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Consolidated Financial Statements
Oncolytics Biotech Inc.
December 31, 2011 and 2010
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
Management is responsible for the preparation and presentation of the consolidated financial statements, Management's Discussion and Analysis ("MD&A") and all other information in the Annual Report.
In management's opinion, the accompanying consolidated financial statements have been properly prepared within reasonable limits of materiality and in accordance with the appropriately selected International Financial Reporting Standards as issued by the International Accounting Standards Board consistently applied and summarized in the consolidated financial statements.
The MD&A has been prepared in accordance with the requirements of securities regulators as applicable to Oncolytics Biotech Inc.
The consolidated financial statements and information in the MD&A generally include estimates that are necessary when transactions affecting the current accounting period cannot be finalized with certainty until future periods. Based on careful judgments by management, such estimates have been properly reflected in the accompanying consolidated financial statements and MD&A. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources and risks and uncertainty. Actual results in the future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected.
Systems of internal controls, including organizational and procedural controls and internal controls over financial reporting, assessed as reasonable and appropriate in the circumstances, are designed and maintained by management to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable records for financial purposes.
We, as the Chief Executive Officer and Chief Financial Officer, will certify to our annual filings with the CSA and the SEC as required in Canada by National Instrument 52-109 (Certification of Disclosure in Issuers' Annual Interim Filings) and in the United States by the Sarbanes-Oxley Act.
The external auditors conducted an independent examination of corporate and accounting records in accordance with generally accepted auditing standards to express their opinion on the consolidated financial statements. Their examination included such tests and procedures as they considered necessary to provide reasonable assurance that the consolidated financial statements are presented fairly. The external auditors have full and free access to our Board of Directors and its Committees to discuss audit, financial reporting and related matters.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board exercises this responsibility through the Audit Committee of the Board. This Committee meets with management and the external auditors to satisfy itself that management's responsibilities are properly discharged and to review the consolidated financial statements and MD&A before they are presented to the Board of Directors for approval.
| /s/ Brad Thompson | /s/ Doug Ball |
| Brad Thompson, Ph.D | Doug Ball, CA |
| Chief Executive Officer | Chief Financial Officer |
INDEPENDENT AUDITORS' REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Oncolytics Biotech Inc.
We have audited the accompanying consolidated financial statements of Oncolytics Biotech Inc., which comprise the consolidated statements of financial position as at December 31, 2011 and 2010 and January 1, 2010, and the consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Oncolytics Biotech Inc. as at December 31, 2011 and 2010 and January 1, 2010, and the results of its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Oncolytics Biotech Inc.'s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2012 expressed an unqualified opinion on Oncolytics Biotech Inc.'s internal control over financial reporting.
Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States)
To the Shareholders of
Oncolytics Biotech Inc.
We have audited Oncolytics Biotech Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Oncolytics Biotech Inc's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Oncolytics Biotech Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Oncolytics Biotech Inc. as at December 31, 2011 and 2010, and January 1, 2010, and the consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information, and our report dated March 14, 2012, expressed an unqualified opinion thereon.
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| December 31, | December 31, | January 1, | |||||
| Notes | 2011 $ | 2010 $ | 2010 $ | ||||
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | 6 | 32,918,751 | 39,296,682 | 32,448,939 | |||
| Short-term investments | 6 | 1,936,787 | 3,609,246 | 1,679,937 | |||
| Accounts receivable | 21 | 55,392 | 284,988 | 64,787 | |||
| Prepaid expenses | 721,576 | 278,934 | 507,408 | ||||
| Total current assets | 35,632,506 | 43,469,850 | 34,701,071 | ||||
| Non-current assets | |||||||
| Property and equipment | 7 | 392,111 | 226,911 | 208,320 | |||
| Long term investment | 8 | - | - | 684,000 | |||
| Total non-current assets | 392,111 | 226,911 | 892,320 | ||||
| Asset held for sale | 8 | - | 735,681 | - | |||
| Total assets | 36,024,617 | 44,432,442 | 35,593,391 | ||||
| Liabilities And Shareholders' Equity | |||||||
| Current Liabilities | |||||||
| Accounts payable and accrued liabilities | 6,504,238 | 2,500,682 | 4,226,933 | ||||
| Warrant liability | 9 | - | 5,536,800 | 1,023,051 | |||
| Total current liabilities | 6,504,238 | 8,037,482 | 5,249,984 | ||||
| Commitments and contingencies | 12, 13, 18 and 19 | ||||||
| Shareholders' equity | |||||||
| Share capital Authorized: unlimited Issued: December 31, 2011 - 71,251,335 December 31, 2010 - 67,958,302 January 1, 2010 - 61,549,969 | 9 | 177,282,566 | 155,439,610 | 131,908,274 | |||
| Warrants | 9 | 2,653,627 | 4,108,652 | 2,437,460 | |||
| Contributed surplus | 9, 10 | 21,142,519 | 19,399,489 | 13,734,743 | |||
| Accumulated other comprehensive loss | (117,501 | ) | (156,660 | ) | - | ||
| Accumulated deficit | (171,440,832 | ) | (142,396,131 | ) | (117,737,070 | ) | |
| Total shareholders' equity | 29,520,379 | 36,394,960 | 30,343,407 | ||||
| Total liabilities and equity | 36,024,617 | 44,432,442 | 35,593,391 |
See accompanying notes
| On behalf of the Board: | |
| /s/ Fred Stewart | /s/ Bob Schultz |
| Director | Director |
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
| For the years ending December 31, | Notes | 2011 $ | 2010 $ | |||||
| Expenses | ||||||||
| Research and development | 10, 22, 23 | 23,386,685 | 13,882,565 | |||||
| Operating | 10, 22, 23 | 5,334,582 | 6,003,870 | |||||
| Loss before the following | (28,721,267 | ) | (19,886,435 | ) | ||||
| Write down of asset available for sale | 8 | (735,681 | ) | - | ||||
| Change in fair value of warrant liability | 36,000 | (4,841,949 | ) | |||||
| Interest | 416,247 | 76,934 | ||||||
| Loss before income taxes | (29,004,701 | ) | (24,651,450 | ) | ||||
| Income tax expense | 14 | (40,000 | ) | (7,611 | ) | |||
| Net loss | (29,044,701 | ) | (24,659,061 | ) | ||||
| Other comprehensive gain (loss) - translation adjustment | 39,159 | (156,660 | ) | |||||
| Net comprehensive loss | (29,005,542 | ) | (24,815,721 | ) | ||||
| Basic and diluted loss per common share | 11 | (0.41 | ) | (0.39 | ) | |||
| Weighted average number of shares (basic and diluted) | 70,911,526 | 62,475,403 |
See accompanying notes
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Share Capital | Warrants | Contributed Surplus | Accumulated Other Comprehensive Income | Accumulated Deficit | Total | |||||||
| $ | $ | $ | $ | $ | $ | |||||||
| As at January 1, 2010 | 131,908,274 | 2,437,460 | 13,734,743 | - | (117,737,070 | ) | 30,343,407 | |||||
| Net loss and comprehensive loss | - | - | - | (156,660 | ) | (24,659,061 | ) | (24,815,721 | ) | |||
| Issue of common shares, public offering | 22,639,719 | 4,120,201 | - | - | - | 26,759,920 | ||||||
| Exercise of warrants | 787,508 | (11,009 | ) | - | - | - | 776,499 | |||||
| Exercise of stock options | 104,109 | - | (24,295 | ) | - | - | 79,814 | |||||
| Expired warrants | - | (2,438,000 | ) | 2,438,000 | - | - | - | |||||
| Share based compensation | - | - | 3,251,041 | - | - | 3,251,041 | ||||||
| As at December 31, 2010 | 155,439,610 | 4,108,652 | 19,399,489 | (156,660 | ) | (142,396,131 | ) | 36,394,960 | ||||
| Net loss and comprehensive income | - | - | - | 39,159 | (29,044,701 | ) | (29,005,542 | ) | ||||
| Exercise of warrants | 21,487,080 | (1,455,025 | ) | - | - | - | 20,032,055 | |||||
| Exercise of stock options | 355,876 | - | (62,473 | ) | - | - | 293,403 | |||||
| Share based compensation | - | - | 1,805,503 | - | - | 1,805,503 | ||||||
| As at December 31, 2011 | 177,282,566 | 2,653,627 | 21,142,519 | (117,501 | ) | (171,440,832 | ) | 29,520,379 |
See accompanying notes
ONCOLYTICS BIOTECH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the years ending December 31, | Notes | 2011 $ | 2010 $ | |||||
| Operating Activities | ||||||||
| Net loss for the year | (29,044,701 | ) | (24,659,061 | ) | ||||
| Amortization - property and equipment | 92,590 | 63,156 | ||||||
| Share based compensation | 10, 22, 23 | 1,805,503 | 3,251,041 | |||||
| Change in fair value of warrant liability | (36,000 | ) | 4,841,949 | |||||
| Write down of asset available for sale | 735,681 | - | ||||||
| Unrealized foreign exchange loss | 115,234 | 343,821 | ||||||
| Net change in non-cash working capital | 17 | 3,790,510 | (1,717,978 | ) | ||||
| Cash used in operating activities | (22,541,183 | ) | (17,877,072 | ) | ||||
| Investing Activities | ||||||||
| Acquisition of property and equipment | (257,790 | ) | (81,846 | ) | ||||
| Acquisition of investment | 8 | - | (51,681 | ) | ||||
| Redemption (purchase) of short-term investments | 1,672,459 | (1,929,309 | ) | |||||
| Cash provided by (used in) investing activities | 1,414,669 | (2,062,836 | ) | |||||
| Financing Activities | ||||||||
| Proceeds from exercise of stock options and warrants | 14,824,658 | 528,211 | ||||||
| Proceeds from public offering | - | 26,759,921 | ||||||
| Cash provided by financing activities | 14,824,658 | 27,288,132 | ||||||
| Increase (decrease) in cash | (6,301,856 | ) | 7,348,224 | |||||
| Cash and cash equivalents, beginning of year | 39,296,682 | 32,448,939 | ||||||
| Impact of foreign exchange on cash and cash equivalents | (76,075 | ) | (500,481 | ) | ||||
| Cash and cash equivalents, end of year | 32,918,751 | 39,296,682 |
See accompanying notes
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Incorporation and Nature of Operations
Oncolytics Biotech Inc. was incorporated on April 2, 1998 under the Business Corporations Act (Alberta) as 779738 Alberta Ltd. On April 8, 1998, we changed our name to Oncolytics Biotech Inc.
Our consolidated financial statements for the year ended December 31, 2011, were authorized for issue in accordance with a resolution of the Board of Directors (the "Board") on March 14, 2012. We are a limited company incorporated and domiciled in Canada. Our shares are publicly traded and our registered office is located at 210, 1167 Kensington Crescent NW, Calgary, Alberta, Canada.
We are a development stage biopharmaceutical company that focuses on the discovery and development of pharmaceutical products for the treatment of cancers that have not been successfully treated with conventional therapeutics. Our product being developed may represent a novel treatment for Ras mediated cancers which can be used as an alternative to existing cytotoxic or cytostatic therapies, as an adjuvant therapy to conventional chemotherapy, radiation therapy, or surgical resections, or to treat certain cellular proliferative disorders for which no current therapy exists.
Note 2: Basis of Financial Statement Presentation
Our consolidated financial statements include our financial statements and the financial statements of our subsidiaries and are presented in Canadian dollars, our functional currency.
The accounts are prepared on the historical cost basis, except for certain assets and liabilities which are measured at fair value as explained in the notes to these financial statements.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRS 1 First-time Adoption of International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB").
Basis of consolidation
Our accounts include the accounts of Oncolytics Biotech Inc. and our subsidiaries. Subsidiaries are entities over which we have control, being the power to govern the financial and operating policies of the investee entity so as to obtain benefits from its activities. Accounting policies of subsidiaries are consistent with our accounting policies and all intra-group transactions, balances, income and expenses are eliminated on consolidation.
A change in ownership interest of a subsidiary, without a change in control, is accounted for as an equity transaction.
Note 3: Adoption of IFRS
Effective January 1, 2011, all Canadian publicly accountable enterprises were required to prepare their financial statements using International Financial Reporting Standards ("IFRS"), issued by the IASB and adopted by the Accounting Standards Board of Canada. IFRS 1 First-time Adoption of International Financial Reporting Standards ("IFRS 1") requires that an entity's accounting policies used in its opening statement of financial position and throughout all periods presented in its first IFRS financial statements comply with IRFS effective at the end of its first IFRS reporting period.
Our accounting policies outlined in Note 4 have been applied in preparing our consolidated financial statements as at and for the year ended December 31, 2011, the comparative information presented as at and for the year ended December 31, 2010 and in the preparation of our opening IFRS balance sheet at January 1, 2010 (our date of transition).
In preparing our opening balance sheet, we have adjusted amounts reported previously in our consolidated financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles in place prior to the adoption of IFRS ("CGAAP"). An explanation of how the transition from CGAAP to IFRS has affected our financial position, financial performance and cash flows is set out in the tables below and in the respective notes.
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Total equity | December 31, 2010 $ | January 1, 2010 $ | ||
| Total equity under CGAAP | 41,931,760 | 31,366,458 | ||
| Adjustment required to conform to IFRS: | ||||
| Warrant liability | (5,536,800 | ) | (1,023,051 | ) |
| Total equity under IFRS | 36,394,960 | 30,343,407 |
| Comprehensive loss for the period | For the year ending December 31, 2010 $ | |
| Comprehensive loss under CGAAP | 19,973,772 | |
| Adjustment required to conform to IFRS: | ||
| Revaluation of warrant liability | 4,841,949 | |
| Comprehensive loss under IFRS | 24,815,721 | |
| Basic and diluted loss per common share, CGAAP | 0.32 | |
| Basic and diluted loss per common share, IFRS | 0.39 | |
| Weighted average number of common shares | 62,475,403 |
Consolidated Statement of Cash Flows
In transitioning to IFRS, there was no impact on our net change in cash or cash flow statement presentation for the year ending December 31, 2010.
IFRS Transitional Arrangements
When preparing our consolidated statement of financial position under IFRS at January 1, 2010, our date of transition, the following optional exemption from full retrospective application of IFRS accounting policies has been adopted:
Cumulative translation differences - cumulative translation differences resulting from the translation of our net investment in our U.S. subsidiary and the financial statements of our U.S. subsidiary have been set to zero at January 1, 2010.
IFRS requires warrants with an exercise price denominated in a currency other than the entity's functional currency to be treated as a liability measured at fair value. Changes in fair value are to be recorded in the consolidated statement of loss and comprehensive loss.
Classification of expenses within the statement of loss and comprehensive loss
Under IFRS, we have chosen to present our expenses based on the function of each expense rather than the nature of each expense. As a result, share based compensation, depreciation of capital assets, and foreign currency gains and losses are no longer separately presented on the statement of loss and comprehensive loss. There is no impact on our net loss or comprehensive loss as a result of these classifications.
Foreign currency translation
Under IFRS, we record the impact of fluctuations in foreign currency exchange rates relating to our net investment in our U.S.
ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsidiary and any foreign currency effects on the translation of our U.S. subsidiary's financial statements as a separate component of equity and other comprehensive income. Under CGAAP we treated our U.S. subsidiary as an integrated subsidiary with foreign currency translation differences recorded as part of our statement of loss. The result of the transition to IFRS is a reclassification of the related foreign currency gains and losses from net loss to other comprehensive income. There is no impact on our net comprehensive loss as a result of these re-classifications.
Note 4: Summary of Significant Accounting Policies
The consolidated financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided on bases and at rates designed to amortize the cost of the assets over their estimated useful lives. Depreciation is recorded using the declining balance method at the following annual rates:
| Office equipment and furniture | 20% |
| Medical equipment | 20% |
| Computer equipment | 30% |
| Leasehold improvements | Straight-line over the term of the lease |
Intellectual property
Intellectual property acquired through our investment in BCBC was included in Asset Held for Sale on the December 31, 2010 balance sheet, at cost. During the year ended December 31, 2011, this amount was written off.
Foreign currency translation
The financial statements for each of our subsidiaries are prepared using their functional currency. Our presentation currency is the Canadian dollar which is also Oncolytics Biotech Inc.'s functional currency. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Exchange differences resulting from the settlement of such transactions and from the translation at exchange rates ruling at the statement of financial position date of monetary assets and liabilities denominated in currencies other than the functional currency are recognized directly in the consolidated statement of loss and comprehensive loss.
Exceptions to this are where the monetary items form part of the net investment in a foreign operation and the foreign operation's functional currency is the local currency. These exchange differences are initially recognized in equity. The statement of financial position of foreign operations is translated into Canadian dollars using the exchange rate at the statement of financial position date and the income statements are translated into Canadian dollars using the average exchange rate for the period. Where this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, the exchange rate on the transaction date is used. Exchange differences on translation into Canadian dollars are recognized as a separate component of equity. On disposal of a foreign operation, any cumulative exchange differences held in equity are transferred to the consolidated statement of loss and comprehensive loss.
Research and development costs
Research costs are expensed as incurred. Development costs that meet specific criteria related to technical, market and financial feasibility will be capitalized. To date, all development costs have been expensed.
Investment tax credits and government assistance
Investment tax credits and government assistance relating to qualifying scientific research and experimental development expenditures that are recoverable in the current period are accounted for as a reduction in research and development expenditures.
ONCOLYTICS BIOTECH INC.