measurements. IFRS 13 applies when other IFRS require or permit fair value measurements or disclosures. IFRS 13 specifies how we should measure fair value and disclose fair value information. It does not specify when an entity should measure an asset, a liability or its own equity instrument at fair value. IFRS 13 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. We are currently assessing the impact of adopting IFRS 13 on our consolidated financial statements.
Presentation of Financial Statements
In June 2011, the IASB issued amendments to IAS 1 Presentation of Financial Statements to improve the consistency and clarity of the presentation of items of comprehensive income by requiring that items presented in Other Comprehensive Income (“OCI”) be grouped on the basis of whether they are at some point reclassified from OCI to net loss or not. The amendments to IAS 1 are effective for annual periods beginning on or after July 1, 2012. Earlier application is permitted. We are currently assessing the impact of adopting the amendments to IAS 1 on our consolidated financial statements.
Consolidated Financial Statements
In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements (“IFRS 10”), which replaces International Accounting Standard 27 Consolidated and Separate Financial Statements (“IAS 27”) and Standing Interpretations Committee Interpretation 12 Consolidation - Special Purpose Entities (“SIC-12”). IFRS 10 provides a revised definition of control so that a single control model can be applied to all entities for consolidation purposes.
Joint Arrangements
In May 2011, the IASB issued IFRS 11 Joint Arrangements, which supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers. IFRS 11 provides for a principle-based approach to the accounting for joint arrangements that requires an entity to recognize its contractual rights and obligations arising from its joint arrangements. IFRS 11 also generally requires the use of the equity method of accounting for interests in joint ventures. Improvements in disclosure requirements are intended to allow investors to gain a better understanding of the nature, extent, and financial effects of the activities that an entity carries out through joint arrangements.
Disclosure of Interests in Other Entities
In May 2011, the IASB issued IFRS 12 Disclosure of Interests in Other Entities, which contains enhanced disclosure requirements about an entity’s interests in consolidated and unconsolidated entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities (special purpose entities).
Investments in Associates and Joint Ventures and Separate Financial Statements
In May 2011, two existing standards, IAS 28 Investments in Associates and Joint Ventures and IAS 27 Separate Financial Statements, were amended. The amendments are not significant, and result from the issuance of IFRS 10, IFRS 11, and IFRS 12.
These new standards and amendments to existing standards (IFRS 10, IFRS 11, and IFRS 12) are effective for annual periods beginning on or after January 1, 2013. The disclosure requirements of IFRS 12 may be incorporated into the financial statements earlier than January 1, 2013. However, early adoption of the other standards is only permitted if all five are applied at the same time. We are currently assessing the impact of adopting these new standards and amendments on our consolidated financial statements, and do not expect the impact to be significant.
F-13
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Note 5: Significant Judgments, Estimates and Assumptions
Judgments
The preparation of our consolidated financial statements requires us to make judgments, estimates and assumptions that affect the reported amount of expenses, assets, liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.
Estimates and assumptions
Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates and such differences could be significant. Significant estimates made by management affecting our consolidated financial statements include:
Share based payments
We measure our share based payment expense by reference to the fair value of the stock options at the date at which they are granted. Estimating fair value for granted stock options requires determining the most appropriate valuation model which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility, dividend yield, and rate of forfeitures and making assumptions about them. The value of the share based payment expense for the year along with the assumptions and model used for estimating fair value for share based compensation transactions are disclosed in note 10.
Warrant liability
We measured our initial warrant liability and subsequent revaluations of our warrant liability by reference to the fair value of the warrants at the date at which they were granted and subsequently revalued at each reporting date. Estimating fair value for these warrants required determining the most appropriate valuation model which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the warrants, volatility and dividend yield and making assumptions about them.
Asset held for sale
In June 2011, we wrote down our asset held for sale to $nil. We have used management judgment pertaining to the timing and potential results of the ongoing sales process. We concluded, under market conditions existing at that time, that we would not be able to complete a sale in a timely manner. As well, assumptions have been made and estimates used in assessing the fair value of the associated intellectual property.
Taxes
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Currently, we are accumulating tax loss carry forward balances in various tax jurisdictions creating a deferred tax asset. Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
To date we have determined that none of our deferred tax assets should be recognized. Our deferred tax assets are mainly comprised of our net operating losses from prior years, prior year research and development expenses, and investment tax credits. These tax pools relate to entities that have a history of losses, have varying expiry dates, and may not be used to offset taxable income within our other subsidiaries. As well, there are no taxable temporary differences or any tax planning opportunities available that could partly support the recognition of these losses as deferred tax assets.
F-14
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Note 6: Cash Equivalents and Short Term Investments
Cash Equivalents
Cash equivalents consist of interest bearing deposits with our bank totaling $31,328,312 (December 31, 2010 - $34,337,595). The current annual interest rate earned on these deposits is 1.11% (December 31, 2010 – 1.06%).
Short-Term Investments
Short-term investments which consist of guaranteed investment certificates are liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. The objectives for holding short-term investments are to invest our excess cash resources in investment vehicles that provide a better rate of return compared to our interest bearing bank account with limited risk to the principal invested. We intend to match the maturities of these short-term investments with the cash requirements of the Company’s activities and treat these as held-to-maturity short-term investments.
Face Value $ | Original Cost $ | Accrued Interest $ | Carrying Value $ | Fair Value $ | Effective Interest Rate % | ||||||
December 31, 2011 | |||||||||||
Short-term investments | 1,936,787 | 1,936,787 | — | 1,936,787 | 1,936,787 | 1.68% | |||||
December 31, 2010 | |||||||||||
Short-term investments | 3,609,246 | 3,609,246 | Nil | 3,609,246 | 3,609,246 | 0.30% | |||||
Fair value is determined by using published market prices provided by our investment advisor.
Note 7: Property and Equipment
Medical Equipment | Computer Equipment | Office Furniture | Office Equipment | Leasehold Improvements | Total | |||||||
Cost | ||||||||||||
As at January 1, 2010 | 100,816 | 271,014 | 111,076 | 36,386 | 139,616 | 658,908 | ||||||
Additions | 6,655 | 68,060 | 6,281 | 850 | — | 81,846 | ||||||
As at December 31, 2010 | 107,471 | 339,074 | 117,357 | 37,236 | 139,616 | 740,754 | ||||||
Additions | 36,788 | 120,120 | 29,633 | 18,866 | 52,383 | 257,790 | ||||||
As at December 31, 2011 | 144,259 | 459,194 | 146,990 | 56,102 | 191,999 | 998,544 | ||||||
Amortization | ||||||||||||
As at January 1, 2010 | 47,504 | 185,825 | 73,457 | 27,006 | 116,895 | 450,687 | ||||||
Amortization for the year | 11,825 | 27,919 | 5,567 | 1,807 | 16,038 | 63,156 | ||||||
As at December 31, 2010 | 59,329 | 213,744 | 79,024 | 28,813 | 132,933 | 513,843 | ||||||
Amortization for the year | 9,817 | 61,770 | 6,561 | 2,466 | 11,976 | 92,590 | ||||||
As at December 31, 2011 | 69,146 | 275,514 | 85,585 | 31,279 | 144,909 | 606,433 | ||||||
Net book value | ||||||||||||
As at December 31, 2011 | 75,113 | 183,680 | 61,405 | 24,823 | 47,090 | 392,111 | ||||||
As at December 31, 2010 | 48,142 | 125,330 | 38,333 | 8,423 | 6,683 | 226,911 | ||||||
F-15
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Note 8: Asset Held for Sale
In 2009, we acquired all of the convertible preferred shares of British Canadian Biosciences Corp. (“BCBC”), a privately held biotechnology company specializing in the development of peptides for the treatment of a variety of conditions, including cancer. In February 2010, we completed the conversion of our preferred share holding in BCBC into common shares. As a result of this conversion we owned 10% of the issued common shares of BCBC. The common shares of BCBC do not have a quoted market price in an active market. BCBC's only asset is intellectual property.
In the fourth quarter of 2010, BCBC concluded that it was unable to obtain additional financing to support its business and subsequently suspended operations. In November 2010, we purchased an additional 60% of the common shares of BCBC for $51,681 which included cash and the settlement of certain trade accounts payable. As the operations of BCBC had been suspended, its only remaining asset was intellectual property. In conjunction with this purchase, we assessed the cost of our investment against the estimated fair value of BCBC using a cash flow analysis and determined that the estimated fair value of our investment was in excess of our cost. At the end of 2010, we began the process to sell BCBC and as a result we had reflected our investment in BCBC's intellectual property as an asset held for sale. In 2011, despite our efforts to sell our investment in BCBC, we were unsuccessful in completing a sale and as a result, we wrote down our investment in BCBC to $nil.
Note 9: Share Capital
Authorized:
Unlimited number of no par value common shares
Issued: | Shares | Warrants | ||||||||
Number | Amount $ | Number | Equity Amount $ | Liability Amount $ | ||||||
Balance, January 1, 2010 | 61,549,969 | 131,908,274 | 4,255,000 | 2,437,460 | 1,023,051 | |||||
Issued for cash pursuant to November 8, 2010 bought deal financing (a) | 6,256,000 | 22,639,719 | 3,503,360 | 4,120,202 | — | |||||
Exercise of warrants | 119,900 | 787,508 | (119,900 | ) | (11,010 | ) | (328,200 | ) | ||
Expired warrants | — | — | (2,300,000 | ) | (2,438,000 | ) | — | |||
Exercise of stock options | 32,433 | 104,109 | — | — | — | |||||
Revaluation of warrant liability | — | — | — | — | 4,841,949 | |||||
Balance, December 31, 2010 | 67,958,302 | 155,439,610 | 5,338,460 | 4,108,652 | 5,536,800 | |||||
Exercise of US$3.50 warrants | 1,833,600 | 11,897,142 | (1,833,600 | ) | — | (5,500,800 | ) | |||
Exercise of warrants | 1,322,750 | 9,589,938 | (1,322,750 | ) | (1,455,025 | ) | — | |||
Exercise of stock options | 136,683 | 355,876 | — | — | — | |||||
Expired warrants | — | — | (12,000 | ) | — | (36,000 | ) | |||
Balance, September 30, 2011 | 71,251,335 | 177,282,566 | 2,170,110 | 2,653,627 | — | |||||
(a) | Pursuant to a bought deal financing, 6,256,000 units were issued at an issue price of $4.60 per unit for gross proceeds of $28,777,600. Each unit included one common share (ascribed value of $4.05) and 0.50 of one common share purchase warrant (ascribed value of $0.55). The ascribed value was determined using the relative fair value method. Each common share purchase warrant entitles the holder to acquire one common share in the capital of the Company upon payment of $6.15 per share until November 8, 2012. Share issue costs for this offering were $2,697,081. In addition, we issued 375,360 common share purchase warrants with an exercise price of $4.60 that expire on November 8, 2012 to the brokerage firm assisting with the transaction. The ascribed value of these broker warrants was $679,402 ($1.81 per broker warrant) and has been included in the share issue costs above. The ascribed values of the warrants were determined using Black Scholes. |
F-16
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Warrants - liability
Under IFRS, the prescribed accounting treatment for warrants with an exercise price denominated in a foreign currency is to treat these warrants as a liability measured at fair value with subsequent changes in fair value accounted for through the consolidated statement of loss. The fair value of these warrants is determined using the Black Scholes Option Pricing Model. Our warrants with an exercise price of U.S.$3.50 meet this requirement and we have presented the value of these warrants as a deemed current liability on the consolidated statement of financial position. As these warrants are exercised, the value of the recorded warrant liability is included in our share capital along with the proceeds from the exercise. If these warrants expire, the related warrant liability is reversed through the statement of loss. There is no cash flow impact as a result of the accounting treatment for changes in the fair value of the warrant liability or when warrants expire unexercised.
As at December 31, 2011, our warrant liability is $nil (December 31, 2010 - $5,536,800; January 1, 2010 - $1,023,051) as these warrants were either exercised or expired on January 24, 2011.
Warrants - equity
The following table summarizes the weighted average assumptions used in the Black Scholes Option Pricing Model with respect to the valuation of warrants and broker warrants issued:
2010 | |
Risk-free interest rate | 1.4% |
Expected hold period to exercise (years) | 2.00 |
Volatility in the price of the Company's shares | 61.9% |
Dividend yield | Zero |
The following table summarizes our outstanding warrants as at December 31, 2011:
Exercise Price | Outstanding, Beginning of the Period | Granted During the Period | Exercised During the Period | Expired During the Period | Outstanding, End of Period | Weighted Average Remaining Contractual Life (years) | ||||||||
$4.60 | 375,360 | — | — | — | 375,360 | 0.83 | ||||||||
$6.15 | 3,117,500 | — | (1,322,750 | ) | — | 1,794,750 | 0.83 | |||||||
US$3.50 | 1,845,600 | — | (1,833,600 | ) | (12,000 | ) | — | — | ||||||
5,338,460 | — | (3,156,350 | ) | (12,000 | ) | 2,170,110 | 0.83 | |||||||
Note 10: Share Based Payments
Stock Option Plan
We have issued stock options to acquire common stock through our stock option plan of which the following are outstanding at December 31:
F-17
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
2011 | 2010 | |||||
Stock Options | Weighted Average Exercise Price $ | Stock Options | Weighted Average Exercise Price $ | |||
Outstanding, beginning of the year | 4,703,760 | 4.53 | 3,936,543 | 4.72 | ||
Granted during the year | 1,325,000 | 4.21 | 1,183,000 | 5.73 | ||
Forfeited during the year | (214,500 | ) | 8.16 | (383,350 | ) | 10.42 |
Exercised during the year | (136,683 | ) | 2.15 | (32,433 | ) | 2.46 |
Outstanding, end of the year | 5,677,577 | 4.37 | 4,703,760 | 4.53 | ||
Options exercisable, end of the year | 5,384,911 | 4.35 | 4,654,926 | 4.54 | ||
The following table summarizes information about the stock options outstanding and exercisable at December 31, 2011:
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price $ | Number Exercisable | Weighted Average Exercise Price $ | ||
$1.45 - $2.37 | 676,327 | 4.4 | 2.11 | 656,327 | 2.11 | ||
$2.70 - $3.89 | 2,296,000 | 7.1 | 3.44 | 2,284,334 | 3.44 | ||
$4.00 - $5.92 | 1,633,250 | 4.6 | 4.88 | 1,372,250 | 4.83 | ||
$6.72 - $9.76 | 1,072,000 | 7.5 | 7.03 | 1,072,000 | 7.03 | ||
5,677,577 | 6.1 | 4.37 | 5,384,911 | 4.35 | |||
Non-exercisable options vest annually over periods ranging from one to three years or after the completion of certain milestones. We have reserved 6,154,997 common shares for issuance relating to outstanding stock options.
Compensation expense related to options granted to employees and directors was $1,805,503 (2010 - $3,251,041) for the year ended December 31, 2011.
The estimated fair value of stock options issued during the year was determined using the Black Scholes Option Pricing Model using the following weighted average assumptions and fair value of options:
2011 | 2010 | |
Risk-free interest rate | 1.31% | 1.85% |
Expected hold period to exercise | 3.35 years | 3.0 years |
Volatility in the price of the Company's shares | 57.28% | 71% |
Rate of forfeiture | —% | —% |
Dividend yield | Nil | Nil |
Weighted average fair value of options | $1.74 | $2.76 |
We use historical data to estimate the expected dividend yield and expected volatility of our stock in determining the fair value of the stock options. The risk-free interest rate is based on the Government of Canada marketable bond rate in effect at the time of grant and the expected life of the options represents the estimated length of time the options are expected to remain outstanding.
Note 11: Loss Per Common Share
Loss per common share is calculated using net loss for the year and the weighted average number of common shares outstanding
F-18
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
for the year ended December 31, 2011 of 70,911,526 (December 31, 2010 of 62,475,403). The effect of any potential exercise of our stock options and warrants outstanding during the year has been excluded from the calculation of diluted loss per common share, as it would be anti-dilutive.
Note 12: Commitments
We are committed to payments totaling $3,933,730 during 2012 for activities related to our clinical trial program and collaborations.
We are committed to rental payments (excluding our portion of operating costs and rental taxes) under the terms of a lease for office premises which expires on May 31, 2016. Annual payments under the terms of this lease are as follows:
Amount $ | ||
2012 | 88,792 | |
2013 | 91,332 | |
2014 | 94,888 | |
2015 | 97,428 | |
2016 | 40,595 | |
413,035 | ||
Under a clinical trial agreement entered into with the Alberta Cancer Board (“ACB”), we have agreed to repay the amount funded under the agreement together with a royalty, to a combined maximum amount of $400,000 plus an overhead repayment of $100,000, upon sales of a specified product. We agreed to repay the ACB in annual installments in an amount equal to the lesser of: (a) 5% of gross sales of a specified product; or (b) $100,000 per annum.
Note 13: Contingencies
Assumption Agreement
During 1999, we entered into an agreement that assumed certain obligations (the “Assumption Agreement”) in connection with a Share Purchase Agreement (the “Agreement”) between SYNSORB and our former shareholders to make milestone payments and royalty payments.
As of December 31, 2011, a milestone payment was still outstanding for $1.0 million, due within 90 days of the first receipt from an Appropriate Regulatory Authority, for marketing approval to sell REOLYSIN® to the public or the approval of a new drug application for REOLYSIN®.
This milestone payment, when payable, will be accounted for as research and development expense and will not be deductible for income tax purposes.
In addition to the milestone payment, payments may become due and payable in accordance with the Agreement upon realization of sales of REOLYSIN®. If we receive royalty payments or other payments as a result of entering into partnerships or other arrangements for the development of the reovirus technology, we are obligated to pay to the founding shareholders 11.75% of the royalty payments and other payments received. Alternatively, if we develop the reovirus treatment to the point where it may be marketed at a commercial level, the payments referred to in the foregoing sentence will be amended to a royalty payment of 2.35% of Net Sales received for such products.
BRI “Work in Kind” Contribution
We entered into an engineering and process development agreement with the Biotechnology Research Institute of the National Research Council of Canada (“BRI”). The terms of this Agreement include a “work in kind” contribution from BRI. In exchange for this “work in kind” contribution, we agreed to provide a royalty, contingent upon receiving Sales Revenue, at the lesser of 0.5% of Sales Revenue or $20,000 per year. The total royalty under this Agreement is equal to two times the “work in kind” contribution. As of December 31, 2011, we estimate that the accumulated work in kind totals approximately $301,000.
F-19
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Note 14: Income Taxes
The provision for income taxes recorded in the consolidated financial statements differs from the amount which would be obtained by applying the statutory income tax rate to the loss before income taxes as follows:
2011 | 2010 | |||
Loss before income taxes | (29,004,701 | ) | (24,651,450 | ) |
Statutory Canadian corporate tax rate | 26.50 | % | 28.00 | % |
Anticipated tax recovery | (7,686,246 | ) | (6,902,406 | ) |
Foreign jurisdiction tax rate difference | 5,797,338 | 3,431,667 | ||
Employee stock based compensation | 478,458 | 910,291 | ||
Write down of asset available for sale | 97,478 | — | ||
Revaluation of the fair value of the warrant liability | (9,540 | ) | 1,355,746 | |
Change in tax rate | 64,163 | 124,696 | ||
Adjustment to opening tax pools | 145,990 | (242,261 | ) | |
Other permanent differences | (89,604 | ) | (156,183 | ) |
Change in deferred tax benefits deemed not probable to be recovered | 1,241,963 | 1,486,061 | ||
Deferred income tax recovery | — | — | ||
Current income taxes | 40,000 | 7,611 | ||
As at December 31, 2011, we have non-capital losses for income tax purposes in Canada of approximately 35,991,000 which are available for application against future taxable income and expire in 2026 ($9,809,000), 2027 ($12,170,000), 2029 ($4,009,000), 2030 ($4,774,000) and 2031 ($5,229,000). As at December 31, 2011, we have non-refundable federal investment tax credits of approximately $3,987,000 (2010 – $4,104,000) which are available to reduce future taxes payable. We have unclaimed scientific research and experimental development expenditures available to reduce future years’ taxable income of approximately $18,112,000 (2010 – $17,634,000) over an indefinite future period. We have not recorded the potential benefits of these tax pools in the consolidated financial statements.
Deferred tax assets are recognized, to the extent that it is probable that taxable income will be available, against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilized. The components of our unrecognized deferred tax asset are as follows:
2011 | 2010 | |||
$ | $ | |||
Net operating losses carried forward | 9,569,715 | 8,251,442 | ||
Scientific research and experimental development | 4,528,214 | 4,408,673 | ||
Investment tax credits | 2,990,243 | 3,078,664 | ||
Undepreciated capital costs in excess of book value of property and equipment and intellectual property | 455,234 | 307,970 | ||
Share issue costs | 592,848 | 939,502 | ||
Net capital losses carried forward | 91,960 | — | ||
Unrecognized deferred tax asset | 18,228,214 | 16,986,251 | ||
F-20
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
Note 15: Capital Disclosures
Our objective when managing capital is to maintain adequate cash resources to support planned activities which include the clinical trial program, product manufacturing, administrative costs and intellectual property expansion and protection. We include shareholders’ equity, cash and cash equivalents and short-term investments in the definition of capital.
2011 | 2010 | |||
$ | $ | |||
Cash and cash equivalents | 32,918,751 | 39,296,682 | ||
Short-term investments | 1,936,787 | 3,609,246 | ||
Shareholders’ equity | 29,520,379 | 36,394,960 | ||
We do not have any debt other than trade accounts payable and we have potential contingent obligations relating to the completion of our research and development of REOLYSIN®.
In managing our capital, we estimate our future cash requirements by preparing a budget and a multi-year plan annually for review and approval by our Board . The budget establishes the approved activities for the upcoming year and estimates the costs associated with these activities. The multi-year plan estimates future activity along with the potential cash requirements and is based on our assessment of our current clinical trial progress along with the expected results from the coming year’s activity. Budget to actual variances are prepared and reviewed by management and are presented quarterly to the Board.
Historically, funding for our plan is primarily managed through the issuance of additional common shares and common share purchase warrants that upon exercise are converted to common shares. Management regularly monitors the capital markets attempting to balance the timing of issuing additional equity with our progress through our clinical trial program, general market conditions, and the availability of capital. There are no assurances that funds will be made available to us when required.
On June 10, 2010, we renewed our existing short form base shelf prospectus (the “Base Shelf”) that qualifies for distribution up to $150,000,000 of common shares, subscription receipts, warrants, or units (the “Securities”). Under our Base Shelf, we may sell Securities to or through underwriters, dealers, placement agents or other intermediaries and also may sell Securities directly to purchasers or through agents, subject to obtaining any applicable exemption from registration requirements. The distribution of Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at market prices prevailing at the time of sale, or at prices related to such prevailing market prices to be negotiated with purchasers and as set forth in an accompanying Prospectus Supplement.
Renewing our Base Shelf provides us with additional flexibility when managing our cash resources as, under certain circumstances, it shortens the time period required to close a financing and is expected to increase the number of potential investors that may be prepared to invest in our company. Funds received from a Prospectus Supplement will be used in line with our Board approved budget and multi-year plan. The Base Shelf expires on July 10, 2012 and we have registered 9,759,360 units and 5,065,750 common shares (issued in February 2012) under this shelf.
We are not subject to externally imposed capital requirements and there have been no changes in how we define or manage our capital in 2011.
Note 16: Financial Instruments
Our financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable. As at December 31, 2011, there are no significant differences between the carrying values of these amounts and their estimated market values.
Credit risk
Credit risk is the risk of financial loss if a counterparty to a financial instrument fails to meet its contractual obligations. We are exposed to credit risk on our cash and cash equivalents and short-term investments in the event of non-performance by counterparties,
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ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
but we do not anticipate such non-performance. Our maximum exposure to credit risk at the end of the period is the carrying value of our cash and cash equivalents and short-term investments.
We mitigate our exposure to credit risk by maintaining our primary operating and investment bank accounts with Schedule I banks in Canada. For our foreign domiciled bank accounts, we use referrals or recommendations from our Canadian banks to open foreign bank accounts and these accounts are used solely for the purpose of settling accounts payable or payroll.
We also mitigate our exposure to credit risk by restricting our portfolio to investment grade securities with short-term maturities and by monitoring the credit risk and credit standing of counterparties. Currently, 100% of our short-term investments are in guaranteed investment certificates.
Interest rate risk
Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. We are exposed to interest rate risk through our cash and cash equivalents and our portfolio of short-term investments. We mitigate this risk through our investment policy that only allows investment of excess cash resources in investment grade vehicles while matching maturities with our operational requirements.
Fluctuations in market rates of interest do not have a significant impact on our results of operations due to the short term to maturity of the investments held.
Currency risk
Currency risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. We are exposed to currency risk from the purchase of goods and services primarily in the U.S. and the U.K. and to the extent cash is held in foreign currencies. The impact of a $0.01 increase in the value of the U.S. dollar against the Canadian dollar would have increased our net loss in 2011 by approximately $147,996. The impact of a $0.10 increase in the value of the British pound against the Canadian dollar would have increased our net loss in 2011 by approximately $145,214. The impact of a $0.10 increase in the value of the Euro against the Canadian dollar would have increased our net loss in 2011 by approximately $263,206 .
We mitigate our foreign exchange risk through the purchase of foreign currencies in sufficient amounts to settle our foreign accounts payable.
Balances in foreign currencies at December 31, 2011 are as follows:
U.S. dollars $ | British pounds £ | Euro € | ||||
Cash and cash equivalents | 968,646 | 20,185 | 13,110 | |||
Accounts payable | (5,054,864 | ) | (110,530 | ) | (170,732 | ) |
(4,086,218 | ) | (90,345 | ) | (157,622 | ) | |
Liquidity risk
Liquidity risk is the risk that we will encounter difficulty in meeting obligations associated with financial liabilities. We manage liquidity risk through the management of our capital structure as outlined in Note 15. Accounts payable are all due within the current operating period.
Note 17: Additional Cash Flow Disclosures
Net Change In Non-Cash Working Capital
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ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
2011 $ | 2010 $ | |||
Change in: | ||||
Accounts receivable | 229,596 | (220,201 | ) | |
Prepaid expenses | (442,642 | ) | 228,474 | |
Accounts payable and accrued liabilities | 4,003,556 | (1,726,251 | ) | |
Change in non-cash working capital related to operating activities | 3,790,510 | (1,717,978 | ) | |
Other Cash Flow Disclosures
2011 $ | 2010 $ | |||
Cash interest received | 416,247 | 76,934 | ||
Cash taxes paid | 3,094 | 7,611 | ||
Note 18: Alberta Heritage Loan
We received a loan of $150,000 from the Alberta Heritage Foundation for Medical Research. Pursuant to the terms of the agreement, the Company is required to repay this amount in annual installments from the date of commencement of sales in an amount equal to the lesser of: (a) 5% of the gross sales generated by the Company; or (b) $15,000 per annum until the entire loan has been paid in full.
Note 19: Indemnification of Officers and Directors
Our corporate by-laws require that, except to the extent expressly prohibited by law, we will indemnify our officers and directors against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment reasonably incurred in respect of any civil, criminal or administrative action or proceeding as it relates to their services to the Company. The by-laws provide no limit to the amount of the indemnification. We have purchased directors’ and officers’ insurance coverage to cover claims made against the directors and officers during the applicable policy periods. The amounts and types of coverage have varied from period to period as dictated by market conditions. We believe that we have adequate insurance coverage; however, there is no guarantee that all indemnification payments will be covered under our existing insurance policies.
There is no pending litigation or proceeding involving any of our officers or directors as to which indemnification is being sought, nor are we aware of any threatened litigation that may result in claims for indemnification.
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Note 20: Economic Dependence
We are economically dependent on our toll manufacturers. We primarily use one toll manufacturer in the U.S. to produce the clinical grade REOLYSIN required for our clinical trial program. Any significant disruption of the services provided by our primary toll manufacturer has the potential to delay the progress of our clinical trial program. We have used another toll manufacturer in the U.K. that has also produced clinical grade REOLYSIN at a smaller scale. We have attempted to mitigate this risk by producing sufficient REOLYSIN in advance of patient enrollment in a particular clinical trial.
Note 21: Accounts Receivable
2011 | 2010 | |||
$ | $ | |||
Government grant receivable | — | 244,000 | ||
Other | 55,392 | 40,988 | ||
55,392 | 284,988 | |||
Note 22: Other Expenses and Adjustments
We present our expenses based on the function of each expense and therefore include realized foreign exchange gains and losses, unrealized non-cash foreign exchange gains and losses, and non-cash stock based compensation associated with research and development activity as a component of research and development expenses and amortization of property and equipment and stock based compensation associated with operating activities as a component of operating expenses.
2011 $ | 2010 $ | |||
Included in research and development expenses: | ||||
Realized foreign exchange loss (gain) | 56,721 | (153,795 | ) | |
Unrealized non-cash foreign exchange loss | 115,234 | 343,821 | ||
Non-cash share based compensation | 1,137,467 | 1,500,730 | ||
Included in operating expenses | ||||
Amortization of property and equipment | 92,950 | 63,156 | ||
Non-cash share based compensation | 668,036 | 1,750,311 | ||
Office minimum lease payments | 69,197 | 89,430 | ||
Note 23: Related Party Transactions
Compensation of Key Management Personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling our activities as a whole. We have determined that key management personnel consists of the members of the Board of Directors along with certain officers of the Company.
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ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
2011 $ | 2010 $ | |||
Short-term employee benefits | 2,588,702 | 2,245,396 | ||
Share-based payments | 1,875,260 | 2,854,500 | ||
4,463,962 | 5,099,896 | |||
Note 24: Subsequent Event
On February 8, 2012, we closed a bought deal financing whereby we issued 5,065,750 common shares at a price of $4.20 per common share for gross proceeds of $21,276,150. In connection with this bought deal financing we issued 303,945 compensation options to the underwriters with an exercise price of $4.20 expiring on February 8, 2014.
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