Aeterna Zentaris(AEZS) - 2018 Q4 - Annual Report

PART I Key Information Provides selected historical financial data and comprehensive risk factors, such as operating losses and product dependence Selected Financial Data Presents audited consolidated financial data for 2014-2018, prepared under IFRS, with no dividends declared - The selected financial data is derived from audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB. The company has declared or paid no dividends during the periods presented[9][10] Consolidated Statements of Comprehensive Income (Loss) Information (2014-2018) | Indicator | 2018 ($) | 2017 ($) | 2016 ($) | 2015 ($) | 2014 ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | 26,881 | 923 | 911 | 545 | 11 | | Income (loss) from operations | 9,842 | (23,074) | (29,476) | (34,884) | (37,395) | | Net (loss) income | 4,187 | (16,796) | (24,959) | (50,143) | (16,564) | | Comprehensive (loss) income | 4,120 | (17,532) | (25,869) | (47,790) | (19,555) | | Basic Net (loss) income per share | 0.25 | (1.12) | (2.41) | (18.14) | (28.06) | | Diluted Net (loss) income per share | 0.24 | (1.12) | (2.41) | (18.14) | (28.06) | Consolidated Statement of Financial Position Information (2014-2018) | Indicator | 2018 ($) | 2017 ($) | 2016 ($) | 2015 ($) | 2014 ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | 14,512 | 7,780 | 21,999 | 41,450 | 34,931 | | Total assets | 25,011 | 22,195 | 31,659 | 51,498 | 47,435 | | Shareholders' (deficiency) equity | 1,907 | (2,783) | 6,212 | 21,615 | 14,484 | Risk Factors Identifies key risks including historical operating losses, reliance on Macrilen™, regulatory compliance, and litigation - The company has a history of operating losses, with an accumulated deficit of approximately $310 million as of December 31, 2018. Its ability to continue as a going concern depends on increasing revenue and/or securing additional funding[16][17][18] - The company's business is heavily dependent on the successful commercialization and out-licensing of its primary product, Macrilen™ (macimorelin). Failure to do so would materially harm the business[23][24] - Aeterna Zentaris relies on third parties, currently Novo Nordisk (following its acquisition of rights from Strongbridge), for the commercialization of Macrilen™ in the U.S. and Canada. Potential revenue is largely contingent on their performance[34][35][37] - The company is subject to stringent ongoing government regulation for its products, and failure to comply with requirements from bodies like the FDA and EMA could result in significant sanctions, penalties, or withdrawal of approvals[46][47][49] - The company is a defendant in a securities class-action lawsuit alleging false and misleading statements regarding Macrilen™ between 2011 and 2014. While the company considers the claims to be without merit, an adverse outcome could materially affect its financial position[103][104][105] - The company's common shares are at risk of being delisted from NASDAQ or TSX if they fail to meet continuing listing requirements, such as maintaining a minimum bid price of $1.00 per share on NASDAQ[130][131][133] Information on the Company Details Aeterna Zentaris's history, Macrilen™-focused strategy, product pipeline, competitive landscape, and IP History and Development of the Company Outlines the company's incorporation, key acquisitions, share consolidation, and stock exchange listings - Aeterna Zentaris Inc. was incorporated on September 12, 1990, under the Canada Business Corporations Act. It acquired Zentaris AG in 2002, which became its German subsidiary (AEZS Germany) responsible for drug development[153][154][155] - On November 17, 2015, the company executed a 100-to-1 share consolidation (reverse stock split)[156] - The company's common shares are listed on both the NASDAQ Capital Market and the Toronto Stock Exchange (TSX) under the symbol "AEZS"[157] Business Overview Describes the company's core strategy, focusing on Macrilen™ development, regulatory approvals, and commercialization - The company's primary business strategy is the development, manufacturing, registration, and commercialization of Macrilen™ (macimorelin), an oral diagnostic test for Adult Growth Hormone Deficiency (AGHD), through out-licensing agreements[160] - Macrilen™ received FDA marketing approval on December 20, 2017, and EMA marketing authorization on January 16, 2019, for the diagnosis of AGHD[181][184] - On January 16, 2018, the company entered into a License and Assignment Agreement with Strongbridge Ireland Limited for the commercialization of Macrilen™ in the U.S. and Canada. These rights were subsequently sold by Strongbridge to Novo Nordisk A/S on December 19, 2018[182][186] - The company discontinued the development of its oncology drug candidate, Zoptrex™ (zoptarelin doxorubicin), in May 2017 after its pivotal Phase 3 ZoptEC study failed to meet its primary endpoint[194] - The company holds worldwide rights to macimorelin through an exclusive license agreement. Key patents covering the compound and its method of use expire between 2021 and 2027 in the U.S., Europe, and other jurisdictions[228][231] Operating and Financial Review and Prospects Analyzes financial condition and operating results, highlighting Macrilen™ license impact on 2018 revenue and 2019 outlook Operating Results Compares fiscal years 2018 and 2017 financial performance, detailing revenue drivers, cost changes, and quarterly results Comparison of Fiscal Years 2018 and 2017 (in thousands of U.S. dollars) | Metric | 2018 | 2017 | Change | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $26,881 | $923 | +$25,958 | Primarily due to the $24.3M license fee from the Macrilen™ agreement | | R&D Costs | $2,932 | $10,704 | -$7,772 | Decrease due to the discontinuation of the Zoptrex™ study and focus on the less costly PIP study for Macrilen™ | | Selling Expenses | $3,109 | $5,095 | -$1,986 | Termination of the North American sales team and co-promotion activities in late 2017 | | Net Income (Loss) | $4,187 | ($16,796) | +$20,983 | Driven by the significant increase in revenue and reduction in operating expenses | - In 2018, the company incurred $1.4 million in settlement costs related to lawsuits with former executives and a former sales agent, which was not present in 2017[281] 2018 Quarterly Results (in thousands, except per share data) | Quarter | Revenues ($) | Net Income (Loss) ($) | Net Income (Loss) per Share [basic] ($) | | :--- | :--- | :--- | :--- | | Q1 2018 | 24,658 | 14,424 | 0.88 | | Q2 2018 | 168 | (2,602) | (0.16) | | Q3 2018 | 663 | (2,509) | (0.15) | | Q4 2018 | 1,392 | (5,126) | (0.31) | Liquidity and Capital Resources Examines the company's liquidity sources, cash position, and management's assessment of future funding needs - The company's primary source of liquidity in 2018 was the $24.0 million upfront payment from the Macrilen™ license agreement. As of December 31, 2018, cash and cash equivalents were $14.5 million[307][309] - Management believes it has sufficient liquidity to fund operations and planned expenses for at least the next twelve months from the report's issuance date, supported by existing cash and expected royalty income[309][310] Consolidated Cash Flow Summary (in thousands of U.S. dollars) | Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 6,825 | (22,913) | (29,010) | | Net cash from financing activities | — | 8,030 | 9,924 | | Net cash from investing activities | (35) | 307 | (314) | | Net change in cash | 6,732 | (14,219) | (19,451) | | Cash at end of period | 14,512 | 7,780 | 21,999 | Trend Information Outlines the 2019 outlook, focusing on Macrilen™ commercialization, out-licensing, and strategic options - The company's 2019 outlook is focused on the commercialization of macimorelin in the U.S. and Canada by its partner, Novo Nordisk, and pursuing out-licensing opportunities for other global territories[340][344][345] - On March 12, 2019, the board formed a Special Committee to review strategic options, including licensing, monetization of macimorelin, or a potential sale of the company[343] 2019 Operating Expenditure Forecasts | Expense Category | Forecasted Amount (USD) | | :--- | :--- | | Research and Development Costs | Up to $2.0 million | | General and Administrative Expenses | $6.5 million to $7.5 million | Directors, Senior Management and Employees Details the company's leadership, including Board members, senior management, compensation, and employee base Directors and Senior Management Identifies key leadership positions as of March 29, 2019, including CEO, CFO, and Chair of the Board - As of March 29, 2019, the company's leadership included Michael V. Ward as President and Chief Executive Officer, Leslie Auld as Senior Vice President, Chief Financial Officer, and Carolyn Egbert as Chair of the Board of Directors[353] Compensation Outlines executive compensation, including director retainers and summary compensation for named executive officers - The executive compensation program is designed to be market-based and competitive, targeting the 50th percentile for small-cap biopharmaceutical companies. It comprises base salary, an annual performance-based bonus, and long-term equity incentives[382][385] 2018 Annual Retainers for Outside Directors | Position | Annual Retainer ($) | | :--- | :--- | | Chair of the Board | 80,000 | | Board Member | 40,000 | | Audit Committee Chair | 20,000 | | Audit Committee Member | 5,000 | | NGCC Chair | 15,000 | | NGCC Member | 3,000 | 2018 Summary Compensation for Named Executive Officers | Name and Position | Salary ($) | Option Awards ($) | Annual Incentive Plan ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Michael V. Ward, President & CEO | 325,000 | 227,241 | 35,000 | — | 587,241 | | James Clavijo, Former CFO | 190,574 | 130,240 | — | 137,500 | 458,314 | | Leslie Auld, SVP, CFO | 62,385 | — | — | — | 62,385 | | Richard Sachse, Former CSO/CMO | 403,297 | — | — | — | 403,297 | | Brian Garrison, SVP, Global Commercial Ops | 235,015 | 3,550 | 35,000 | — | 273,565 | | Eckhard Guenther, VP, Alliance Mgmt | 191,242 | — | 13,154 | 3,298 | 207,694 | Employees Provides a breakdown of the company's workforce by location and functional area as of December 31, 2018 - As of December 31, 2018, the company had 22 active employees. Of these, 18 were based in Frankfurt, Germany, and 4 in the United States, with the CFO based in Canada[459] - The workforce is primarily engaged in R&D (12 employees), commercial operations (4 employees), and administration (6 employees)[459] Major Shareholders and Related Party Transactions Identifies major shareholders, with J. Goldman & Co., L.P. holding over 5%, and confirms no significant related party transactions - As of March 29, 2019, J. Goldman & Co., L.P. and its affiliates were the only major shareholders, beneficially owning 997,494 common shares, which represents 6.07% of the outstanding shares[462][463] - As of March 7, 2019, approximately 99.8% of the company's outstanding common shares were held by two registered holders with addresses in the United States, primarily in broker "street names"[466] Financial Information Confirms the location of full consolidated financial statements and reports no significant changes since their issuance - The full consolidated financial statements are presented under Item 18 of this Annual Report on Form 20-F[469] - No significant changes have occurred since the date of the annual consolidated financial statements included in this report[470] The Offer and Listing Details the company's common share listings on NASDAQ and TSX, including historical high and low closing prices Common Share Price History (High/Low Closing Prices) | Period | NASDAQ (US$) High | NASDAQ (US$) Low | TSX (CAN$) High | TSX (CAN$) Low | | :--- | :--- | :--- | :--- | :--- | | 2018 | 3.87 | 1.19 | 5.10 | 1.53 | | 2017 | 3.65 | 0.84 | 4.81 | 1.13 | Additional Information Provides supplementary corporate, legal, and financial details, including articles, material contracts, and shareholder tax Memorandum and Articles of Association Details the company's governing act, authorized share capital, shareholder rights plan, and advance notice provisions - The company is governed by the Canada Business Corporations Act (CBCA). Its authorized share capital consists of an unlimited number of Common Shares and two classes of Preferred Shares (First and Second), issuable in series[475][491] - The company has an amended and restated shareholder rights plan, approved in 2016 and updated in 2019, designed to ensure fair treatment of all shareholders in the event of an unsolicited take-over bid[497][500] - The bylaws include an advance notice provision requiring shareholders to provide timely notice (30-65 days before an annual meeting) for director nominations[538][539] Material Contracts Summarizes key agreements, including the Macrilen™ license agreement with Novo Nordisk and executive employment contracts - The key material contract is the License and Assignment Agreement for Macrilen™ (macimorelin) in the U.S. and Canada, originally with Strongbridge and now held by Novo Nordisk. The agreement provides for a 15-18% royalty on net sales, plus potential commercial milestones ranging from $4 million to $100 million[552][553][554] - The company has employment and change of control agreements with its Named Executive Officers, which include provisions for severance payments upon termination without cause or for good reason following a change of control[568][571][574] Taxation Discusses U.S. and Canadian tax implications for shareholders, including Passive Foreign Investment Company (PFIC) risk - For U.S. Holders, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC). The company believes it was a PFIC in 2015 but not in 2016, 2017, or 2018. PFIC status could result in adverse U.S. federal income tax consequences[117][118][612] - Dividends paid to non-resident holders are subject to Canadian withholding tax at a rate of 25%, which may be reduced by an applicable tax treaty (e.g., to 15% for qualifying U.S. residents under the Canada-U.S. Tax Convention)[594][630] Quantitative and Qualitative Disclosures About Market Risk Identifies primary market risks including share price volatility affecting warrant liability and foreign exchange risk - The company is exposed to share price risk, as changes in its stock price materially affect the fair value of its warrant liability, which is reported in the income statement. The stock price on NASDAQ ranged from $1.19 to $3.87 during 2018[651][895] Sensitivity of Net Income to Share Price Changes via Warrant Liability (as of Dec 31, 2018) | Change in Market Price | Impact on Net Income (in thousands of U.S. dollars) | | :--- | :--- | | -30% | +$1,792 | | +30% | -$1,504 | - The company is exposed to foreign exchange risk from its German subsidiary, whose functional currency is the Euro. A 10% change in the USD/EUR exchange rate would have impacted 2018 net income by approximately $1.1 million[896] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Based on an evaluation as of December 31, 2018, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[654] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the criteria established in the Internal Control – Integrated Framework (2013) by COSO[658] Corporate Governance and Other Matters Covers corporate governance, including audit committee financial expert, Code of Conduct, accountant fees, and NASDAQ compliance - The Board has determined that Mr. Gérard Limoges, Chairman of the Audit Committee, qualifies as an "audit committee financial expert"[663] - The company is not in compliance with the NASDAQ quorum requirement of 33 1/3% for shareholder meetings, as its bylaws set the quorum at 10%. It benefits from a home country practice exemption as this complies with Canadian law and TSX rules[673] Principal Accountant Fees (PricewaterhouseCoopers LLP) | Fee Category | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Audit Fees | 563,558 | 506,309 | | Audit-related Fees | 37,663 | 113,430 | | Tax Fees | 36,224 | 5,426 | | All Other Fees | 0 | 0 | PART III Financial Statements Presents audited consolidated financial statements for 2016-2018, prepared under IFRS, including key financial statements Consolidated Statement of Financial Position (in thousands of U.S. dollars) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total current assets | 16,256 | 9,381 | | Total Assets | 25,011 | 22,195 | | Total current liabilities | 5,596 | 5,769 | | Total Liabilities | 23,104 | 24,978 | | Total shareholders' equity (deficiency) | 1,907 | (2,783) | Consolidated Statement of Comprehensive Income (Loss) (in thousands of U.S. dollars) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenues | 26,881 | 923 | 911 | | Gross income | 24,777 | 923 | 911 | | Total operating expenses | 14,935 | 23,997 | 30,387 | | Income (loss) from operations | 9,842 | (23,074) | (29,476) | | Net income (loss) | 4,187 | (16,796) | (24,959) | | Comprehensive income (loss) | 4,120 | (17,532) | (25,869) | Consolidated Statement of Cash Flows (in thousands of U.S. dollars) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 6,825 | (22,913) | (29,010) | | Net cash from financing activities | — | 8,030 | 9,924 | | Net cash from investing activities | (35) | 307 | (314) | | Cash and cash equivalents – end of year | 14,512 | 7,780 | 21,999 | Exhibits Indexes all exhibits, including corporate governance documents, material contracts, and Sarbanes-Oxley certifications - The exhibit list includes key corporate governance documents, such as the Restated Articles of Incorporation (1.1), Amended and Restated By-Law One (1.4), and the Shareholder Rights Plan Agreement (2.1)[917] - Material contracts filed as exhibits include the 2018 Long-Term Incentive Plan (4.2), the License and Assignment Agreement for Macrilen™ (4.3), and various executive employment agreements (4.4-4.8)[917]