XTSE:TTH Transition Therapeutics Inc Annual Report 20-F Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 20-F

 

[Mark One]  
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
   
  OR
   
x ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended: June 30, 2012 Commission File Number: 001-33514

 

TRANSITION THERAPEUTICS INC.
(Exact name of Registrant as specified in its charter)

Ontario, Canada
(Jurisdiction of incorporation or organization)

 

101 College Street, Suite 220
Toronto, Ontario, Canada
M5G 1L7
(416) 260-7770
(Address and telephone number of Registrant’s principal executive offices)

 

Nicole Rusaw-George
Chief Financial Officer
101 College Street, Suite 220
Toronto, Ontario, Canada
M5G 1L7
(416) 260-7770 Tel.
(416) 260-2886 Fax
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be 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   The NASDAQ Stock Market LLC

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of June 30, 2012: 26,921,302 shares of Common Shares were outstanding.

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). ¨ Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 ¨ Accelerated filer ¨ Non-accelerated filer x

 

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 x Other ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes ¨ No

 

 
 

 

Table of Contents

 

  Page
   
Introduction 2
   
Presentation of Financial Information 2
   
Currency Translation 2
   
Exchange Rate Data 2
   
Cautionary Statement Concerning Forward-Looking Statements 3
   
Item 1. Identity of Directors, Senior Management and Advisers 5
     
Item 2. Offer Statistics and Expected Timetable 5
     
Item 3. Key Information 5
     
Item 4. Information on the Corporation 14
     
Item 4A. Unresolved Staff Comments 29
     
Item 5. Operating and Financial Review and Prospects 29
     
Item 6. Directors, Senior Management and Employees 44
     
Item 7A. Major Shareholders and Related Party Transactions 52
     
Item 8. Financial Information 54
     
Item 9. The Offer and Listing 54
     
Item 10. Additional Information 55
     
Item 11. Quantitative and Qualitative Disclosures About Market Risk. 65
     
Item 12. Description of Securities Other than Equity Securities. 66
     
Item 13. Defaults, Dividend Arrearages and Delinquencies. 67
     
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. 67
     
Item 15. Controls and Procedures. 67
     
Item 16. [Reserved] 68
     
Item 16A. Audit committee financial expert. 68
     
Item 16B. Code of Ethics. 68
     
Item 16C. Principal Accountant Fees and Services. 68
     
Item 16D. Exemptions from the Listing Standards for Audit Committees. 69
     
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. 69
     
Item 16F. Change in Registrant’s Certifying Accountant. 69
     
Item 16G. Corporate Governance. 70
     
Item 16H. Mine Safety Disclosure. 70
     
Item 17. Financial Statements. 71
   
Item 18. Financial Statements. 71
     
Item 19. Exhibits. 71

 

i
 

 

Introduction

 

In this annual report, where “we”, “us”, “our”, “Transition”, “Corporation” or the “Company” is used, it is referring to Transition Therapeutics Inc. and its wholly-owned subsidiaries, unless otherwise indicated. All amounts are in Canadian dollars, unless otherwise indicated.

 

Additional information relating to the Corporation, including the Corporation’s most recently filed Annual Information Form, can be found on SEDAR at www.sedar.com.

 

Presentation of Financial Information

 

Unless we indicate otherwise, financial information in this annual report has been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board. IFRS differs in some respects from United States generally accepted accounting principles, or United States GAAP, and thus our financial statements may not be comparable to the financial statements of United States companies.

 

Percentages and some amounts in this annual report have been rounded for ease of presentation. Any discrepancies between totals and the sums of the amounts listed are due to rounding.

 

Currency Translation

 

We present our historical financial statements in Canadian dollars, which is the reporting currency of the Corporation. All figures reported in this annual report are in Canadian dollars, except where we indicate otherwise, and are referenced as “CAD$,” “$” and “dollars”. This annual report contains a translation of some Canadian dollar amounts into United States dollars at specified exchange rates solely for your convenience. See “Exchange Rate Data” below for certain information about the rates of exchange between Canadian dollars and United States dollars.

 

Exchange Rate Data

 

The following table sets forth, for each period indicated, the low and high exchange rates for Canadian dollars expressed in United States dollars, the exchange rate at the end of such period and the average of such exchange rates on the last day of each month during such period, based on the inverse of the noon buying rate in the City of New York for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. The source of the exchange rate data is: (i) with respect to periods ending on or prior to December 31, 2008, the Federal Reserve Bank of New York, and (ii) with respect to any period ending on or after January 1, 2009, the H.10 statistical release of the Federal Reserve Board. The exchange rates set forth below demonstrate trends in exchange rates, but the actual exchange rates used throughout this Annual Report may vary.

 

2
 

 

   Exchange Rate 
   Period
End
   High  

Average (1)

   Low 
   (CAN$ per US$) 
Last Five Fiscal Years                    
Fiscal Year Ended June 30, 2008   0.9818    1.0908    0.9938    0.9299 
Fiscal Year Ended June 30, 2009   0.8601    0.9985    0.8589    0.7695 
Fiscal Year Ended June 30, 2010   0.9429    1.0040    0.9433    0.8584 
Fiscal Year Ended June 30, 2011   1.0371    1.0542    1.0013    0.9392 
Fiscal Year Ended June 30, 2012    0.9814    1.0584    0.9977    0.9430 

Last Six Months

                    
March 2012   1.0010    1.0154    1.0063    0.9987 
April 2012   1.0115    1.0197    1.0073    0.9960 
May 2012   0.9663    1.0164    0.9906    0.9663 
June 2012   0.9814    0.9826    0.9728    0.9600 
July 2012   0.9986    0.9986    0.9860    0.9790 
August 2012   0.9857    1.0085    0.9927    0.9843 

Notes:

(1)For the years indicated, the average exchange rates are determined by averaging the exchange rates on the last business day of each month during the relevant period. For the months indicated, the average exchange rates are determined by averaging the exchange rates on each day of the month.

  

Cautionary Statement Concerning Forward-Looking Statements

 

This annual report contains and incorporates by reference certain forward looking statements within the meaning of applicable securities laws. Forward looking information typically contains statements with words such as “anticipate”, “believe”, “expect”, “plan”, “estimate”, “intend”, “may” or similar words suggesting future outcomes. This forward looking information is subject to various risks and uncertainties, including those discussed below, that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed. Readers are cautioned not to place undue reliance on this forward looking information, which is provided as of the date of this annual report unless otherwise stated, and the Corporation will not undertake any obligation to publicly update or revise any forward looking information, whether as a result of new information, future events, or otherwise, except as required by securities laws.

 

Forward-looking statements in this annual report include, but are not limited to, statements with respect to: the clinical study phases of each of the Corporation’s product candidates which the Corporation expects to complete in fiscal 2013, the ability of the Corporation’s business model to maximize shareholder returns, the potential for ELND005 (AZD-103) to slow the progression of Alzheimer’s disease and improve symptoms, the timing and manner of future clinical development of ELND005 (AZD-103) performed by Elan Pharma International Limited (“Elan”), the global population size of those affected by Alzheimer’s disease; the demand for a product that can slow or reverse the progression of Alzheimer’s disease, the development of TT-401 and the series of preclinical compounds in-licensed from Eli Lilly and Company (“Lilly”) and their potential benefit in type 2 diabetes patients, the potential clinical benefit of the anti-inflammatory compounds TT-301 and TT-302, the intention of the Corporation to seek a partnership for the development of TT-301 and TT-302, the engagement of third party manufacturers to produce the Corporation’s drug substances and products, the intention of the Corporation to make collaborative arrangements for the marketing and distribution of its products, the impact of human capital on the growth and success of the Corporation and the Corporation’s dividend policy.

 

Some of the assumptions, risks and factors which could cause future outcomes to differ materially from those set forth in the forward looking information include, but are not limited to: (i) the assumption that the Corporation will be able to obtain sufficient and suitable financing to support operations, clinical trials and commercialization of products, (ii) the risk that the Corporation may not be able to capitalize on partnering and acquisition opportunities, (iii) the assumption that the Corporation will obtain favourable clinical trial results in the expected timeframe, (iv) the assumption that the Corporation will be able to adequately protect proprietary information and technology from competitors, (v) the risks relating to the uncertainties of the regulatory approval process, (vi) the impact of competitive products and pricing and the assumption that the Corporation will be able to compete in the targeted markets, and (vii) the risk that the Corporation may be unable to retain key personnel or maintain third party relationships, including relationships with key collaborators.

 

3
 

 

By its nature, forward looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections or other forward looking statements will not occur. Prospective investors should carefully consider the information contained under the heading “Risk Factors” and all other information included in or incorporated by reference in this annual report before making investment decisions with regard to the securities of the Corporation.

 

The section entitled “Risks Factors” discusses risks, uncertainties and factors that our management believes could cause actual results or events to differ materially from the forward-looking statements. Although we have attempted to identify important risks, uncertainties and other factors that could cause actual results or events to differ materially from those expressed or implied in the forward-looking information, there may be other factors that cause actual results or events to differ from those expressed or implied in the forward-looking information.

 

Forward-looking statements contained in this annual report are made as of the dates hereof, and such forward-looking statements are based on the beliefs, expectations and opinions of our management as of such date. We disclaim any obligation to update any forward-looking statements.

 

4
 

 

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

 

The following information should be read in conjunction with the Corporation’s audited consolidated financial statements for the year ended June 30, 2012 and the related notes, which are prepared in accordance with IFRS. The selection of financial information includes financial information derived from the annual audited consolidated financial statements.

 

The following table is a summary of selected audited consolidated financial information of the Corporation for each of the two most recently completed financial years. The information presented is presented in accordance with IFRS:

 

   June 30, 2012   June 30, 2011 
Revenue  $   $10,251,394 
Net loss (1)  $(12,269,846)  $(5,689,613)
Basic and diluted net loss per common share  $(0.48)  $(0.25)
Total assets  $37,093,030   $43,179,488 
Total long-term liabilities (2)  $1,469,253   $1,480,685 
Shareholders’ equity  $32,123,489   $38,432,070 
Common shares outstanding   26,921,302    23,217,599 
Cash dividends declared per share  $   $ 

 

Notes:

(1)Net loss before discontinued operations and extraordinary items was equivalent to the net loss for such periods.
(2)Total long-term liabilities exclude deferred revenue, a non-financial liability.

 

The following table is a summary of selected audited consolidated financial information of the Corporation for the three fiscal years ended June 30, 2010. The information presented is presented in accordance with Canadian Generally Accepted Accounting Principles or Canadian GAAP:

 

   June 30, 2010   June 30, 2009   June 30, 2008 
Revenue  $4,503,892   $2,513,108   $1,596,722 
Net loss (1)  $(19,308,910)  $(22,374,491)  $(16,119,202)
Basic and diluted net loss per common share  $(0.83)  $(0.97)  $(0.70)
Total assets  $49,659,526   $72,819,261   $94,875,961 
Total long-term liabilities (2)  $57,160   $68,592   $80,024 
Shareholders’ equity  $26,792,213   $43,901,643   $63,687,755 
Common shares outstanding   23,217,599    23,215,160    23,186,707 
Cash dividends declared per share  $   $   $ 

 

5
 

 

Notes:

(1)Net loss before discontinued operations and extraordinary items was equivalent to the net loss for such periods.
(2)Total long-term liabilities exclude deferred revenue, a non-financial liability.

 

The following table is a summary of selected audited consolidated financial information of the Corporation for the three fiscal years ended June 30, 2010. The information presented is presented in accordance with United States Generally Accepted Accounting Principles or U.S. GAAP:

 

   June 30, 2010   June 30, 2009   June 30, 2008 
Net loss (1)  $(17,123,358)  $(20,838,254)  $(14,837,024)
Basic and diluted net loss per common share  $(0.74)  $(0.90)  $(0.65)

 

Notes:

(1)Net loss before discontinued operations and extraordinary items was equivalent to the net loss for such periods.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

Investing in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, in addition to the other information provided in this annual report and the Corporation’s other disclosure documents filed with the U.S. Securities and Exchange Commission on www.sec.gov.

 

The Corporation will require significant additional financing and it may not have access to sufficient capital.

 

The Corporation anticipates that it will need additional financing in the future to fund its ongoing research and development programs and for general corporate requirements. The Corporation may choose to seek additional funding through public or private offerings, corporate collaborations or partnership arrangements. The amount of financing required will depend on many factors including the financial requirements of the Corporation to fund its research and clinical trials, and the ability of the Corporation to secure partnerships and achieve partnership milestones as well as to fund other working capital requirements. The Corporation’s ability to access the capital markets or to enlist partners is mainly dependent on the progress of its research and development and regulatory approval of its products. There is no assurance that additional funding will be available on acceptable terms, if at all.

 

The Corporation has a history of losses, and it has not generated any product revenue to date. It may never achieve or maintain profitability.

 

Since inception, the Corporation has incurred significant losses each year and expects to incur significant operating losses as the Corporation continues product research and development and clinical trials. There is no assurance that the Corporation will ever successfully commercialize or achieve revenues from sales of its therapeutic products if they are successfully developed or that profitability will ever be achieved or maintained. Even if profitability is achieved, the Corporation may not be able to sustain or increase profitability.

 

6
 

 

We are an early stage development company in an uncertain industry.

 

The Corporation is at an early stage of development. Preclinical and clinical trial work must be completed before our products could be ready for use within the markets we have identified. We may fail to develop any products, to obtain regulatory approvals, to enter clinical trials or to commercialize any products. We do not know whether any of our potential product development efforts will prove to be effective, meet applicable regulatory standards, obtain the requisite regulatory approvals or be capable of being manufactured at a reasonable cost. If the Corporation’s products are approved for sale, there can be no assurance that the products will gain market acceptance among consumers, physicians, patients and others in the medical community. A failure to gain market acceptance may adversely affect the revenues of the Corporation.

 

The Corporation is subject to a strict regulatory environment.

 

None of the Corporation’s product candidates have received regulatory approval for commercial sale.

 

Numerous statutes and regulations govern human testing and the manufacture and sale of human therapeutic products in Canada, the United States and other countries where the Corporation intends to market its products. Such legislation and regulation bears upon, among other things, the approval of protocols and human testing, the approval of manufacturing facilities, testing procedures and controlled research, review and approval of manufacturing, preclinical and clinical data prior to marketing approval including adherence to Good Manufacturing Practices (“GMP”) during production and storage as well as regulation of marketing activities including advertising and labelling.

 

The completion of the clinical testing of our product candidates and the obtaining of required approvals are expected to take years and require the expenditure of substantial resources. There can be no assurance that clinical trials will be completed successfully within any specified period of time, if at all. Furthermore, clinical trials may be delayed or suspended at any time by the Corporation or by regulatory authorities if it is determined at any time that patients may be or are being exposed to unacceptable health risks, including the risk of death, or that compounds are not manufactured under acceptable GMP conditions or with acceptable quality. Any failure or delay in obtaining regulatory approvals would adversely affect the Corporation’s ability to utilize its technology thereby adversely affecting operations. No assurance can be given that the Corporation’s product candidates or lead compounds will prove to be safe and effective in clinical trials or that they will receive the requisite protocol approval or regulatory approval. Furthermore, no assurance can be given that current regulations relating to regulatory approval will not change or become more stringent. There are no assurances the Corporation can scale-up, formulate or manufacture any compound in sufficient quantities with acceptable specifications for the regulatory agencies to grant approval or not require additional changes or additional trials be performed. The agencies may also require additional trials be run in order to provide additional information regarding the safety, efficacy or equivalency of any compound for which the Corporation seeks regulatory approval. Similar restrictions are imposed in foreign markets other than the United States and Canada. Investors should be aware of the risks, problems, delays, expenses and difficulties which may be encountered by the Corporation in light of the extensive regulatory environment in which the Corporation’s business operates.

 

Even if a product candidate is approved by the FDA or any other regulatory authority, the Corporation may not obtain approval for an indication whose market is large enough to recoup its investment in that product candidate. The Corporation may never obtain the required regulatory approvals for any of its product candidates.

 

7
 

 

The Corporation is faced with uncertainties related to its research.

 

The Corporation’s research programs are based on scientific hypotheses and experimental approaches that may not lead to desired results. In addition, the timeframe for obtaining proof of principle and other results may be considerably longer than originally anticipated, or may not be possible given time, resource, financial, strategic and collaborator scientific constraints. Success in one stage of testing is not necessarily an indication that the particular program will succeed in later stages of testing and development. It is not possible to predict, based upon studies in in-vitro models and in animals, whether any of the compounds made for these programs will prove to be safe, effective, and suitable for human use. Each compound will require additional research and development, scale-up, formulation and extensive clinical testing in humans. Development of these compounds will require investigations into the mechanism of action of the molecules as these are not fully understood. Unsatisfactory results obtained from a particular study relating to a program may cause the Corporation to abandon its commitment to that program or to the lead compound or product candidate being tested. The discovery of unexpected toxicities, lack of sufficient efficacy, poor physiochemical properties, unacceptable ADME (absorption, distribution, metabolism and excretion) and DMPK (drug metabolism and pharmacokinetics), pharmacology, inability to increase scale of manufacture, market attractiveness, regulatory hurdles, competition, as well as other factors, may make the Corporation’s targets, lead compounds or product candidates unattractive or unsuitable for human use, and the Corporation may abandon its commitment to that program, target, lead compound or product candidate. In addition, preliminary results seen in animal and/or limited human testing may not be substantiated in larger controlled clinical trials.

 

If difficulties are encountered enrolling patients in the Corporation’s clinical trials, the Corporation’s trials could be delayed or otherwise adversely affected.

 

Clinical trials for the Corporation’s product candidates require that the Corporation identify and enrol a large number of patients with the disorder under investigation. The Corporation may not be able to enrol a sufficient number of patients to complete its clinical trials in a timely manner. Patient enrolment is a function of many factors including, but not limited to, design of the study protocol, size of the patient population, eligibility criteria for the study, the perceived risks and benefits of the therapy under study, the patient referral practices of physicians and the availability of clinical trial sites. If the Corporation has difficulty enrolling a sufficient number of patients to conduct the Corporation’s clinical trials as planned, it may need to delay or terminate ongoing clinical trials.

 

Even if regulatory approvals are obtained for the Corporation’s product candidates, the Corporation will be subject to ongoing government regulation.

 

Even if regulatory authorities approve any of the Corporation’s human therapeutic product candidates, the manufacture, marketing and sale of such products will be subject to strict and ongoing regulation. Compliance with such regulation may be expensive and consume substantial financial and management resources. If the Corporation, or any future marketing collaborators or contract manufacturers, fail to comply with applicable regulatory requirements, it may be subject to sanctions including fines, product recalls or seizures, injunctions, total or partial suspension of production, civil penalties, withdrawal of regulatory approvals and criminal prosecution. Any of these sanctions could delay or prevent the promotion, marketing or sale of the Corporation’s products.

 

The Corporation may not achieve its projected development goals in the time frames announced and expected.

 

The Corporation sets goals for and makes public statements regarding the timing of the accomplishment of objectives material to its success, such as the commencement and completion of clinical trials, anticipated regulatory submission and approval dates and time of product launch. The actual timing of these events can vary dramatically due to factors such as delays or failures in the Corporation’s clinical trials, the uncertainties inherent in the regulatory approval process and delays in achieving manufacturing or marketing arrangements sufficient to commercialize its products.

 

There can be no assurance that the Corporation’s clinical trials will be completed, that the Corporation will make regulatory submissions or receive regulatory approvals as planned. If the Corporation fails to achieve one or more of these milestones as planned, the price of the Common Shares would likely decline.

 

If the Corporation fails to obtain acceptable prices or adequate reimbursement for its human therapeutic products, its ability to generate revenues will be diminished.

 

The Corporation’s ability to successfully commercialize its human therapeutic products will depend significantly on its ability to obtain acceptable prices and the availability of reimbursement to the patient from third-party payers, such as government and private insurance plans. While the Corporation has not commenced discussions with any such parties, these third-party payers frequently require companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for pharmaceuticals and other medical products. The Corporation’s human therapeutic products may not be considered cost-effective, and reimbursement to the patient may not be available or sufficient to allow the Corporation to sell its products on a competitive basis. The Corporation may not be able to negotiate favourable reimbursement rates for its human therapeutic products.

 

8
 

 

In addition, the continuing efforts of third-party payers to contain or reduce the costs of healthcare through various means may limit the Corporation’s commercial opportunity and reduce any associated revenue and profits. The Corporation expects proposals to implement similar government control to continue. In addition, increasing emphasis on managed care will continue to put pressure on the pricing of pharmaceutical and biopharmaceutical products. Cost control initiatives could decrease the price that the Corporation or any current or potential collaborators could receive for any of its human therapeutic products and could adversely affect its profitability. In addition, in Canada and in many other countries, pricing and/or profitability of some or all prescription pharmaceuticals and biopharmaceuticals are subject to government control.

 

If the Corporation fails to obtain acceptable prices or an adequate level of reimbursement for its products, the sales of its products would be adversely affected or there may be no commercially viable market for its products.

 

The Corporation may not obtain adequate protection for its products through its intellectual property.

 

The Corporation’s success depends, in large part, on its ability to protect its competitive position through patents, trade secrets, trademarks and other intellectual property rights. The patent positions of pharmaceutical and biopharmaceutical firms, including the Corporation, are uncertain and involve complex questions of law and fact for which important legal issues remain unresolved. The patents issued or to be issued to the Corporation may not provide the Corporation with any competitive advantage. The Corporation’s patents may be challenged by third parties in patent litigation, which is becoming widespread in the biopharmaceutical industry. In addition, it is possible that third parties with products that are very similar to the Corporation’s will circumvent its patents by means of alternate designs or processes. The Corporation may have to rely on method of use protection for its compounds in development and any resulting products, which may not confer the same protection as compounds per se. The Corporation may be required to disclaim part of the term of certain patents. There may be prior applications of which the Corporation is not aware that may affect the validity or enforceability of a patent claim. There also may be prior applications which are not viewed by the Corporation as affecting the validity or enforceability of a claim, but which may, nonetheless ultimately be found to affect the validity or enforceability of a claim. No assurance can be given that the Corporation’s patents would, if challenged, be held by a court to be valid or enforceable or that a competitor’s technology or product would be found by a court to infringe the Corporation’s patents. Applications for patents and trademarks in Canada, the United States and in foreign markets have been filed and are being actively pursued by the Corporation. Pending patent applications may not result in the issuance of patents, and the Corporation may not develop additional proprietary products which are patentable.

 

Patent applications relating to or affecting the Corporation’s business have been filed by a number of pharmaceutical and biopharmaceutical companies and academic institutions. A number of the technologies in these applications or patents may conflict with the Corporation’s technologies, patents or patent applications, and such conflict could reduce the scope of patent protection which the Corporation could otherwise obtain. The Corporation could become involved in interference proceedings in the United States in connection with one or more of its patents or patent applications to determine priority of invention. The Corporation’s granted patents could also be challenged and revoked in opposition proceedings in certain countries outside the United States.

 

In addition to patents, the Corporation relies on trade secrets and proprietary know-how to protect its intellectual property. The Corporation generally requires its employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to enter into confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with the Corporation is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of the Corporation’s employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is the Corporation’s exclusive property. These agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of the Corporation’s proprietary information. In addition, it is possible that third parties could independently develop proprietary information and techniques substantially similar to those of the Corporation or otherwise gain access to the Corporation’s trade secrets.

 

9
 

 

The Corporation currently has the right to use certain technology under license agreements with third parties. The Corporation’s failure to comply with the requirements of material license agreements could result in the termination of such agreements, which could cause the Corporation to terminate the related development program and cause a complete loss of its investment in that program.

 

As a result of the foregoing factors, the Corporation may not be able to rely on its intellectual property to protect its products in the marketplace.

 

The Corporation may infringe the intellectual property rights of others.

 

The Corporation’s commercial success depends significantly on its ability to operate without infringing the patents and other intellectual property rights of third parties. There could be issued patents of which the Corporation is not aware that its products infringe or patents, that the Corporation believes it does not infringe, but that it may ultimately be found to infringe. Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications of which the Corporation is unaware that may later result in issued patents that its products infringe.

 

The biopharmaceutical industry has produced a proliferation of patents, and it is not always clear to industry participants, including the Corporation, which patents cover various types of products. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. The Corporation is aware of, and has reviewed, third party patents relating to the treatment of Alzheimer’s disease, diabetes, and other relevant indication areas. In the event of infringement or violation of another party’s patent, the Corporation may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost. Any inability to secure licenses or alternative technology could result in delays in the introduction of the Corporation’s products or lead to prohibition of the manufacture or sale of the products.

 

Patent litigation is costly and time consuming and may subject the Corporation to liabilities.

 

The Corporation’s involvement in any patent litigation, interference, opposition or other administrative proceedings will likely cause the Corporation to incur substantial expenses, and the efforts of its technical and management personnel will be significantly diverted. In addition, an adverse determination in litigation could subject the Corporation to significant liabilities.

 

The Corporation operates in a fiercely competitive business environment.

 

The biopharmaceutical industry is highly competitive. Competition comes from health care companies, pharmaceutical companies, large and small biotech companies, specialty pharmaceutical companies, universities, government agencies and other public and private companies. Research and development by others may render the Corporation’s technology or products non-competitive or obsolete or may result in the production of treatments or cures superior to any therapy the Corporation is developing or will develop. In addition, failure, unacceptable toxicity, lack of sales or disappointing sales or other issues regarding competitors’ products or processes could have a material adverse effect on the Corporation’s product candidates, including its clinical candidates or its lead compounds.

 

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The market price of the Corporation’s Common Shares may experience a high level of volatility due to factors such as the volatility in the market for biotechnology stocks generally, and the short-term effect of a number of possible events.

 

The Corporation is a public growth company in the biotechnology sector. As frequently occurs among these companies, the market price for the Corporation’s Common Shares may experience a high level of volatility. Numerous factors, including many over which the Corporation has no control, may have a significant impact on the market price of Common Shares including, among other things, (i) clinical and regulatory developments regarding the Corporation’s products and product candidates and those of its competitors, (ii) arrangements or strategic partnerships by the Corporation, (iii) other announcements by the Corporation or its competitors regarding technological, product development, sales or other matters, (iv) patent or other intellectual property achievements or adverse developments, (v) arrivals or departures of key personnel; (vi) government regulatory action affecting the Corporation’s product candidates in the United States, Canada and foreign countries, (vii) actual or anticipated fluctuations in the Corporation’s revenues or expenses, (viii) general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors, (ix) reports of securities analysts regarding the expected performance of the Corporation, and (x) events related to threatened, new or existing litigation. Listing on NASDAQ and the TSX may increase share price volatility due to various factors including, (i) different ability to buy or sell the Corporation’s Common Shares, (ii) different market conditions in different capital markets; and (iii) different trading volume.

 

In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of Common Shares, regardless of the Corporation’s operating performance. In addition, sales of substantial amounts of Common Shares in the public market after any offering, or the perception that those sales may occur, could cause the market price of Common Shares to decline.

 

Furthermore, shareholders may initiate securities class action lawsuits if the market price of the Corporation’s stock drops significantly, which may cause the Corporation to incur substantial costs and could divert the time and attention of its management.

 

The Corporation is highly dependent on third parties.

 

The Corporation is or may in the future be dependent on third parties for certain raw materials, product manufacture, marketing and distribution and, like other biotechnology and pharmaceutical companies, upon medical institutions to conduct clinical testing of its potential products. Although the Corporation does not anticipate any difficulty in obtaining any such materials and services, no assurance can be given that the Corporation will be able to obtain such materials and services.

 

The Corporation is subject to intense competition for its skilled personnel, and the loss of key personnel or the inability to attract additional personnel could impair its ability to conduct its operations.

 

The Corporation is highly dependent on its management and its clinical, regulatory and scientific staff, the loss of whose services might adversely impact its ability to achieve its objectives. Recruiting and retaining qualified management and clinical, scientific and regulatory personnel is critical to the Corporation’s success. Competition for skilled personnel is intense, and the Corporation’s ability to attract and retain qualified personnel may be affected by such competition.

 

The Corporation’s business involves the use of hazardous materials which requires the Corporation to comply with environmental regulation.

 

The Corporation’s discovery and development processes involve the controlled use of hazardous materials. The Corporation is subject to federal, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Corporation could be held liable for any damages that result, and any such liability could exceed the Corporation’s resources. The Corporation may not be adequately insured against this type of liability. The Corporation may be required to incur significant costs to comply with environmental laws and regulations in the future, and its operations, business or assets may be materially adversely affected by current or future environmental laws or regulations.

 

Legislative actions, potential new accounting pronouncements and higher insurance costs are likely to impact the Corporation’s future financial position or results of operations.

 

Compliance with changing regulations regarding corporate governance and public disclosure, notably with respect to internal controls over financial reporting, may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for companies such as ours, and insurance costs are increasing as a result of this uncertainty.

 

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Future health care reforms may produce adverse consequences.

 

Health care reform and controls on health care spending may limit the price the Corporation can charge for any products and the amounts thereof that it can sell. In particular, in the United States, the federal government and private insurers have considered ways to change, and have changed, the manner in which health care services are provided. Potential approaches and changes in recent years include controls on health care spending and the creation of large purchasing groups. In the future, the U.S. government may institute further controls and different reimbursement schemes and limits on Medicare and Medicaid spending or reimbursement. These controls, reimbursement schemes and limits might affect the payments the Corporation could collect from sales of any of its products in the United States. Uncertainties regarding future health care reform and private market practices could adversely affect the Corporation’s ability to sell any products profitably in the United States. Election of new or different political or government officials in large market countries could lead to dramatic changes in pricing, regulatory approval legislation and reimbursement which could have material impact on product approvals and commercialization.

 

The Corporation faces an unproven market for its future products.

 

The Corporation believes that there will be many different applications for products successfully derived from its technologies and that the anticipated market for products under development will continue to expand. No assurance, however, can be given that these beliefs will prove to be correct due to competition from existing or new products and the yet to be established commercial viability of the Corporation’s products. Physicians, patients, formularies, third party payers or the medical community in general may not accept or utilize any products that the Corporation or its collaborative partners may develop.

 

The Corporation may be faced with future lawsuits related to secondary market liability.

 

Securities legislation in Canada has recently changed to make it easier for shareholders to sue. These changes could lead to frivolous law suits which could take substantial time, money, resources and attention or force the Corporation to settle such claims rather than seek adequate judicial remedy or dismissal of such claims.

 

The Corporation may encounter unforeseen emergency situations and information technology breaches.

 

Despite the implementation of security measures, any of the Corporation’s, its collaborators’ or its third party service providers’ internal computer systems are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failure. Any resulting system failure, accident or security breach could result in a material disruption of the Corporation’s operations. Likewise, data privacy or security breaches by employees and others with permitted access to our systems, including in some cases third-party service providers to which we may outsource certain business functions, may pose a risk that sensitive data, including intellectual property or personal information, may be exposed to unauthorized persons or to the public. While we have invested in the protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems, that could adversely affect our business and/or result in the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm to us.

 

The Corporation’s technologies may become obsolete.

 

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 the Corporation’s technologies obsolete, less competitive or less marketable.

 

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Our product candidates may cause undesirable serious adverse events during clinical trials that could delay or prevent their regulatory authorization, approval or other permission to conduct further testing or commence commercialization.

 

Our product candidates in clinical development, including ELND005 (AZD-103), can potentially cause adverse events. Most recently, together with our collaborator, Elan, we completed a Phase II study that evaluated three dose groups of ELND005 (AZD-103) and a placebo group in mild to moderate Alzheimer’s disease patients. The study included four treatment arms: placebo, 250mg bid, 1000mg bid and 2000mg bid. The two high dose ELND005 (AZD-103) groups were electively discontinued in 2009 by the companies due to an observed imbalance of serious adverse events, including deaths. No causal relationship could be determined between these higher doses and the events.

 

Of the 351 subjects who received study drug, a total of 171 subjects received either 250mg bid or placebo, the rest were in the two discontinued high dose groups. The overall incidence of adverse events in the 250mg bid and placebo groups was 87.5% versus 91.6%; and the incidence of withdrawals due to adverse events was 10.2% versus 9.6%, respectively. The incidence of serious adverse events in the 250mg bid and placebo groups was 21.6% versus 13.3%, but the incidence of serious adverse events that were considered drug related was 2.3% and 2.4%, respectively. The total number of deaths in the study was five and four in the 1000mg bid and 2000mg bid dose groups versus one and zero in the 250mg bid and placebo groups, respectively. These deaths occurred between August 2008 and November 2009. The study’s independent safety monitoring committee reviewed the final safety results and continued to conclude that a causal relationship between the deaths and drug could not be determined.

 

The most common adverse events in the 250mg bid group that were >5% in incidence and double the placebo rate were: falls (12.5% vs. placebo 6%), depression (11.4% vs. placebo 4.8%), and confusional state (8% vs. placebo 3.6%). Because our product candidates have been tested in relatively small patient populations and for limited durations, additional adverse events may be observed as their development progresses.

 

Adverse events caused by any of our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other non-U.S. regulatory authorities for any or all targeted indications. This, in turn, could prevent the commercialization of our product candidates and the generation of revenues from their sale. In addition, if our product candidates receive authorization, marketing approval or other permission and we or others later identify adverse events caused by the product:

 

regulatory authorities may withdraw their authorization, approval, or other permission to test or market the candidate product;

 

we may be required to recall the product, change the way the product is administered, conduct additional clinical trials or change the labeling of the product;

 

a product may become less competitive and product sales may decrease; or

 

our reputation may suffer.

 

Any one or a combination of these events could prevent us from achieving or maintaining market acceptance or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from the sale of such products.

 

We may be subject to costly product liability claims and may not have adequate insurance.

 

The conduct of clinical trials in humans involves the potential risk that the use of our product candidates will result in adverse effects. We currently maintain product liability insurance for our clinical trials; however, such liability insurance may not be adequate to fully cover any liabilities that arise from clinical trials of our product candidates. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limit of, our insurance coverage.

 

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U.S. holders of our common shares may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company (“PFIC”).

 

There is a risk that we will be classified as a PFIC for U.S. federal income tax purposes. Our status asa PFIC could result in a reduction in the after-tax return to U.S. Holders of our common shares and may cause a reduction in the value of such shares. We will be classified as a PFIC for any taxable year in which (i) at least 75% of our gross income is passive income or (ii) at least 50% of the average value of all of our assets produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, and royalties and rents that are not derived in the active conduct of a trade or business, as well as gains from the sale of assets that produce passive income. Based on the projected composition of our income and valuation of our assets, we do not believe we were a PFIC for the taxable year ended June 30, 2012 and do not believe we will be a PFIC for the taxable year ending June 30, 2013. However, the U.S. Internal Revenue Service or a U.S. court could determine that we are a PFIC in any year. If we are classified as a PFIC, U.S. Holders of our common shares could be subject to greater U.S. income tax liability than might otherwise apply, imposition of U.S. income tax in advance of when tax would otherwise apply, and detailed tax filing requirements that would not otherwise apply. Subject to certain exceptions, once a U.S. Holder’s shares are treated as shares from a PFIC, they remain shares in a PFIC. Dividends received by a U.S. Holder from a PFIC will not constitute qualified dividend income. The PFIC rules are complex and U.S. Holders of our common shares are urged to consult their own tax advisors regarding the possible application of the PFIC rules to them in their particular circumstances. See “Taxation—United States Federal Income Taxation.”

 

Item 4. Information on the Corporation

 

Name, Address and Incorporation

 

Transition Therapeutics Inc. was incorporated pursuant to the Business Corporations Act (Ontario) on July 6, 1998 as “Transition Therapeutics and Diagnostics Inc.” The Corporation filed articles of amendment on October 12, 2000 and on October 19, 2000 to create a class of non-voting shares (the “Class B Shares”) and to amend certain attributes of its Common Shares. On November 2, 2000, the Corporation filed articles of amendment to delete its private company restrictions. On December 14, 2000, the Corporation filed articles of amendment to change its name to “Transition Therapeutics Inc.” and effect a split of its issued and outstanding Common Shares on the basis of 3.25649 Common Shares for each previously issued and outstanding Common Share. On December 14, 2004, the Corporation filed articles of amendment to eliminate the Class B Shares from its authorized capital. In July 2007, the Corporation completed the consolidation of its issued and outstanding Common Shares on the basis of one (1) post-consolidation Common Share for every nine (9) pre-consolidation Common Shares.

 

The Corporation’s principal and registered office is located at 101 College Street, Suite 220, Toronto, Ontario, M5G 1L7, and its telephone number is (416) 260-7770. The Corporation’s agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, NY 10011.

 

Intercorporate Relationships

 

The Corporation has one wholly-owned material subsidiary: Waratah Pharmaceuticals Inc. (“Waratah”), which is incorporated under the Canada Business Corporations Act.

 

The chart below illustrates the corporate structure:

 

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Z:\TQData\VINEYARD\Live Jobs\2012\09 Sep\11 Sep\Shift III\Transition Therapeutics Inc\Draft\03-Production

 

Waratah’s principal business activity is to develop and commercialize its ELND005 (AZD-103) compound for the treatment of Alzheimer’s disease and bipolar disorder; the type 2 diabetes drug candidate TT-401 licensed from Lilly in March 2010; and TT-301 and TT-302 which are the anti-inflammatory compounds acquired in connection with the acquisition of NeuroMedix Inc. (“NeuroMedix”) in June 2007.

 

General Development of the Business

 

Three Year History

 

On July 13, 2009, Elan and the Corporation announced Phase 1 data showing ELND005 (AZD-103) achieves desired concentrations in brain tissue and cerebrospinal fluid when given orally. Preclinical data also were presented showing that ELND005 (AZD-103) administration is associated with preservation of choline acetyltransferase (ChAT), reflecting preservation of nerve cells that are critical to memory function in the brain. These results were presented at the 2009 Alzheimer’s Association International Conference on Alzheimer’s Disease (ICAD 2009) in Vienna, Austria.

 

On December 15, 2009, Elan and the Corporation announced modifications to ELND005 (AZD-103) Phase II clinical trials in Alzheimer's disease. Patients were withdrawn immediately from the study in the two higher dose groups (1000mg and 2000mg dosed twice daily). The study continued unchanged for patients who were assigned to the lower dose (250mg dosed twice daily) and placebo groups. The open label extension study was modified to dose patients only at 250mg twice daily. Greater rates of serious adverse events, including nine deaths, were observed among patients receiving the two highest doses. A direct relationship between ELND005 (AZD-103) and these deaths has not been established. The Independent Safety Monitoring Committee (“ISMC”) and both companies concurred that the tolerability and safety data are acceptable among patients receiving the 250mg dose and that the blinded study should continue for this dose and the placebo group.

 

In December 2009, management assessed the development potential of the intangible assets acquired from Forbes and accordingly, recognized an impairment of the intangible assets of $1,053,446.

 

On January 25, 2010, the Corporation announced results from a Phase II clinical study of gastrin analogue, TT-223, in patients with type 2 diabetes. Patients who received the highest daily dose of TT-223 for 12 weeks and completed the entire study without adjusting their diabetes therapies experienced a statistically significant reduction in HbA1c of 1.13%, 6 months after completing TT-223. Patients who had received placebo treatment experienced a 0.22% HbA1c reduction 6 months post-treatment. HbA1c is a reflection of a person's average glucose level and is used by doctors as a measure of glucose management. Post prandial (after a meal) and AUC (area under the curve) glucose showed improvement versus placebo but not against baseline at 3 and 6 months post-treatment, while fasting blood glucose and mixed meal tolerance insulin parameter tests did not show improvement. No detectable changes in weight were observed. There were no treatment-related serious adverse events. The most common adverse event was nausea, which was generally mild to moderate and decreased in frequency and severity over the treatment period.

 

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On March 3, 2010 the Corporation announced a second licensing agreement with Lilly to acquire the rights to a series of preclinical compounds in the area of diabetes. Under the licensing and collaboration agreement, the Corporation will receive exclusive worldwide rights to develop and potentially commercialize a class of compounds that, in preclinical diabetes models showed potential to provide glycemic control and other beneficial effects including weight loss.

 

On June 30, 2010, the Corporation announced the initiation of a Phase I clinical study of TT-301. The study is a double blind, randomized, placebo controlled study in which healthy volunteers receive placebo or escalating doses of intravenously administered TT-301. The primary objectives of the trial are to evaluate the safety, tolerability and pharmacokinetics of TT-301.

 

On August 9, 2010, Elan and the Corporation announced topline summary results of a Phase II study and plans for Phase III for ELND005 (AZD-103). The AD201 study did not achieve significance on co-primary outcome measures (NTB and ADCS-ACL) however; the study did identify a dose with acceptable safety and tolerability. The dose demonstrated a biological effect on amyloid-beta protein in the cerebrospinal fluid and effects on clinical endpoints in an exploratory analysis. Based on the preponderance of evidence, and input from the experts in this field, the companies intend to advance ELND005 (AZD-103) into Phase III studies.

 

On September 17, 2010, the Corporation announced that a clinical study of gastrin analogue TT-223 in combination with a Lilly proprietary GLP-1 analogue in patients with type 2 diabetes did not meet its efficacy endpoints. Given these findings, there will be no further development of TT-223. The next generation diabetes compounds that the Corporation has in-licensed from Lilly (TT-401/402), as announced on March 3, 2010, act through a distinctly different mechanism of action from gastrin based therapies. The companies continue to work diligently on this program and the licensing arrangement is unaffected by the TT-223 clinical study results.

 

On December 27, 2010, the Corporation announced the modification of the ELND005 (AZD-103) collaboration agreement between Elan and the Corporation. Under the terms of the modification, in lieu of a contractually required Phase III milestone payment, the Corporation received from Elan a payment of US$9 million at the time of signing and is eligible to receive a US$11 million payment upon the commencement of the next ELND005 (AZD-103) clinical trial, which occurred on August 29, 2012 when Elan dosed the first patient in a Phase II clinical study of ELND005 in bipolar disorder. The Corporation also will be eligible to receive up to an aggregate of US$93 million in additional regulatory and commercial launch related milestone payments plus tiered royalties ranging from 8% to 15% based on net sales of ELND005 (AZD-103) should the drug receive the necessary regulatory approvals for commercialization. As the agreement is now a royalty arrangement, the Corporation no longer funds the development or commercialization of ELND005 (AZD-103) and has relinquished its 30% ownership of ELND005 (AZD-103) to Elan.

 

On July 15, 2011, the Corporation announced that ELND005 (AZD-103) Phase II clinical trial data would be presented at the International Conference of Alzheimer's Disease (ICAD) meeting on July 18, 2011.

 

On September 27, 2011, the Corporation announced that Phase II clinical study data of ELND005 (AZD-103) in mild to moderate Alzheimer’s disease has been published in the peer-reviewed journal, Neurology. The Neurology article was entitled “A Phase II randomized trial of ELND005 (AZD-103), scyllo-inositol, in mild-moderate Alzheimer’s disease”. In addition, the embargo on the ELND005 (AZD-103) Phase II data previously presented at the International Conference on Alzheimer’s Disease (ICAD) in July 2011 was lifted.

 

In the overall population (mild and moderate Alzheimer’s disease), the treatment effects on the primary endpoints NTB and ADCS-ADL were not significant. In the pre-specified analyses of the Mild Alzheimer’s disease group (MMSE 23-26), there were encouraging trends on cognition (NTB: p=0.007 in compliant patients who completed the study). The positive NTB trends were observed on both memory and function. In the Mild Alzheimer’s disease group, both the ADCS-ADL and CDR-SB effects of ELND005, though not significant, showed a consistent and favourable separation over the 18 months, where the active group showed at least 30% less decline than placebo. These trends were consistent throughout both the modified intent to treat and the compliant completer patient (or per protocol) populations. The ADAS-Cog treatment difference was not significant but directionally opposite to the other cognitive (NTB) and functional/global (ADCS-ADL and CDR-SB) endpoints in the study and was largely driven by a minimal decline in the placebo group over the 18 months. The Moderate Alzheimer’s disease group (MMSE 16-22, inclusive) and ApoE4 carriers and non-carriers showed no consistent positive or negative trends.

 

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The safety and tolerability profile of 250mg bid dose was deemed acceptable, and the independent safety committee concurred with this assessment. The two high dose groups were electively discontinued due to imbalance of infections and deaths due to various causes. The overall incidence of adverse events in the 250mg bid and placebo groups was 87.5% versus 91.6%; and the incidence of withdrawals due to adverse events was 10.2% versus 9.6%, respectively. The most common adverse events in the 250mg bid group that were >5% in incidence and double the placebo rate were: falls (12.5% vs. placebo 6%), depression (11.4% vs. placebo 4.8%), and confusional state (8% vs. placebo 3.6%).

 

In the cerebrospinal fluid (“CSF”) subset at 78 weeks, ELND005 (AZD-103) treatment resulted in a significant reduction of CSF Aβ42 (~27%), and a numerical reduction of tau which is potential evidence of target engagement. In the overall population, the increase in ventricular volume as measured by MRI was greater in the 250mg group compared to placebo, this difference though statistically significant was small (approximately 3cc). Whole brain volume treatment differences were not significant.

 

On November 22, 2011, the Corporation announced a US$5 million private placement. Under the non-brokered private placement, Transition issued 3,703,703 common shares at a price of US$1.35 for gross proceeds of approximately US$5,000,000.

 

On November 29, 2011, Elan provided an update on the development of ELND005 (AZD-103). Elan reported that Lonza Group AG has been contracted to supply future active pharmaceutical ingredient. In addition, four oral presentations were presented at the 4th Annual Conference on Clinical Trials on Alzheimer’s Disease (“CTAD”) focusing on ELND005 (AZD-103) treatment effects at earlier stages of Alzheimer’s disease and the use of validated “composite” cognitive endpoints. Elan also noted that ELND005 (AZD-103)’s role in reducing neuropsychiatric symptoms in Alzheimer’s disease was highlighted at the CTAD meeting, and that ELND005 (AZD-103) may have applications in additional psychiatric indications such as bipolar disorder.

 

On December 9, 2011, the Corporation announced the departure of Mr. Elie Farah, the Corporation’s President and Chief Financial Officer.

 

On December 12, 2011, the Corporation announced the appointment of Ms. Nicole Rusaw-George, as Chief Financial Officer of the Corporation.

 

On December 12, 2011, the Corporation announced that the first patient has been dosed in a Phase I clinical study of type 2 diabetes drug candidate, TT-401. TT-401 is a once-weekly administered peptide being studied for its potential to lower blood glucose levels in patients with type 2 diabetes and accompanying obesity.

 

On April 26, 2012, the Corporation announced that three ELND005 poster presentations were presented at the American Academy of Neurology. These presentations described responder analyses and characteristics, along with findings on the effect of ELND005 on the emergence of neuropsychiatric symptoms.

 

On May 14, 2012, the Corporation announced that a mini symposium entitled “The Emerging Clinical Profile of Oral Scyllo-inositol (ELND005) in Alzheimer’s Disease: A Dual Mechanism of Action” was presented at the 12th International Stockholm/Springfield Symposium on Advances in Alzheimer Therapies.

 

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On June 18, 2012, the Corporation announced the results of the Phase I clinical study of type 2 diabetes drug candidate, TT-401. The Phase 1, double-blind, placebo-controlled randomized study enrolled 48 non-diabetic obese subjects in six cohorts evaluating six escalating subcutaneous single doses of TT-401. TT-401 demonstrated an acceptable safety and tolerability profile in non-diabetic obese subjects in the study. TT-401 exhibited the expected pharmacological effect on glucose and pharmacodynamic biomarkers at doses that were safe and tolerable. The pharmacokinetic profile, assessed over 28 days, demonstrated a half-life consistent with once-weekly dosing. As the study results met expectations, Transition and its development partner Lilly have jointly decided that the next development step will be a multiple ascending dose study of TT-401 in obese subjects with type 2 diabetes.

 

Recent Developments

 

On August 30, 2012, the Corporation announced that its licensing partner Elan had dosed the first patient in a Phase II clinical study of ELND005 in bipolar disorder. The study is a placebo-controlled, safety and efficacy study of oral ELND005 as an adjunctive maintenance treatment in patients with Bipolar I Disorder to delay the time to occurrence of mood episodes. As the first patient has been dosed in the study, the Corporation will receive a milestone payment of US$11 million from Elan.

 

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Business of the Corporation

 

Market sizes appearing in this annual report are estimates of potential markets only. The Corporation makes no claim that such figures represent sales figures actually anticipated should the Corporation successfully develop and receive approval for any of its product candidates.

 

General

 

The Corporation is a product-focused biopharmaceutical company developing novel therapeutics for disease indications with large markets. The Corporation considers itself to be in one business segment: the research and development of therapeutic agents.

 

The Corporation’s strategic focus is on building shareholder value. To effectively achieve this, the Corporation has established a business model based on the following steps: 1) identifying attractive early stage technologies targeting large markets; 2) moving these products through the clinic to provide validation; 3) considering additional product opportunities; 4) identifying partners with the infrastructure and resources to complete late stage clinical development and product commercialization; and 5) identifying new product opportunities to replenish the Corporation’s product pipeline.

 

This business model allows the Corporation to maximize the return from its early stage investment and validation through partnerships with large pharmaceutical companies. These partnerships not only provide the Corporation with third party validation, but also fund the more costly later stage clinical development of its lead products and provide revenues through milestone payments, royalties and profit sharing arrangements for the future growth of the Corporation. The revenues from these partnerships may also allow the Corporation to continually replenish its product development pipeline while reducing the need to secure funding from the public markets.

 

The Corporation’s business model has resulted in an infrastructure that also allows the Corporation to advance several products simultaneously while controlling the diminishment of its working capital. The Corporation’s small and versatile infrastructure has in part resulted from the Corporation conducting research and development internally, as well as, out-sourcing work to hospitals, universities or pharmaceutical companies.

 

Technology

 

The Corporation’s technologies in development are as follows: (i) ELND005 (AZD-103) for the treatment of Alzheimer’s disease and bipolar disorder; (ii) TT-401/402 for the treatment of diabetes and (iii) TT-301 and TT-302 which may have a therapeutic effect on diseases including arthritis, neuropathic pain, Alzheimer’s disease, traumatic brain injury and intracerebral haemorrhage.

 

ELND005 (AZD-103) Technology

 

The Corporation is developing disease-modifying small molecule therapeutics that act by preventing the formation of and breaking down amyloid beta peptide aggregates. The accumulation of amyloid beta has been connected to several diseases including Alzheimer’s disease, AA Amyloidosis and others.

 

The Product

 

The Alzheimer’s disease lead product, ELND005 (AZD-103), is part of an emerging class of disease-modifying drugs that have the potential to both reduce disease progression and improve symptoms such as diminished cognitive function. ELND005 (AZD-103) breaks down neuro-toxic fibrils, allowing amyloid peptides to clear the brain rather than form amyloid plaques, a hallmark pathology of Alzheimer’s disease.

 

The Corporation and its licensing partner, Elan, have performed multiple Phase I studies evaluating the safety, tolerability and pharmacokinetic profile of ELND005 (AZD-103) in healthy volunteers. Approximately 110 subjects have been exposed to ELND005 (AZD-103) in multiple Phase I studies, including single and multiple ascending dosing; pharmacokinetic evaluation of levels in the brain; and CSF and plasma studies. In these studies, ELND005 (AZD-103) was safe and well-tolerated at all doses and dosing regimens examined. There were no severe or serious adverse events observed. ELND005 (AZD-103) was also shown to be orally bioavailable, to cross the blood-brain barrier and to achieve levels in the human brain and CSF that were shown to be effective in animal models for Alzheimer’s disease.

 

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In 2007, the Corporation and Elan commenced a Phase II clinical study (AD201) of ELND005 (AZD-103) in patients with Alzheimer’s disease. In December, 2009, Elan and the Corporation announced modifications to the AD201 clinical trial. Patients were withdrawn immediately from the study in the two higher dose groups (1000mg and 2000mg dosed twice daily) and the study continued unchanged for patients who were assigned to the lower dose (250mg dosed twice daily) and placebo groups. The open label extension study was modified to dose patients only at 250mg twice daily. Greater rates of serious adverse events, including nine deaths, were observed among patients receiving the two highest doses. A direct relationship between ELND005 (AZD-103) and these deaths has not been established. The Independent Safety Monitoring Committee (“ISMC”) and both companies concur that the tolerability and safety data are acceptable among patients receiving the 250mg dose and that the blinded study should continue for this dose and the placebo group.

 

In August, 2010, Elan and the Corporation announced topline summary results of the Phase II study and plans for Phase III for ELND005 (AZD-103). The AD201 study did not achieve significance on co-primary outcome measures (NTB and ADCS-ACL) in mild to moderate patients.

 

The AD201 study identified a dose with acceptable safety and tolerability that achieved target drug levels in the cerebrospinal fluid. The dose demonstrated a biological effect on amyloid-beta protein in the cerebrospinal fluid and effects on clinical endpoints in an exploratory analysis. Based on the preponderance of evidence, and input from the experts in this field, the companies intend to advance ELND005 (AZD-103) into Phase III studies.

 

On December 27, 2010, the Corporation announced the modification of the ELND005 (AZD-103) collaboration agreement between Elan and the Corporation. Under the terms of the modification, in lieu of a contractually required Phase III milestone payment, the Corporation received from Elan a payment of US$9 million at the time of signing and is eligible to receive a US$11 million payment upon the commencement of the next ELND005 (AZD-103) clinical trial, which occurred on August 29, 2012 when Elan dosed the first patient in a Phase II clinical study of ELND005 in bipolar disorder. The Corporation also will be eligible to receive up to an aggregate of US$93 million in additional regulatory and commercial launch related milestone payments plus tiered royalties ranging from 8% to 15% based on net sales of ELND005 (AZD-103) should the drug receive the necessary regulatory approvals for commercialization. As the agreement is now a royalty arrangement, the Corporation no longer funds the development or commercialization of ELND005 (AZD-103) and has relinquished its 30% ownership of ELND005 (AZD-103) to Elan.

 

In November, 2011, Elan provided an update on the development of ELND005 (AZD-103). Elan reported that Lonza Group AG has been contracted to supply future active pharmaceutical ingredient. In addition, four oral presentations were presented at the 4th Annual Conference on Clinical Trials on Alzheimer’s Disease (“CTAD”) focusing on ELND005 (AZD-103) treatment effects at earlier stages of Alzheimer’s Disease and the use of validated “composite” cognitive endpoints. Elan also noted that ELND005 (AZD-103)’s role in reducing neuropsychiatric symptoms in Alzheimer’s Disease was highlighted at the CTAD meeting, and that ELND005 (AZD-103) may have applications in additional psychiatric indications such as bipolar disorder.

 

Alzheimer’s Disease – The Disease and the Market Opportunity

 

Alzheimer’s disease is a progressive brain disorder that gradually destroys a person’s memory and ability to learn, reason, make judgments, communicate and carry out daily activities. As Alzheimer’s disease progresses, individuals may also experience changes in personality and behaviour, such as anxiety, suspiciousness or agitation, as well as delusions or hallucinations. In late stages of the disease, individuals need help with dressing, personal hygiene, eating and other basic functions. People with Alzheimer’s disease die an average of eight years after first experiencing symptoms, but the duration of the disease can vary from three to 20 years.

 

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The disease mainly affects individuals over the age of 65 and it is estimated over 18 million people are suffering from Alzheimer’s disease worldwide. The likelihood of developing late-onset Alzheimer’s approximately doubles every five years after age 65. By age 85, the risk reaches nearly 50 percent. In the United States, Alzheimer’s disease is the sixth leading cause of death and current direct/indirect costs of caring for an estimated 5.4 million Alzheimer’s disease patients are at least US$100 billion annually. Scientists have so far discovered one gene that increases risk for late-onset of the disease.

 

Current FDA approved Alzheimer’s disease medications may temporarily delay memory decline for some individuals, but none of the currently approved drugs are known to stop the underlying degeneration of brain cells. Certain drugs approved to treat other illnesses may sometimes help with the emotional and behavioral symptoms of Alzheimer’s disease. With an aging population, there is a great need for disease-modifying compounds that can slow or reverse disease progression.

 

ELND005 (AZD-103) for Bipolar Disorder

 

On August 30, 2012, the Corporation announced that its licensing partner Elan had dosed the first patient in a Phase II clinical study of ELND005 in bipolar disorder. The study is a placebo-controlled, safety and efficacy study of oral ELND005 as an adjunctive maintenance treatment in patients with Bipolar I Disorder to delay the time to occurrence of mood episodes. As the first patient has been dosed in the study, the Corporation will receive a milestone payment of US$11million from Elan.

 

The Product

 

The Phase II study in mild to moderate Alzheimer’s disease patients provided the first clinical evidence of the neuropsychiatric effects of ELND005. In the study, ELND005 treatment resulted in a statistically significant reduction in the emergence of neuropsychiatric symptoms.These changes were particularly evidenced in the emergence of depression and anxiety, two common neuropsychiatric symptoms associated with Alzheimer’s disease.   Biologically, ELND005 treatment was also associated with reductions in myo-inositol levels in the brain, a mechanism of action common to other neuropsychiatric drugs including lithium and valproic acid. As a therapy, ELND005 (AZD-103) aims to provide similar efficacy with an improved safety profile over current bipolar drugs.

 

Bipolar Disease – The Disease and the Market Opportunity

 

Bipolar I Disorder is a severe form of bipolar disorder, also commonly known as manic depressive illness. It is a psychiatric disorder characterized by excessive swings in a person’s mood and energy affecting their ability to function. Bipolar disorder is a lifetime recurrent disorder with cycles of dramatic mood swings of highs and lows, often with periods of normal moods in between. The periods of highs and lows are called episodes of mania and depression. Bipolar disorder is also associated with increased cardiovascular morbidity and suicide risk. The US and European Union population of bipolar disorder patients is estimated at approximately 3.5 million.

 

TT-401 / TT-402

 

In March, 2010, the Corporation acquired the rights to a series of preclinical compounds from Lilly in the area of diabetes. Under the licensing and collaboration agreement, the Corporation receives exclusive worldwide rights to develop and potentially commercialize a class of compounds.

 

In preclinical diabetes models, the lead compound, TT-401 has shown potential to provide glycemic control and other beneficial effects including weight loss. In June, 2012, Transition announced the results of the Phase I clinical study of type 2 diabetes drug candidate, TT-401. The Phase 1, double-blind, placebo-controlled randomized study enrolled 48 non-diabetic obese subjects in six cohorts evaluating six escalating subcutaneous single doses of TT-401. TT-401 demonstrated an acceptable safety and tolerability profile in non-diabetic obese subjects in the study. TT-401 exhibited the expected pharmacological effect on glucose and pharmacodynamic biomarkers at doses that were safe and tolerable. The pharmacokinetic profile, assessed over 28 days, demonstrated a half-life consistent with once-weekly dosing. As the study results met expectations, Transition and its development partner Lilly have jointly decided that the next development step will be a multiple ascending dose study of TT-401 in obese subjects with type 2 diabetes.

 

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Diabetes – The Disease and the Market Opportunity

 

Diabetes is a disease in which the body does not produce or properly use insulin. Insulin is a hormone released from islet cells located in the pancreas that is needed to convert sugar, starches and other food into energy needed for daily life. There are two primary forms of diabetes; type 1 diabetes and type 2 diabetes.

 

Type 1 diabetes develops when the body’s immune system destroys pancreatic islet beta cells, the only cells in the body that make the hormone insulin that regulates blood glucose. To survive, people with type 1 diabetes must have insulin delivered by injection or pump. Type 1 diabetes accounts for 5-10% of all diagnosed cases of diabetes.

 

Type 2 diabetes usually begins as insulin resistance, a disorder in which the cells do not use insulin properly. As the need for insulin increases, the pancreas gradually loses its ability to produce it. Current treatments for type 2 diabetes include lifestyle changes, oral medications, incretin therapy and insulin therapy. Type 2 diabetes accounts for about 90-95% of all diagnosed cases of diabetes.

 

With the insulins and anti-diabetic medications markets having global sales of over US$9 billion and US$15 billion, respectively, the market opportunity for an effective therapeutic is significant.

 

TT-301 / TT-302

 

Pro-inflammatory cytokines are part of the body’s natural defense mechanism against infection. However, the overproduction of these cytokines can play a harmful role in the progression of many different diseases. In the last decade there have been antibody and protein therapies approved (including Enbrel, Remicade and Humira) to inhibit the activity of pro-inflammatory cytokines. Each of these therapies has made a significant impact in the treatment regimen for hundreds of thousands of patients suffering from arthritis, Crohn’s disease, and other autoimmune disorders and has annual sales in excess of US$1.5 billion. The therapeutic and commercial success of these therapies provides a strong proof of concept for the approach of targeting pro-inflammatory cytokines. Unfortunately, an antibody or protein approach is not desirable for the treatment of central nervous system (“CNS”) diseases for a variety of reasons, including an inability to sufficiently cross the blood brain barrier.

 

To address this large unmet medical need, the Corporation is developing a class of small molecule compounds that are designed to cross the blood brain barrier and have been shown to have an inhibitory effect on pro-inflammatory cytokines. Animal model studies have been performed demonstrating that members of this class of compounds can have a therapeutic effect on diseases including arthritis, neuropathic pain, Alzheimer’s disease, traumatic brain injury, intracerebral hemorrhage, and others.

 

Development of TT-301 and TT-302

 

The Corporation’s lead drug candidates in development are TT-301 and TT-302. These novel drug candidates are derived from a diligent drug design program engineered to produce compounds optimized to target inhibiting pro-inflammatory cytokines in the brain and periphery. Each compound is designed to cross the blood-brain-barrier and each has the flexibility to be administered by injection or orally. In preclinical studies, both TT-301/302 have shown a favorable safety profile and therapeutic window for efficacy.

 

In June 2010, the Corporation announced the initiation of a Phase I clinical study of TT-301 and the dosing of the first patient. The study was a double blind, randomized, placebo controlled study in which healthy volunteers received placebo or escalating doses of intravenously administered TT-301.

 

Both TT-301 and TT-302 have been shown to suppress inflammatory cytokine production, reduce inflammation and improve outcomes in preclinical models of collagen-induced arthritis. The Corporation has also performed additional preclinical studies demonstrating the potential therapeutic application of TT-301 and TT-302 in the treatment of neuropathic pain. The Corporation may seek a partnership to access specialized expertise and resources to maximize the potential of these therapies.

 

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Arthritis – The Disease and the Market Opportunity

 

There are two major forms of arthritis: rheumatoid arthritis and osteoarthritis.

 

Rheumatoid Arthritis. Rheumatoid arthritis is a disorder in which the body's own immune system starts to attack body tissues. The attack is not only directed at the joint but to many other parts of the body. In rheumatoid arthritis, most damage occurs to the joint lining and cartilage which eventually results in erosion of two opposing bones. Rheumatoid arthritis affects joints in the fingers, wrists, knees and elbows. Rheumatoid arthritis occurs mostly in people aged 20 and above.

 

About 1% of the world's population is afflicted by rheumatoid arthritis with women being three times more susceptible than men. With earlier diagnosis and aggressive treatment, many individuals can lead a decent quality of life. The drugs to treat rheumatoid arthritis range from corticosteroids to monoclonal antibodies given intravenously. The latest drugs like Remicade, Enbrel and Humira can significantly improve quality of life in the short term.

 

Osteoarthritis. Osteoarthritis is the most common form of arthritis affecting approximately 27 million people in the United States alone. It can affect both the larger and the smaller joints of the body, including the hands, feet, back, hip or knee. The disease is essentially one acquired from daily wear and tear of the joint; however, osteoarthritis can also occur as a result of injury. Osteoarthritis begins in the cartilage and eventually leads to the two opposing bones eroding into each other. Initially, the condition starts with minor pain while walking but soon the pain can be continuous and even occur at night. The pain can be debilitating and prevent one from doing some activities. Osteoarthritis typically affects the weight bearing joints such as the back, spine, and pelvis. Unlike rheumatoid arthritis, osteoarthritis is most commonly a disease of the elderly.

 

Osteoarthritis, like rheumatoid arthritis, cannot be cured but one can prevent the condition from worsening. Weight loss is the key to improving symptoms and preventing progression. Physical therapy to strengthen muscles and joints is very helpful. Pain medications are widely required by individuals with osteoarthritis. When the disease is far advanced and the pain is continuous, surgery may be an option. Unlike rheumatoid arthritis, joint replacement does help many individuals with osteoarthritis.

 

Product Pipeline

 

Below is a diagram illustrating the Corporation’s product pipeline for its lead technologies, and the current stage of development for each product:

 

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Regulatory Approval Process for Therapeutic Drugs

 

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. In the United States, the regulatory body is the FDA. Similar processes are conducted in other countries by similar regulatory bodies. Regulations in each jurisdiction require that licenses be obtained from regulatory agencies for drug manufacturing facilities and also mandate strict research and product testing standards in order to ensure quality in respect of the manufacturing of therapeutic products, “Good Manufacturing Practices” (“GMP”). Companies must establish that the production of their products comply with GMP and the clinical development be conducted with Good Clinical Practices in order to demonstrate the safety and effectiveness of the therapeutic. While the Corporation will pursue the approval of any product that it develops, success in acquiring regulatory approval for any such product is not assured. See “Risk Factors”.

 

In order to market its pharmaceutical products in Canada and the United States, the Corporation must successfully satisfy the requirements of each of the following stages of the regulatory approval process and drug development:

 

Pre–Clinical Studies: Pre–clinical studies involve extensive testing in laboratory animals to determine if a potential therapeutic product has utility in an in vivo disease model and has any adverse toxicological effects in animals. The conduct and results of these studies are reported to regulatory agencies in an Investigational New Drug (“IND”) application in the United States and a Clinical Trial Application (“CTA”) in Canada, to gain approval to commence clinical trials of the product in human subjects or patients, depending on the indication for use.

 

Phase I Clinical Trials: Phase I clinical trials are designed to determine the pharmacokinetics, metabolism and pharmacologic actions of the drug in humans, the side effects associated with increasing doses and the maximum tolerated dose. These studies, usually short in duration, are typically conducted with healthy volunteers.

 

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Phase II Clinical Trials: Phase II studies are conducted to evaluate the safety of the drug in the intended patient population with the disease or condition under study and to determine the common short-term side effects and risks associated with the drug. Phase II studies are typically well controlled, closely monitored and conducted in a relatively small number of patients. These studies are usually designed to gain early evidence of the effectiveness of the therapeutic, along with its safety.

 

Phase III Clinical Trials: Phase III studies are expanded studies performed after preliminary evidence suggesting effectiveness of the drug is obtained. Phase III studies gather additional information about effectiveness and safety that is required to evaluate the overall benefit-risk profile of the drug and to provide adequate basis for physician labelling. Phase III trials usually involve several hundred to several thousand patients.

 

After all three phases of clinical trials have been completed, the results are then submitted to the respective health authority for marketing approval in the respective countries. If and when marketing approval is granted by Health Canada or the FDA, as the case may be, the product is then approved for commercial sale in the respective jurisdiction.

 

In addition to the approval of the drug itself, Health Canada and the FDA each require that the manufacturer of a therapeutic drug be in full compliance with the current GMPs in effect in Canada or the United States, respectively. A similar process for therapeutic drug approval is followed in most other countries with sophisticated regulatory bodies that have appropriate regulations and oversight.

 

Manufacturing

 

The Corporation relies on third party manufacturers to supply all of its drug substances and the finished dosage form for its preclinical and clinical products. Similarly, it will rely on third party manufacturers to manufacture its products for sale. As such, the commercial success of such products may be outside of the Corporation’s control. See “Risk Factors”.

 

The preclinical and clinical products are produced in compliance with current GMPs as established by applicable regulatory authorities, and the manufacturer is responsible for ensuring compliance to the set standard, and biosafety testing, with full characterization being the responsibility of the Corporation.

 

Thus far, ELND005 (AZD-103), the active pharmaceutical ingredient, has been produced for the Corporation by Albany Molecular Research Inc. (New York) and Abbott Laboratories (Illinois). The final drug product for all the Phase I and Phase II studies was encapsulated by a third party contract manufacturer for clinical use. For Phase II bipolar disorder studies and future phase III studies, the final drug product will be prepared in a tablet form by Elan.

 

The Corporation has contracted PolyPeptide Laboratories, Inc. of the United States to produce the active ingredient for TT-401. The preparation of final drug product was performed by AAIPharma Services Corp., a third party contract manufacturer.

 

The Corporation contracted Piramal Healthcare (Canada) Limited to produce active ingredient for TT-301/ TT-302. The preparation of final drug product was performed by Formatech, Inc. a third party contract manufacturer.

 

All of the above manufacturing contracts are on a fee-for-service basis.

 

Product Marketing Strategy

 

The markets for the products being developed by the Corporation are large and may require substantial sales and marketing capability. Before successful completion of the development of the Corporation’s various products, the Corporation hopes to enter into one or more strategic partnerships or other collaborative arrangements with pharmaceutical or other companies that have marketing and distribution expertise to address these needs. If appropriate, the Corporation will establish arrangements with various partners for different geographical areas.

 

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Specialized Skills and Knowledge

 

As of June 30, 2012, the Corporation had 16 full-time employees, who possess the skills and knowledge that the Corporation requires to implement its current strategy.

 

The Corporation believes that investing in human capital is fundamental to its continued growth and success. The Corporation depends on its people for constant innovation and research and development. The Corporation intends to implement a practice of aggressively recruiting high calibre personnel and retaining such personnel by offering appropriate compensation incentives.

 

Competitive Conditions

 

There are a number of treatments in various stages of development which may compete with the Corporation’s therapeutic programs in each of its selected therapeutic disease-specific applications. The following is a summary of the principal therapeutic treatments, which the Corporation understands are currently being developed by others for therapeutic areas in which the Corporation is currently focusing its clinical efforts. This summary is not necessarily an exhaustive list of such competing therapeutic treatments. Competition may have an adverse effect on the Corporation. See “Risk Factors.

 

Alzheimer’s Disease

 

Currently, all of the approved Alzheimer’s therapies and many of the clinical candidates seek to reduce Alzheimer’s related symptoms rather than treating the underlying disease. These products include cholinesterase inhibitors and glutamate receptor antagonists. The emerging classes of compounds in clinical development are immunotherapies and fibril inhibitors. Each class seeks to slow or even to reverse the Alzheimer’s disease process by targeting a mechanism to reduce the occurrence of beta-amyloid plaques, a hallmark pathology of the disease.

 

Bipolar Disorder

 

To date there is no cure for bipolar disorder but proper treatment helps most people with bipolar disorder gain better control of their mood swings and related symptoms. Currently there are three types of medications generally used to treat bipolar disorder: mood stabilizing medications; atypical antipsychotic medications and antidepressant medications:

 

Mood stabilizing medications are usually the first choice to treat bipolar disorder and in general terms, people with bipolar disorder continue treatment with mood stabilizers for years. Mood stabilizing medications include Lithium, Valproic acid or divalproex (Depakote), and Lamotrigine (Lamictal). With the exception of Lithium, many of these medications are anticonvulsants which are usually used to treat seizures but also help control moods.

 

Atypical antipsychotic medications are sometimes used to treat symptoms of bipolar disorder. Often these medications are taken with other medications. Atypical antipsychotic medications are called “atypical” to set them apart from earlier medications which are referred to as “conventional” or “first generation”. Atypical antipsychotic medications include Olanzapine (Zyprexa), Aripiprazole (Abilify), Quetiapine (Seroquel), Risperidone (Risperdal) and Ziprasidone (Geodon).

 

Antidepressant medications can also be used to treat the symptoms of depression in bipolar disorder. People with bipolar disorder who take antidepressants often also take a mood stabilizer as taking only an antidepressant can increase a person’s risk of switching between mania or hypomania or of developing rapid mood cycling symptoms.

 

Diabetes

 

The following is a brief summary of the principal therapeutic strategies, of which the Corporation is aware, currently being developed for the treatment of diabetes.

 

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Intensive Insulin Therapy – The goal of intensive insulin therapy is to more accurately control hyperglycemia by increasing the frequency of insulin injection. This type of insulin therapy, however, increases the risk of hypoglycemia and demands more frequent blood sugar monitoring which can be painful and time consuming. This approach only addresses type 1 diabetics and the subset of type 2 diabetics that requires constant insulin injections and it only manages the disease, it does not offer a long-term solution.

 

Oral Antidiabetic Agents are FDA approved for use in conjunction with diet and exercise to enhance glycemic control in type 2 diabetic patients.

 

Oral sulfonylureas reduce blood glucose by stimulating insulin from pancreatic beta-cells as well as increasing responsiveness in insulin-sensitive tissues.

 

Metformin is an oral hypoglycemic agent that improves glycemic control by decreasing hepatic glucose production and intestinal glucose absorption as well as improving insulin sensitivity through increased peripheral glucose uptake and utilization.

 

Thiazolidinediones are potent agonists of peroxisome proliferator-activated receptor-gamma (“PPAR-gamma”), receptors important for insulin action which are located in adipose tissue, liver and skeletal muscle. Activation of these receptors affects the transcription of genes responsible for control of glucose and lipid metabolism. These agents, in the presence of insulin, decrease insulin resistance in the liver and at peripheral sites and improve insulin-dependent glucose disposal and reduce hepatic glucose output.

 

Incretin Therapies – The incretin hormones, GLP-1 and glucose-dependent insulinotropic peptide (“GIP”), have been identified as important factors in glucose homeostasis. Released from the gut following a meal, GLP-1 and GIP stimulate insulin secretion from pancreatic beta cells in response to normal or elevated blood glucose concentrations. GLP-1 also lowers glucagon excretion from pancreatic beta cells, which results in reduced hepatic glucose production, and also reduces appetite, slows gastric emptying, and improves β-cell function. When administered intravenously or subcutaneously, GLP-1 is effective in treating type 2 diabetes. Unfortunately, both GLP-1 and GIP are rapidly degraded by dipeptidyl peptidase IV (“DPP-IV”); therefore, research has been focused on preventing degradation by inhibiting the DPP-IV enzyme. Sitagliptin is a novel agent with a unique mechanism of action: the drug acts as a DPP-IV inhibitor which reduces inactivation of incretin hormones and improves glycemic control in type 2 diabetic patients.

 

Arthritis

 

Osteoarthritis

 

Currently, the treatment options for osteoarthritis are focused on pain reduction. The main medications utilized are over-the-counter pain relievers such as acetaminophen, ibuprofen and naproxen. Stronger prescription versions of these pain relievers can be effective or other prescription pain-relievers such as tramadol or codeine can be employed. Physicians also administer corticosteroid injections directly into the painful joint. The following is a brief summary of the principal therapeutic strategies, of which the Corporation is aware, currently being developed for the treatment of arthritis.

 

Rheumatoid Arthritis

 

Medications can reduce inflammation in joints in order to relieve pain and prevent or slow joint damage. There may a need for stronger drugs or a combination of drugs as the disease progresses.

 

NSAIDs. Nonsteroidal anti-inflammatory drugs (NSAIDs) can relieve pain and reduce inflammation. Over-the-counter NSAIDs include ibuprofen (Advil, Motrin, others) and naproxen sodium (Aleve). Stronger versions of these NSAIDs and others are available by prescription.

 

Steroids. Corticosteroid medications, such as prednisone and methylprednisolone (Medrol), reduce inflammation and pain and slow joint damage.

 

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Disease-modifying antirheumatic drugs (DMARDs). These drugs can slow the progression of rheumatoid arthritis and save the joints and other tissues from permanent damage. Common DMARDs include methotrexate (Rheumatrex, Trexall), leflunomide (Arava), hydroxychloroquine (Plaquenil), sulfasalazine (Azulfidine) and minocycline (Dynacin, Minocin).

 

Immunosuppressants. These medications act to tame the immune system, which is out of control in rheumatoid arthritis. Examples include azathioprine (Imuran, Azasan), cyclosporine (Neoral, Sandimmune, Gengraf) and cyclophosphamide (Cytoxan).

 

TNF-alpha inhibitors. Tumor necrosis factor-alpha (TNF-alpha) is an inflammatory substance produced by the body. TNF-alpha inhibitors can help reduce pain, morning stiffness, and tender or swollen joints — usually within one or two weeks after treatment begins. Examples include etanercept (Enbrel), infliximab (Remicade) and adalimumab (Humira).

 

Other drugs. Several other rheumatoid arthritis drugs target a variety of inflammatory substances produced by the body. These drugs include anakinra (Kineret), abatacept (Orencia) and rituximab (Rituxan).

 

Intellectual Property

 

The Corporation’s intellectual property practice is to file patent and trademark applications to protect proprietary inventions, technologies, improvements and trademarks that are considered to be important to the development of the Corporation’s business and consistent with the Corporation’s strategic focus. The Corporation also depends upon trade secrets and licensing opportunities to expand and maintain its competitive position.

 

The Corporation possesses a strong intellectual property position for its platform technologies. The Corporation currently holds the rights to 22 patent families relating to its technology platforms and drug development programs. To date, the Corporation possesses or exclusively licenses 17 issued patents, with the remainder in varying stages of the patent application process. Current Canadian and U.S. patent laws provide that the Corporation’s patents are protected for a period of 20 years after their filing dates.

 

Patent Protection

 

The Corporation’s patent portfolio provides protection for its areas of technology focus:

 

ELND005 (AZD-103)

 

The Corporation has a number of U.S. and PCT patent applications for the ELND005 (AZD-103) technology through its acquisition of Ellipsis Neurotherapeutics Inc. This portfolio has been expanded with the filing of additional patent applications based on findings from clinical and preclinical studies performed by the Corporation with its licensing partner, Elan.

 

US Patent Number 7,521,481, issued on April 21, 2009, covers treatment of Alzheimer’s Disease with ELND005 (AZD-103). European Patent No. 1608350 granted on June 3, 2009 from a corresponding application covers ELND005 (AZD-103) for treatment or prevention of a condition of the central or peripheral nervous system or systemic organ associated with a disorder in protein folding aggregation, or amyloid formation, deposition accumulation or persistence. The US Patent will expire in the year 2026 or later due to any patent term extensions. The Corporation is actively prosecuting patent application families in multiple jurisdictions throughout the world.

 

TT-401/402

 

In March 2010, the Corporation acquired the rights to a series of preclinical compounds from Lilly in the area of diabetes. Patent applications have been filed worldwide covering the lead preclinical compounds.

 

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TT-301/302

 

The Corporation acquired 100% of CNS-focused Neuromedix Inc. in June of 2007. With this acquisition, the Corporation acquired multiple patent applications covering the TT-301/TT-302 family of compounds.

 

Property, Plant and Equipment

 

The Corporation’s offices are located at 101 College Street, Toronto, ON, M5G 1L7. The Corporation’s head office is located at Suite 220 and lab facilities are located in L245. The Corporation occupies a total of 5,995 square feet of the building which represents approximately 3.2% of the total facility.

 

Item 4A.  Unresolved Staff Comments

 

None.

 

Item 5.  Operating and Financial Review and Prospects

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following information should be read in conjunction with the Corporation’s audited consolidated financial statements for the year ended June 30, 2012 and the related notes, which are prepared in accordance with IFRS. This Management’s Discussion and Analysis (“MD&A”) provides a review of the performance of the Corporation for the year ended June 30, 2012 as compared to the year ended June 30, 2011. This MD&A includes financial information derived from the annual audited consolidated financial statements.

 

Overview

 

Transition is a product-focused biopharmaceutical company, developing novel therapeutics for disease indications with large markets. The Company’s lead product is ELND005 (AZD-103) for the treatment of Alzheimer’s disease and neuropsychiatric disorders. Transition also has an emerging pipeline of innovative preclinical and clinical drug candidates targeting anti-inflammatory and metabolic indications. TT-301 and TT-302 are small molecule anti-inflammatory compounds that have demonstrated efficacy in preclinical models of rheumatoid arthritis, Alzheimer’s disease, intracerebral hemorrhage (“ICH”) and traumatic brain injury (“TBI”). Transition has also in-licensed a series of compounds (TT-401/402) from Lilly in the area of diabetes.

 

During fiscal 2012 and up to the date of this MD&A, the Company announced the following:

 

ELND005 (AZD-103):

 

·On July 15, 2011, Transition announced that ELND005 (AZD-103) Phase II clinical trial data would be presented at the International Conference of Alzheimer's Disease (ICAD) meeting on July 18, 2011;

 

·On September 27, 2011, Transition announced that Phase II clinical study data of ELND005 (AZD-103) in mild to moderate Alzheimer's disease has been published in the peer-reviewed journal, Neurology. The Neurology article is entitled "A Phase II randomized trial of ELND005, scyllo-inositol, in mild-moderate Alzheimer's disease";

 

·On April 26, 2012, Transition announced that three ELND005 poster presentations were presented at the American Academy of Neurology. These presentations described responder analyses and characteristics, along with findings on the effect of ELND005 on the emergence of neuropsychiatric symptoms;

 

·On May 14, 2012, Transition announced that a mini symposium entitled “The Emerging Clinical Profile of Oral Scyllo-inositol (ELND005) in Alzheimer’s Disease: A Dual Mechanism of Action” was presented at the 12th International Stockholm/Springfield Symposium on Advances in Alzheimer Therapies;

 

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·On August 30, 2012, Transition announced that its licensing partner Elan had dosed the first patient in a Phase II clinical study of ELND005 in bipolar disorder. The study is a placebo-controlled, safety and efficacy study of oral ELND005 as an adjunctive maintenance treatment in patients with Bipolar I Disorder to delay the time to occurrence of mood episodes. As the first patient has been dosed in the study, Transition will receive a milestone payment of US$11 million from Elan;

 

TT-401:

 

·On December 12, 2011, Transition announced that the first patient has been dosed in a Phase I clinical study of type 2 diabetes drug candidate, TT-401. TT-401 is a once-weekly administered peptide being studied for its potential to lower blood glucose levels in patients with type 2 diabetes and accompanying obesity;

 

·On June 18, 2012, Transition announced the results of the Phase I clinical study of type 2 diabetes drug candidate, TT-401. The Phase 1, double-blind, placebo-controlled randomized study enrolled 48 non-diabetic obese subjects in six cohorts evaluating six escalating subcutaneous single doses of TT-401. TT-401 demonstrated an acceptable safety and tolerability profile in non-diabetic obese subjects in the study. TT-401 exhibited the expected pharmacological effect on glucose and pharmacodynamic biomarkers at doses that were safe and tolerable. The pharmacokinetic profile, assessed over 28 days, demonstrated a half-life consistent with once-weekly dosing;

 

Corporate Developments:

 

·On November 22, 2011, Transition announced a US$5 million private placement. Under the non-brokered private placement, Transition issued 3,703,703 common shares at a price of US$1.35 for gross proceeds of approximately US$5,000,000.

 

Strategic Collaborations

 

Elan Pharma International Limited

 

In September 2006, Transition announced a global collaboration with Elan to develop and commercialize ELND005 (AZD-103). Under the terms of the agreement, Transition has received an up-front payment of US$15 million in two separate tranches. On December 21, 2007, the Corporation and Elan jointly announced that the first patient had been dosed in the Phase II clinical study of ELND005 (AZD-103). As a result, the Corporation received a US$5 million milestone payment, which was triggered by the initiation of the Phase II clinical trial.

 

Under the terms of the agreement, Transition received up-front payments of US$15 million: US$7.5 million in calendar 2006 and the remaining US$7.5 million in calendar 2007. In addition, Transition was eligible to receive milestone payments of up to US$185 million of which US$5 million was received during fiscal 2008.

 

On December 27, 2010, Transition and Elan mutually agreed to modify their collaboration agreement for the development and commercialization of ELND005 (AZD-103). Under the terms of the modification, in lieu of the contractually required initiation of Phase III milestone payment of US$15 million, Transition received from Elan a payment of US$9 million and is eligible to receive a US$11 million payment upon the commencement of the next ELND005 (AZD-103) clinical trial, which occurred on August 29, 2012 when Elan dosed the first patient in a Phase II clinical study of ELND005 in bipolar disorder. As per the terms of the original agreement, Transition is also eligible to receive up to an aggregate of US$93 million in additional regulatory and commercial launch related milestone payments plus tiered royalties ranging from 8% to 15% based on net sales of ELND005 (AZD-103) should the drug receive the necessary regulatory approvals for commercialization. The Corporation recorded $10,251,394 as revenue during the year ended June 30, 2011. The payment of US$9 million was received in January, 2011.

 

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As the agreement is now a royalty arrangement, Transition is no longer obligated to fund the development or commercialization of ELND005 (AZD-103) and has relinquished its 30% ownership of ELND005 (AZD-103) to Elan. The Company has recognized $20,719,750 (US$20,000,000) as revenue which represents the total of up-front and milestone payments received from Elan since the initiation of the agreement.

 

On August 29, 2012, Transition’s licensing partner Elan announced dosing of the first patient in a Phase II trial of ELND005 in Bipolar I Disorder. Under the terms of the amended agreement, Transition will now receive the US$11 million payment. The Company expects to receive the US$11million during the three-month period ending September 30, 2012 and the amount will be recognized as revenue upon receipt.

 

Eli Lilly and Company

 

On March 3, 2010, Transition and Eli Lilly and Company (“Lilly”) entered into a licensing and collaboration agreement granting Transition the rights to a series of preclinical compounds in the area of diabetes. Under the licensing and collaboration agreement, Transition will receive exclusive worldwide rights to develop and potentially commercialize a class of compounds that, in preclinical models, showed potential to provide glycemic control and other beneficial effects including weight loss.

 

Under the terms of the agreement, Lilly received an up-front payment of US$1 million and will retain the option to reacquire the rights to the compounds at a later date. Lilly will retain this option up until the end of Phase II. If Lilly exercises these rights, Transition would be eligible to receive milestone payments up to US$250 million and up to low double digit royalties on sales of products containing such compounds should such products be successfully commercialized. If Lilly does not exercise these rights, Lilly would be eligible for low single digit royalties from Transition on sales of products containing such compounds should such products be successfully commercialized.

 

The up-front payment of $1,055,900 (US$1 million) has been capitalized as a license acquired from Lilly and will be amortized over 20 years which represents the estimated remaining life of the underlying compounds and patents.

 

Programs

 

Transition is focused on developing innovative therapies in several distinct areas of opportunity. Transition’s vision is to build a company that has a strong foundation for growth based on multiple technologies and product opportunities, which reduces risk and enhances return. The Corporation’s technologies are as follows:

 

ELND005 (AZD-103) for Alzheimer’s Disease

 

Alzheimer’s disease is a progressive brain disorder that gradually destroys a person’s memory and ability to learn, reason, make judgments, communicate and carry out daily activities. As Alzheimer’s disease progresses, individuals may also experience changes in personality and behavior, such as anxiety, suspiciousness or agitation, as well as delusions or hallucinations. In late stages of the disease, individuals need help with dressing, personal hygiene, eating and other basic functions. People with Alzheimer’s disease die an average of eight years after first experiencing symptoms, but the duration of the disease can vary from three to 20 years.

 

The disease mainly affects individuals over the age 65 and it is estimated over 18 million people are suffering from Alzheimer’s disease worldwide. The likelihood of developing late-onset Alzheimer’s approximately doubles every five years after age 65. By age 85, the risk reaches nearly 50 percent. In the U.S., Alzheimer’s disease is the sixth leading cause of death and current direct/indirect costs of caring for an estimated 5.4 million Alzheimer’s disease patients are at least US$100 billion annually.

 

Current FDA approved Alzheimer’s disease medications may temporarily delay memory decline for some individuals, but none of the currently approved drugs is known to stop the underlying degeneration of brain cells. Certain drugs approved to treat other illnesses may sometimes help with the emotional and behavioral symptoms of Alzheimer’s disease. With an aging population, there is a great need for disease-modifying compounds that can slow or reverse disease progression.

 

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In April 2007, Transition announced that the FDA granted Fast Track designation to ELND005 (AZD-103). Under the FDA Modernization Act of 1997, Fast Track designation is intended to facilitate the development and expedite the review of a drug or biologic if it is intended for the treatment of a serious or life-threatening condition, and it demonstrates the potential to address unmet medical needs for such a condition.

 

On August 30, 2007, Transition announced the completion of Phase I clinical studies with ELND005 (AZD-103). Transition and its licensing partner Elan have performed multiple Phase I studies evaluating the safety, tolerability and pharmacokinetic profile of ELND005 (AZD-103) in healthy volunteers. Approximately 110 subjects have been exposed to ELND005 (AZD-103) in multiple Phase I studies, including single and multiple ascending dosing; pharmacokinetic evaluation of levels in the brain; and cerebrospinal fluid (“CSF”) and plasma studies. ELND005 (AZD-103) was safe and well-tolerated at all doses and dosing regimens examined. There were no severe or serious adverse events observed. ELND005 (AZD-103) was also shown to be orally bio-available, cross the blood-brain barrier and achieve levels in the human brain and CSF that were shown to be effective in animal models for Alzheimer’s disease.

 

On April 23, 2009, Elan and Transition announced the receipt of a key patent for Alzheimer's disease treatment with ELND005 (AZD-103). The United States Patent and Trademark Office issued US patent number 7,521,481 on April 21, 2009. The patent is entitled "Methods of Preventing, Treating and Diagnosing Disorders of Protein Aggregation," and generally claims methods for treating Alzheimer's disease comprising administering scyllo-inositol ELND005 (AZD-103). The patent will expire in the year 2025 or later due to any patent term extensions.

 

On July 13, 2009, Elan and Transition announced Phase I data showing ELND005 (AZD-103) achieves desired concentrations in brain tissue and cerebrospinal fluid when given orally. Preclinical data also were presented showing that ELND005 (AZD-103) administration is associated with preservation of choline acetyltransferase (ChAT), reflecting preservation of nerve cells that are critical to memory function in the brain. These results were presented at the 2009 Alzheimer's Association International Conference on Alzheimer's Disease (ICAD 2009) in Vienna, Austria.

 

On December 15, 2009, Elan and Transition announced modifications to ELND005 (AZD-103) Phase II clinical trials in Alzheimer's disease. Patients were withdrawn immediately from the study in the two higher dose groups (1000mg and 2000mg dosed twice daily). The study continued unchanged for patients who were assigned to the lower dose (250mg dosed twice daily) and placebo groups. The study was modified to dose patients only at 250mg twice daily. Greater rates of serious adverse events, including nine deaths, were observed among patients receiving the two highest doses. A direct relationship between ELND005 (AZD-103) and these deaths has not been established. The Independent Safety Monitoring Committee (“ISMC”) and both companies concur that the tolerability and safety data are acceptable among patients receiving the 250mg dose and that the blinded study should continue for this dose and the placebo group.

 

On August 9, 2010, Elan and Transition announced topline summary results of the Phase II study and plans for Phase III studies for ELND005 (AZD-103). The AD201 study did not achieve significance on co-primary outcome measures (NTB and ADCS-ADL) in mild to moderate patients however; the study did identify a dose with acceptable safety and tolerability. The dose demonstrated a biological effect on amyloid-beta protein in the CSF and effects on clinical endpoints in an exploratory analysis. Based on the preponderance of evidence, and input from the experts in this field, the companies intend to advance ELND005 (AZD-103) into Phase III studies.

 

On December 27, 2010, Elan and Transition announced the mutual agreement to modify their collaboration agreement for the development and commercialization of ELND005 (AZD-103). Under the terms of the modification, in lieu of the contractually required initiation of Phase III milestone payment of US$15 million, Transition received from Elan a payment of US$9 million and will be eligible to receive a US$11 million payment upon the commencement of the next ELND005 (AZD-103) clinical trial. As per the terms of the original agreement, Transition is also eligible to receive up to an aggregate of US$93 million in additional regulatory and commercial launch related milestone payments plus tiered royalties ranging from 8% to 15% based on net sales of ELND005 (AZD-103) should the drug receive the necessary regulatory approvals for commercialization. As the agreement is now a royalty arrangement, Transition no longer funds the development or commercialization of ELND005 (AZD-103) and has relinquished its 30% ownership of ELND005 (AZD-103) to Elan.

 

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On September 27, 2011, Transition announced that Phase II clinical study data of ELND005 (AZD-103) in mild to moderate Alzheimer’s disease has been published in the peer-reviewed journal, Neurology. The Neurology article was entitled “A Phase II randomized trial of ELND005 (AZD-103), scyllo-inositol, in mild-moderate Alzheimer’s disease”. In addition, the embargo on the ELND005 (AZD-103) Phase II data previously presented at the International Conference on Alzheimer’s Disease (ICAD) in July 2011 was lifted.

 

In the overall population (mild and moderate Alzheimer’s disease), the treatment effects on the primary endpoints NTB and ADCS-ADL were not significant. In the pre-specified analyses of the Mild Alzheimer’s disease group (MMSE 23-26), there were encouraging trends on cognition (NTB: p=0.007 in compliant patients who completed the study). The positive NTB trends were observed on both memory and function. In the Mild Alzheimer’s disease group, both the ADCS-ADL and CDR-SB effects of ELND005, though not significant, showed a consistent and favorable separation over the 18 months, where the active group showed at least 30% less decline than placebo. These trends were consistent throughout both the modified intent to treat and the compliant completer patient (or per protocol) populations. The ADAS-Cog treatment difference was not significant but directionally opposite to the other cognitive (NTB) and functional/global (ADCS-ADL and CDR-SB) endpoints in the study and was largely driven by a minimal decline in the placebo group over the 18 months. The Moderate Alzheimer’s disease group (MMSE 16-22, inclusive) and ApoE4 carriers and non-carriers showed no consistent positive or negative trends.

 

The safety and tolerability profile of 250mg bid dose was deemed acceptable, and the independent safety committee concurred with this assessment. The two high dose groups were electively discontinued due to imbalance of infections and deaths due to various causes. The overall incidence of adverse events in the 250mg bid and placebo groups was 87.5% versus 91.6%; and the incidence of withdrawals due to adverse events was 10.2% versus 9.6%, respectively. The most common adverse events in the 250mg bid group that were >5% in incidence and double the placebo rate were: falls (12.5% vs. placebo 6%), depression (11.4% vs. placebo 4.8%), and confusional state (8% vs. placebo 3.6%).

 

In the cerebrospinal fluid (“CSF”) subset at 78 weeks, ELND005 (AZD-103) treatment resulted in a significant reduction of CSF Aβ42 (~27%), and a numerical reduction of tau which is potential evidence of target engagement. In the overall population, the increase in ventricular volume as measured by MRI was greater in the 250mg group compared to placebo, this difference though statistically significant was small (approximately 3cc). Whole brain volume treatment differences were not significant.

 

On November 29, 2011, Elan provided an update on the development of ELND005 (AZD-103). Elan reported that Lonza Group AG has been contracted to supply future active pharmaceutical ingredient. In addition, four oral presentations were presented at the 4th Annual Conference on Clinical Trials on Alzheimer’s Disease (“CTAD”) focusing on ELND005 (AZD-103) treatment effects at earlier stages of Alzheimer’s disease and the use of validated “composite” cognitive endpoints. Elan also noted that ELND005 (AZD-103)’s role in reducing neuropsychiatric symptoms in Alzheimer’s disease was highlighted at the CTAD meeting, and that ELND005 (AZD-103) may have applications in additional psychiatric indications such as bipolar disorder.

 

ELND005 (AZD-103) for Bipolar Disorder

 

Bipolar I Disorder is a severe form of bipolar disorder, also commonly known as manic depressive illness. It is a psychiatric disorder characterized by excessive swings in a person’s mood and energy affecting their ability to function. Bipolar disorder is a lifetime recurrent disorder with cycles of dramatic mood swings of highs and lows, often with periods of normal moods in between. The periods of highs and lows are called episodes of mania and depression. Bipolar disorder is also associated with increased cardiovascular morbidity and suicide risk. The US and EU population of bipolar disorder patients is estimated at approximately 3.5 million.

 

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On August 30, 2012, Transition announced that its licensing partner Elan had dosed the first patient in a Phase II clinical study of ELND005 in bipolar disorder. The study is a placebo-controlled, safety and efficacy study of oral ELND005 as an adjunctive maintenance treatment in patients with Bipolar I Disorder to delay the time to occurrence of mood episodes. As the first patient has been dosed in the study, Transition will receive a milestone payment of US$11 million from Elan.

 

Expenditures for the ELND005 (AZD-103) Program

 

On December 27, 2010, Elan and Transition announced the mutual agreement to modify their collaboration agreement for the development and commercialization of ELND005 (AZD-103). Under the terms of the modification, as the agreement is now a royalty arrangement, Transition no longer funds the development or commercialization of ELND005 (AZD-103). Accordingly Transition did not incur any expenditures relating to the program during the year ended June 30, 2012.

 

TT-401 / TT-402

 

Development of TT-401 and TT-402 for Diabetes

 

Diabetes is a disease in which the body does not produce or properly use insulin. Insulin is a hormone released from islet cells located in the pancreas that is needed to convert sugar, starches and other food into energy needed for daily life. There are two primary forms of diabetes; type 1 diabetes and type 2 diabetes.

 

Type 1 diabetes develops when the body’s immune system destroys pancreatic islet beta cells, the only cells in the body that make the hormone insulin that regulates blood glucose. To survive, people with type 1 diabetes must have insulin delivered by injection or pump. Type 1 diabetes accounts for 5-10% of all diagnosed cases of diabetes.

 

Type 2 diabetes usually begins as insulin resistance, a disorder in which the cells do not use insulin properly. As the need for insulin increases, the pancreas gradually loses its ability to produce it. Current treatments for type 2 diabetes include lifestyle changes, oral medications, incretin therapy and insulin therapy. Type 2 diabetes accounts for about 90-95% of all diagnosed cases of diabetes.

 

On March 3, 2010, Transition announced that it had acquired the rights to a series of preclinical compounds from Lilly in the area of diabetes. Under this licensing and collaboration agreement with Lilly, Transition will receive exclusive worldwide rights to develop and potentially commercialize a class of compounds that, in preclinical diabetes models showed potential to provide glycemic control and other beneficial effects including weight loss.

 

The unique properties of these compounds have the potential to provide important therapeutic benefits to type 2 diabetes patients and could represent the next generation of diabetes therapies to be advanced to clinical development. On December 12, 2011, the Company announced that the first patient was dosed in a Phase I clinical study. TT-401 is a once-weekly administered peptide being studied for its potential to lower blood glucose levels in patients with type 2 diabetes and accompanying obesity.

 

On June 18, 2012, Transition announced the results of the Phase I clinical study of type 2 diabetes drug candidate, TT-401. The Phase I, double-blind, placebo-controlled randomized study enrolled 48 non-diabetic obese subjects in six cohorts evaluating six escalating subcutaneous single doses of TT-401. TT-401 demonstrated an acceptable safety and tolerability profile in non-diabetic obese subjects in the study. TT-401 exhibited the expected pharmacological effect on glucose and pharmacodynamic biomarkers at doses that were safe and tolerable. The pharmacokinetic profile, assessed over 28 days, demonstrated a half-life consistent with once-weekly dosing. As the study results met expectations, Transition and its development partner Lilly have jointly decided that the next development step will be a multiple ascending dose study of TT-401 in obese subjects with type 2 diabetes.

 

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Expenditures for the TT-401/402 Program

 

During the year ended June 30, 2012 and 2011, the Corporation incurred direct research and development costs for this program as follows:

 

TT-401 Program(1)

  Fiscal 2012   Fiscal 2011 
Pre-clinical studies  $725,572   $1,070,352 
Clinical studies   1,178,074    - 
Manufacturing   1,071,340    506,474 
Other direct research   111,931    25,683 
TOTAL  $3,086,917   $1,602,509 

 

(1) These costs are direct research and development costs only and do not include patent costs, investment tax credits, salaries and benefits or an allocation of Corporation overhead.

 

TT-301 / TT-302

 

Pro-inflammatory cytokines are part of the body’s natural defense mechanism against infection. However, the overproduction of these cytokines can play a harmful role in the progression of many different diseases. In the last decade there have been antibody and protein therapies approved (including Enbrel, Remicade and Humira) to inhibit the activity of pro-inflammatory cytokines. Each of these therapies has made a significant impact in the treatment regimen for hundreds of thousands of patients suffering from arthritis, Crohn’s disease, and other autoimmune disorders and has annual sales in excess of US$1.5 billion. The therapeutic and commercial success of these therapies provides a strong proof of concept for the approach of targeting pro-inflammatory cytokines. Unfortunately, an antibody or protein approach is not desirable for the treatment of CNS diseases for a variety of reasons including an inability to sufficiently cross the blood-brain-barrier.

 

To address this large unmet medical need, Transition is developing a class of small molecule compounds that are designed to cross the blood brain barrier and have been shown to have an inhibitory effect on pro-inflammatory cytokines. Animal model studies have been performed demonstrating that members of this class of compounds can have a therapeutic effect on diseases including arthritis, neuropathic pain, Alzheimer’s disease, Traumatic Brain Injury (“TBI”), Intracerebral Hemorrhage (“ICH”), and others.

 

Development of TT-301 and TT-302

 

Transition’s lead drug candidates in development are TT-301 and TT-302. These novel drug candidates are derived from a diligent drug design program engineered to produce compounds optimized to target inhibiting pro-inflammatory cytokines in the brain and the periphery. Each compound is designed to cross the blood-brain-barrier and each has the flexibility to be administered by injection or orally. In preclinical studies, both TT-301/302 have shown a favorable safety profile and therapeutic window for efficacy.

 

On June 30, 2010, Transition announced the initiation of a Phase I clinical study of TT-301 and that the first patient was dosed. The study was a double blind, randomized, placebo controlled study in which healthy volunteers received placebo or escalating doses of intravenously administered TT-301.

 

Both TT-301 and TT-302 have been shown to suppress inflammatory cytokine production, reduce inflammation and improve outcomes in preclinical models of collagen-induced arthritis. The Corporation has also performed additional preclinical studies demonstrating the potential therapeutic application of TT-301 and TT-302 in the treatment of neuropathic pain. The Corporation may seek a partnership to access specialized expertise and resources to maximize the potential of these therapies.

 

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Expenditures for the TT-301/302 Program

 

During the year ended June 30, 2012 and 2011, the Corporation incurred direct research and development costs for this program as follows:

 

TT-301/302 Program(1)

  Fiscal 2012   Fiscal 2011 
Pre-clinical studies  $407,783   $656,671 
Clinical studies   269,984    743,141 
Manufacturing   166,704    880,711 
Other direct research   25,510    80,852 
TOTAL  $869,981   $2,361,375 

 

(1) These costs are direct research and development costs only and do not include patent costs, investment tax credits, salaries and benefits or an allocation of Corporation overhead.

 

The Next Steps

 

Transition’s goal for its programs is to achieve product approval and ultimately significant revenues or royalties. To achieve product approval, the Corporation must successfully complete clinical trials and achieve regulatory approval. The stages of development of the Corporation’s technologies are illustrated below:

 

 

Financial Reporting

 

On July 1, 2011, the Company adopted IFRS for the preparation and reporting of its consolidated financial statements and other financial information, which became mandatory in Canada for publicly accountable entities with year ends beginning on or after January 1, 2011. Financial information presented for the comparative period ending June 30, 2011 and as at July 1, 2010 and June 30, 2011 has been restated to reflect the adoption of IFRS.

 

Overall Performance

 

During the year ended June 30, 2012, the Company recorded a net loss of $12,269,845 ($0.48 loss per common share) compared to a net loss of $5,689,613 ($0.25 loss per common share) for the year ended June 30, 2011.

 

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In fiscal 2011, the Company and Elan mutually agreed to modify their collaboration agreement for the development and commercialization of ELND005 (AZD-103). Under the terms of the modification, Transition is no longer obligated to fund the development or commercialization of ELND005 (AZD-103). The recognized net revenue of $8,951,400 ($US 9 million) in fiscal 2011 represented the agreement modification payment that was received partially in lieu of the contractually required Phase III milestone payments.

 

During the fiscal year ended June 30, 2012, the Company reported an increase in net loss of $6,580,232 compared to the fiscal year ending June 30, 2011. The increase in net loss is largely attributed to the reduction in revenue recognized resulting from the amendments to the Elan agreement. The increase in net loss has been partially offset by decreases in: general and administrative expenses; change in the fair value of contingent consideration payable; foreign exchange loss and research and development expenses.

 

At June 30, 2012, the Company’s cash and cash equivalents and short term investments were $19,012,345. The Company’s current cash projection indicates that the current cash resources should enable the Company to execute its core business plan and meet its projected cash requirements beyond the next 12 months.

 

Selected Annual Information

 

The following table is a summary of selected audited consolidated financial information of the Corporation for each of the five most recently completed financial years. The information presented for the fiscal years ending June 30, 2012 and 2011 are presented in accordance with IFRS and the financial information presented for the fiscal years ending June 30, 2010, 2009 and 2008 is presented in accordance with Canadian Generally Accepted Accounting Principles or Canadian GAAP:

 

   June 30, 2012   June 30, 2011   June 30, 2010   June 30, 2009   June 30, 2008 
Revenue  $-   $10,251,394   $4,503,892   $2,513,108   $1,596,722 
Net income loss (1)  $(12,269,845)  $(5,689,613)  $(19,308,910)  $(22,374,491)  $(16,119,202)
Basic and diluted net loss per common share  $(0.48)  $(0.25)  $(0.83)  $(0.97)  $(0.70)
Total assets  $37,093,030   $43,179,488   $49,659,526   $72,819,261   $94,875,961 
Total long-term liabilities (2)  $1,469,253   $1,480,685   $57,160   $68,592   $80,024 
Cash dividends declared per share  $   $   $   $   $ 

 

 

Notes:

(1)Net loss before discontinued operations and extraordinary items was equivalent to the net loss for such periods.

(2)Total long-term liabilities exclude deferred revenue, a non-financial liability.

 

ANNUAL RESULTS – YEAR ENDED JUNE 30, 2012 COMPARED TO YEAR ENDED JUNE 30, 2011

 

Results of Operations

 

Revenue

 

Revenue is nil in the year ended June 30, 2012 compared to $10,251,394 in the year ended June 30, 2011.

 

Transition received a US$9 million agreement modification payment which was recognized as revenue during fiscal 2011. At June 30, 2012, in light of the amendments to the Elan agreement, the balance in deferred revenue is nil as all amounts received from Elan have been fully recognized as revenue. Under the terms of the amended agreement with Elan, dosing of the first patient in another clinical trial of ELND005 (AZD-103) triggers the payment of a US$11 million milestone. The Corporation expects to receive the US$11million during the three-month period ending September 30, 2012 and the amount will be recognized as revenue upon receipt.

 

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Research and Development

 

Research and development expenses decreased $295,250 or 3% from $8,493,975 for the fiscal year ended June 30, 2011 to $8,198,725 for the fiscal year ended June 30, 2012.

 

The decreases are primarily due to decreased clinical development costs related to ELND005 (AZD-103) and TT-301/302, decreased amortization due to the fact that the technology and patents acquired from Protana were fully amortized during the second quarter of fiscal 2011 and decreased salaries and related costs associated with headcount reductions. The decrease is largely offset by an increase in pre-clinical and clinical development costs associated with advancing the TT-401/402 compounds.

 

The Company anticipates that research and development expenses will remain relatively consistent in fiscal 2013 as the Company continues to advance the development of TT-401/402.

 

General and Administrative

 

General and administrative expenses decreased by $801,037 or 15% from $5,208,317 for the fiscal year ended June 30, 2011 to $4,407,280 for the year ended June 30, 2012.

 

The decrease in general and administrative expenses during the fiscal year ended June 30, 2012 is largely due to decreases in payroll resulting from headcount reductions as well as decreases in consulting, insurance expense and facility lease costs. The decrease in general and administrative expenses is partially offset by increased professional fees as well as increased option expenses.

 

The Company anticipates that general and administrative expenses will remain relatively consistent in fiscal 2013.

 

Summary of Quarterly Results

 

The following table is a summary of selected quarterly consolidated financial information of the Corporation for each of the eight most recently completed quarters ending at June 30, 2012.

 

   First Quarter   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Year 
2012                         
Revenue  $-   $-   $-   $-   $- 
Net loss (1)  $(2,870,757)  $(3,790,421)  $(3,072,112)  $(2,536,555)  $(12,269,845)
Basic and diluted net loss per common share  $(0.12)  $(0.15)  $(0.11)  $(0.10)  $(0.48)
                          
2011 (2)                         
Revenue  $850,909   $9,400,485   $-   $-   $10,251,394 
Net income (loss) (1)  $(3,534,517)  $5,195,827   $(3,219,529)  $(4,131,394)  $(5,689,613)
Basic and diluted net loss per common share  $(0.15)  $0.22   $(0.14)  $(0.18)  $(0.25)

 

Notes:

(1) Net loss before discontinued operations and extraordinary items was equivalent to the net loss for such periods.

(2) The quarterly information presented for fiscal 2011 has been restated to reflect the adoption of IFRS.

 

The fluctuations of Transition’s quarterly results are primarily due to changes in activity levels of the clinical trials being performed by the Company, amortization of the technology relating to the assets acquired from Protana, ENI, and NeuroMedix, foreign exchange gains and losses, recognition of up-front and licensing fees relating to the Elan agreement, interest income and corporate development costs.

 

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Critical Accounting Estimates

 

The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can differ from those estimates. We have identified the following areas which we believe require management’s most subjective judgments, often requiring the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods.

 

Valuation and Amortization of Intangible Assets

 

The Company’s intangible assets are comprised of purchased or licensed pharmaceutical compounds, technology and patents. The costs of the Company’s intangible assets are amortized over the estimated useful life ranging from 15 to 20 years. Factors considered in estimating the useful life of the intangible asset include the expected use of the asset by the Company, legal, regulatory and contractual provisions that may limit the useful life, the effects of competition and other economic factors, and the level of expenditures required to obtain the expected future cash flows from the intangible asset. The Company re-evaluates the useful life when there has been a change in these factors. The Company assesses its intangible assets for recoverability whenever indicators of impairment exist. When the carrying value of an asset is greater than its recoverable amount, which is the higher of its value in use or fair value less costs to sell, an impairment loss is recognized.

 

Valuation of Contingent Consideration Payable

 

The contingent consideration is measured at fair value based on level 3 inputs. The contingent consideration is not based on observable inputs and is measured using a discounted cash flow analysis of expected payments in future periods. The significant estimates used in the fair value calculations are as follows:

 

(a)Management has estimated the timing of the milestone payments based on current expectations and plans for the development of ELND005 (AZD103). The milestone payments are assigned a probability based on industry statistics for the successful development of pharmaceutical products. An increase of 10% applied to the probability assumptions would increase the contingent consideration payable by $258,000. Conversely a decrease of 10% applied to the probability assumptions would decrease the contingent consideration payable by $258,000; and

 

(b)The probability adjusted cash flows are discounted at a rate of 24% which is management’s best estimate of the Company’s cost of capital. An increase of 5% to the discount rate would decrease the contingent consideration payable by $211,913. Conversely, a decrease of 5% to the discount rate would increase the contingent consideration payable by $235,888.

 

Valuation Allowance for Deferred Income Tax Assets

 

The Company has not recognized certain future tax assets primarily related to the carry forward of operating losses and qualifying research and development expenses. The Company has determined that it is not probable that these carry forward amounts will be realized based on historical results and estimated future taxable income. The generation of future taxable income or the implementation of tax planning strategies could result in the realization of some or all of the carry forward amounts, which could result in a material change in our net income (loss) through the recovery of deferred income taxes. However, there is no assurance that the Company will be able to record deferred income tax recoveries in the future.

 

Share Based Payments

 

When the Company issues stock options, an estimate of fair value is derived for the equity instrument using the Black-Scholes option pricing model. The application of this option pricing model requires management to make assumptions regarding several variables, including the period for which the instrument will be outstanding, the price volatility of the Company’s stock over a relevant timeframe, the determination of a relevant risk free interest rate and an assumption regarding the Company’s dividend policy in the future. If other assumptions are used, the value derived for the equity instruments could be significantly impacted.

 

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Recognition of Revenue

 

As a result of the Company’s amendment to the collaboration agreement with Elan, the Company has recognized as revenue all amounts that have been received under the contract. The recognition of revenue requires judgment in evaluating the contractual terms and assessing the Company’s performance towards meeting the contractual obligations.

 

Accounting Changes

 

International Financial Reporting Standards Conversion

 

In February 2008, the Accounting Standards Board (AcSB) confirmed that Canadian GAAP for public companies will be converged with IFRS for accounting periods commencing on or after January 1, 2011. Accordingly, the Company has commenced reporting on this basis in these interim consolidated financial statements. Information on the Company’s adoption of the major accounting policies in preparing IFRS consolidated financial statements is as follows:

 

Share-based payments

 

The Company has a stock option plan which is an equity settled, share-based payment compensation plan, under which the Company receives services from employees or consultants as consideration for equity instruments of the Company. The stock option plan is open to directors, officers, employees, members of the Scientific Advisory Board and consultants of the Company. The fair value of the employees or consultants services received in exchange for the grant of the options is recognized as an expense over the service period using the graded method of amortization.

 

The fair value of stock options is estimated using the Black-Scholes option pricing model. This model requires the input of a number of assumptions, including expected dividend yield, expected share price volatility, expected time until exercise and risk-free interest rates. Although the assumptions used reflect management’s best estimates, they involve inherent uncertainties based on conditions outside of the Company’s control. Changes in these assumptions could significantly impact share-based payment compensation.

 

The share-based payment reserve included in equity is reduced as the options are exercised or when the options expire unexercised. If the share options are exercised, cancelled or forfeited, the amount initially recorded for the options in share-based payment reserve is credited to common shares or contributed surplus, along with the proceeds received on the exercise. If the share options expire unexercised, the amount initially recorded for the options in the share based payment reserve is credited to contributed surplus.

 

Revenue recognition

 

Revenue comprises the fair value of consideration received or receivable for the sale of services in the ordinary course of the Company’s activities. The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Company’s activities as described below.

 

The Company generally enters into two types of revenue producing arrangements with pharmaceutical companies: licensing arrangements and collaboration /co-development arrangements (“collaborations”).

 

Licensing arrangements

 

Under a licensing arrangement the Company transfers the rights of a compound or series of compounds to a counterparty who directs the development, manufacture and commercialization of the product. The Company’s additional involvement is limited to involvement in a joint steering committee which the Company generally considers protective in nature. In return, the Company will generally receive an upfront fee, additional payments based on specifically defined developmental, regulatory, and commercial milestones, and a royalty based on a percentage of future sales of the product.

 

40
 

 

Revenue related to up-front payments received in licensing arrangements are deferred and amortized into income over the estimated term of the arrangement or are recognized when the milestones are achieved.

 

Collaboration arrangements

 

Under a collaboration arrangement the Company participates in the development by paying a fixed share of the development and commercialization costs in return for a fixed percentage of the product’s future profits. For contributing rights to the intellectual property the co-collaborator will pay the Company an upfront fee and additional payments based on specifically defined developmental and regulatory milestones. Collaboration agreements generally require the Company to participate in joint steering committees and to participate actively in the research and development of the product.

 

The Company accounts for collaboration arrangements using the percentage of completion model. Under this method, revenue is recorded as related costs are incurred, on the basis of the proportion of actual costs incurred to date, related to the estimated total costs to be incurred under the arrangement. The cumulative impact of any revisions in cost and earnings estimates are reflected in the period in which the need for a revision becomes known. In the event that there are significant uncertainties with respect to the outcome of the contract, the Company uses a zero profit model whereby revenue will be recognized equal to direct costs incurred, but not in excess of cash received or receivable. Losses on these contracts are recorded in the period in which management has determined that a loss is expected.

 

The Company uses an input based measure, primarily direct costs or other appropriate inputs, to determine the percent complete because the Company believes that the inputs are representative of the value being conveyed through the research and development activities. The Company believes that using direct costs as the unit of measure of percentage complete also most closely reflects the level of effort related to the Company's performance under the arrangement. Direct costs are those costs that directly result in the culmination of an earnings process for which the counterparty to the arrangement receives a direct benefit. The nature of these costs are third party and internal costs associated with conducting clinical trial activities, allocated payroll related costs for representatives participating on the joint steering committee and sales and marketing costs during the co-commercialization period. Direct costs specifically exclude costs that are of a general and administrative nature.

 

Amounts resulting from payments received in advance of revenue recognized are recorded as deferred revenue.

 

The Company is required to assess the profitability of the overall arrangement on a periodic basis throughout the life of the arrangement when events or circumstances indicate a potential change in facts. Such assessment is based on estimates to determine the most likely outcome based on available facts and circumstances at each assessment date. The estimates include the consideration of factors such as the progress and timing of clinical trials, competition in the market, the development progress of other potential competitive therapies, drug related serious adverse events and other safety issues in the clinical trials, pricing reimbursement in relevant markets and historical costs incurred compared to original estimates. When the periodic assessment or other events or circumstances indicate a loss will result from performance under the arrangement, the entire amount of the loss is charged against income in the period in which the determination is made.

 

Contingent Consideration Payable

 

The Company acquired the ELND005 (AZD-103) technology from Ellipsis Neurotherapeutic Inc. (“ENI”). Under the terms of the step-acquisition agreement with ENI, the Company is committed to pay the former shareholders of ENI contingent clinical milestones potentially totaling $10.9 million payable in cash or Transition common shares at the then market price. Under IFRS, this contingent consideration is required to be measured as a financial liability at fair value and re-measured at each reporting date. Accordingly, the Company recognized a liability at July 1, 2010 which represents the fair value of the contingent consideration payable.

 

The Company is required to determine the fair value of the contingent consideration payable on a quarterly basis and any changes in the fair value of the contingent consideration payable are recorded as a change in fair value of contingent consideration payable in the consolidated statement of comprehensive loss.

 

41
 

 

IFRS ISSUED BUT NOT YET ADOPTED

 

IFRS 10 – Consolidated Financial Statements (“IFRS 10”)

 

IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation – Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements.

 

IFRS 13 – Fair Value Measurement (“IFRS 13”)

 

IFRS 13 is a comprehensive standard for the fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures.

 

IFRS 10 and IFRS 13 are effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Company has not yet begun the process of assessing the impact that the new and amended standards will have on its consolidated financial statements or whether to early adopt either of these new standards.

 

Outstanding Share Data

 

Authorized

 

The authorized share capital of the Corporation consists of an unlimited number of common shares.

 

Issued and Outstanding

 

The following details the issued and outstanding equity securities of the Corporation:

 

Common Shares

 

As at September 7, 2012, the Corporation has 26,921,302 common shares outstanding.

 

Stock Options

 

As at September 7, 2012 the Company has 1,949,919 stock options outstanding with exercise prices ranging from $2.09 to $15.48 and various expiry dates extending to June 30, 2022. At September 7, 2012, on an if-converted basis, these stock options would result in the issuance of 1,949,919 common shares at an aggregate exercise price of $7,991,839.

 

B.Liquidity and Capital Resources

 

Overview

 

The Company commenced operations in July 1998, and has devoted its resources primarily to fund its research and development programs. All revenue to date has been generated from interest income on surplus funds, milestone payments, and licensing fees. The Company has incurred a cumulative deficit to June 30, 2012 of $149,356,213. Losses are expected to continue for the next several years as the Company invests in research and development, preclinical studies, clinical trials, manufacturing and regulatory compliance.

 

42
 

 

Since inception, the Company has been financed primarily from public and private sales of equity, the exercise of warrants and stock options, interest earned on cash deposits and short term investments and revenues and reimbursements from partners.

 

The Company’s cash, cash equivalents and short term investments were $19,012,345 at June 30, 2012 as compared to $22,460,720 at June 30, 2011. The decrease of $3,448,375 was primarily due to the operating expenditures incurred during the year ended June 30, 2012, which have been partially offset by the net result of the Company’s November, 2011 private placement of 3,703,703 common shares for net proceeds of $4,836,000.

 

The Company’s working capital position at June 30, 2012 was $16,113,952, as compared to $20,469,088 at June 30, 2011. The decrease in the Company’s working capital position is due to the expenditures incurred during the year ended June 30, 2012, which have been partially offset by the private placement. Under the terms of the amended agreement with Elan, dosing of the first patient in another clinical trial of ELND005 (AZD-103) triggers the payment of a US$11 million milestone. The Company expects to receive the US$11 million milestone payment during the first quarter of fiscal 2013. The Company’s current cash projection indicates that the current cash resources should enable the Company to execute its core business plan and meet its projected cash requirements well beyond the next 12 months.

 

The success of the Company is dependent on its ability to bring its products to market, obtain the necessary regulatory approvals and achieve future profitable operations. The continuation of the research and development activities and the commercialization of its products are dependent on the Company’s ability to successfully complete these activities and to obtain adequate financing through a combination of financing activities, operations, and partnerships. It is not possible to predict either the outcome of future research and development programs or the Company’s ability to fund these programs going forward.

 

Financial Instruments

 

Financial instruments of the Company consist mainly of cash and cash equivalents, short term investments, accounts payable and accrued liabilities, and contingent consideration payable. Management’s primary investment objective is to maintain safety of principal and provide adequate liquidity to meet all current payment obligations and future planned expenditures.

 

The Company is exposed to market risks related to volatility in interest rates for the Company’s investment portfolio and foreign currency exchange rates related to purchases of supplies and services made in US dollars.

 

The Company is exposed to interest rate risk to the extent that the cash equivalents and short term investments are at a fixed rate of interest and their market value can vary with the change in market interest rates. The Company’s maximum exposure to interest rate risk is based on the effective interest rate of the current carrying value of these assets. The Company does not speculate on interest rates and holds all deposits until their date of maturity.

 

C.Research and Development, Patents and Licenses, etc.

 

Transition is focused on developing innovative therapies in several distinct areas of opportunity. Transition’s vision is to build a company that has a strong foundation for growth based on multiple technologies and product opportunities, which reduces risk and enhances return. The Corporation’s technologies are described above under Programs.

 

D.Trend Information

 

The pharmaceutical and biotechnology industry is challenged by increasing competition, downward pressure on drug pricing, increased drug development costs and shortened drug product life cycles. In order to compete in this industry, companies must consider ways to decrease the time and cost for developing products.

 

The success of the Corporation is dependent on bringing its products to market, obtaining the necessary regulatory approvals and achieving profitable operations in the future. The continuation of the research and development activities and the commercialization of its products are dependent on the Corporation’s ability to successfully complete these activities and to obtain adequate financing through a combination of financing activities, operations, and partnerships. It is not possible to predict either the outcome of future research and development programs or the Corporation’s ability to fund these programs going forward.

 

43
 

 

The Corporation continues to be focused on increasing shareholder value by advancing its products through clinical trials and by successfully partnering products. During fiscal 2013, the Corporation expects:

 

·Its licensing partner Elan to advance the Alzheimer’s disease product ELND005 (AZD-103) into a Phase II study for bipolar disorder and potentially a second disease indication;

 

·The completion of the ongoing multiple ascending dose/proof of concept study of TT-401 in subjects with type 2 diabetes and accompanying obesity. In parallel, the Company also expects to complete the Phase II enabling non-clinical studies of TT-401;

 

·To identify a partner to collaborate on the future development of TT-301 and TT-302.

 

E.Off-Balance Sheet Arrangements

 

The Corporation does not have any “off-balance sheet arrangements” as that term is defined in Item 5.E.2 of Form 20-F.

 

F.Contractual Obligations

 

Contractual Obligations

 

Minimum payments under our contractual obligations as of June 30, 2012 are as follows:

 

   Less than 1
Year
   1-3 Years   4-5 Years   More than 
5 Years
   Total 
Operating Leases  $171,654   $290,429   $-   $-   $462,083 
Collaboration agreements   4,072    -    -    -    4,072 
Clinical and toxicity study agreements   2,653,841    -    -    -    2,653,841 
Other   7,992    -    -    -    7,992 
Manufacturing agreements   710,710    -    -    -    710,710 
Contingent consideration payable   2,847,75    8,068,760    -    -    10,916,519 
TOTAL  $6,396,028   $8,359,189   $-   $-   $14,755,217 

 

44
 

 

Item 6.  Directors, Senior Management and Employees

 

The following table sets forth the name and province or state and country of residence of each director and executive officer of the Corporation as well as their position(s) and offices held with the Corporation and their principal occupations during the five preceding years for each as of September 7, 2012.

 

Name and Province/
State and
Country of Residence
  Position(s) Held
with the Corporation
  Principal Occupations within the
Five Proceeding Years 
  Director
Since (4)
  Age 
Dr. Tony F. Cruz
Ontario, Canada
  Chief Executive Officer, Director and Chairman of the Board of Directors   Chief Executive Officer of the Corporation.   January 1999   59
Dr. Aleksandra Pastrak
Ontario, Canada
  VP of Clinical Development and Medical Officer   VP of Clinical Development and Medical Officer since September 2011, prior thereto, VP Research and Medical Officer of the Corporation since July 2007, prior thereto, VP, Research of the Corporation since May 2005.   N/A   46
Nicole Rusaw-George
Ontario, Canada
  Chief Financial Officer   Chief Financial Officer of the Corporation since December 2011; prior thereto, VP, Finance of the Corporation since July 2008, prior thereto, Director of Finance of the Corporation since June 2005.   N/A   39
Carl Damiani
Ontario, Canada
  VP Business Development   VP of Business Development of the Corporation since December 2007, prior thereto, Director of Business Development of the Corporation since October 2003.   N/A   40

Bruce Connop

Ontario, Canada

  VP of Non-Clinical and Pharmaceutical Development   VP of Non-Clinical and Pharmaceutical Development of the Corporation since July 2012, prior thereto, Senior Director Non-Clinical Drug Development since December 2006.   N/A   43
Michael Ashton (1)(2)(3)
Connecticut, USA
  Director   Independent consultant to the pharmaceutical industry since March 2006; prior thereto, Chief Executive Officer of SkyePharma PLC, a U.K. based drug delivery company   December 2002   66
Paul Baeher (1)(2)(3)
Quebec, Canada
  Director   President, Chief Executive Officer and Chairman of IBEX Technologies Inc., a publicly traded biotechnology company.   December 2002   69
Christopher Henley (1)(2)(3)
Ontario, Canada
  Director   President of Henley Capital Corporation, an exempt market dealer and portfolio manager.   October 2000   52
Dr. Gary W. Pace (5)
California, USA
  Lead Director   Chairman and founder of Sova Pharmaceuticals Inc. since May, 2010, Director and consultant of QRxPharma, a biotechnology company, since April 13, 2007; prior thereto, Co-founder, Chairman and Chief Executive Officer of QRxPharma since November 2002   January 2002   64

 

 

Notes:

(1)Member of the Audit Committee.
(2)Member of the Compensation Committee.
(3)Member of the Corporate Governance Committee.
(4)The term of each current director’s appointment will expire at the Corporation’s Annual Meeting of shareholders which is scheduled for December 11, 2012. It is anticipated that each current director will be nominated by management for re-appointment at the Corporation’s Annual Meeting.

 

45
 

 

(5)Effective May 26, 2011, Dr. Pace resigned from his position as Chairman of the Corporate Governance Committee and also resigned as a member of the Audit Committee, Compensation Committee, and Corporate Governance Committee.

 

Family Relationships

 

There are no family relationships among our directors and executive officers.

 

Arrangement or understanding with major shareholders, customers, suppliers or others

 

There are no arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.

 

B. Executive Compensation

 

Summary Compensation Table

 

The following table provides a summary of compensation earned during the most recently completed fiscal year by the Corporation’s Chief Executive Officer, current and former Chief Financial Officer, and for the next three most highly compensated executive officers of the Corporation other than the Chief Executive Officer and the Chief Financial Officer (the “Named Executive Officers” as the term is used in National Instrument Form 51-102 – Statement of Executive Compensation), whose total salary and bonus exceeded $150,000.

 

46
 

 

                   Non-equity incentive
plan compensation
($)
             
Name and principal position  Year   Salary
($)
   Share-
based
awards
($)
   Option-
based
awards
($)
   Annual
incentive
plans
   Long-
term
incentive
plans
   Pension
value
($)
   All other
compensation
($)
   Total
compensation
 
Tony Cruz,
Chief Executive Officer
   2012    378,741        366,150                1,388(5)   746,279 
    2011    367,710     —    486,300    75,213            1,388(5)   930,611 
                                              
Aleksandra Pastrak
Vice President Clinical Development & Medical Officer (1)
   2012    243,477        146,460                1,388(5)   391,324 
    2011    236,385        294,650    37,198            1,388(5)   569,621 
                                              
Nicole Rusaw-George
Chief Financial Officer (2)
   2012    173,384        124,491                752(5)   298,626 
    2011    160,742        118,150    25,295                304,187 
                                              
Carl Damiani
Vice President Business Development
   2012    183,960        124,491                    308,451 
    2011    178,602        188,750    28,105                395,457 
                                             
Bruce Connop
Vice President Non-Clinical and Pharmaceutical Development (3)
   2012    157,590        73,230    7,564                238,384 
                                              
Elie Farah
Former President & Chief Financial Officer (4) (6)
   2012    164,052                        294,897(4)   427,329 
    2011    278,409        486,300    75,213            8,888(6)   700,003 

 

Notes:

(1)Ms. Pastrak was appointed Vice President of Clinical Development and Medical Officer, effective September 2011, but has been employed by the Corporation in other capacities since October 19, 1999.
(2)Ms. Rusaw-George was appointed Chief Financial Officer on December 12, 2012, but has been employed by the Corporation in other capacities since June 21, 2005.
(3)Dr. Connop was appointed Vice President Non-Clinical and Pharmaceutical Development on July 1, 2012 but has been employed by the Corporation in other capacities since December 1, 2006.
(4)On December 9, 2012, Mr. Farah, President and Chief Financial Officer, left the Company, which resulted in a termination payment of $286,761. Under the terms of Mr. Farah’s Employment Agreement, the Corporation matched his contributions to a Registered Retirement Savings Plan, to a maximum of $7,500 per year and Mr. Farah received subsidized parking from the Corporation in the amount of $636.
(5)Dr. Cruz, Dr. Pastrak and Ms. Rusaw-George receive subsidized parking from the Corporation and the subsidy represents the full amount of all other compensation disclosed.
(6)Under the terms of Mr. Farah’s Employment Agreement, the Corporation matched his contributions to a Registered Retirement Savings Plan, to a maximum of $7,500 per year and Mr. Farah received subsidized parking from the Corporation in the amount of $1,388.

 

Outstanding Option-based Awards

 

The following table sets forth information with respect to stock option grants exercisable into Common Shares made to the Named Executive Officers that were outstanding at June 30, 2012:

  

   Option-based Awards 
Name  Number of
securities
underlying
unexercised
Options
(#)
   Option
exercise
price ($)
   Option expiration
date
 

Value of
unexercised
in-the-
money
options ($)(1)

 
Tony Cruz   55,000    4.15   June 16, 2014    
    55,000    3.50   August 12, 2015    
    150,000    3.22   May 26, 2021    
    250,000    2.10   June 1, 2022    
                   
Alexandra Pastrak   40,000    4.15   June 16, 2014    
    40,000    3.50   August 12, 2015    
    85,000    3.22   May 26, 2021    
    100,000    2.10   June 1, 2022    

 

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   Option-based Awards 
Name  Number of
securities
underlying
unexercised
Options
(#)
   Option
exercise
price ($)
   Option expiration
date
 

Value of

unexercised

in-the-

money

options ($)(1)

 
Nicole Rusaw-George   20,000    4.15   June 16, 2014    
    15,000    3.50   August 12, 2015    
    35,000    3.22   May 26, 2021    
    85,000    2.10   June 1, 2022    
                   
Carl Damiani   35,000    4.15   June 16, 2014    
    25,000    3.50   August 12, 2015    
    55,000    3.22   May 26, 2021    
    85,000    2.10   June 1, 2022    
                   
Bruce Connop   5,556    15.48   July 9, 2012(2)    
    2,000    13.50   September 11, 2012(2)    
    20,000    13.00   March 18, 2013    
    10,000    13.70   June 30, 2013    
    10,000    3.22   May 26, 2021    
    50,000    2.10   June 1, 2022    

 

Note:

(1)Calculated based on the difference between the closing price of the Common Shares on the TSX on June 29, 2012 of $2.09 and the exercise price of the options. All options were out-of-the-money at June 30, 2012.
(2)The original option expiry date occurred during a trading black-out. Pursuant to the terms of the Stock Option Plan, the original expiry date was extended.

 

Incentive Plan Awards – Value Vested or Earned during the Year

 

The following table sets forth for option-based awards, the aggregate dollar value that would have been realized if the options under the option-based award had been exercised on the vesting date.

 

Name 

Option-based awards – Value
vested during the year
($)(1)

 
Tony Cruz   Nil 
Alexandra Pastrak   Nil 
Nicole Rusaw-George   Nil 
Carl Damiani   Nil 
Bruce Connop   Nil 

 

 

Notes:

(1)All options that vested during the year were out of the money based on the closing price of Common Shares on the TSX on June 30, 2012 of $2.09.

 

48
 

  

Compensation of Directors

 

The following table details the total compensation earned by each non-employee director during the year ended June 30, 2012:

 

Name  Fees
earned
($)
   Option-based
awards
($)
   All other compensation
($)
   Total
($)
 
Michael Ashton   45,250    22,466        67,716 
Paul Baehr   47,000    22,466        69,466 
Christopher Henley   46,000    22,466        68,466 
Gary W. Pace   35,000    22,466        57,466 

 

Dr. Tony Cruz, Chief Executive Officer and a director of the Corporation, does not receive any compensation as a director of the Corporation, but receives compensation as an executive officer of the Corporation as detailed under the heading “Chief Executive Officer’s Compensation”. The remaining directors are not employees of the Corporation. Non-employee directors have been remunerated in the following manner.

 

Standard Arrangements

 

The Corporation has standard arrangements for its non-employee directors, which include the following:

 

·Board member annual retainer in the amount of $18,000 and an annual grant of stock options;

 

·Committee Chair annual retainers – the Audit Committee Chair is paid $10,000 annually and the Corporate Governance and Nominating Committee and Compensation Committee Chairs are each paid $6,000 annually;

 

·Board and Committee meeting fees are paid in the amount of $1,500 for each meeting attended and $750 for each conference call attended;

 

·Travel fees of $1,000 for each meeting are paid to all non-employee directors who traveled from outside the Greater Toronto area to attend in person; and

 

·All reasonable out of pocket expenses incurred by the non-employee directors in respect of their duties as directors are reimbursed by the Corporation.

 

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Directors – Outstanding Option-based Awards

 

The following table sets forth information with respect to stock option grants exercisable into Common Shares made to the directors that were outstanding at June 30, 2012.

 

   Option-based Awards 
Name  Number of
securities
underlying
unexercised
options (#)
   Option
exercise price
($)
   Option expiration
date
 

Value of  unexercised
in-the-money
options ($) (1)

 
Michael Ashton   10,000    13.70   June 30, 2013    
    10,000    4.29   June 30, 2014    
    10,000    3.42   June 30, 2015    
    15,000    3.00   June 30, 2021    
    15,000    2.09   June 30, 2022    
                   
Paul Baehr   10,000    13.70   June 30, 2013    
    10,000    4.29   June 30, 2014    
    10,000    3.42   June 30, 2015    
    15,000    3.00   June 30, 2021    
    15,000    2.09   June 30, 2022    
                   
Christopher Henley   10,000    13.70   June 30, 2013    
    10,000    4.29   June 30, 2014    
    10,000    3.42   June 30, 2015    
    15,000    3.00   June 30, 2021    
    15,000    2.09   June 30, 2022    
                   
Gary W. Pace   10,000    13.70   June 30, 2013    
    10,000    4.29   June 30, 2014    
    10,000    3.42   June 30, 2015    
    15,000    3.00   June 30, 2021    
    15,000    2.09   June 30, 2022    

____________

Notes:

(1)

Calculated based on the difference between the closing price of the Common Shares on the TSX on June 30, 2012 of $2.09 and the exercise price of the options.

 

Directors – Incentive Plan Awards – Value Vested or Earned during the Year

 

The following table sets forth (i) for option-based awards, the aggregate dollar value that would have been realized if the options under the option-based award had been exercised on the vesting.

 

Name  

Option-based awards – Value
vested during the year
($) (1)

 
Michael Ashton   Nil  
Paul Baehr   Nil  
Christopher Henley   Nil  
Gary W. Pace   Nil  

__________

Notes:

(1)

All options that vested during the year were out of the money based on the closing price of Common Shares on the TSX on June 29, 2012 of $2.09.

 

 

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C.      Board Practices

 

Audit Committee

 

The Corporation has a separately-designated standing Audit Committee established in accordance with section 3(a)(58) of the Exchange Act. The members of the Audit Committee are: Mr. Christopher Henley (chair), Mr. Paul Baehr, and Mr. Michael Ashton each of whom is independent under the TSX and NASDAQ listing standards and financially literate.

 

Audit Committee Charter

 

The charter of the Corporation’s audit committee is attached as Appendix A to our Annual Information Form available at www.sedar.com.

 

Relevant Education and Experience

 

Mr. Christopher Henley (Chair):

 

Mr. Henley has a B.A. from Memorial University and an MBA from Dalhousie University. He has completed the Institute of Corporate Directors Education Program at the Rotman School of Management, University of Toronto and holds the professional designation ICD.D. He is currently founder and President of Henley Capital Corporation, an exempt market dealer and portfolio manager.

 

Mr. Henley has been an investment banker for over 25 years and previously was the head of investment banking in Toronto at what was then Canada’s largest independent employee-owned investment dealer where he also ran the firm’s High Technology and Communications practice. Mr. Henley is a former director and Chair of the Toronto Port Authority, a former member of the Board and Audit Committee of Ontario Transportation Capital Corporation, a Government of Ontario Crown Corporation that, through a public partnership, developed Highway 407 in Toronto, Ontario, the first all-electronic toll highway in the world. Mr. Henley is also a founding member of the National Angel Organization in Canada and the Ministers’ Technology Advisory Group (“MTAG”) for the Province of Ontario. He is also a former Chair of the MTAG Task Force on Access to Capital, a former member of the Advisory Board, Faculty of Business Administration, Memorial University of Newfoundland and an active member of the Institute of Corporate Directors. Mr. Henley is currently Vice-Chair of West Park Healthcare Centre and a member of the Governance Committee of the Ontario Cancer Research Ethics Board and also sits on the Board of the McMichael Canadian Art Foundation.

 

Mr. Paul Baehr:

 

Mr. Baehr has a B.A. from the University of British Columbia. He is currently President, Chief Executive Officer and Chairman of IBEX Technologies Inc., a biotechnology company listed on the TSX under the symbol “IBT”. Previously, Mr. Baehr was an Executive Vice President at Sterling Winthrop and prior thereto a Senior Vice President at CIBA-GEIGY Pharmaceuticals, both of which are large pharmaceutical companies. In addition, Mr. Baehr currently sits on the board of directors of IBEX Technologies Inc., a public company.

 

Mr. Michael Ashton:

 

Mr. Ashton has been an independent consultant to the pharmaceutical industry since March 2006. Prior thereto, he was the Chief Executive Officer of SkyePharma PLC. He has over 30 years of experience in the Pharmaceutical industry having worked for Merck, Pfizer, Purepac and Faulding, where Mr. Ashton was Chairman, President and CEO. Mr. Ashton is currently the Chairmen of the Board at Puricore PLC and is also a member of the Board of Directors of Hikma Pharmaceuticals PLC.

 

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Pre-Approval Policies and Procedures

 

The Corporation’s audit committee is responsible for the oversight of the work of the external auditor. As part of this responsibility, the audit committee is required to pre-approve all audit, audit related, tax services and non-audit services performed by the external auditor in order to assure that they do not impair the external auditor’s independence from the Corporation. Accordingly, the audit committee has adopted a pre-approval policy, which sets forth the procedures and the conditions pursuant to which services proposed to be performed by the external auditor may be pre-approved.

 

Under the pre-approval policy, the Corporation’s audit committee annually reviews and pre-approves specific audit, audit-related and tax services that may be provided by the external auditor without obtaining specific pre-approval from the audit committee, as well as maximum fees for such services. All services that are not pre-approved or exceed the pre-approved maximum fees require specific pre-approval by the audit committee before the service can be performed by the external auditor. The pre-approval policy also includes a list of prohibited services.

 

Compensation Committee

 

Compensation of the executive officers is determined by the Board of Directors upon recommendations made by the Compensation Committee. The following individuals comprise the Compensation Committee of the Board of Directors: Mr. Michael Ashton (Chair); Mr. Paul Baehr; and Mr. Christopher Henley.

 

The Compensation Committee of the Board of Directors (the “Compensation Committee”) exercises general responsibility regarding overall compensation of employees and executive officers of the Corporation. It annually reviews and recommends to the Board (i) executive compensation policies, practices and overall compensation philosophy, (ii) total compensation packages for all employees who receive aggregate annual compensation in excess of $150,000, (iii) bonuses and grants of options under the Corporation’s Stock Option Plan, and (iv) major changes in benefit plans. Final approval of all compensation items rests with the full Board.

 

D.      Employees

 

As of June 30, 2012, the Corporation had 16 full-time employees.

 

E.      Share Ownership

 

Please see Item 7.A.

 

Item 7A.      Major Shareholders and Related Party Transactions

 

Securities Ownership of Certain
Beneficial Owners and Management

 

As of the date of this annual report, the directors and officers of the Corporation, as a group, beneficially own, directly or indirectly, or exercise control or discretion over 1,623,763 Common Shares, which represents 5.9% of the issued and outstanding Common Shares.

 

The following table sets forth information with respect to the beneficial ownership of our Common Shares, by (1) each of the Corporation’s shareholders who is a beneficial owner of more than 5% of the Corporation’s Common Shares, (2) each of the Corporation’s directors and executive officers, individually, and (3) all of the Corporation’s executive officers and directors, as a group, as of August 31, 2012.

 

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Name of Beneficial Owner  Amount and Nature of
Beneficial  Ownership
   Percent of
Class
 
Mr. Jack Schuler (1)   5,215,854    19.4%
Fidelity Research and Management Company   3,388,657    12.6%
Schuler Family Foundation (1)   2,392,844    8.9%
Larry N Feinberg (2)   3,405,766    12.7%
Wellington Management Company LLP   601,679    2.2%
Oracle Associates LLC (3)   1,546,676    5.7%
Oracle Partners, L.P. (3)   1,305,426    4.8%
Louis Alexopoulos   36,003    *
Michael Ashton (4)   46,389    *
Tony Cruz (5)   1,011,865    3.7%
Paul Baehr (4)   46,945    *
Christopher Henley (4)   105,654    *
Gary Pace (4)   100,407    *
Aleksandra Pastrak (6)   100,677    *
Nicole Rusaw-George (7)   55,428    *
Carl Damiani (8)   81,003    *
Bruce Connop (9)   48,392    *
All executive officers and directors as a group (10 persons)   1,632,763    5.9%

___________

Notes:

* Less than 1%.
(1) Includes the 2,392,844 shares beneficially owned by the Schuler Family Foundation over which Mr. Schuler shares dispositive power.
(2) The shares reported to be beneficially owned by Mr. Larry Feinberg includes the 1,305,426 shares beneficially owned by Oracle Partners, L.P. and the 1,546,676 shares beneficially owned by Oracle Associates LLC.
(3) The shares reported to be beneficially owned by Oracle Associates LLC includes the 1,305,426 shares beneficially owned by Oracle Partners, L.P.
(4) Includes 42,500 options exercisable within 60 days of August 31, 2012.
(5) Includes 165,741 options exercisable within 60 days of August 31, 2012.
(6) Includes 100,650 options exercisable within 60 days of August 31, 2012.
(7) Includes 55,428 options exercisable within 60 days of August 31, 2012.
(8) Includes 75,011 options exercisable within 60 days of August 31, 2012.
(9) Includes 48,042 options exercisable within 60 days of August 31, 2012.

 

The Corporation has 12 registered shareholders in the U.S. who hold 7,989,963 shares, representing approximately 29.7% of the Corporation’s common shares outstanding as of September 7, 2012.

 

Certain Relationships and Related Transactions

 

No material related party transactions have occurred since the beginning of fiscal year 2012 up to and including the date of this annual report or are currently proposed, other than as set forth below:

 

In June, 2011, the Company entered into a consulting agreement with P&S Global Ventures (“P&S”), a company that is controlled by a Director of the Corporation. Total fees and disbursements charged by P&S during the year ended June 30, 2012 was $97,082, which is included in general and administrative expenses. The balance owing at June 30, 2012 is nil. This agreement has been terminated effective October 30, 2011.

 

During fiscal 2012, the Company paid legal fees to a law firm where the Company’s Secretary is a partner and to a corporation controlled by the Company’s Secretary. Total fees and disbursements charged to the Company by these companies was $3,783 and are included in general and administrative expenses. The balance owing at June 30, 2012 is $658.00.

 

These transactions occurred in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

 

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During year ended June 30, 2012, the President and Chief Financial Officer left the Company, which resulted in a termination payment of $286,761 in the second quarter of fiscal 2012.

 

Item 8.      Financial Information

 

A.      Consolidated Statements and Other Information

 

Please see our audited consolidated financial statements filed as a part of this annual report on page F-1.

 

Dividend Policy

 

The Corporation has not declared any dividends to date and does not currently anticipate paying any dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of the board of directors of the Corporation and will depend upon the Corporation’s need to finance growth, its financial condition, results of operations, capital requirements and other factors which the Board of Directors may consider appropriate in the circumstances.

 

Legal Proceedings

 

As of June 30, 2012, we did not have any litigation, arbitration or claim of material importance, and the Directors were not aware of any pending or threatened litigation, arbitration or claim of material importance against us or our subsidiaries.

 

B.      Significant Changes

 

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

Item 9.      The Offer and Listing

 

Market Price

 

The Common Shares are listed and posted for trading on the TSX under the symbol “TTH” and as of January 7, 2008 on the NASDAQ Global Market under the symbol “TTHI”. Prior to graduating to the NASDAQ Global Market, from August 20, 2007 to January 6, 2008 the common shares were also traded on the NASDAQ Capital Market under the symbol “TTHI”.

 

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The following table sets forth, for the periods indicated, the high and low sales prices for the our Common Shares on NASDAQ (in U.S.$) and TSX (in CAN$).

 

   NASDAQ   TSX 
   High   Low   High   Low 
Yearly Highs and Lows for the Year Ending June 30,                    
2012   3.23    1.15    3.00    1.19 
2011   5.49    1.81    5.28    1.82 
2010   9.00    2.32    9.77    2.36 
2009   14.10    2.00    13.67    2.42 
2008   14.50 1    8.73 2    16.60    8.77 
                     
Quarterly Highs and Lows                    
2012                    
First Quarter (July-September 2011)   3.23    1.54    3.00    1.50 
Second Quarter (October-December 2011)   1.85    1.15    1.83    1.19 
Third Quarter (January-March 2012)   2.25    1.35    2.34    1.32 
Fourth Quarter (April-June 2012)   2.35    1.66    2.34    1.64 
2011                    
First Quarter (July-September 2010)   4.23    2.90    4.45    2.98 
Second Quarter (October-December 2010)   3.11    1.81    3.15    1.83 
Third Quarter (January-March 2011)   5.49    1.85    5.28    1.82 
Fourth Quarter (April-June 2011)   4.39    2.62    4.20    2.58 
                     
Monthly Highs and Lows                    
March 2012   1.99    1.67    2.01    1.68 
April 2012   2.00    1.66    1.88    1.64 
May 2012   2.35    1.75    2.34    1.68 
June 2012   2.16    1.83    2.09    1.91 
July 2012   2.74    1.90    2.75    1.87 
August 2012   2.73    1.78    2.55    1.82 

____________

Notes:

1 Calculation for the year ending June 30, 2008 is from August 20, 2007 through June 30, 2008.
2 Calculation for the year ending June 30, 2008 is from August 20, 2007 through June 30, 2008.

  

Item 10.      Additional Information

 

A.      Share Capital.

 

Not applicable.

 

B.      Memorandum and Articles of Association

 

Articles of Incorporation

 

We are governed by our amended articles of incorporation (the “Articles”) under the Business Corporations Act (Ontario) (the “Act”) and by our by-laws (the “By-laws”). Our Ontario corporation number is 1303782. Our Articles provide that there are no restrictions on the business we may carry on or on the powers we may exercise.

 

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 or is a director or an officer of or has a material interest in any person who 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 by the Board of Directors. 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. The numbers of our Board of Directors are not replaced at staggered intervals but are elected annually.

 

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In the event of the liquidation, dissolution or winding up of the Corporation or other distribution of assets of the Corporation among its shareholders for the purpose of winding up its affairs, the holders of common shares shall have a right to receive their pro rata share of such distribution, subject to the rights of the holders of any other class of shares of the Corporation entitled to receive the assets of the Corporation upon such a distribution in priority to the common shares. 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

 

In order to change the rights of our shareholders, we would need to amend our articles of incorporation to effect the change. Such an amendment would require approval by a special resolution passed by at least two-thirds of the votes cast at a duly called special meeting. For certain amendments such as those creating of a class of preferred shares, a shareholder is entitled to dissent in respect of such a resolution amending our articles and, if the resolution is adopted and the Corporation implements such changes, demand payment of the fair value of its shares.

 

Annual and Special Meetings of Shareholders

 

An annual meeting of shareholders is held each year for the purpose of receiving the financial statements and report of the auditor, electing directors, appointing the auditor and for the transaction of other business as may be brought before the meeting. The Board of Directors has the power to call a special meeting of shareholders at any time. Under the Act and our Bylaws, 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 Bylaws, a quorum of one or more shareholders in person or represented by proxy holding or representing by proxy not less than five (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.

 

Investment Canada Act

 

Under the Investment Canada Act, transactions exceeding certain financial thresholds, and which involve the acquisition of control 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 CDN$299 million for the year 2010 (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.

 

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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.

 

Disclosure of Share Ownership

 

Under applicable securities regulation in Canada, notice is required to be given to the market in the event of an acquisition of equity or voting securities representing 10% (5% where a take-over bid has already been made) of a class of securities of a target (including shares beneficially owned by the purchaser and its joint actors). The purchaser must give this notice to the market by issuing a press release forthwith and filing, within two business days, an “early warning” report in the prescribed form (which must include disclosure of any intention on the part of the purchaser to acquire additional securities of the class). A press release is required to be issued and an additional report is required to be filed if there is a change in a material fact contained in a prior report, or upon the acquisition of a further 2% per cent of the class of securities.

 

An alternative monthly reporting system is available to eligible institutional investors, which requires only the filing of a report within 10 days after the end of the month in which the security holding percentage of the eligible institutional investor in a class of voting or equity securities of the issuer, as at the end of the month, increased to 10% or more or increased or decreased past 2.5% thresholds or decreased to less than 10% or there has been a change in a material fact contained in the report of the eligible institutional investor most recently filed.

 

In addition, in Canada, a person or company (other than an eligible institutional investor) 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 Securities Exchange Act of 1934 (the “Exchange Act”). In general, such persons must file, within 10 days after such acquisition, a report of beneficial ownership with the Securities and Exchange Commission 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 of our Articles or Bylaws that would have an effect of delaying, deferring or preventing a change in control of the Corporation and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Corporation. Our Bylaws do not contain a provision governing the ownership threshold above which shareholder ownership must be disclosed. There are no provisions in our Articles or Bylaws governing changes in capital, where such provisions are more stringent than those required by law.

 

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C.      Material Contracts

 

Other than those listed in the paragraphs below, we have not entered into any material contracts other than in the ordinary course of business or other than those described in Item 4 “Information on the Corporation” and elsewhere in this annual report.

 

The Corporation has entered into the following material contracts, which were not in the ordinary course of business:

 

Elan

 

In September 2006, the Corporation and Elan signed a US$200 million global collaboration agreement to develop and commercialize the Alzheimer’s disease product, ELND005 (AZD-103).

 

Under the terms of the agreement, the Corporation has received up-front payments of US$15 million. In addition, dependent upon the successful development, regulatory approval and commercialization of ELND005 (AZD-103), the Corporation would have been eligible to receive milestone payments of up to US$185 million of which US$5 million was received during fiscal 2008. Initially, Elan and the Corporation shared the costs and operating profits of ELND005 (AZD-103) if successfully developed and commercialized, with the Corporation’s cost share and ownership interest at 30%.

 

In December, 2010, the Corporation announced the modification of the ELND005 (AZD-103) collaboration agreement between Elan and the Corporation. Under the terms of the modification, in lieu of a contractually required Phase III milestone payment, the Corporation received from Elan a payment of US$9 million at the time of signing and will be eligible to receive a US$11 million payment upon the commencement of the next ELND005 (AZD-103) clinical trial. The Corporation also will be eligible to receive up to an aggregate of US$93 million in additional regulatory and commercial launch related milestone payments plus tiered royalties ranging from 8% to 15% based on net sales of ELND005 (AZD-103) should the drug receive the necessary regulatory approvals for commercialization. As the agreement is now a royalty arrangement, the Corporation no longer funds the development or commercialization of ELND005 (AZD-103) and has relinquished its 30% ownership of ELND005 (AZD-103) to Elan.

 

Eli Lilly

 

TT-401/402

 

On March 3, 2010, the Corporation and Lilly entered into a licensing and collaboration agreement granting the Corporation the rights to a series of preclinical compounds in the area of diabetes. Under the licensing and collaboration agreement, the Corporation will receive exclusive worldwide rights to develop and potentially commercialize a class of compounds that, in preclinical models showed potential to provide glycemic control and other beneficial effects including weight loss.

 

Under the terms of the agreement, Lilly received an up-front payment of US$1 million and will retain the option to reacquire the rights to the compounds at a later date. Lilly will retain this option up until the end of Phase II. If Lilly exercises these rights, the Corporation would be eligible to receive milestone payments of up to US$250 million and up to low double digit royalties on sales of products containing such compounds should such products be successfully commercialized. If Lilly does not exercise these rights, Lilly would be eligible for low single digit royalties from the Corporation on sales of products containing such compounds should such products be successfully commercialized.

 

D.      Exchange Controls

 

There are currently no limitations imposed by Canadian federal or provincial laws on the rights of non-resident or foreign owners of our securities to hold or vote the securities held. There are also no such limitations imposed by our Articles and By-Laws with respect to our Common Shares.

 

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E.      Taxation

 

United States Federal Income Taxation

 

The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (defined below) under present law of an investment in our common shares. This summary applies only to investors that hold our common shares as capital assets and that have the U.S. dollar as their functional currency. This discussion assumes that we are not a “controlled foreign corporation” for U.S. federal income tax purposes. This discussion is based on the tax laws of the United States as in effect on the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.

 

The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:

 

·banks;

 

·certain financial institutions;

 

·regulated investment companies;

 

·real estate investment trusts;

 

·insurance companies;

 

·broker dealers;

 

·U.S. expatriates;

 

·traders that elect to mark to market;

 

·tax-exempt entities;

 

·persons liable for alternative minimum tax;

 

·persons holding a common share as part of a straddle, hedging, constructive sale, conversion or integrated transaction;

 

·persons who acquired common shares pursuant to the exercise of any employee share option or otherwise as compensation; or

 

·persons holding common shares through partnerships or other pass-through entities for U.S. federal income tax purposes.

 

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U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES.

 

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply if you are a beneficial owner of common shares and you are, for U.S. federal income tax purposes,

 

·an individual who is a citizen or resident of the United States;

 

·a corporation (or other entity taxable as a corporation) organized under the laws of the United States, any State 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 supervision of a court within the United States and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

If you are a partner in partnership or other entity taxable as a partnership that holds common shares, your tax treatment will depend on your status and the activities of the partnership.

 

Dividends and Other Distributions on the Common Shares; Foreign Tax Credits

 

Subject to the passive foreign investment company rules discussed below under “– Passive Foreign Investment Company,” the gross amount of all our distributions to a U.S. Holder with respect to the common shares (including any Canadian taxes withheld therefrom) will be included in the U.S. Holder’s gross income as foreign source ordinary dividend income on the date of receipt by the U.S. Holder, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of a U.S. Holder’s tax basis in its common shares, and to the extent the amount of the distribution exceeds the U.S. Holder’s tax basis, the excess will be taxed as capital gain. Any amount of a distribution treated as a dividend will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

 

With respect to individuals and certain other non-corporate U.S. Holders for taxable years beginning before January 1, 2013, dividends may constitute “qualified dividend income” that is taxed at the lower applicable capital gains rate provided that (1) the common shares are readily tradable on an established securities market in the United States or we are eligible for the benefits of the income tax treaty between the United States and Canada, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, (3) certain holding period requirements are met and (4) the U.S. Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. U.S. treasury guidance indicates that our common shares, which are listed on the NASDAQ Global Market, are readily tradable on an established securities market in the United States. In addition, we should be eligible for the benefits of the income tax treaty between the United States and Canada. U.S. Holders should consult their tax advisors regarding the availability of the lower rate for dividends paid with respect to our common shares.

 

Subject to various limitations, Canadian taxes withheld from a distribution to a U.S. Holder will be eligible for credit against such U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to common shares generally will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.” The rules relating to the determination of the U.S. foreign tax credits of a U.S. Holder are complex, and U.S. Holders should consult their tax advisors to determine whether and to what extent a foreign tax credit will be available with respect to distributions in respect of our common shares. A U.S. Holder that does not elect to claim a foreign tax credit with respect to any foreign taxes for a given taxable year may instead claim an itemized deduction for foreign taxes paid in that taxable year.

 

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Dispositions of Common Shares

 

Subject to the passive foreign investment company rules discussed below under “– Passive Foreign Investment Company,” a U.S. Holder will recognize U.S. source taxable gain or loss on any sale, exchange or other taxable disposition of a common share equal to the difference between the amount realized for the common share and the U.S. Holder’s tax basis in the common share. Such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if at the time of the sale, exchange or other disposition such common shares have been held by such U.S. Holder for more than one year. Long-term capital gain realized by a non-corporate U.S. Holder will generally be subject to taxation at a reduced rate as compared to ordinary income. The deductibility of capital losses is subject to limitations.

 

Passive Foreign Investment Company

 

A non-U.S. corporation is considered to be a “passive foreign investment company,” or “PFIC,” for any taxable year if either:

 

·at least 75% of its gross income is passive income, or

 

·at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

 

For purposes of determining whether we are a PFIC, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock.

 

Based on the market price of our common shares and the composition of our income and assets and our operations, we believe that we were not a PFIC for U.S. federal income tax purposes for our taxable year ended June 30, 2012 and do not expect to be a PFIC for the year ending June 30, 2013. However, we must make a separate determination each year as to whether we are a PFIC after the close of each taxable year, which is June 30. Accordingly, we cannot assure you that we will not be a PFIC for our current taxable year or any future taxable year. As a result, our PFIC status may change. In particular, because the total value of our assets for purposes of the asset test will be calculated by reference to the market price of our common shares (assuming that we continue to be a publicly traded corporation for purposes of the applicable PFIC rules), our PFIC status will depend in part on the market price of our common shares. Accordingly, fluctuations in the market price of our common shares may result in our being a PFIC for a particular year. If we are a PFIC for any year during which a U.S. Holder holds common shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds common shares, absent a special election by the U.S. Holder. If we are a PFIC for any taxable year and any of our non-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules.

 

If we are a PFIC for any taxable year during which a U.S. Holder holds common shares, such U.S. Holder will be subject to special tax rules with respect to any “excess distribution” that it receives and any gain it realizes from a sale or other disposition (including a pledge) of the common shares, unless the U.S. Holder makes a “mark-to-market” election as discussed below. Distributions received by a U.S. Holder in a taxable year that are greater than 125% of the average annual distributions such U.S. Holder received during the shorter of the three preceding taxable years or its holding period for the common shares will be treated as an excess distribution. Under these special tax rules:

 

·the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the common shares,

 

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·the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, will be treated as ordinary income, and

 

·the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the common shares cannot be treated as capital gain, even if the U.S. Holder holds the common shares as capital assets.

 

Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election with respect to shares of the PFIC to elect out of the tax treatment discussed above. If a U.S. Holder makes a valid mark-to-market election for the common shares, the U.S. Holder will include in income each year an amount equal to the excess, if any, of the fair market value of the common shares as of the close of its taxable year over the U.S. Holder’s adjusted basis in such common shares. The U.S. Holder is allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the common shares included in the U.S. Holder’s income for prior taxable years. Amounts included in a U.S. Holder’s income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common shares, are treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included in income with respect to such common shares. A U.S. Holder’s basis in the common shares will be adjusted to reflect any such income or loss amounts. If a U.S. Holder makes such an election, the tax rules that ordinarily apply to distributions by corporations that are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for “qualified dividend income” discussed above under “– Dividends and Other Distributions on the Common Shares; Foreign Tax Credits” would not apply.

 

The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange, including the NASDAQ Global Market, or other market as defined in applicable U.S. Treasury regulations. We expect that our common shares will continue to be listed on the NASDAQ Global Market, in which case the mark-to-market election would be available to U.S. Holders of common shares were we to be a PFIC.

 

If a non-U.S. corporation is a PFIC, a U.S. holder of shares in that corporation may also avoid taxation under the rules described above by making a “qualified electing fund” election to include its share of the corporation’s income in the U.S. Holder’s income on a current basis. However, a U.S. Holder may make a qualified electing fund election with respect to its common shares only if we furnish the U.S. Holder annually with certain tax information, and we do not intend to prepare or provide such information.

 

If we are classified as a PFIC, a U.S. Holder must file United States Internal Revenue Service Form 8621 for each year the U.S. Holder owns the shares of the PFIC.

 

If we are a PFIC for a given taxable year, then U.S. Holders should consult their tax advisors concerning the tax consequences of such PFIC status, the availability and consequences of making a mark-to-market election mentioned above and the annual filing requirements described above. Another election, to treat us as a “qualified electing fund,” would not be available because we do not currently plan to provide U.S. Holders with information sufficient to permit U.S. Holders to make such an election.

 

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Medicare Tax

 

For taxable years beginning after December 31, 2012, a United States person that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax on the lesser of (1) the United States person’s “net investment income” for the relevant taxable year and (2) the excess of the United States person’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125 thousand and $250 thousand, depending on the individual’s circumstances). A United States person's net investment income will include its gross dividend income and its net gains from the disposition of stock, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). A U.S. Holder that is an individual, estate or trust is urged to consult his, her or its tax advisors regarding the applicability of the Medicare tax to income and gains in respect of an investment in our common shares.

 

Information with Respect to Foreign Financial Assets

 

Individuals who own “specified foreign financial assets” with an aggregate value in excess of a specified threshold are required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities. U.S. Holders who are individuals are urged to consult their tax advisors regarding the application of these rules to their ownership of our common shares.

 

Reporting and Backup Withholding

 

Dividends on common shares and the proceeds of a sale or redemption of a common share may be subject to information reporting to the IRS and possible U.S. backup withholding, unless the conditions of an applicable exemption are satisfied. Backup withholding will not apply to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status can provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application to them of the U.S. information reporting and backup withholding rules.

 

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.

 

Material Canadian Federal Tax Considerations

 

General

 

The following is a summary of the material Canadian federal tax implications applicable to a holder (a “U.S. Holder”) who holds our common shares (the “Common Shares”) and who, at all relevant times, for purposes of the Income Tax Act (Canada) (the “Canadian Tax Act”) (i) has not been, is not and will not be resident (or deemed resident) in Canada at any time while such U.S. Holder has held or holds the Common Shares; (ii) holds the Common Shares as capital property and as beneficial owner; (iii) deals at arm’s length with and is not affiliated with us; (iv) does not use or hold, and is not deemed to use or hold, the Common Shares in the course of carrying on a business in Canada; (v) did not acquire the Common Shares in respect of, in the course of or by virtue of employment with our company; (vi) is not a financial institution, specified financial institution, partnership or trust as defined in the Canadian Tax Act; (vii) is a resident of the United States for purposes of the Canada-United States Income Tax Convention (1980), as amended (the “Convention”) who is fully entitled to the benefits of the Convention; and (viii) has not, does not and will not have a fixed base or permanent establishment in Canada within the meaning of the Convention at any time while such U.S. Holder has held or holds the Common Shares. Special rules, which are not addressed in this summary, may apply to a U.S. Holder that is a “registered non-resident insurer” or “authorized foreign bank”, as defined in the Canadian Tax Act, carrying on business in Canada and elsewhere.

 

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This summary is based on the current provisions of the Canadian Tax Act, and the regulations thereunder, the Convention, and counsel’s understanding of the published administrative practices and policies of the Canada Revenue Agency all in effect as of the date of this annual report on Form 20-F. This summary takes into account all specific proposals (the “Proposals”) to amend the Canadian Tax Act and the regulations thereunder publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date of this annual report on Form 20-F. No assurances can be given that such Proposals will be enacted in the form proposed, or at all. This summary is not exhaustive of all potential Canadian federal tax consequences to a U.S. Holder and does not take into account or anticipate any other changes in law or administrative practices, whether by judicial, governmental or legislative action or decision, nor does it take into account provincial, territorial or foreign tax legislation or considerations, which may differ from the Canadian federal tax considerations described herein.

 

This summary assumes that we are a resident of Canada for purposes of the Canadian Tax Act.

 

TAX MATTERS ARE VERY COMPLICATED AND THE CANADIAN FEDERAL TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF COMMON SHARES WILL DEPEND ON THE SHAREHOLDER’S PARTICULAR SITUATION. THIS SUMMARY IS NOT INTENDED TO BE A COMPLETE ANALYSIS OF OR DESCRIPTION OF ALL POTENTIAL CANADIAN FEDERAL TAX CONSEQUENCES, AND SHOULD NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE DIRECTED AT ANY PARTICULAR HOLDER OR PROSPECTIVE PURCHASER OF COMMON SHARES. ACCORDINGLY, HOLDERS OR PROSPECTIVE PURCHASERS OF COMMON SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH RESPECT TO THE CANADIAN FEDERAL TAX CONSEQUENCES OF AN INVESTMENT IN COMMON SHARES BASED ON THEIR PARTICULAR CIRCUMSTANCES.

 

Dividends

 

Amounts paid or credited, or deemed under the Canadian Tax Act to be paid or credited, on account of, in lieu of payment of, or in satisfaction of, dividends to a U.S. Holder will be subject to Canadian non-resident withholding tax at the reduced rate of 15% under the Convention. This rate is further reduced to 5% in the case of a U.S. Holder that is a company for purposes of the Convention that owns at least 10% of our voting shares at the time the dividend is paid or deemed to be paid. Under the Convention, dividends paid or credited to certain religious, scientific, literary, educational or charitable organizations and certain pension organizations that are resident in the United States and that have complied with certain administrative procedures may be exempt from Canadian withholding tax.

 

Disposition of Our Common Shares

 

A U.S. Holder will not be subject to tax under the Canadian Tax Act in respect of any capital gain realized on the disposition or deemed disposition of the Common Shares unless, at the time of disposition, the Common Shares constitute “taxable Canadian property” of the U.S. Holder for the purposes of the Canadian Tax Act and the U.S. Holder is not otherwise entitled to an exemption under the Convention.

 

Under the Canadian Tax Act currently in force, the Common Shares will not constitute “taxable Canadian property” to a U.S. Holder provided that (i) the Common Shares are, at the time of disposition, listed on a designated stock exchange for purposes of the Canadian Tax Act (which currently includes Nasdaq and the TSX); (ii) at no time during the 60-month period immediately preceding the disposition of the Common Shares did the U.S. Holder, persons with whom the U.S. Holder did not deal at arm’s length, or the U.S. Holder together with such persons, own 25% or more of the issued shares of any class or series of our capital stock; and (iii) the Common Shares are not otherwise deemed under the Canadian Tax Act to be taxable Canadian property. Provided the Common Shares are listed on Nasdaq or the TSX or another designated stock exchange at the time of a disposition thereof, the preclearance provisions of the Canadian Tax Act will not apply to the disposition. If the Common Shares are not so held at the time of disposition, preclearance and post-closing notification procedures as set out in the Canadian Tax Act will apply.

 

Pursuant to a Proposal which would be effective from March 5, 2010, the definition of taxable Canadian property will be narrowed. If this Proposal is enacted as proposed, a U.S. Holder will be exempt from tax and from pre-clearance and post-closing notification procedures under the Canadian Tax Act unless the Common Shares derive their value principally from Canadian real or immoveable property within the previous 60 months.

 

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Pursuant to the Convention, even if the Common Shares constitute “taxable Canadian property” of a particular U.S. Holder, any capital gain realized on the disposition of the Common Shares by the U.S. Holder generally will be exempt from tax under the Canadian Tax Act, unless, at the time of disposition, the Common Shares derive their value principally from real property situated in Canada within the meaning of the Convention.

 

F.      Dividends and Paying Agents

 

Not applicable.

 

G.      Statement by Experts

 

Not applicable.

 

H.      Documents on Display

 

Additional information relating to the Corporation may be found on SEDAR at www.sedar.com and on the SEC’s website at www.sec.gov..

 

Specifically, additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of securities of the Corporation and securities authorized for issuance under the Corporation’s stock option plan is contained in the Corporation’s Management Information Circular for its most recent annual meeting of securities holders that involved the election of directors dated November 4, 2011.

 

Our corporate Internet address is http://www.transitiontherapeutics.com. We make available free of charge on or through our website our annual reports, current reports, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by Securities and Exchange Commission (“SEC”) rules. Information contained on our website is not part of this report or any other report filed with the SEC. You may read and copy any public reports we filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site http://www.sec.gov that contains reports, proxy and information statements, and other information that we filed electronically.

 

I.      Subsidiary Information

 

For a listing of our subsidiaries, see “Item 4. Information on the Corporation” and Exhibit 8.1.

 

Item 11.      Quantitative and Qualitative Disclosures About Market Risk.

 

Qualitative and Quantitative Disclosures about Market Risk

 

We are exposed to various types of market risks in the normal course of business, including foreign exchange risk and interest rate risk. We have not in the past used derivatives to manage our exposure to interest rate risk or foreign exchange risk.

 

Foreign Exchange Risk

 

The Corporation is exposed to market risks related to volatility in foreign currency exchange rates related to purchases of supplies and services made in US dollars.

 

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Interest Rate Risk

 

The Corporation is exposed to interest rate risk to the extent that the cash equivalents and short term investments are at a fixed rate of interest and their market value can vary with the change in market interest rates. The Corporation’s maximum exposure to interest rate risk is based on the effective interest rate of the current carrying value of these assets. The Corporation does not speculate on interest rates and holds all deposits until their date of maturity.

 

For additional information please see Note 5.2[a][ii] to the Corporation’s audited consolidated financial statements for the year ended June 30, 2012.

 

Item 12.      Description of Securities Other than Equity Securities.

 

Not applicable.

 

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Part II

 

Item 13.      Defaults, Dividend Arrearages and Delinquencies.

 

Not applicable.

 

Item 14.      Material Modifications to the Rights of Security Holders and Use of Proceeds.

 

Not applicable.

 

Item 15.      Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including the Company’s CEO and CFO, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures as of June 30, 2012 as required by Canadian securities legislation. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports it files or submits under securities legislation is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and reported to management, including the Company’s CEO and CFO, as appropriate, to allow required disclosures to be made in a timely fashion. Based on their evaluation, the CEO and CFO have concluded that as of June 30, 2012, the Company’s disclosure controls and procedures were effective.

 

Management’s Report on Internal Control over Financial Reporting

 

The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). The Corporation’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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

 

The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of June 30, 2012. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. The Corporation’s management, including the CEO and CFO, concluded that, as of June 30, 2012, the Corporation’s internal control over financial reporting was effective based on the criteria in Internal Control – Integrated Framework issued by COSO.

 

Changes in Internal Control over Financial Reporting.

 

There was no change in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

Item 16.      [Reserved]

 

Item 16A.      Audit committee financial expert.

 

The Corporation’s Board of Directors has determined that it has one “audit committee financial expert” (as such term is defined in Form 20-F) serving on its Audit Committee. Such audit committee financial expert is Mr. Christopher Henley. Mr. Henley is “independent” as defined in NASDAQ Rule 5605(a)(2). Mr. Henley’s business experience is included under the heading “Audit Committee – Relevant Education and Experience” in this Annual Report on Form 20-F. The Securities and Exchange Commission (the “Commission”) has indicated that the designation of Mr. Henley as an audit committee financial expert does not make Mr. Henley an “expert” for any purpose, impose any duties, obligations or liability on Mr. Henley that are greater than those imposed on members of the Audit Committee and the Corporation’s Board of Directors who do not carry this designation or affect the duties, obligations or liability of any other member of the Audit Committee.

 

Item 16B.      Code of Ethics.

 

The Corporation has adopted a “code of ethics” (as that term is defined in Form 20-F) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions (the “Ethics Code”). A copy of the Ethics Code entitled “Code of Business Ethics” is available for viewing on the Corporation’ website at www.transitiontherapeutics.com.

 

During the fiscal year ended June 30, 2012, there were no amendments to the Ethics Code or waivers, including implicit waivers, from any provision of the Ethics Code.

 

Item 16C.      Principal Accountant Fees and Services.

 

Audit Fees

 

The aggregate fees billed for each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for the audit of the Corporation’s annual consolidated financial statements, and the effectiveness of internal controls over financial reporting is included under the heading “Audit Fees” below.

 

Audit-Related Fees

 

The aggregate fees billed for each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for audit-related services is included under the heading “Audit Related Fees” below.

 

Tax Fees

 

The aggregate fees billed for each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for tax compliance, tax advice and tax planning is included under the heading “Tax Fees” below.

 

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All Other Fees

 

The aggregate fees billed for each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for services provided other than the services described above is included under the heading “Non-Audit” below.

   During the Year Ended
June 30, 2012
$
   During the Year Ended
June 30, 2011
$
 
Audit Fees (1)   209,000    266,256 
Audit-Related Fees (2)   13,900    0 
Tax Fees (3)   27,450    38,595 
Non-Audit(4)   29,267    40,037 
Total   279,617    344,888 

__________

Notes:

(1)       During the years ended June 30, 2012 and 2011 “Audit Fees” include fees for the annual audit, quarterly reviews, accounting consultations related to accounting, financial reporting or disclosure matters and assistance with understanding and implementing new accounting and financial reporting guidance from regulatory authorities.

(2)       During the year ended June 30, 2012, “Audit-Related Fees” represents accounting fees associated with the Corporation’s private placement which closed on November 22, 2011.

(3)       During the years ended June 30, 2012 and 2011 “Tax Fees” include fees for assistance in the preparation and review of tax returns and related items, assistance with tax audits, general tax planning and advice relating to tax items such as withholding tax and SR&ED eligibility.

(4)       For the years ended June 30, 2012 and 2011, the category “Non-Audit” includes IFRS fees and a charge from the Corporation’s external auditors for a levy from the Canadian Public Accountability Board.

 

Pre-Approval Policies and Procedures

 

The Corporation’s audit committee is responsible for the oversight of the work of the external auditor. As part of this responsibility, the audit committee is required to pre-approve all audit, audit related, tax services and non-audit services performed by the external auditor in order to assure that they do not impair the external auditor’s independence from the Corporation. Accordingly, the audit committee has adopted a pre-approval policy, which sets forth the procedures and the conditions pursuant to which services proposed to be performed by the external auditor may be pre-approved.

 

Under the pre-approval policy, the Corporation’s audit committee annually reviews and pre-approves specific audit, audit-related and tax services that may be provided by the external auditor without obtaining specific pre-approval from the audit committee, as well as maximum fees for such services. All services that are not pre-approved or exceed the pre-approved maximum fees require specific pre-approval by the audit committee before the service can be performed by the external auditor. The pre-approval policy also includes a list of prohibited services.

 

Item 16D.      Exemptions from the Listing Standards for Audit Committees.

 

We have not been granted an exemption from the applicable listing standards for the audit committee of our board of directors.

 

Item 16E.      Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

 

None.

 

Item 16F.      Change in Registrant’s Certifying Accountant.

 

None.

 

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Item 16G.      Corporate Governance.

 

The Corporation is a foreign private issuer and its common shares are listed on the NASDAQ Stock Market (“NASDAQ”).

 

NASDAQ Rule 5615(a)(3) permits a foreign private issuer to follow its home country practice in lieu of the requirements of the Rule 5600 Series, the requirement to distribute annual and interim reports set forth in Rule 5250(d), and the Direct Registration Program requirement set forth in Rules 5210(c) and 5255, provided, however, that such a company shall: comply with the Notification of Material Noncompliance requirement ( Rule 5625), the Voting Rights requirement ( Rule 5640), have an audit committee that satisfies Rule 5605(c)(3), and ensure that such audit committee’s members meet the independence requirement in Rule 5605(c)(2)(A)(ii). The Corporation does not follow Rule 5620(c) (shareholder quorum) but instead follows its home country practice, as described below.

 

Shareholder Meeting Quorum Requirements: The NASDAQ minimum quorum requirement under Rule 5620(c) for a shareholder meeting is 33 1/3% of the outstanding shares of common stock. In addition, a registrant listed on NASDAQ is required to state its quorum requirement in its by laws. The Corporation’s quorum requirement is set forth in its by laws. A quorum for a meeting of shareholders of the Corporation is shareholders or proxyholders holding five percent of the issued and outstanding shares entitled to be voted at the meeting.

 

The foregoing is consistent with the laws, customs and practices in Canada.

 

Item 16H.      Mine Safety Disclosure.

 

Not applicable.

 

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Part III

 

Item 17.      Financial Statements.

 

Not applicable.

 

Item 18.      Financial Statements.

 

Not applicable.

 

Item 19.      Exhibits.

 

Exhibit
Number
Description
   
3.1 Articles of Incorporation of Transition Therapeutics Inc., as amended (incorporated by reference to Exhibit 99.110 of Form 40-F filed on June 5, 2007, File No. 001-33514).
   
3.2 Bylaws of Transition Therapeutics Inc., as amended (incorporated by reference to Exhibit 99.111 of Form 40-F filed on June 5, 2007, File No. 001-33514).
   
8.1 Subsidiaries.
   
10.1 Collaboration Agreement, dated September 25, 2006, between Waratah Pharmaceuticals Inc. and Elan Pharma International Limited (incorporated by reference to Exhibit 99.46 of Form 40-F filed on June 5, 2007, File No. 001-33514).
   
10.2 Share Purchase Agreement, dated February 24, 2006, among Registrant, 1255205 Ontario Inc., Ellipsis Neurotherapeutics Inc., and other parties named therein (incorporated by reference to Exhibit 99.47 of Form 40-F filed on June 5, 2007, File No. 001-33514).
   
10.3

Amendment dated December 26, 2010 to the Collaboration Agreement dated September 25, 2006,

by and between Waratah Pharmaceuticals Inc. and Elan Pharma International Limited (incorporated by reference to Exhibit 10.3 of Form 20-F filed on September 19, 2011, File No. 001-33514). 

   
10.4 License Agreement dated May 28, 2003, by and between Ellipsis Biotherapeutics Corp. and JoAnne McLaurin, PHD, as amended on April 1, 2005. (incorporated by reference to Exhibit 99.2 of Form 6-K filed on March 17, 2008, File No. 001-33514).
   
10.5 Consent to License – JoAnne McLaurin Novel Treatment for Alzheimer’s Disease and Amyloid Disorders using Inositol-Based Compounds dated May 29, 2003, by the University of Toronto. (incorporated by reference to Exhibit 99.3 of Form 6-K filed on March 17, 2008, File No. 001-33514).
   
10.6 Consent to Assignment dated November 2, 2004, by and between JoAnne McLaurin, Ellipsis Biotherapeutics Corp. and Ellipsis Neurotherapeutics Inc. (incorporated by reference to Exhibit 99.4 of Form 6-K filed on March 17, 2008, File No. 001-33514).
   
10.7 Collaboration Agreement dated September 25, 2006, by and between Waratah Pharmaceuticals Inc. and Elan Pharma International Limited (incorporated by reference to Exhibit 99.5 of Form 6-K filed on March 28, 2008, File No. 001-33514).
   
10.8 Collaboration and License Agreement effective as of February 25, 2010 among Waratah Pharmaceuticals Inc. and Eli Lilly and Company (incorporated by reference to Exhibit 99.2 of Form 6-K filed on March 12, 2010, File No. 001-33514).
   
12.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

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Exhibit
Number
Description
   
12.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
   
13.1 Section 1350 Certification of the Chief Executive Officer.
   
13.2 Section 1350 Certification of the Chief Financial Officer.
   
15.1 Consent of PricewaterhouseCoopers LLP.

 

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Signatures

 

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.

 

  TRANSITION THERAPEUTICS INC.
   
  By          /S/ Nicole Rusaw George
  Name:      Nicole Rusaw-George
  Title:        Chief Financial Officer

 

Date: September 13, 2012

 

73
 

  

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

 

The accompanying consolidated financial statements of Transition Therapeutics Inc. have been prepared by management and have been approved by the Board of Directors. Management is responsible for the information and representation contained in these consolidated financial statements.

 

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and include some amounts that are based on best estimates and judgments.

 

Management, to meet its responsibility for integrity and objectivity of the data in the consolidated financial statements, has developed and maintains a system of internal accounting controls. Management believes that this system of internal accounting controls provides reasonable assurance that the financial records are reliable and form a proper basis for preparation of the consolidated financial statements, and that the assets are properly accounted for and safeguarded.

 

The Audit Committee reviews the consolidated financial statements, adequacy of internal controls, audit process and financial reporting with management. The Audit Committee, which consists of three directors not involved in the daily operations of the Company, reports to the Board of Directors prior to their approval of the audited consolidated financial statements for publication.

 

The shareholders’ auditors have full access to the Audit Committee, with and without management being present, to discuss the consolidated financial statements and to report their findings from the audit process. The consolidated financial statements have been examined by the shareholders’ independent auditors, PricewaterhouseCoopers LLP Chartered Accountants, and their report is provided herein.

 

   
Tony Cruz Nicole Rusaw-George
Chief Executive Officer Chief Financial Officer

 

September 7, 2012

 

F-1
 

 

Independent Auditor’s Report

 

To the Shareholders of Transition Therapeutics Inc.

 

We have audited the accompanying consolidated financial statements of Transition Therapeutics Inc. and its subsidiaries, which comprise the consolidated balance sheets as at June 30, 2012, June 30, 2011 and July 1, 2010 and the consolidated statements of loss and comprehensive loss, cash flows and shareholders’ equity for the years ended June 30, 2012 and June 30, 2011 and the related notes, which comprise 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.

 

Auditor’s 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 plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards require that we comply with ethical requirements.

 

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 auditor’s judgment, including the assessments of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. We were not engaged to perform an audit of the company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes 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 Transition Therapeutics Inc. and its subsidiaries as at June 30, 2012, June 30, 2011 and July 1, 2010 and their financial performance and their cash flows for the years ended June 30, 2012 and June 30, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

/s/PricewaterhouseCoopers LLP

 

Chartered Accountants, Licensed Public Accountants

September 7, 2012

Toronto, Ontario

 

F-2
 

 

Audited Consolidated Financial Statements

 

Transition Therapeutics Inc.

For the years ended June 30, 2012 and 2011

 

F-3
 

 

Transition Therapeutics Inc.

 

CONSOLIDATED BALANCE SHEETS

 

In Canadian Dollars  Note  June 30, 2012   June 30, 2011   July 1, 2010 
                
Assets                  
Current assets                  
Cash and cash equivalents  6   12,955,081    17,422,364    16,570,033 
Short term investments  6   6,057,264    5,038,356    10,507,822 
Trade and other receivables      43,658    155,477    125,501 
Investment tax credits receivable      241,951    368,624    206,313 
Prepaid expenses and deposits      316,286    751,000    549,218 
       19,614,240    23,735,821    27,958,887 
                   
Non-current assets                  
Property and equipment      215,000    400,581    605,637 
Intangible assets  7   17,263,790    19,043,086    21,095,002 
Total assets      37,093,030    43,179,488    49,659,526 
                   
Liabilities                  
Current liabilities                  
Trade and other payables  8   1,178,915    945,360    2,090,403 
Current portion of contingent consideration payable  11   2,321,373    2,321,373    - 
Deferred revenue  9   -    -    1,299,994 
       3,500,288    3,266,733    3,390,397 
                   
Non-current liabilities                  
Contingent consideration payable  11   1,434,958    1,434,958    3,081,500 
Leasehold inducement      34,295    45,727    57,160 
       4,969,541    4,747,418    6,529,057 
                   
Equity attributable to owners of the Company                  
Share capital  12   165,334,259    160,498,537    160,498,537 
Contributed surplus  12   13,168,411    11,840,574    4,800,368 
Share-based payment reserve  12   2,977,032    3,179,327    9,228,319 
Deficit      (149,356,213)   (137,086,368)   (131,396,755)
       32,123,489    38,432,070    43,130,469 
                   
Total liabilities and equity      37,093,030    43,179,488    49,659,526 
                   
Contingencies and commitments  17               
Subsequent event  22               

 

The notes are an integral part of these consolidated financial statements.

 

On behalf of the Board:

 

Tony Cruz Christopher Henley
Director Director

 

F-4
 

 

Transition Therapeutics Inc.

 

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

For the years ended June 30, 2012 and 2011

 

In Canadian Dollars  Note  2012   2011 
            
Revenues             
Licensing fees  9   -    10,251,394 
Direct costs of services  9   -    1,299,994 
Gross Profit      -    8,951,400 
              
Expenses             
Research and development  15   8,198,725    8,493,975 
Selling, general and administrative expenses  15   4,407,280    5,208,317 
Loss on disposal of property and equipment      125,748    116,312 
       12,731,753    13,818,604 
              
Operating Loss      (12,731,753)   (4,867,204)
              
Interest income      165,070    201,085 
Interest expense      (851)   (530)
Foreign exchange gain (loss)      297,689    (348,133)
Change in fair value of contingent consideration payable  11   -    (674,831)
Net loss and comprehensive loss for the year      (12,269,845)   (5,689,613)
Basic and diluted net loss per common share  16   (0.48)   (0.25)

 

The notes are an integral part of these consolidated financial statements.

 

F-5
 

 

Transition Therapeutics Inc.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

For the years ended June 30, 2012 and 2011

 

      Attributable to equity holders of the company 
In Canadian Dollars, except share data  Note  Number of
common
shares
   Share
capital
   Contributed
surplus
   Share-based
payment reserve
   Deficit   Total equity 
      #   $   $   $   $   $ 
                            
Balance, July 1, 2011      23,217,599    160,498,537    11,840,574    3,179,327    (137,086,368)   38,432,070 
Net loss and comprehensive loss for the year                          (12,269,845)   (12,269,845)
Shares issued pursuant to a private placement  12b   3,703,703    4,835,722    -    -    -    4,835,722 
Share options expired or cancelled  12c   -    -    1,327,837    (1,327,837)   -    - 
Share-based payment compensation expense  12c   -    -    -    1,125,542    -    1,125,542 
Balance, June 30, 2012      26,921,302    165,334,259    13,168,411    2,977,032    (149,356,213)   32,123,489 
                                  
Balance, July 1, 2010      23,217,599    160,498,537    4,800,368    9,228,319    (131,396,755)   43,130,469 
Net loss and comprehensive loss for the year                          (5,689,613)   (5,689,613)
Share options expired or cancelled  12c   -    -    7,040,206    (7,040,206)   -    - 
Share-based payment compensation expense  12c   -    -    -    991,214    -    991,214 
Balance, June 30, 2011      23,217,599    160,498,537    11,840,574    3,179,327    (137,086,368)   38,432,070 

 

The notes are an integral part of these consolidated financial statements.

 

F-6
 

 

Transition Therapeutics Inc.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended June 30, 2012 and 2011

 

In Canadian Dollars  Note  2012   2011 
            
Cash flows from operating activities             
Net loss for the period      (12,269,845)   (5,689,613)
Adjustments for:             
Depreciation and amortization      1,834,496    2,106,878 
Share-based payment compensation expense      1,125,542    991,214 
Loss on disposal of property and equipment      125,748    116,312 
Change in fair value of contingent consideration payable      -    674,831 
Accrued interest      (1,072)   (38,356)
Unrealized foreign exchange (gain) loss      (416,127)   258,074 
Deferred revenue recognized      -    (1,299,994)
Change in working capital  18   906,761    (1,539,112)
Net cash used in operating activities      (8,694,497)   (4,419,766)
              
Cash flows from investing activities             
Maturity of short term investments      7,568,186    18,488,538 
Purchase of short term investments      (8,586,022)   (12,980,716)
Proceeds on disposal of property and equipment      -    41,985 
Purchase of property and equipment      (6,799)   (19,636)
Net cash (used in) provided by investing activities      (1,024,635)   3,530,171 
              
Cash flows from financing activities             
Net proceeds from private placement  12   4,835,722    - 
Net cash provided by financing activities      4,835,722    - 
              
Foreign exchange gains/(losses) on cash and cash equivalents      416,127    (258,074)
              
Net (decrease) increase in cash and cash equivalents      (4,467,283)   852,331 
Cash and cash equivalents at beginning of year      17,422,364    16,570,033 
Cash and cash equivalents at end of year  6   12,955,081    17,422,364 

 

The notes are an integral part of these consolidated financial statements.

 

F-7
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

1.GENERAL INFORMATION AND NATURE OF OPERATIONS

 

Transition Therapeutics Inc. and its subsidiaries (together the Company or Transition) was incorporated by Articles of Incorporation under the Business Corporations Act (Ontario) on July 6, 1998. The Company is a public company with common shares listed on both the NASDAQ and Toronto Stock Exchange and is incorporated and domiciled in Canada. The address of its registered office is 101 College Street, Suite 220, Toronto, Ontario, Canada.

 

The Company is a product-focused biopharmaceutical company developing therapeutics for disease indications with large markets. The Company’s lead technologies are focused on the treatment of Alzheimer’s disease and diabetes.

 

The success of the Company is dependent on bringing its products to market, obtaining the necessary regulatory approvals and achieving future profitable operations. The continuation of the research and development activities and the commercialization of its products are dependent on the Company’s ability to successfully complete these activities and to obtain adequate financing through a combination of financing activities and operations. It is not possible to predict either the outcome of future research and development programs or the Company’s ability to fund these programs going forward.

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated.

 

2.1Basis of preparation and adoption of IFRS

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The consolidated financial statements have been prepared using the historical cost convention except for the revaluation of certain financial assets and financial liabilities to fair value, including the contingent consideration payable.

 

The preparation of financial statements in conformity with IFRS requires use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

 

Application of IFRS 1, First-time Adoption of IFRS (IFRS 1)

 

The Company prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards, and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011 (July 1, 2011 for the Company). Accordingly the Company has commenced reporting on this basis in these consolidated financial statements. In these consolidated financial statements, the term Canadian GAAP refers to Canadian GAAP before adoption of IFRS.

 

Subject to certain transition elections disclosed in Note 3, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet at July 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 3 discloses the impact of the transition to IFRS on the Company’s reported balance sheet, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company’s consolidated financial statements for the year ended June 30, 2011.

 

F-8
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

The policies applied in these consolidated financial statements are based on IFRS issued and outstanding as of September 7, 2012, the date the Board of Directors approved the statements.

 

2.2Consolidation

 

These consolidated financial statements incorporate the assets and liabilities of Transition and its wholly owned subsidiaries: Transition Therapeutics Leaseholds Inc., Waratah Pharmaceuticals Inc. and Transition Therapeutics (USA) Inc. Intercompany transactions, balances and unrealized gains/losses on transactions between group companies are eliminated.

 

Subsidiaries are all those entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company and de-consolidated from the date that control ceases.

 

The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Company’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statement of comprehensive loss.

 

2.3Foreign currency translation

 

Functional and presentation currency

 

Items included in the consolidated financial statements are measured using the currency of the primary economic environment in which the Company operates (the functional currency). These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional and presentation currency.

 

Transactions and balances

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive loss.

 

2.4Property and equipment

 

Property and equipment is recorded at historical cost less depreciation. Historical cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of a replaced asset is derecognized when it is replaced. Repairs and maintenance costs are charged to the consolidated statement of comprehensive loss during the period in which they are incurred. Depreciation of property and equipment is calculated using either the straight-line or diminishing balance methods to allocate the cost of each item over its estimated useful life, as follows:

 

F-9
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

Asset class   Percentage   Method
Computer equipment   30% - 45%   Diminishing balance
Office equipment and furniture   20%   Diminishing balance
Laboratory equipment   20%   Diminishing balance
Leasehold improvements   Term of lease plus one renewal period   Straight-line

 

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

 

On disposal of items of property and equipment, the cost and related accumulated depreciation and impairments are removed from the consolidated balance sheet and the net amount, less any proceeds, is taken to the consolidated statement of comprehensive loss.

 

2.5Intangible assets

 

Intangible assets consist of intellectual property in the form of technology, patents, licenses and compounds. Separately acquired intangible assets are recorded at historical cost. Intangible assets acquired in a business combination are recognized at fair value at the acquisition date. All intangible assets have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of the intangible assets over their estimated useful lives of 15 to 20 years.

 

2.6Impairment of non-financial assets

 

Property and equipment and intangible assets that are subject to amortization or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

 

2.7Financial Instruments: Classification and Measurement

 

IFRS 9 was issued in November, 2009 and replaces parts of IAS 39 that relate to the classification and measurement of financial assets. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Adoption of IFRS 9 is mandatory from January 1, 2015 and earlier adoption is permitted. The Company has adopted IFRS 9 from July 1, 2010 as well as the related consequential amendments to other IFRSs, because this new accounting policy provides reliable and more relevant information for users to assess the amounts, timing and uncertainty of future cash flows.

 

The Company has assessed the financial assets held by the Company at July 1, 2010, the date of initial application of IFRS 9. Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.

 

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

 

F-10
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

Financial assets measured at amortized cost

 

Cash and cash equivalents, short term investments and trade and other receivables meet the requirements of IFRS 9 and are measured at amortized cost as these assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have fixed maturities that the Company intends to hold until maturity. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets.

 

Financial liabilities measured at fair value

 

The Company’s contingent consideration payable is measured at fair value at each reporting period with changes in the fair value being recorded in the consolidated statement of comprehensive loss. The estimate of fair value is based on management’s best estimate of the timing and probability of having to make the contingent payments, discounted at the Company’s weighted average cost of capital.

 

Fair Value Hierarchy

 

The Company categorizes its financial assets and liabilities that are recognized at fair value in the consolidated financial statements into one of three different levels.   The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.  Each fair value measurement is reported in one of the three levels, which is determined by the lowest level input that is significant to the fair value measurement in its entirety.  These levels are:

 

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

 

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

 

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

2.8Impairment of financial assets

 

The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

 

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is reduced and the amount of the loss is recognized in the consolidated statement of comprehensive loss.

 

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment is recognized in the consolidated statement of comprehensive loss.

 

F-11
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

2.9Investment tax credits

 

Investment tax credits (ITCs) are accounted for as government assistance and are accrued when qualifying expenditures are made and there is reasonable assurance that the credits will be realized. Government assistance is accounted for using the cost reduction method, whereby they are netted against the related research and development expenses or capital expenditures to which they relate.

 

2.10Trade and other receivables

 

Trade and other receivables are amounts due for services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.

 

Trade and other receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment.

 

2.11Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, deposits held with banks and other short-term highly liquid investments with original maturities of three months or less.

 

2.12Share capital

 

Common shares are classified as equity. Incremental costs directly attributable to the issuance of new shares or options are shown in equity as a deduction, net of income tax, from the proceeds received.

 

2.13Trade and other payables

 

Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade and other payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

 

2.14Current and deferred income tax

 

The income tax expense for the period comprises current and deferred tax. Income tax is recognized in the consolidated statement of comprehensive loss except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.

 

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

 

Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects either accounting, taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

 

F-12
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

Deferred income tax assets are recognized only to the extent that it is probable that the assets can be recovered.

 

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

 

2.15Share-based payments

 

The Company has a stock option plan which is an equity settled, share-based payment compensation plan, under which the Company receives services from employees or consultants as consideration for equity instruments of the Company. The stock option plan is open to directors, officers, employees, members of the Scientific Advisory Board and consultants of the Company. The fair value of the employees or consultants services received in exchange for the grant of the options is recognized as an expense over the service period using the graded vesting method.

 

The fair value of stock options is estimated using the Black-Scholes option pricing model. This model requires the input of a number of assumptions, including expected dividend yield, expected share price volatility, expected time until exercise and risk-free interest rates. Although the assumptions used reflect management’s best estimates, they involve inherent uncertainties based on conditions outside of the Company’s control. Changes in these assumptions could significantly impact share-based payment compensation.

 

The share-based payment reserve, included in equity is reduced as the options are exercised or when the options expire unexercised. If the share options are exercised, cancelled or forfeited, the amount initially recorded for the options in share-based payment reserve is credited to common shares or contributed surplus, along with the proceeds received on the exercise. If the share options expire unexercised, the amount initially recorded for the options in the share based payment reserve is credited to contributed surplus.

 

2.16Revenue recognition

 

Revenue comprises the fair value of consideration received or receivable for the sale of services in the ordinary course of the Company’s activities. The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Company’s activities as described below.

 

The Company generally enters into two types of revenue producing arrangements with pharmaceutical companies: licensing arrangements and collaboration / co-development arrangements (“collaborations”).

 

Licensing arrangements

 

Under a licensing arrangement the Company transfers the rights of a compound or series of compounds to a counterparty who directs the development, manufacture and commercialization of the product. The Company’s additional involvement is limited to involvement in a joint steering committee which the Company generally considers protective in nature. In return, the Company will generally receive an upfront fee, additional payments based on specifically defined developmental, regulatory, and commercial milestones, and a royalty based on a percentage of future sales of the product.

 

Revenue related to up-front payments received in licensing arrangements are deferred and amortized into income over the estimated term of the arrangement. Revenue from milestone payments are recognized when the milestones are achieved.

 

F-13
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

Collaboration arrangements

 

Under a collaboration arrangement the Company participates in the development by paying a fixed share of the development and commercialization costs in return for a fixed percentage of the product’s future profits. For contributing rights to the intellectual property the co-collaborator will pay the Company an upfront fee and additional payments based on specifically defined developmental and regulatory milestones. Collaboration agreements generally require the Company to participate in joint steering committees and to participate actively in the research and development of the product.

 

The Company accounts for collaboration arrangements using the percentage of completion model. Under this method, revenue is recorded as related costs are incurred, on the basis of the proportion of actual costs incurred to date, related to the estimated total costs to be incurred under the arrangement. The cumulative impact of any revisions in cost and earnings estimates are reflected in the period in which the need for a revision becomes known. In the event that there are significant uncertainties with respect to the outcome of the contract, the Company uses a zero profit model whereby revenue will be recognized equal to direct costs incurred, but not in excess of cash received or receivable. Losses on these contracts are recorded in the period in which management has determined that a loss is expected.

 

The Company uses an input based measure, primarily direct costs or other appropriate inputs, to determine the percent complete because the Company believes that the inputs are representative of the value being conveyed through the research and development activities. The Company believes that using direct costs as the unit of measure of percentage complete also most closely reflects the level of effort related to the Company's performance under the arrangement. Direct costs are those costs that directly result in the culmination of an earnings process for which the counterparty to the arrangement receives a direct benefit. The nature of these costs are third party and internal costs associated with conducting clinical trial activities, allocated payroll related costs for representatives participating on the joint steering committee and sales and marketing costs during the co-commercialization period. Direct costs specifically exclude costs that are of a general and administrative nature.

 

Amounts resulting from payments received in advance of revenue recognized are recorded as deferred revenue.

 

The Company is required to assess the profitability of the overall arrangement on a periodic basis throughout the life of the arrangement when events or circumstances indicate a potential change in facts. Such assessment is based on estimates to determine the most likely outcome based on available facts and circumstances at each assessment date. The estimates include the consideration of factors such as the progress and timing of clinical trials, competition in the market, the development progress of other potential competitive therapies, drug related serious adverse events and other safety issues in the clinical trials, pricing reimbursement in relevant markets and historical costs incurred compared to original estimates. When the periodic assessment or other events or circumstances indicate a loss will result from performance under the arrangement, the entire amount of the loss is charged to the statement of comprehensive consolidated loss in the period in which the determination is made.

 

2.17Research and development

 

Research and development expenses include salaries, share-based payments, clinical trial costs, manufacturing and research inventory. Research and development expenditure is charged to the consolidated statement of comprehensive loss in the period in which it is incurred. Development expenditure is capitalized when the criteria for recognizing an asset are met.

 

Research inventories

 

Inventories consist of materials that are used in future studies and clinical trials, and are measured at the lower of cost and net realizable value. Net realizable value is measured at the estimated selling price of the inventory less estimated costs of completion and estimated costs to make the sale. The amount of the write-down of inventories is included in research and development expense in the period the loss occurs, which is currently at the time the inventory is acquired since the Company does not intend to sell the material used in studies and clinical trials.

 

F-14
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

2.18Leases

 

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are expensed on a straight-line basis over the term of the lease.

 

2.19IFRS issued but not yet adopted

 

In May, 2011, the IASB issued the following standards which have not been adopted by the Company:

 

IFRS 10 – Consolidated Financial Statements (“IFRS 10”)

 

IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation – Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements.

 

IFRS 13 – Fair Value Measurement (“IFRS 13”)

 

IFRS 13 is a comprehensive standard for the fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures.

 

IFRS 10 and IFRS 13 are effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Company has not yet begun the process of assessing the impact that the new and amended standards will have on its consolidated financial statements or whether to early adopt either of these new standards.

 

3.TRANSITION TO IFRS

 

The effect of the company’s transition to IFRS, described in Note 2, is summarized in this note as follows:

 

(i)Transition elections;
(ii)Reconciliation of equity and comprehensive loss previously reported under Canadian GAAP to IFRS;
(iii)Explanatory notes; and
(iv)Adjustments to the statement of cash flows.

 

(i)The Company has applied the following transition exceptions and exemptions to full retrospective application of IFRS:

 

As described in note (iv)  
Business combinations (a)
Share-based payments (d)

 

The Company has applied the following mandatory exemptions in its transition to IFRS:

 

(a)Estimates – The Company has applied estimates as at the date of transition to IFRS consistent with the estimates applied in its previous Canadian GAAP consolidated financial statements;

 

F-15
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

(b)Derecognition of financial assets and financial liabilities, hedge accounting and non-controlling interest – These exemptions under IFRS1 are not applicable to the Company as the Company does not have any of these transactions or balance reported under its previous Canadian GAAP consolidated financial statements.

 

(ii)Reconciliation of equity previously reported under Canadian GAAP to IFRS:

 

      As at June 30, 2011   As at July 1, 2010 
   Note  Canadian
GAAP
   Adjustment   IFRS   Canadian
GAAP
   Adjustment   IFRS 
      $   $   $   $   $   $ 
Assets                                 
Current assets                                 
Cash and cash equivalents      17,422,364    -    17,422,364    16,570,033    -    16,570,033 
Short term investments      5,038,356    -    5,038,356    10,507,822    -    10,507,822 
Trade and other receivables      155,477    -    155,477    125,501    -    125,501 
Investment tax credits receivable      368,624    -    368,624    206,313    -    206,313 
Prepaid expenses and deposits      751,000    -    751,000    549,218    -    549,218 
       23,735,821    -    23,735,821    27,958,887    -    27,958,887 
Non-current assets                                 
Property and equipment      400,581    -    400,581    605,637    -    605,637 
Intangible assets      19,043,086    -    19,043,086    21,095,002    -    21,095,002 
                                  
Total assets      43,179,488    -    43,179,488    49,659,526    -    49,659,526 
                                  
Liabilities                                 
Current liabilities                                 
Trade and other payables      945,360    -    945,360    2,090,403    -    2,090,403 
Current portion of contingent consideration payable  c   -    2,321,373    2,321,373    -    -    - 
Deferred revenue  b   -    -    -    -    1,299,994    1,299,994 
       945,360    2,321,373    3,266,733    2,090,403    1,299,994    3,390,397 
Non-current liabilities                                 
Deferred revenue  b   -    -    -    20,719,750    (20,719,750)   - 
Contingent consideration payable  c   -    1,434,958    1,434,958    -    3,081,500    3,081,500 
Leasehold inducement      45,727    -    45,727    57,160    -    57,160 
       991,087    3,756,331    4,747,418    22,867,313    (16,338,256)   6,529,057 
Equity attributable to owners of the company                                 
Share capital      160,498,537    -    160,498,537    160,498,537    -    160,498,537 
Contributed surplus      11,840,574    -    11,840,574    4,800,368    -    4,800,368 
Share-based payment reserve  d   2,790,478    388,849    3,179,327    7,337,480    1,890,839    9,228,319 
Deficit  b                       19,419,756      
   c        (3,756,331)             (3,081,500)     
   d        (388,849)             (1,890,839)     
       (132,941,188)        (137,086,368)   (145,844,172)        (131,396,755)
       42,188,401    (3,756,331)   38,432,070    26,792,213    (16,338,256)   43,130,469 
Total liabilities and equity      43,179,488    -    43,179,488    49,659,526    -    49,659,526 

 

F-16
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

(iii)Reconciliation of comprehensive loss as previously reported under Canadian GAAP to IFRS:

 

   Note  For the year ended June 30, 2011 
      Canadian GAAP   Adjustments   IFRS 
      $   $   $ 
Revenues                  
Licensing fees  b   29,671,150    (19,419,756)   10,251,394 
Cost of services  e   -    1,299,994    1,299,994 
Gross Profit      29,671,150    20,719,750    8,951,400 
                   
Expenses                  
Research and development  d, e   7,972,204    377,225    8,349,429 
Selling, general and administration  d, e   6,425,194    (1,072,331)   5,352,863 
Amortization  e   2,106,878    (2,106,878)   - 
Loss on disposal of property and equipment      116,312    -    116,312 
       16,620,588    (2,801,984)   13,818,604 
Operating income (loss)      13,050,562    17,917,766    (4,867,204)
                   
Interest income      200,555    530    201,085 
Interest expense      -    (530)   (530)
Foreign exchange loss      (348,133)   -    (348,133)
Change in fair value of contingent consideration payable  c   -    674,831    (674,831)
Net income (loss) and comprehensive income (loss) for the year      12,902,984    (18,592,597)   (5,689,613)

 

(iv)Explanatory notes

 

a)Business combinations

 

In accordance with IFRS transition provisions, the Company elected to apply IFRS 3 relating to business combinations prospectively from July 1, 2010. As such, Canadian GAAP balances relating to business combinations entered into before that date have been carried forward without adjustment.

 

b)Deferred Revenue

 

Under IAS 18 – Revenue (IAS 18), the Company has recognized revenue on the Elan Pharma International Limited (Elan) contract based on the percentage of completion methodology. Due to the uncertainties in estimating the outcome of this contract, revenue has been recognized only to the extent of the direct costs incurred. Under Canadian GAAP as at July 1, 2010, the Company had deferred revenue of $20,719,750 in respect of this contract. Accordingly, at July 1, 2010, the Company has recognized revenue of $19,419,756 relating to the Company’s agreement with Elan under IAS 18 compared to nil in accordance with Canadian GAAP. For the year ended June 30, 2011, revenue of $1,299,994 was recognized under IAS 18 compared to $20,719,750 respectively under Canadian GAAP.

 

c)Contingent Consideration Payable

 

The Company acquired the ELND-005 (AZD-103) technology from Ellipsis Neurotherapeutic Inc. (“ENI”). Under the terms of the step-acquisition agreement with ENI, the Company is committed to pay the former shareholders of ENI contingent clinical milestones potentially totaling $10.9 million payable in cash or Transition common shares at the then market price. Under IFRS, this contingent consideration is required to be measured as a financial liability at fair value and re-measured at each reporting date. Under Canadian GAAP, no liability was recognized. Accordingly, the Company recognized a liability at July 1, 2010 which represents the fair value of the contingent consideration payable. The Company determined the fair value of the contingent consideration payable to be $3,081,500 as at July 1, 2010 and a non-current liability has been recognized in this amount and the deficit has been reduced accordingly. As at June 30, 2011, the fair value of the contingent consideration payable is $3,756,331 and $674,831 has been recorded as a change in the fair value of the contingent consideration payable in the consolidated statement of comprehensive loss for the year ended June 30, 2011.

 

F-17
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

d)Share-based payments

 

The Company has applied the IFRS 1 exemption from retrospective application of IFRS 2 share-based payments and accordingly has not restated the consolidated financial statements for stock options vested prior to July 1, 2010. Under Canadian GAAP, the Company measures stock-based compensation for stock option grants at their fair value determined using the Black-Scholes option pricing formula and expenses this equally over the options’ vesting terms. IFRS requires the fair value of stock options granted to be expensed on an accelerated basis over the options’ vesting term using a method called graded vesting.

 

Under Canadian GAAP, the Company recognizes the effect of forfeitures as they occur. Under IFRS, the Company is required to estimate the expected rate of stock option forfeiture at the grant date and adjust the number of options included in the measurement of the compensation expense.

 

As a result of the above-mentioned Canadian GAAP and IFRS share based payment differences, the Company has recorded a cumulative adjustment at July 1, 2010 within the components of shareholders’ equity that increased share-based payment reserve by $1,890,839, and increase the deficit by $1,890,839. For the year ended June 30, 2011, the effect of these adjustments is a reduction in the share-based payment compensation expense and share-based payment reserve of $1,501,990 of which $557,690 was adjusted to research and development expense and $944,300 to selling, general and administrative expense.

 

e)Presentation of the consolidated statement of comprehensive loss

 

In accordance with IAS 1 – Presentation, the Company has reclassified certain amounts in the consolidated statement of comprehensive loss for the year ended June 30, 2011 as follows:

 

   2011 
Cost of services   1,299,994 
Research and development expense   (1,299,994)
    2,082,755 
Selling, general and administrative expense   24,123 
Amortization   (2,106,878)

 

f)Adjustments to the consolidated statement of cash flows

 

The transition from Canadian GAAP to IFRS had no significant impact on cash flows generated by the Company.

 

4.CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

 

The preparation of the consolidated financial statements in conformity with IFRS requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases its estimates and judgments on historical experience and on various other assumptions that it considers to be reasonable. The resulting accounting estimates will, by definition, seldom equal the related actual results. Actual results may differ from these estimates under different assumptions or conditions.

 

The most significant estimates included in these consolidated financial statements are the evaluation of the profitability of a revenue contract, the valuation and amortization of intangible assets, recognition of deferred income tax assets, valuation of contingent consideration payable and share-based payments.

 

F-18
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

Valuation and Amortization of Intangible Assets

 

The Company’s intangible assets are comprised of purchased or licensed pharmaceutical compounds, technology and patents. The costs of the Company’s intangible assets are amortized over the estimated useful life ranging from 15 to 20 years. Factors considered in estimating the useful life of the intangible asset include the expected use of the asset by the Company, legal, regulatory and contractual provisions that may limit the useful life, the effects of competition and other economic factors, and the level of expenditures required to obtain the expected future cash flows from the intangible asset. The Company re-evaluates the useful life when there has been a change in these factors. The Company assesses its intangible assets for recoverability whenever indicators of impairment exist. When the carrying value of an asset is greater than its recoverable amount, which is the higher of its value in use or fair value less costs to sell, an impairment loss is recognized.

 

Valuation of Contingent Consideration Payable

 

The contingent consideration is measured at fair value based on level 3 inputs. The contingent consideration is not based on observable inputs and is measured using a discounted cash flow analysis of expected payments in future periods. The significant estimates used in the fair value calculations are as follows:

 

(a)Management has estimated the timing of the milestone payments based on current expectations and plans for the development of ELND005 (AZD103). The milestone payments are assigned a probability based on industry statistics for the successful development of pharmaceutical products. An increase of 10% applied to the probability assumptions would increase the contingent consideration payable by $258,000. Conversely a decrease of 10% applied to the probability assumptions would decrease the contingent consideration payable by $258,000;

 

(b)The probability adjusted cash flows are discounted at a rate of 24% which is management’s best estimate of the Company’s cost of capital. An increase of 5% to the discount rate would decrease the contingent consideration payable by $211,913. Conversely, a decrease of 5% to the discount rate would increase the contingent consideration payable by $235,888.

 

Valuation Allowance for Deferred Income Tax Assets

 

The Company has not recognized certain future tax assets primarily related to the carry forward of operating losses and qualifying research and development expenses. The Company has determined that it is not probable that these carry forward amounts will be realized based on historical results and estimated future taxable income. The generation of future taxable income or the implementation of tax planning strategies could result in the realization of some or all of the carry forward amounts, which could result in a material change in our net income (loss) through the recovery of deferred income taxes. However, there is no assurance that the Company will be able to record deferred income tax recoveries in the future.

 

Share Based Payments

 

When the Company issues stock options, an estimate of fair value is derived for the equity instrument using the Black-Scholes option pricing model. The application of this option pricing model requires management to make assumptions regarding several variables, including the period for which the instrument will be outstanding, the price volatility of the Company’s stock over a relevant timeframe, the determination of a relevant risk free interest rate and an assumption regarding the Company’s dividend policy in the future. If other assumptions are used, the value derived for the equity instruments could be significantly impacted.

 

F-19
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

Recognition of Revenue

 

As a result of the Company’s amendment to the collaboration agreement with Elan, the Company has recognized as revenue all amounts that have been received under the contract. The recognition of revenue requires judgment in evaluating the contractual terms and assessing the Company’s performance towards meeting the contractual obligations.

 

5.FINANCIAL RISK MANAGEMENT

 

5.1Categories of financial assets and liabilities

 

All financial instruments are measured at amortized cost except for the contingent consideration payable which is at fair value. The following table outlines the Company’s financial instruments, their classification, carrying value and fair value.

 

Financial Instruments as at June 30, 2012   Classification   Carrying Value ($)   Fair Value ($)
Cash   Loans and receivables   11,955,426   11,955,426
Cash equivalents   Held to maturity   999,655   999,655
Short term investments   Held to maturity   6,057,264   6,057,087
Accounts payable and accrued liabilities   Other liabilities   1,178,915   1,178,915
Contingent consideration payable   Fair value through profit and loss   3,756,331   3,756,331

 

Financial Instruments as at June 30, 2011   Classification   Carrying Value ($)   Fair Value ($)
Cash   Loans and receivables   12,593,173   12,593,173
Cash equivalents   Held to maturity   4,829,191   4,829,306
Short term investments   Held to maturity   5,038,356   5,038,356
Accounts payable and accrued liabilities   Other liabilities   945,360   945,360
Contingent consideration payable   Fair value through profit and loss   3,756,331   3,756,331

 

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. Fair value of cash equivalents and short term investments is determined based on a valuation model that uses daily pricing reports to determine the amount the holder would receive if the instrument were sold on that day. The fair value of the contingent consideration payable is determined using a valuation model as discussed in note 4.

 

5.2Financial risk factors

 

The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate risks), credit risk and liquidity risk. Risk management is the responsibility of the Company’s finance function which identifies, evaluates and where appropriate, mitigates financial risks.

 

(a)Market risk

 

(i)Foreign exchange risk

 

The Company operates in Canada and has relationships with entities in other countries. Foreign exchange risk arises from purchase transactions, as well as recognized financial assets and liabilities denominated in foreign currencies, mainly the US dollar. The Company does not enter into hedging or other contracts to mitigate its exposure to foreign exchange risk and maintains sufficient US dollars to meet the Company’s planned US dollar expenses.

 

F-20
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

Balances in foreign currencies at June 30, 2012 and 2011 are approximately:

 

   2012   2011 
   US$   US$ 
Cash and cash equivalents   8,392,258    7,134,877 
Short term investments   999,740    - 
Trade and other payables   (724,901)   (150,049)
    8,663,820    6,984,828 

 

Fluctuations in the US dollar exchange rate could potentially have a significant impact on the Company’s results. At June 30, 2012, if the Canadian dollar weakened 10% against the US dollar, with all other variables held constant, comprehensive loss for the year ended June 30, 2012 would have decreased by approximately $388,000. Conversely, if the Canadian dollar strengthened 10% against the US dollar, with all other variables held constant, comprehensive loss for the year ended June 30, 2012 would have increased by approximately $388,000.

 

(ii)Interest rate risk

 

Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s cash and cash equivalents and short term investments which are at a fixed rate of interest and accordingly are not exposed to changes in market interest rates, however, their fair value can vary with the change in market interest rates.

 

Although the Company monitors market interest rates, the Company’s investment policies are designed to maintain safety of principal and provide adequate liquidity to meet all current payment obligations and future planned expenditures. The Company does not speculate on interest rates and holds all deposits until their date of maturity.

 

Interest income from cash, cash equivalents and short term investments was $152,971 for the year ended June 30, 2012 (2011 - $201,085).

 

(b)Credit risk

 

Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations.

 

The Company’s exposure to credit risk at the period end is the carrying value of its cash and cash equivalents, short term investments and trade and other receivables.

 

The Company manages credit risk by maintaining bank accounts with Schedule 1 banks and investing in cash and cash equivalents with maturities less than 90 days and ratings of R-1 or higher. Short term investments consist of bankers’ acceptances and other debentures maturing in less than 12 months and ratings of R-1 or higher. At June 30, 2012, cash and cash equivalents and short term investments are spread amongst three Canadian financial institutions. The Company mitigates other credit risk by entering into long-term revenue agreements with companies that are well-funded and represent a low risk of default. The Company currently does not have an allowance against trade and other receivables and there are no amounts past due.

 

(c)Liquidity risk

 

Liquidity risk is the risk that the Company will not be able to meet its obligations as they become due.

 

The Company’s investment policies are designed to maintain safety of principal and provide sufficient readily available cash in order to meet liquidity requirements. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. All cash and cash equivalents and short term investments have maturities less than one year.

 

F-21
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

At June 30, 2012 the Company’s financial liabilities which include trade and other payables are current and are expected to be repaid within 1 to 3 months of the period end date.

 

The contingent consideration payable is expected to be paid as follows:

 

Fiscal year ending June 30, 2013  $2,847,759 
Fiscal year ending June 30, 2015  $8,068,760 

 

5.3Capital risk management

 

The Company’s primary objective when managing capital is to ensure its ability to continue as a going concern in order to pursue the development of its drug candidates and the out-license of these drug candidates to pharmaceutical companies. The Company attempts to maximize return to shareholders by minimizing shareholder dilution and, when possible, utilizing non-dilutive funding arrangements such as interest income and collaborative partnership arrangements.

 

The Company includes equity comprised of issued share capital, contributed surplus and deficit in the definition of capital. The Company has financed its capital requirements primarily through share issuances since inception and collaborative partnership agreements.

 

The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and risk characteristics of the underlying assets. The Company monitors its cash requirements and market conditions to anticipate the timing of requiring additional capital to finance the development of its drug candidates. The Company is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital management strategy during the year ended June 30, 2012 from the year ended June 30, 2011.

 

The Company’s current cash projection indicates that the current cash resources should enable the Company to execute its core business plan and meet its projected cash requirements beyond the next 12 months. However, the Company’s working capital may not be sufficient to meet its stated business objectives in the event of unforeseen circumstances or a change in the strategic direction of the Company. When, or if, the Company requires additional capital, there can be no assurance that the Company will be able to obtain further financing on favourable terms, if at all.

 

6.CASH AND CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

 

The Company’s cash equivalents are invested in bankers’ acceptances and other short-term instruments with a rating of R-1 or higher and maturities less than 90 days at the date of purchase.

 

Short term investments consist of medium term note debentures totaling $6,057,264 at June 30, 2012 [June 30, 2011 – $5,038,356] with ratings of R1 or higher and maturity dates between July 5, 2012 and November 23, 2012. There were no gains or losses realized on the disposal of the short term investments in 2012 and 2011, as all the financial assets were held to their redemption date. The maximum exposure to credit risk at the reporting date is the carrying amount of short term investments.

 

Cash and cash equivalents consist of the following:

 

   June 30, 2012   June 30, 2011   July 1, 2010 
   $   $   $ 
Cash   11,955,426    12,593,173    11,505,222 
Cash equivalents   999,655    4,829,191    5,064,811 
    12,955,081    17,422,364    16,570,033 

 

F-22
 

 

Notes to the Audited Consolidated Financial Statements

June 30, 2012

(In Canadian Dollars)

 

7.INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

   Technology
acquired
[ELND005
(AZD-103)]
   Patents   NMX
Compounds
acquired
(TT-301/302)
   Lilly
Licenses
acquired
(TT-401/402)
   Total 
   $   $   $   $   $ 
As at July 1, 2011                         
Cost   20,547,993    386,000    11,085,259    1,055,900    33,075,152 
Accumulated amortization and impairment   (10,513,849)   (386,000)   (3,061,382)   (70,835)   (14,032,066)
Net book value   10,034,144    -    8,023,877    985,065    19,043,086 
As at June 30, 2012                          
Cost   20,547,993    386,000    11,085,259    1,055,900    33,075,152 
Accumulated amortization and impairment   (11,501,321)   (386,000)   (3,800,410)   (123,631)   (15,811,362)
Net book value June 30, 2012   9,046,672    -    7,284,849    932,269    17,263,790 
                          
Period ended June 30, 2012                          
Opening net book value   10,034,144    -    8,023,877    985,065    19,043,086 
Amortization charge   (987,472)   -    (739,028)   (52,796)   (1,779,342)
Net book value June 30, 2012   9,046,672    -    7,284,849    932,269    17,263,790 

 

<
   Technology
acquired
[ELND005
(AZD-103)]
   Patents   Compounds
acquired
(TT-301/302)
   Licenses
acquired
(TT-401/402)
   Total 
   $   $   $   $   $ 
As at July 1, 2010                         
Cost   20,547,993    386,000    11,085,259    1,055,900    33,075,152 
Accumulated amortization and impairment   (9,273,757)   (366,000)   (2,322,354)   (18,039)   (11,980,150)
Net book value   11,274,236    20,000    8,762,905    1,037,861    21,095,002 
As at June 30, 2011