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Form 6-K Aeterna Zentaris Inc. For: Dec 31

March 30, 2016 6:07 AM EDT


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 6-K
 _______________________________
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
For the month of March 2016
Commission file number 0-30752
 _______________________________
AETERNA ZENTARIS INC.
_______________________________
c/o Norton Rose Fulbright Canada LLP
1 Place Ville Marie, Suite 2500
Montréal, Quebec
Canada H3B 1R1
(Address of Principal Executive Offices)
 _______________________________
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F  ý    Form 40-F  ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes  ¨    No  ý
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-            .







DOCUMENTS INDEX
Documents
Description
99.1
Press Release of the Registrant entitled: “Aeterna Zentaris Reports Fourth Quarter and Full-Year 2015 Financial and Operating Results”
99.2
The Registrant’s Management's Discussion and Analysis of Financial Condition and Results of Operations for the financial year ended December 31, 2015
99.3
The Registrant’s Annual Audited Consolidated Financial Statements as at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013






SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
 
 
 
AETERNA ZENTARIS INC.
 
 
 
 
Date: March 29, 2016
 
By:
 
/s/ Philip A. Theodore
 
 
 
 
Philip A. Theodore
 
 
 
 
Senior Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary




Exhibit 99.2
2015 Annual MD&A


Management's Discussion and Analysis
of Financial Condition and Results of Operations
Introduction
This Management's Discussion and Analysis ("MD&A") provides a review of the results of operations, financial condition and cash flows of Aeterna Zentaris Inc. for the year ended December 31, 2015. In this MD&A, "Aeterna Zentaris", the "Company", "we", "us", "our" and the "Group" mean Aeterna Zentaris Inc. and its subsidiaries. This discussion should be read in conjunction with the information contained in the Company's consolidated financial statements and the accompanying notes thereto as at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
All amounts in this MD&A are presented in US dollars, except for share, option and warrant data, or as otherwise noted.
All share, option and share purchase warrant as well as per share, option and share purchase warrant information presented in this MD&A has been adjusted, including proportionate adjustments being made to each option and share purchase warrant exercise price, to reflect and to give effect to a share consolidation (or reverse split), on November 17, 2015, of our issued and outstanding common shares on a 100-to-1 basis. The share consolidation affected all shareholders, optionholders and warrantholders uniformly and thus did not materially affect any securityholder's percentage of ownership interest.
Company Overview
We are a specialty biopharmaceutical company engaged in developing and commercializing novel treatments in oncology, endocrinology and women’s health.
We have two Phase 3 product candidates in development: Zoptrex™, a first-in-class targeted therapy, which, if approved, will be the first United States ("US") Food and Drug Administration (the "FDA")-approved treatment for advanced, recurrent endometrial cancer, and Macrilen™, potentially the first FDA-approved drug to be used in conjunction with the evaluation of adult growth hormone deficiency ("AGHD"). In addition, we currently co-promote three products: EstroGel® (estradiol gel), a leading gel application of estrogen therapy, on behalf of Ascend Therapeutics US LLC (“Ascend”); Saizen® [somatropin (rDNA origin) for injection], a recombinant human growth hormone supplement, on behalf of EMD Serono, Inc., the US and Canadian biopharmaceutical businesses of Merck KGaA of Darmstadt, Germany ("EMD Serono"); and APIFINY®, the first non-prostate-specific antigen (“PSA”) blood test for use in evaluating and managing the risk of prostate cancer, on behalf of Armune BioScience, Inc. (“Armune”).
In addition to the clinical development programs and current commercial activities, we actively seek opportunities to in-license and acquire products for US commercialization. Our goal is to become a growth-oriented specialty biopharmaceutical company by pursuing successful development and commercialization of our product portfolio, achieving successful commercial presence and growth, while consistently delivering value to our shareholders, employees and the medical providers and patients who will benefit from our products.
The Company's common shares are listed both on The NASDAQ Capital Market ("NASDAQ"), under the symbol "AEZS", and on the Toronto Stock Exchange ("TSX"), under the symbol "AEZ".
About Forward-Looking Statements
This document contains forward-looking statements, which reflect our current expectations regarding future events. Forward-looking statements may include words such as "anticipate", "assume", "believe", "could", "expect", "foresee", "goal", "guidance", "intend", "may", "objective", "outlook", "plan", "seek", "should", "strive", "target" and "will". Forward-looking statements involve risks and uncertainties, many of which are discussed in this MD&A and others of which are discussed under the caption "Key Information - Risk Factors" in our most recent Annual Report on Form 20-F filed with the relevant Canadian securities regulatory authorities in lieu of an annual information form and with the US Securities and Exchange Commission ("SEC"). Such statements include, but are not limited to, statements about the progress of our research, development and clinical trials and the timing of, and prospects for, regulatory approval and commercialization of our product candidates, the timing of expected results of our studies, anticipated results of these studies, statements about the status of our efforts to establish a commercial operation and to

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2015 Annual MD&A


obtain the right to promote or sell products that we did not develop and estimates regarding our capital requirements and our need for, and our ability to obtain, additional financing. Known and unknown risks and uncertainties could cause our actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the availability of funds and resources to pursue our research and development ("R&D") projects, the successful and timely completion of clinical studies, the risk that safety and efficacy data from any of our Phase 3 trials may not coincide with the data analyses from previously reported Phase 1 and/or Phase 2 clinical trials, the rejection or non-acceptance of any new drug application by one or more regulatory authorities and, more generally, uncertainties related to the regulatory process, the ability of the Company to efficiently commercialize one or more of its products or product candidates, the degree of market acceptance once our products are approved for commercialization, our ability to take advantage of business opportunities in the pharmaceutical industry, our ability to protect our intellectual property and general changes in economic conditions. See also the section entitled "Risk Factors and Uncertainties" in this MD&A.
Given these uncertainties and risk factors, readers are cautioned not to place undue reliance on any forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments, unless required to do so by a governmental authority or by applicable law.
About Material Information
This MD&A includes information that we believe to be material to investors after considering all circumstances. We consider information and disclosures to be material if they result in, or would reasonably be expected to result in, a significant change in the market price or value of our securities, or where it is likely that a reasonable investor would consider the information and disclosures to be important in making an investment decision. The Company is a reporting issuer under the securities legislation of all of the provinces of Canada, and our securities are registered with the SEC. The Company is therefore required to file or furnish continuous disclosure information, such as interim and annual financial statements, MD&A, proxy or information circulars, annual reports on Form 20-F, material change reports and press releases with the appropriate securities regulatory authorities. Copies of these documents may be obtained free of charge upon request from the Company's Corporate Secretary or on the Internet at the following addresses: www.aezsinc.com, www.sedar.com and www.sec.gov.
Key Developments
Status of Our Drug Pipeline
_________________________
(1)  
Phase 2 in ovarian cancer completed.
(2)  
Investigator-driven and sponsored Phase 2 trial in castration and taxane resistant prostate cancer completed.
(3) 
Potential oral prostate cancer vaccine available for co-development/out-licensing, subject to an option granted to a third party, as described on page 4 of this MD&A under the sub-heading "Pre-clinical developments".
(4)  
Available for co-development/out-licensing.
(5) 
Compound library transferred to Medical University of South Carolina. Aeterna Zentaris has access to future potential development candidates.

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2015 Annual MD&A


Zoptrex™ (zoptarelin doxorubicin)
ZoptrexTM is a complex molecule that combines a synthetic peptide carrier with doxorubicin, a well-known chemotherapy agent. The synthetic peptide carrier is a luteinizing hormone-releasing hormone ("LHRH") agonist, a modified natural hormone with affinity for the LHRH receptor. The design of the compound allows for the specific binding and selective uptake of the cytotoxic conjugate by LHRH receptor-positive tumors. Potential benefits of this targeted approach include a better efficacy and a more favorable safety profile with lower incidence and severity of side effects as compared to doxorubicin alone.
We believe that ZoptrexTM has the potential to become the first FDA-approved medical therapy for advanced, recurrent endometrial cancer, potentially resulting in the compound's rapid adoption as a novel core therapy for patient treatment and management, representing a significant potential market opportunity for us. Moving forward, we will continue to develop our commercialization plans regarding ZoptrexTM in this indication. In addition, contingent on the success of the ZoptEC (Zoptarelin Doxorubicin in Endometrial Cancer) pivotal Phase 3 clinical trial in women with advanced, recurrent or metastatic endometrial cancer, we have additional areas of interest for further therapeutic development for zoptarelin doxorubicin, including ovarian, prostate, breast cancer and potentially bladder cancer.
On April 16, 2015, we announced that we had filed an application for a European patent on a novel method of manufacturing ZoptrexTM. Because this compound is a complex molecule, it is expensive to synthesize, and the requested patent, if granted, may make it difficult for generic manufacturers to produce ZoptrexTM on a financially feasible basis once our composition of matter patent on the compound expires. Further, the claimed manufacturing process is expected to result in a significant reduction in cost of goods sold, which should place us in a stronger competitive position.
On April 27, 2015, we announced that an independent Data and Safety Monitoring Board ("DSMB") for the pivotal Phase 3 ZoptrexTM clinical trial with zoptarelin doxorubicin in women with advanced, recurrent or metastatic endometrial cancer had completed a pre-specified first interim futility analysis at approximately 128 events, and on June 30, 2015, we announced that we had reached our goal of completing enrollment of 500 patients for this clinical trial.
On September 28, 2015, we announced that ZoptrexTM had met the primary end point of the investigator-driven and sponsored Phase 2 clinical trial in castration and taxane resistant prostate cancer ("CRPC") and demonstrated good tolerability. This was a single-arm Simon Optimum design Phase 2 study in 25 patients with CRPC.
On October 13, 2015, we announced that the independent DSMB had recommended that the pivotal Phase 3 ZoptEC study continue as planned. The DSMB's decision followed completion of its pre-specified second interim analysis on efficacy and safety at approximately 192 events. A final analysis of the data is expected at approximately 384 events.
Macrilen™ (macimorelin)
On April 13, 2015, we announced plans to conduct a new confirmatory Phase 3 clinical trial to demonstrate the efficacy of Macrilen™ for the evaluation of AGHD, as well as a dedicated thorough QT study to evaluate the effect of Macrilen™ on myocardial repolarization. During an end-of-review meeting with the FDA on March 6, 2015, we and the FDA agreed on the general design of the confirmatory Phase 3 clinical trial of Macrilen™, as well as on evaluation criteria.
On May 26, 2015, we announced that we had received written scientific advice from the European Medicines Agency (the "EMA") regarding the further development plan, including the study design, for the new confirmatory Phase 3 clinical trial of Macrilen™ for use in evaluating AGHD, following a Scientific Advice Meeting that had been held earlier that month. As a result of the advice, we believe that the confirmatory Phase 3 clinical trial that was agreed with the FDA meets the EMA's study-design expectations allowing for US and European approval if the study is successful.
On June 25, 2015, we announced that we had entered into an agreement with Ergomed PLC (formerly Ergomed Clinical Research Limited, hereafter referred to as "Ergomed"), pursuant to which Ergomed will manage the new confirmatory Phase 3 clinical trial of Macrilen™. Ergomed is already the clinical research organization supporting our pivotal Phase 3 ZoptEC clinical trial.
On November 19, 2015, we announced the first patient enrolled for confirmatory Phase 3 trial of Macrilen™ for the evaluation of AGHD. The confirmatory Phase 3 clinical study of Macrilen™ is designed as a two-way crossover study with the insulin tolerance test ("ITT") as the benchmark comparator and will involve some 30 sites in the US and Europe. The study population will consist of approximately 110 subjects (at least 55 ITT-positive and 55 ITT-negative) with a medical history documenting risk factors for AGHD, and will include a spectrum of subjects from those with a low risk of having AGHD to those with a high risk

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2015 Annual MD&A


of having the condition. The primary endpoint is validation of a single oral dose of macimorelin for the diagnosis of AGHD, using the ITT as a comparator. 
Pre-clinical developments
On March 31, 2015, we announced the transfer of our discovery library of roughly 100,000 unique compounds to the South Carolina Center for Therapeutic Discovery and Development (the "Center") which is part of The Medical University of South Carolina ("MUSC"). Our material transfer agreement with the Center will result in the continued use of the library for the discovery of drug development candidates for the Company in the areas of oncology, neurology, endocrinology and women's health. The Center may make the library available to all investigators in the University of South Carolina system without restriction on its use and will own any therapeutic compounds discovered outside our areas of therapeutic interest.
The Center has agreed to conduct screening and pre-clinical activities with respect to the library with a view toward submitting to us at least one development candidate per year in our areas of therapeutic interest over a ten-year period beginning in 2018. We also have a right of first refusal to in-license any submitted development candidates. Should we decide to further develop a development candidate submitted by the Center, MUSC will license the compound candidate to us and be entitled to a royalty on the net sales of all commercialized products developed from the development candidate. However, should we decide not to further develop the development candidate submitted by the Center, MUSC is required to pay us a royalty on net sales of all commercialized products developed from the development candidate.
On July 28, 2015, we announced that we had granted to German life sciences entrepreneurs with a proven track-record of funding the development and commercialization of biotechnology (the "Optionee"), an option to license our live recombinant allogenic oral cancer vaccine technology (the "Technology"), including AEZS-120, the most advanced product candidate for prostate cancer which is ready to enter into a Phase 1 clinical trial. This option was granted to the Optionee worldwide, for a period of twelve months, in exchange for an upfront fee. Pursuant to the option agreement, the Optionee has the right to obtain a worldwide exclusive license to develop, use and sell products relating to the Technology and AEZS-120, in exchange for milestone payments and royalties on net sales of any product developed from the Technology and an equity interest in the company formed to develop the Technology. At the present time, we hold worldwide rights to the Technology, including AEZS-120.
On July 29, 2015, we announced that we had selected an optimized Erk inhibitor molecule, AEZS-140 and back-up candidates, for development. We have since decided to suspend our efforts on internally developing this class of potential cancer therapies to conserve our resources for other projects. Therefore, we are seeking proposals from parties who are interested in either co-developing or licensing the compounds.
On January 13, 2016, during our participation in the annual J.P. Morgan Healthcare conference, we announced that, in addition to our focus on Zoptrex™, we are also focusing on Disorazol Z, because it is an ideal compound for the formation of cytotoxic conjugates with peptides, proteins and antibodies to selectively target cancer cells. We have one cytotoxic conjugate, AEZS-138, in preclinical development. It is a conjugate based on Disorazol Z and the LHRH receptor agonist that is utilized in Zoptrex™. We believe that the peptide directs the compound specifically to LHRH receptor expressing tumor cells, and mediates binding and uptake via endocytosis. Within the cancer cell, the conjugates are cleaved and Disorazol Z can deploy its potent anti-proliferative activity. We have patented the cytotoxic agent Disorazol Z in 35 countries, including the US, Japan, Europe, China, Russia, Korea and Taiwan. This patent protection expires in 2026. The conjugate of Disorazol Z and the LHRH receptor agonist as a targeted cytotoxic agent is patented in 15 countries, including the US, Japan, China, Russia, Korea and Taiwan. This patent protection expires in 2027. We expect the European patent to be granted in the near future.













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2015 Annual MD&A


Commercial Operations

Our commercial operations consist of 21 full-time sales representatives and a sales-management staff. The sales representatives provide services pursuant to our agreement with a contract sales organization. The structuring and implementation of our commercial operations organization is felt to provide direct value through our existing co-promotion commercial activities, discussed below, as well as in support of our efforts to in-license and/or acquire products into our portfolio.

EstroGel® 

During 2015, we ramped up selling efforts related to our co-promotion agreement with Ascend, which we entered into in August 2014, for EstroGel®, a leading non-patch transdermal hormone replacement therapy product, in specific agreed-upon US territories in exchange for a sales commission that is based upon incremental sales volumes of the product that are generated over pre-established baselines.

Detailing efforts associated with EstroGel® commenced in earnest early in the first quarter of 2015, following the completion of sales force training and other knowledge-transfer activities that had been underway since late 2014. During 2015, we began exceeding pre-established unit sales baseline thresholds on a total nation basis.

Saizen® 

On May 8, 2015, we announced that we had entered into a promotional services agreement with EMD Serono, allowing us to promote Saizen® [somatropin (rDNA origin) for injection] to designated medical professionals in specified US territories. Saizen® is a recombinant human growth hormone registered in the US for the treatment of growth hormone deficiency in children and adults. Under this agreement, we are detailing Saizen® to designated medical professionals, representing an important incremental field promotion activity in support of EMD Serono's product. Payment to Aeterna Zentaris is based on new, eligible patient starts on Saizen® above an agreed-upon baseline.

We are currently promoting Saizen® in 21 US territories, with efforts having commenced during the third quarter of 2015.

APIFINY® 

On December 1, 2015, we announced the finalization of a co-marketing agreement that allows us to promote Armune's APIFINY®, the only cancer specific, non-PSA blood test for the detection of prostate cancer. Pursuant to this co-marketing agreement, we promote APIFINY to designated medical professionals in 20 US territories and are entitled to receive a commission for each test performed resulting from our targeted promotion.
Corporate Activities
Share consolidation
On November 18, 2015, we announced the details and implementation of the consolidation of our issued and outstanding common shares approved by shareholders at a special meeting held on November 16, 2015, which occurred at a consolidation ratio of 100-to-1 and became legally effective on November 17 2015. Our common shares began trading on a consolidated basis on each of the NASDAQ and the TSX at the opening of markets on November 20, 2015 under our current NASDAQ and TSX trading symbols, “AEZS” and “AEZ”, respectively. All common share and warrant data presented in the MD&A and pertaining to pre-share consolidation events or transactions have been retroactively adjusted to reflect this share consolidation.
On December 8, 2015, we announced that the NASDAQ had notified the Company that we regained compliance with Rule 5450(a)(1), which requires a minimum bid price of $1.00 for continued listing on the NASDAQ.
Public offerings and related events
On March 11, 2015, we completed a public offering of 596,775 units (the "Units"), generating net proceeds of approximately $34.4 million, with each Unit consisting of either one common share or one pre-funded warrant to purchase one common share ("Series C Warrant"), 0.75 of a warrant to purchase one common share ("Series A Warrant") and 0.50 of a warrant to purchase one common share ("Series B Warrant"), at a purchase price of $62.00 per Unit (the "March 2015 Offering"). The Series A Warrants are exercisable

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2015 Annual MD&A


during a five-year term at an initial exercise price of $81.00 per share, and the Series B Warrants are exercisable during an 18-month term at an initial exercise price of $81.00 per share. Both the Series A and Series B warrants are subject to certain anti-dilution provisions. The Series C Warrants were exercisable for a period of five years at an exercise price of $62.00 per share. Total gross proceeds payable to us in connection with the exercise of the Series C Warrants were pre-paid by investors at the closing of the March 2015 Offering and therefore are included in the aforementioned proceeds. Between March 23, 2015 and June 16, 2015, all of the pre-funded Series C Warrants were exercised, resulting in the issuance of a total of 346,294 common shares.
Both the Series A and Series B Warrants may at any time be exercised on a standard cashless basis. In addition, the Series B Warrants may be exercised on an alternate net cashless basis. The exercise of Series B Warrants performed on an alternate net cashless basis results in the issuance of a substantially larger number of the Company's common shares than otherwise would be issued following a standard cash or cashless exercise. Specifically, between May 26, 2015 and December 31, 2015, 290,318 Series B Warrants were exercised on an alternate net cashless basis, resulting in the issuance of approximately 5.7 million common shares. The remaining 8,064 Series B Warrants expire on September 12, 2016.
In connection with the March 2015 Offering, the holders of 211,230 of the 219,000 outstanding warrants issued in connection with previous public offerings completed in November 2013 and January 2014 each entered into an amendment agreement that caused such previously issued warrants to expire and terminate in consideration for a cash payment made by us in the aggregate amount of approximately $5.7 million out of the proceeds of the March 2015 Offering.
On November 2, 2015, we announced that the holders (the "Participating Holders") of substantially all of the remaining outstanding Series B Warrants at that time had agreed to exercise all of the Series B Warrants held by them, as promptly as practicable, at a maximum exercise ratio of approximately 33.23 common shares per warrant in accordance with the alternate cashless exercise feature in such Series B Warrants. Following the exercise of Series B Warrants by the Participating Holders in accordance with the terms of the agreements, 8,064 Series B Warrants, with an expiry date of September 12, 2016, remain outstanding, representing approximately 2.7% of the originally issued number of Series B Warrants. A total of $2.9 million in cash was paid to the Participating Holders pursuant to the aforementioned agreements.
On December 14, 2015, we completed an underwritten public offering (the “December 2015 Offering”) of 3.0 million common shares and warrants to acquire 2.1 million common shares with a combined purchase price of $5.55 for one common share together with a warrant to purchase 0.7 of a common share, generating net proceeds of approximately $15.0 million. In addition, the Company granted the underwriter a 45-day option to purchase up to an additional 330,000 common shares and/or warrants to purchase up to an additional 231,000 common shares, to cover over-allotments, if any. Prior to closing, the underwriter exercised its over-allotment option with respect to the warrants to acquire an additional 231,000 common shares, resulting in an issuance of warrants to acquire an aggregate of approximately 2.3 million common shares at closing.
The warrants are exercisable immediately and expire five years following issuance at an exercise price of $7.10 per share. The warrants do not contain any price or other adjustment provision, except for customary adjustment provisions that apply in the event of certain corporate events or transactions that affect all outstanding common shares. The warrants may at any time be exercised on a standard cashless basis in accordance with a customary formula but do not contain an alternate cashless exercise feature contained in our previously issued Series B common shares purchase warrants. The warrants are not listed on any stock exchange.
On December 30, 2015, we announced that we had filed a preliminary short form base shelf prospectus (the “Shelf Prospectus”) with the securities regulatory authorities in each of the provinces of Canada, and a corresponding shelf registration statement on Form F-10 with the SEC under the US/Canada Multijurisdictional Disclosure System. The Shelf Prospectus and corresponding shelf registration statement, which became effective subsequent to year-end on January 13, 2016, will allow us to offer up to $150 million of common shares, preferred shares, debt securities, subscription receipts, warrants or units comprised of one or more of such securities during the 25-month period that the Shelf Prospectus is effective.
Class action lawsuit
The Company and certain of its current and former officers are defendants in a putative class-action lawsuit brought on behalf of shareholders of the Company. The pending lawsuit is the result of the consolidation of several lawsuits, the first of which was filed on November 11, 2014. The plaintiffs filed their amended consolidated complaint on April 10, 2015. The amended complaint alleged violations of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the defendants between August 30, 2011 and November 6, 2014 (the "Class Period"), regarding the safety and efficacy of Macrilen™

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2015 Annual MD&A


and the prospects for the approval of the Company's new drug application for the product by the FDA. The plaintiffs seek to represent a class comprised of purchasers of the Company's common shares during the Class Period and seek unspecified damages, costs and expenses and such other relief as determined by the court.
On September 14, 2015, the Court dismissed the lawsuit, but granted the plaintiffs leave to amend. In dismissing the lawsuit, the court affirmed that the plaintiffs had failed to state a claim. On October 14, 2015, the plaintiffs filed a second amended complaint. We subsequently filed a motion to dismiss, because we believe that the second amended complaint also fails to state a claim. The hearing of the motion to dismiss the Second Amended Complaint occurred on January 19, 2016. On March 2, 2016, the Court issued an order granting our motion to dismiss the complaint in part and denying it in part.  The Court dismissed certain of our current and former officers from the lawsuit.  The Court allowed the claim that we omitted material facts from our public statements during the Class Period to proceed against us and our former CEO who departed in 2013, while dismissing such claims against other current and former officers.  The Court also allowed a claim for “controlling person” liability to proceed against certain current and former officers.  We disagree with the Court's decision and we filed a motion for reconsideration on March 16, 2016.
Restructuring
On October 12, 2015, we announced that our Board of Directors had approved a plan to restructure our finance and accounting operations and to close our Quebec City office (the “Corporate Restructuring”). We transferred all functions performed by the five employees in our Quebec City office to other personnel and we intend to add new finance and accounting personnel, including a new Chief Financial Officer, in our Summerville, South Carolina, office. We estimate that the Corporate Restructuring will be completed by September 2016.


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2015 Annual MD&A




Consolidated Statements of Comprehensive (Loss) Income Information
 
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands, except share and per share data)
 
2015
 
2014
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
 
 
 
 
Sales commission and other
 
41

 

 
297

 

 
96

License fees
 
61

 
11

 
248

 
11

 
6,079

 
 
102

 
11

 
545

 
11

 
6,175

Operating expenses
 
 
 
 
 
 
 
 
 
 
Cost of sales
 

 

 

 

 
51

Research and development costs
 
4,243

 
6,282

 
17,234

 
23,716

 
21,284

General and administrative expenses
 
3,953

 
2,633

 
11,308

 
9,840

 
11,091

Selling expenses
 
1,764

 
2,043

 
6,887

 
3,850

 
1,225

 
 
9,960

 
10,958

 
35,429

 
37,406

 
33,651

Loss from operations
 
(9,858
)
 
(10,947
)
 
(34,884
)
 
(37,395
)
 
(27,476
)
Finance income
 
26

 
15,053

 
305

 
20,319

 
1,748

Finance costs
 
(211
)
 

 
(15,649
)
 

 
(1,512
)
Net finance (costs) income
 
(185
)
 
15,053

 
(15,344
)
 
20,319

 
236

(Loss) income before income taxes
 
(10,043
)
 
4,106

 
(50,228
)
 
(17,076
)
 
(27,240
)
Income tax expense
 

 
(111
)
 

 
(111
)
 

Net (loss) income from continuing operations
 
(10,043
)
 
3,995

 
(50,228
)
 
(17,187
)
 
(27,240
)
Net income from discontinued operations
 
25

 
158

 
85

 
623

 
34,055

Net (loss) income
 
(10,018
)
 
4,153

 
(50,143
)
 
(16,564
)
 
6,815

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
249

 
(677
)
 
1,509

 
(1,158
)
 
1,073

Items that will not be reclassified to profit or loss:
 
 
 
 
 
 
 
 
 
 
Actuarial (loss) gain on defined benefit plans
 
(116
)
 
1,336

 
844

 
(1,833
)
 
2,346

Comprehensive (loss) income
 
(9,885
)
 
4,812

 
(47,790
)
 
(19,555
)
 
10,234

Net (loss) income per share (basic and diluted) from continuing operations
 
(1.46
)
 
6.11

 
(18.17
)
 
(29.12
)
 
(92.41
)
Net income per share (basic and diluted) from discontinued operations
 
0.00

 
0.24

 
0.03

 
1.06

 
115.53

Net (loss) income per share (basic and diluted)
 
(1.46
)
 
6.35

 
(18.14
)
 
(28.06
)
 
23.12

Weighted average number of shares outstanding
 


 
 
 
 
 
 
 
 
Basic
 
6,874,460

 
653,833

 
2,763,603

 
590,247

 
294,765

Diluted
 
7,302,816

 
653,833

 
3,424,336

 
590,247

 
294,765



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2015 Annual MD&A


2015 compared to 2014
Revenues
Revenues recorded during the year ended December 31, 2015 resulted primarily from the amortization of a one-time, non-refundable payment made to us in December 2014 in connection with a master collaboration agreement, a technology transfer and technical assistance agreement and a license agreement that we entered into with Sinopharm A-Think Pharmaceuticals Co., Ltd. ("Sinopharm") related to ZoptrexTM. We deferred this non-refundable payment and we amortize it on a straightline basis over a four-year period. In addition, we started to generate sales commission in connection with our co-promotion efforts related to EstroGel®, pursuant to the co-promotion services agreement entered into with Ascend.
We expect revenues during the year ended December 31, 2016 to be higher than those recorded during the year ended December 31, 2015 due to the recording of expected higher sales commissions associated with our promotional efforts related to EstroGel® and as we begin to generate sales commissions related to Saizen®, provided that we are able to begin to exceed the pre-established baselines outlined in the related co-marketing agreement, as well as sales commissions related to APIFINY®.
Operating Expenses
R&D costs were $4.2 million and $17.2 million for the three-month period and the year ended December 31, 2015, respectively, compared to $6.3 million and $23.7 million for the same periods in 2014.
The decrease for the three-month period ended December 31, 2015, as compared to the same period in 2014, is attributable to lower comparative third-party costs, as described below, lower employee compensation and benefits costs and lower facilities rent and maintenance costs. A substantial portion of this decrease is due to the realization of cost savings in connection with our effort to streamline our R&D activities and to increase our commercial operations and flexibility by reducing our R&D staff, which was started in 2014 (the "Resource Optimization Program"), for which a provision had been recorded in the third quarter of 2014. In addition, the decrease is also due to the weakening, in 2015, of the EUR against the US dollar, which has appreciated quarter-over-quarter on average by approximately 12.0% from the quarter ended December 31, 2014 to the same period in 2015.

The decrease for the year ended December 31, 2015, as compared to the same period in 2014, is attributable to lower comparative employee compensation and benefits costs, facilities rent and maintenance costs as well as other costs. A substantial portion of this decrease is due to the realization of cost savings in connection with our Resource Optimization Program rolled out in the third quarter of 2014, as well as to the weakening, in 2015, of the EUR against the US dollar, which has appreciated on average by approximately 16.5% from the year ended December 31, 2014 to the same period in 2015. The decrease for the year ended December 31, 2015 was partly offset by higher third-party costs, as described below.
The following table summarizes our net R&D costs by nature of expense:
 
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
 
$
 
$
Third-party costs
 
2,899

 
3,967

 
11,891

 
11,356

 
10,049

Employee compensation and benefits
 
905

 
1,231

 
3,699

 
8,430

*
7,864

Facilities rent and maintenance
 
224

 
887

 
940

 
2,160

 
1,758

Other costs**
 
231

 
197

 
727

 
1,901

 
2,130

R&D tax credits and grants
 
(16
)
 

 
(23
)
 
(131
)
 
(517
)
 
 
4,243

 
6,282

 
17,234

 
23,716

 
21,284

 _________________________
* Includes a provision for restructuring in the amount of $2.2 million.
** Includes depreciation, amortization, impairment charges, loss (gain) on disposal of property, plant and equipment and onerous lease provision recognized.



(9)

2015 Annual MD&A


The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the three-month periods ended December 31, 2015 and 2014.
(in thousands, except percentages)
 
Three-month periods ended December 31,
Product Candidate
 
2015
 
2014
 
 
$
 
%
 
$
 
%
Zoptrex™ (zoptarelin doxorubicin)
 
1,488

 
51.3

 
3,609

 
91.0

Macrilen™ (macimorelin)
 
977

 
33.7

 
192

 
4.8

Erk inhibitors
 
71

 
2.5

 
112

 
2.8

LHRH - Disorazol Z
 
73

 
2.5

 
54

 
1.4

Other
 
290

 
10.0

 

 

 
 
2,899

 
100.0

 
3,967

 
100.0

The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the years ended December 31, 2015, 2014 and 2013.
(in thousands, except percentages)
 
Years ended December 31,
Product Candidate
 
2015
 
2014
 
2013
 
 
$
 
%
 
$
 
%
 
$
 
%
Zoptrex™ (zoptarelin doxorubicin)
 
8,635

 
72.6

 
9,668

 
85.1

 
4,934

 
49.1

Macrilen™ (macimorelin)
 
1,555

 
13.1

 
404

 
3.6

 
1,238

 
12.3

Erk inhibitors
 
1,081

 
9.1

 
488

 
4.3

 
1,128

 
11.2

LHRH - Disorazol Z
 
212

 
1.8

 
257

 
2.3

 
659

 
6.6

Perifosine
 
29

 
0.2

 
196

 
1.7

 
1,134

 
11.3

Other
 
379

 
3.2

 
343

 
3.0

 
956

 
9.5

 
 
11,891

 
100.0

 
11,356

 
100.0

 
10,049

 
100.0

As shown above, a substantial portion of the quarter-to-date and year-to-date third-party R&D costs relates to development initiatives associated with ZoptrexTM, and in particular with our pivotal Phase 3 ZoptEC clinical trial initiated in 2013 with Ergomed. Excluding the impact of the foreign exchange rate fluctuations, third-party costs attributable to ZoptrexTM increased slightly during the year ended December 31, 2015, as compared to the same period in 2014, mainly due to a higher comparative number of patients enrolled in the clinical trial, which is now fully enrolled. However, the quarter-over-quarter decrease is explained by the fact that the number of patients in active treatment in the clinical trial was lower in 2015 as compared to the same period in 2014.
During the year ended December 31, 2015, ongoing services provided by Ergomed included the conducting of monitoring visits at various clinical sites, screening and enrollment initiatives, investigation-related management and analysis as well as regulatory and quality assurance support. ZoptEC-related efforts are progressing in accordance with pre-established timelines. As we continue to closely monitor all initiatives supported by Ergomed, we may decide to revise some of the trial's parameters or expand the scope of work performed by Ergomed and, consequently, total estimated costs in connection with the co-development and revenue sharing agreement may be adjusted. To date, our arrangement with Ergomed has been revised following our decision to open additional clinical sites and to perform additional sub-studies, resulting in overall, cumulative cost increases of approximately $2.4 million, as compared to our original expectations. We currently estimate that we will incur approximately $6 million pursuant to our agreement with Ergomed over the next 12 months as we proceed with and complete our ZoptEC trial.
In addition, during the year 2015, we started the new confirmatory Phase 3 clinical trial of Macrilen™, which explains the increase in costs for this product candidate.
Excluding the impact of foreign exchange rate fluctuations, we expect R&D costs for 2016 to increase, as compared to 2015, with the recent initiation of our confirmatory Phase 3 clinical trial for MacrilenTM. Based on currently available information and taking into account our more detailed forecasts for the MacrilenTM trial, and excluding the impact of foreign exchange rate fluctuations, we expect that we will incur overall R&D costs of between $19 million and $20 million for the year ended December 31, 2016.

(10)

2015 Annual MD&A


General and administrative ("G&A") expenses were $4.0 million and $11.3 million for the three-month period and the year ended December 31, 2015, respectively, as compared to $2.6 million and $9.8 million for the same periods in 2014. The increase is mainly attributable to the recording of a provision related to our Corporate Restructuring in the fourth quarter of 2015, as well as to the recording of certain transaction costs associated with the completion of the March 2015 Offering and the December 2015 Offering, discussed above.
During 2016, excluding the impact of foreign exchange rate fluctuations and the recording of transaction costs related to potential financing activities (not currently known or estimable), we expect G&A expenses to be lower as compared to 2015, ranging between $6 million and $7 million, because we do not expect to record any restructuring charges in 2016 as we had in 2015.
Selling expenses were $1.8 million and $6.9 million for the three months and the year ended December 31, 2015, respectively, as compared to $2.0 million and $3.9 million for the same periods in 2014.
The decrease in selling expenses for the three-month period ended December 31, 2015 is explained by the start-up costs related to the deployment of our contracted sales force related to the co-promotion activities, which were launched during the fourth quarter of 2014.
The increase in selling expenses for the year ended December 31, 2015 as compared to the same period in 2014 is attributable to the fact that 2014 was not a full year of sales activity. During the third quarter of 2015, we also expanded the size of our contracted sales force from 19 to 21 sales representatives in order to support our promotional efforts associated with Saizen®. This sales force expense will also cover the recently initiated selling in support of APIFINY®.
During 2016, we expect selling expenses to increase slightly to reach a range of between $7 million and $8 million.
Net finance (costs) income are comprised predominantly of the change in fair value of warrant liability and of gains and losses recorded due to changes in foreign currency exchange rates, as presented below.
 
 
Three-month periods ended December 31,
 
Years ended December 31,
 
 
2015
 
2014
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
 
$
 
$
Finance income
 
 
 
 
 
 
 
 
 
 
Change in fair value of warrant liability
 
3,030

 
14,079

 

 
18,272

 
1,563

Gain associated with the extinguishment of warrant liability
 

 

 
162

 

 

Gains due to changes in foreign currency exchange rates
 

 
924

 

 
1,879

 

Interest income
 
26

 
50

 
143

 
168

 
185

 
 
3,056

 
15,053

 
305

 
20,319

 
1,748

Finance costs
 
 
 
 
 
 
 
 
 
 
Change in fair value of warrant liability
 

 

 
(10,956
)
 

 

Warrant exercise inducement fee *
 
(2,926
)
 

 
(2,926
)
 

 

Losses due to changes in foreign currency exchange rates
 
(315
)
 

 
(1,767
)
 

 
(1,512
)
 
 
(3,241
)
 

 
(15,649
)
 

 
(1,512
)
 
 
(185
)
 
15,053

 
(15,344
)
 
20,319

 
236

 _________________________
*
Recorded in connection with the agreement with the Participating Holders, as discussed above.
The change in fair value of our warrant liability results from the periodic "mark-to-market" revaluation, via the application of the intrinsic valuation and the Black-Scholes option pricing models, of currently outstanding share purchase warrants. The "mark-to-market" warrant valuation has been most notably impacted by the issuance of 3.1 million additional share purchase warrants and

(11)

2015 Annual MD&A


by the closing price of our common shares, which, on the NASDAQ, has fluctuated from $4.00 to $84.20 during the year ended December 31, 2015, from $52.00 to $150.00 for the same period in 2014 and from $103.00 to $323.00 for the same period in 2013.
With specific reference to 2014, we recorded substantial fair value gains on our warrant liability, resulting from the significant reduction in our share price following our announcement, in November, that the FDA had issued a complete response letter ("CRL") in connection with our new drug application ("NDA") for Macrilen™. The lower closing price of our shares following our announcement of the CRL has resulted in a lower Black-Scholes valuation of our outstanding share purchase warrants during the fourth quarter of 2014.
In 2015, the change in fair value of warrant liability was significantly impacted by the issuance of the Series B Warrants. More than 97% of the Series B Warrants were exercised before the end of the year.
Net (loss) income for the three-month period and the year ended December 31, 2015 was ($10.0) million and ($50.1) million, or ($1.46) and ($(18.14) per basic and diluted share, respectively, compared to $4.2 million and ($16.6) million, or $6.35 and ($28.06) per basic and diluted share for the same periods in 2014.
The increase in our net loss from continuing operations for the three-month period and for the year ended December 31, 2015, as compared to the same period in 2014, is due to the higher comparative G&A and selling expenses and net finance costs, partly offset by lower comparative R&D costs, as presented above.
2014 compared to 2013
Revenues
Revenues recorded during the year ended December 31, 2013 resulted predominantly from the non-recurring, accelerated recognition of remaining unamortized deferred revenue associated with an upfront payment received from a licensee following the termination of related R&D activities.
Operating Expenses
R&D costs were $23.7 million for the year ended December 31, 2014, compared to $21.3 million for the same period in 2013.
The increase for the year ended December 31, 2014, as compared to the same period in 2013, is attributable to higher comparative employee compensation and benefits costs, which in turn are mainly due to the recording of R&D restructuring costs. Following the approval of our aforementioned Resource Optimization Program, we recorded a provision for restructuring costs, amounting to approximately $2.5 million, for severance payments, onerous lease provisions and other directly related costs associated with the Resource Optimization Program. This increase was partly offset by lower comparative salaries and short-term employee benefits and share-based compensation costs.
A substantial portion of the increase in 2013-to-2014 third-party R&D costs relates to development initiatives associated with Zoptrex™, and in particular with our Phase 3 ZoptEC trial initiated in 2013 with Ergomed. This increase was partially offset by the lower comparative development costs associated with most of our other product candidates.
General and administrative ("G&A") expenses were $9.8 million for the year ended December 31, 2014, compared to $11.1 million for the same period in 2013.
For the year ended December 31, 2014, the decrease in G&A expenses, as compared to the same period in 2013, is mainly related to recognition in the second quarter of 2013 of non-recurring termination benefits paid to our former Chief Executive Officer and to the recording of related non-cash based compensation costs, partially offset by the recording of restructuring costs related to administrative staff redundancies resulting from the Resource Optimization Program.
Selling Expenses were $3.9 million for the year ended December 31, 2014 compared to $1.2 million for the same period in 2013.
For the year ended December 31, 2014, the increase in selling expenses, as compared to the same period in 2013, mainly relates to the ramping up of our pre-commercialization activities and the deployment of our contracted sales force related to our co-promotion activities.

(12)

2015 Annual MD&A


Net finance income (costs) are comprised predominantly of the change in fair value of warrant liability and of gains and losses recorded due to changes in foreign currency exchange rates.
The change in fair value of our warrant liability results from the periodic "mark-to-market" revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes "mark-to-market" warrant valuation most notably has been impacted by the issuance of 8.8 million additional share purchase warrants and by the closing price of our common shares, which, on the NASDAQ, fluctuated from $52.00 to $150.00 during the year ended December 31, 2014 and from $103.00 to $323.00 for the same period in 2013.
With specific reference to 2014, we recorded substantial fair value gains on our warrant liability, resulting from the significant reduction in our share price following our announcement, in November, that the FDA had issued a CRL in connection with our NDA for Macrilen™. The lower closing price of our shares following our announcement of the CRL has resulted in a lower Black-Scholes valuation of our outstanding share purchase warrants during the fourth quarter of 2014.
Gains or losses due to changes in foreign currency exchange rates are mainly related to the US dollar, which strengthened against the EUR by approximately 12.2%, during the twelve-month period ended December 31, 2014. During the twelve-month period ended December 31, 2013, however, the US dollar weakened against the EUR by approximately 4.5%.
Net loss from continuing operations for the year ended December 31, 2014 was $(17.2) million, or $(29.12) per basic and diluted share, compared to $(27.2) million, or $(92.41) per basic and diluted share for the same period in 2013.
The decrease in net loss from continuing operations for the year ended December 31, 2014, as compared to the same period in 2013, is due largely to higher comparative net finance income, partly offset by lower comparative license fee revenues and by higher comparative net R&D costs and G&A and selling expenses, as presented above.
Discontinued Operations
Following a strategic review of our risks and prospects with respect to the manufacturing of Cetrotide® and related activities (collectively, the "Cetrotide® Business") and, in particular, having taken into account, as discussed below, the previous monetization of the corresponding royalty stream, we decided to transfer all manufacturing rights of Cetrotide® and to discontinue our involvement with the Cetrotide® Business. On April 3, 2013 (the "Cetrotide® Effective Date"), we entered into a transfer and service agreement ("TSA") and concurrent agreements with various partners and licensees with respect to our manufacturing rights for Cetrotide®, marketed for therapeutic use as part of in vitro fertilization programs. The principal effect of these agreements was to transfer, effective October 1, 2013 (the "Cetrotide®Closing Date"), our manufacturing rights for Cetrotide® to Merck Serono in all territories. Also per the TSA, we agreed to provide certain transition services to Merck Serono over a period of 36 months from the Cetrotide® Effective Date in order to assist Merck Serono in managing overall responsibility for the Cetrotide® Business.
Under the TSA, during the period commencing on the Cetrotide® Effective Date and ending on the Cetrotide® Closing Date (the "Cetrotide® Interim Period"), we were obligated to continue to conduct the Cetrotide® Business in the ordinary course in a manner consistent with past practices, subject to certain conditions. Per the TSA, we received a non-refundable, one-time payment of €2.5 million (approximately $3.3 million) in consideration for the transfer of our manufacturing rights referred to above, as well as other payments in exchange for the transfer, also on the Cetrotide® Closing Date, of certain assets, such as inventory and equipment used solely for the manufacture of Cetrotide®. We recognized the non-refundable, one-time payment on the Cetrotide® Closing Date, as we no longer had managerial involvement or effective control over the manufacturing of goods sold through the Cetrotide® Business. We provide the aforementioned transition services to Merck Serono in exchange for a monthly service fee. As a result of the transfer of substantially all of the risks and rewards associated with the Cetrotide® Business on the Cetrotide® Closing Date, the Cetrotide® Business has been classified as a discontinued operation in the consolidated financial statements. As such, relevant amounts in our consolidated statements of comprehensive (loss) income have been retroactively reclassified to reflect the Cetrotide® Business as a discontinued operation.

(13)

2015 Annual MD&A


 
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
 
 
 
 
Sales and royalties
 

 

 

 

 
63,755

License fees and other*
 
59

 
118

 
331

 
1,037

 
4,589

 
 
59

 
118

 
331

 
1,037

 
68,344

Operating expenses
 
 
 
 
 
 
 
 
 
 
Cost of sales
 

 

 

 

 
30,002

Research and development costs
 
2

 
8

 
31

 
25

 
8

General and administrative expenses
 

 

 

 
1

 
15

Selling Expenses
 
32

 
(48
)
 
215

 
388

 
4,264

 
 
34

 
(40
)
 
246

 
414

 
34,289

Net income from discontinued operations
 
25

 
158

 
85

 
623

 
34,055

 _________________________
*
Includes the non-refundable, one-time payment made by Merck Serono in exchange for the manufacturing rights for Cetrotide®and revenues from certain transition services provided pursuant to the aforementioned agreement.
The decrease in sales and royalties from discontinued operations, in cost of sales from discontinued operations and in selling expenses from discontinued operations during the year ended December 31, 2014, as compared to the same period in 2013, reflects the fact that we recorded no sales of Cetrotide® and royalties during the year ended December 31, 2014, as compared to the corresponding period of 2013, given that the transfer of the Cetrotide® Business was effective on October 1, 2013.
Net (loss) income
Net (loss) income for the year ended December 31, 2014 was $(16.6) million or $(28.06) per basic and diluted share compared to $6.8 million, or $23.12 per basic and diluted share, for the same period in 2013.
The decrease in net income for the year ended December 31, 2014, as compared to the same period in 2013, is due largely to higher loss from operations and to lower net income from discontinued operations, partially offset by higher comparative net finance income.


(14)

2015 Annual MD&A


Quarterly Consolidated Results of Operations Information
(in thousands, except for per share data)
 
Three-month periods ended
 
 
December 31, 2015
 
September 30,
2015
 
June 30,
2015
 
March 31, 2015
 
 
$
 
$
 
$
 
$
Revenues
 
102

 
173

 
197

 
73

Loss from operations
 
(9,858
)
 
(7,501
)
 
(7,989
)
 
(9,536
)
Net loss from continuing operations
 
(10,043
)
 
(15,401
)
 
(15,148
)
 
(9,636
)
Net loss
 
(10,018
)
 
(15,290
)
 
(15,099
)
 
(9,736
)
Net loss per share from continuing operations (basic and diluted)*
 
(1.46
)
 
(6.71
)
 
(13.69
)
 
(13.45
)
Net loss per share (basic and diluted)*
 
(1.46
)
 
(6.66
)
 
(13.65
)
 
(13.59
)

(in thousands, except for per share data)
 
Three-month periods ended
 
 
December 31, 2014
 
September 30, 2014
 
June 30,
2014
 
March 31, 2014
 
 
 
 
$
 
$
 
$
Revenues
 
11

 

 

 

Loss from operations
 
(10,947
)
 
(9,843
)
 
(8,410
)
 
(8,195
)
Net income (loss) from continuing operations
 
3,995

 
(11,629
)
 
(5,249
)
 
(4,304
)
Net income (loss)
 
4,153

 
(11,337
)
 
(5,024
)
 
(4,356
)
Net income (loss) per share from continuing operations (basic and diluted)*
 
6.11

 
(19.66
)
 
(9.29
)
 
(7.84
)
Net income (loss) per share (basic and diluted)*
 
6.35

 
(19.16
)
 
(8.89
)
 
(7.93
)
_________________________
*
Net income (loss) per share is based on the weighted average number of shares outstanding during each reporting period, which may differ on a quarter-to-quarter basis. As such, the sum of the quarterly net income (loss) per share amounts may not equal year-to-date net (loss) income per share.
Historical quarterly results of operations and net income (loss) from continuing operations cannot be taken as reflective of recurring revenue or expenditure patterns or of predictable trends, largely given the non-recurring nature of certain components of our historical revenues due most notably to the accelerated recognition of upfront payments and to unpredictable quarterly variations attributable to our net finance income (costs), which in turn are comprised of the impact of the periodic "mark-to-market" revaluation of our warrant liability and of foreign exchange gains and losses. Additionally, our net R&D costs historically have varied on a quarter-over-quarter basis due to the ramping up or winding down of potential product candidate activities, which in turn are dependent upon a number of factors that often do not occur on a linear or predictable basis.
Our selling expenses have increased on a quarter-over-quarter basis due to the ramping up of pre-commercialization activities associated with Macrilen™ (prior to the receipt in November 2014 of the CRL from the FDA) and to the deployment of our contracted sales force and managerial staff related to our co-promotion and other commercial activities.
In addition to the items referred to above, our net income (loss) also has been impacted by net variations attributable to the Cetrotide® Business, which, as discussed above, has been presented on a retrospective basis within discontinued operations.

(15)

2015 Annual MD&A


Consolidated Statement of Financial Position Information
 
 
As at December 31,
(in thousands)
 
2015
 
2014
 
 
$
 
$
Cash and cash equivalents1
 
41,450

 
34,931

Trade and other receivables and other current assets
 
944

 
1,286

Restricted cash equivalents
 
255

 
760

Property, plant and equipment
 
256

 
797

Other non-current assets
 
8,593

 
9,661

Total assets
 
51,498

 
47,435

Payables and other current liabilities2
 
4,770

 
7,304

Current portion of deferred revenues
 
244

 
270

Warrant liability (current and non-current portions)
 
10,891

 
8,225

Non-financial non-current liabilities3
 
13,978

 
17,152

Total liabilities
 
29,883

 
32,951

Shareholders' equity
 
21,615

 
14,484

Total liabilities and shareholders' equity
 
51,498

 
47,435

_________________________
1    Of which approximately $1.5 million was denominated in EUR as of December 31, 2015 ($3.6 million as of December 31, 2014).
2 
Of which approximately $0.6 million is related to a provision for restructuring costs as of December 31, 2015 ($1.5 million as of December 31, 2014).
3    Comprised mainly of employee future benefits, provisions for onerous contracts and non-current portion of deferred revenues.
The increase in cash and cash equivalents as at December 31, 2015, as compared to December 31, 2014, is due to the receipt of aggregate net proceeds of $49.4 million in connection with the March 2015 Offering and the December 2015 Offering, as well as of the proceeds from the disposal of property, plant and equipment and the decrease in restricted cash equivalents, both of which were related to our Resource Optimization Program. This increase was partially offset by the variations in components of our working capital and to net cash used in operating activities, as well as to the effect of exchange rate fluctuations. We also paid $8.6 million in connection with warrant amendment agreements and a warrant exercise inducement fee, as discussed above.
The decrease in trade and other receivables and other current assets as at December 31, 2015, as compared to December 31, 2014, is mainly due to lower accounts receivable related to Canadian sites for our ZoptEC trial.
The decrease in other non-current assets, which consist mainly of goodwill, as at December 31, 2015, as compared to December 31, 2014, is primarily due to the lower comparative exchange rate of the EUR against the US dollar, which weakened from December 31, 2014 to December 31, 2015.
The decrease in payables and other current liabilities as at December 31, 2015, as compared to December 31, 2014, is due to the recording of a provision for restructuring costs related to the Resource Optimization Program in Q3-2014, discussed above.
Our warrant liability increased from December 31, 2014 to December 31, 2015. The increase is due to net fair value revaluation losses of $11.0 million, which were recorded pursuant to our periodic "mark-to-market" revaluation of the underlying outstanding share purchase warrants, as discussed above and by the issuance of 3.1 million additional share purchase warrants in connection with the March and December 2015 Offerings, which initially had increased our warrant liability by $28.7 million. Those increases were partly offset by the derecognition of part of the warrant liability due to early expiry as well as to the exercise of warrants for a total of $37.0 million.
Non-financial non-current liabilities decreased largely as a result of a change in discount rate underlying the calculation of the employee future benefit obligation.

(16)

2015 Annual MD&A


The decrease in shareholders' equity as at December 31, 2015, as compared to December 31, 2014, is mainly attributable to the increase in our deficit due to the recording of net loss, partly offset by the increase in our share capital following the issuance of common shares and warrants discussed above.
Financial Liabilities, Obligations and Commitments
We have certain contractual lease obligation commitments as well as other long-term obligations related to unfunded pension plan benefits and unfunded post-employment benefit plans. The following tables summarize future cash requirements with respect to these obligations.
Expected future minimum lease payments which also include future payments in connection with utility service agreements and future minimum sublease receipts under non-cancellable operating leases (subleases), as well as future payments in connection with service and manufacturing agreements, as at December 31, 2015 are as follows:
(in thousands)
 
Minimum lease payments
 
Minimum sublease receipts
 
Service and manufacturing
 
 
$
 
$
 
$
Less than 1 year
 
1,367

 
(385
)
 
639

1 - 3 years
 
2,394

 
(487
)
 
370

4 - 5 years
 
1,837

 
(23
)
 

More than 5 years
 
286

 

 

Total
 
5,884

 
(895
)
 
1,009

During the third quarter of 2015, our lease agreement in Germany for laboratory, office, and storage space was terminated, and we entered into a new lease agreement for the rental of less space on the same premises as compared to our former arrangement. The new lease expires on April 30, 2021 and is subject to renewal upon notice by us for two additional four-year periods. Under the terms of the arrangement, the minimum lease payment may be increased or decreased in accordance with the fluctuations in the German consumer price index up to 5% on a cumulative basis.
In accordance with the assumptions used in our employee future benefit obligation calculation as at December 31, 2015, undiscounted benefits expected to be paid are as follows:
(in thousands)
 
$
Less than 1 year
 
453

1 – 3 years
 
944

4 – 5 years
 
1,016

More than 5 years
 
17,439

Total
 
19,852


Outstanding Share Data
As at March 29, 2016, we had 9,928,697 common shares issued and outstanding, as well as 275,041 stock options outstanding. Warrants outstanding as at March 29, 2016 represented a total of 2,842,309 equivalent common shares (excluding any exercises of Series B Warrants under the alternate cashless exercise feature of such warrants).
Capital Disclosures
Our objective in managing capital, consisting of shareholders' equity, with cash and cash equivalents and restricted cash equivalents being its primary components, is to ensure sufficient liquidity to fund R&D costs, selling expenses, general and administrative expenses, working capital and capital expenditures.
Over the past several years, we have increasingly raised capital via public equity offerings and drawdowns under various ATM sales programs as our primary source of liquidity.

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2015 Annual MD&A


Our capital management objective remains the same as that in previous periods. The policy on dividends is to retain cash to keep funds available to finance the activities required to advance our product development portfolio and to pursue appropriate commercial opportunities as they may arise. We are not subject to any capital requirements imposed by any regulators or by any other external source.
Liquidity, Cash Flows and Capital Resources
Our operations and capital expenditures have been financed through certain transactions impacting our cash flows from operating activities, public equity offerings, as well as from the drawdowns under various ATM programs.
Based on our assessment, which took into account current cash levels, as well as our strategic plan and corresponding budgets and forecasts, we believe that we have sufficient liquidity and financial resources to fund planned expenditures and other working capital needs for at least, but not limited to, the 12-month period following the statement of financial position date of December 31, 2015.
We may endeavor to secure additional financing, as required, through strategic alliance arrangements or through other activities, as well as via the issuance of new share capital or other securities.
The variations in our cash and cash equivalents by activity are explained below.
(in thousands)
 
Three-month periods ended December 31,
 
Years ended December 31,
 
 
2015
 
2014
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
 
$
 
$
Cash and cash equivalents - Beginning of period
 
38,345

 
41,952

 
34,931

 
43,202

 
39,521

Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Cash used in operating activities from continuing operations
 
(8,419
)
 
(8,676
)
 
(33,929
)
 
(30,787
)
 
(30,131
)
Cash provided by (used in) operating activities from discontinued operations
 
25

 
93

 
85

 
(295
)
 
10,147

 
 
(8,394
)
 
(8,583
)
 
(33,844
)
 
(31,082
)
 
(19,984
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
Net proceeds from issuance of common shares and warrants
 
14,987

 
2,075

 
49,427

 
24,358

 
23,708

Payment pursuant to warrant amendment agreements and Series B Warrant exercise inducement fee
 
(2,926
)
 

 
(8,629
)
 

 

 
 
12,061

 
2,075

 
40,798

 
24,358

 
23,708

 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by investing activities from continuing operations
 
(6
)
 
(4
)
 
913

 
(61
)
 
(85
)
Net cash provided by investing activities from discontinued operations
 

 

 

 

 
113

 
 
(6
)
 
(4
)
 
913

 
(61
)
 
28

 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(556
)
 
(509
)
 
(1,348
)
 
(1,486
)
 
(71
)
Cash and cash equivalents - End of period
 
41,450

 
34,931

 
41,450

 
34,931

 
43,202


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2015 Annual MD&A


Operating Activities
2015 compared to 2014
Cash flows used in operating activities were $8.4 million and $33.8 million for the three-month period and the year ended December 31, 2015, respectively, compared to $8.6 million and $31.1 million for the same periods in 2014. The increase in cash used in operating activities for the year ended December 31, 2015, as compared to the same period in 2014, is mainly due to higher trade accounts payable settlements and higher payments in connection with the aforementioned restructuring programs.
We expect net cash used in operating activities to range from $30 million to $32 million for the year ended December 31, 2016, mainly as we continue to invest in our Zoptrex™ and Macrilen™ Phase 3 programs and related sub-studies and as we generate higher revenues in connection with the promotion of Estrogel®, Saizen® and APIFINY®. This guidance may vary significantly in future periods, most notably as we monitor our progress with regard to our co-promotion activities and in light of ongoing business development initiatives, as discussed further below.
2014 compared to 2013
Cash flows used in operating activities were $31.1 million and $20.0 million for the years ended December 31, 2014 and 2013, respectively. The significant increase in cash used in operating activities for the year ended December 31, 2014 as compared to the same period in 2013 is mainly due to the variations associated with our discontinued operations, following the transfer of the Cetrotide® Business in the fourth quarter of 2013, as discussed above.
Financing Activities
2015 compared to 2014
Cash flows provided by financing activities were $12.1 million and $40.8 million for the three-month period and the year ended December 31, 2015, respectively, compared to $2.1 million and $24.4 million for the same periods in 2014. The increase for the three-month period and year ended December 31, 2015, as compared to the same period in 2014 is mainly due to higher net proceeds received from the issuance of common shares and warrants.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements as at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013 have been prepared in accordance with IFRS as issued by the IASB.
The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, expenses and related disclosures. Judgments, estimates and assumptions are based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which our consolidated financial statements are prepared.
Management reviews, on a regular basis, the Company's accounting policies, assumptions, estimates and judgments in order to ensure that the consolidated financial statements are presented fairly and in accordance with IFRS. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
A summary of those critical accounting estimates and assumptions, as well as critical judgments used in applying accounting policies in the preparation of our consolidated financial statements, can be found in note 3 to our consolidated financial statements as at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013.

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2015 Annual MD&A


Recent Accounting Pronouncements
Not yet adopted
Annual improvements to IFRS (2012-2014) cycle: On September 25, 2014 the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements process. The amendments will apply for annual periods beginning on or after January 1, 2016. Amendments were made to clarify the following in their respective standards:

Changes in method for disposal under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations ("IFRS 5");
Continuing involvement for servicing contracts and offsetting disclosures in condensed interim financial statements under IFRS 7, Financial Instruments: Disclosures (“IFRS 7”);
Discount rate in a regional market sharing the same currency under International Accounting Standard ("IAS") 19, Employee Benefits;
Disclosure of information "elsewhere in the interim financial reports" under IAS 34, Interim Financial Reporting;

We are currently assessing the impact that these amendments may have on our consolidated financial statements.

The final version of IFRS 9, Financial Instruments ("IFRS 9"), was issued by the IASB in July 2014 and will replace IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39"). IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle-based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of an entity's own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity's own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9, which is to be applied retrospectively, is effective for annual periods beginning on or after January 1, 2018 and is available for early adoption. In addition, an entity's own credit risk changes can be applied early in isolation without otherwise changing the accounting for financial instruments. In addition, there are amendments to IFRS 7 which require additional disclosures on transition from IAS 39 to IFRS 9. These amendments are effective upon adoption of IFRS 9. We are currently assessing the impact, if any, that these new standards will have on our consolidated financial statements.
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers ("IFRS 15"). The objective of this new standard is to provide a single, comprehensive revenue recognition framework for all contracts with customers to improve comparability of financial statements of companies globally. This new standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to receive in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. We are currently assessing the impact that this new standard may have on our consolidated financial statements.
In January 2016, the IASB issued IFRS 16, Leases ("IFRS 16"), which supersedes IAS 17, Leases, and the related interpretations on leases: IFRIC 4, Determining Whether an Arrangement Contains a Lease; Standard Interpretations Committee ("SIC") 15, Operating Leases - Incentives; and SIC 27, Evaluating the Substance of Transactions in the Legal Form of a Lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted for companies that also apply IFRS 15. We are currently assessing the impact that this new standard may have on our consolidated financial statements.

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2015 Annual MD&A


Outlook for 2016

Clinical Activities
ZoptrexTM
With the recent DSMB recommendation that the pivotal Phase 3 ZoptEC study in women with advanced, recurrent, or metastatic endometrial cancer continue as planned, we are expanding our commercialization planning for ZoptrexTM. Our commercialization efforts will focus on the development of a scientific platform, the identification of key opinion leaders and the expansion of market research initiatives. We expect to complete the ZoptEC trial during the third quarter of 2016 and, if the results of the trial warrant doing so, to file the NDA for Zoptrex™ in 2017, looking toward commercial launch of the product in 2018, assuming positive Phase 3 results and that our NDA is granted.
Macrilen
We will focus on patient recruitment for the confirmatory Phase 3 trial in AGHD. We also initiated the QT study. We currently estimate that the trials will be completed in Q3 of 2016, with a combined expected expenditure of approximately $5 million over the remaining trial period. This would permit us to submit a NDA by mid-year 2017. If the study is successful in meeting its primary endpoint, we anticipate FDA approval of Macrilen™ by year-end 2017.
Commercial Operations

EstroGel® 

Our promotional efforts in support of EstroGel® continue to demonstrate positive promotional response, and ongoing activities by our contract sales force are expected to continue to result in exceeding pre-established baseline thresholds for unit sales in our US territories. We expect steady incremental growth of EstroGel prescriptions by competitively targeting high-volume transdermal prescribers, expanding our total prescriber base and increasing usage with our current high prescribers. For the remainder of 2016, we anticipate continued year-over-year growth of new and total prescriptions.

Saizen® 

During the third quarter of 2015, we initiated promotional efforts in support of Saizen®. We recognize the value of direct promotion in the category of growth hormone treatments, and our objective is to exceed pre-established baselines on a total nation basis by significantly increasing the share-of-voice in support of this product in territories not previously covered by EMD Serono. There are now 21 representatives actively promoting Saizen® in conjunction with our promotion of EstroGel®. 

APIFINY® 

During the fourth quarter of 2015, we signed a co-marketing agreement with Armune. We already started promotional efforts using our existing contracted sales force, and we expect to commence generating commission revenues in the first quarter of 2016.
Summary of key expectations for revenues, operating expenditures and cash flows
As noted above, we expect to continue to record commissions revenue in connection with our co-promotion agreement for EstroGel® and to begin to record commissions revenues in relation to our promotional services agreement for Saizen® and with our co-marketing agreement with Armune. As for license fee revenues, we will continue to recognize the amortization of deferred revenues related to the agreements we entered into with Sinopharm in 2014, as mentioned above. 
As noted above, our main focus for R&D efforts will be on ZoptrexTM, with the ongoing pivotal Phase 3 ZoptEC clinical trial, as well as on Macrilen™ with the initiated confirmatory Phase 3 clinical trial and the QT study, where we continue to anticipate substantial investment to fund ongoing development initiatives. More specifically, we currently estimate that we will incur approximately $11 million pursuant to our agreements with Ergomed over the next 12 months as we complete our QT study and our confirmatory Phase 3 clinical trial for Macrilen™ and as we proceed with and complete our ZoptEC trial.

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2015 Annual MD&A


As discussed above, excluding the impact of foreign exchange rate fluctuations, we expect that we will incur R&D costs of between $19 million and $20 million for the year ended December 31, 2016.
We expect that selling expenses will slightly increase for the year ended December 31, 2016, as compared to the year ended December 31, 2015, mainly due to our increased promotional activities associated with Saizen® and APIFINY®.
Excluding the impact of foreign exchange rate fluctuations, we expect that our G&A expenses will be lower for the year ended December 31, 2016, as compared to the year ended December 31, 2015, mainly due to the aforementioned recording of transaction costs in connection with our public offerings completed in March and December 2015 and to the recording of a provision for restructuring in connection to the closure of our Quebec City office during the fourth quarter of 2015.
Excluding any foreign exchange impacts, as well as income from new business development initiatives, we expect that our overall use of cash for operations in 2016 will range from $30 million to $32 million as we continue to fund ongoing operating activities and working capital requirements.
The preceding summary with regard to our revenue, operating expenditure and cash flow expectations excludes any consideration of any potential strategic commercial initiatives that may be consummated in connection with our efforts to expand our commercial operations in the US or elsewhere. In addition, these expectations may be materially impacted by our expected growth in sales commission. As such, the guidance presented in this MD&A is subject to revision based on new information that is not currently known or available.
Financial Risk Factors and Other Instruments
Fair value risk
As noted above, the change in our warrant liability, which is measured at fair value through profit or loss, results from the periodic "mark-to-market" revaluation, via the application of the intrinsic valuation and the Black-Scholes option pricing model, of currently outstanding share purchase warrants. These valuation models are impacted, among other inputs, by the market price of our common shares. As a result, the change in fair value of the warrant liability, which is reported as finance income (cost) in our consolidated statements of comprehensive income (loss), has been and may continue in future periods to be materially affected by changes in our common share closing price, which has ranged from $4.00 to $84.20 on the NASDAQ during the year ended December 31, 2015.
If variations in the market price of our common shares of -10% and +10% were to occur, the impact on our net loss for the warrant liability held at December 31, 2015 would be as follows:
(in thousands)
 
Carrying
amount
 
-10%
 
+10%
 
 
$
 
$
 
$
Warrant liability
 
10,891

 
1,059

 
(1,067
)
Total impact on net loss – decrease / (increase)
 
 
 
1,059

 
(1,067
)
Liquidity risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they become due. We manage this risk through the management of our capital structure and by continuously monitoring actual and projected cash flows. Our Board of Directors reviews and approves our operating and capital budgets, as well as any material transactions out of the ordinary course of business. We have adopted an investment policy in respect of the safety and preservation of our capital to ensure our liquidity needs are met. The instruments are selected with regard to the expected timing of expenditures and prevailing interest rates.
We believe that we have sufficient funds to pay our ongoing general and administrative expenses, to pursue our R&D activities and to meet our obligations and existing commitments as they fall due at least through December 31, 2016. In making this assessment, we took into account all available information about the future, which is at least, but not limited to, twelve months from the end of the most recent reporting period. We expect to continue to incur operating losses and may require significant capital to fulfill our future obligations. Our ability to continue future operations beyond December 31, 2016 and to fund our activities is dependent on our ability to secure additional funding, which may be completed in a number of ways, including but not limited to licensing

(22)

2015 Annual MD&A


arrangements, partnerships, share and other security issuances and other financing activities. We will pursue such additional sources of financing when required, and while we have been successful in securing financing in the past, there can be no assurance we will be able to do so in the future or that these sources of funding or initiatives will be available for the Company or that they will be available on terms which are acceptable to us.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. We regularly monitor credit risk exposure and take steps to mitigate the likelihood of this exposure resulting in losses. Our exposure to credit risk currently relates to cash and cash equivalents, to trade and other receivables and to restricted cash equivalents. We hold our available cash in amounts that are readily convertible to known amounts of cash and deposit our cash balances with financial institutions that have an investment grade credit rating of at least "A" or the equivalent. This information is supplied by independent rating agencies where available and, if not available, we use publicly available financial information to ensure that we invest our cash in creditworthy and reputable financial institutions.
As at December 31, 2015, trade accounts receivable for an amount of approximately $122,000 were with two counterparties and no trade accounts receivable were past due or impaired.
Generally, we do not require collateral or other security from customers for trade accounts receivable; however, credit is extended following an evaluation of creditworthiness. In addition, we perform ongoing credit reviews of all our customers and establish an allowance for doubtful accounts when accounts are determined to be uncollectible.
The maximum exposure to credit risk approximates the amount recognized on our condensed interim consolidated statement of financial position.
Related Party Transactions and Off-Balance Sheet Arrangements
In addition to recurring payments made to members of our key management team, during the years ended December 31, 2015 and 2014, we incurred nil and $38,000, respectively, in professional fees for services rendered by one of the members of the Company's Board of Directors in connection with special tasks mandated by our Nominating, Governance and Compensation Committee.
As at December 31, 2015, we did not have any interests in special purpose entities or any other off-balance sheet arrangements.
Risk Factors and Uncertainties
Risks Associated with Operations
Our product candidates are currently at the development stage. It is impossible to ensure that the R&D activities related to these product candidates will result in the creation of profitable operations.
We are currently developing our product candidates based on R&D activities, preclinical testing and clinical trials conducted to date, and we may not be successful in developing or introducing to the market these or any other new products or technology. If we fail to develop and deploy new products successfully and on a timely basis, we may become non-competitive and unable to recover the R&D and other expenses we incur to develop and test new products. Additionally, if we are unable to successfully complete our clinical trial programs, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.
Even if our products are approved for commercialization, they may not be successful in the marketplace. Market acceptance of any of our products will depend on a number of factors including, but not limited to: demonstration of clinical efficacy and safety; the prevalence and severity of any adverse side effects; limitations or warnings contained in the product's approved labeling; availability of alternative treatments for the indications we target; the advantages and disadvantages of our products relative to current or alternative treatments; the availability of acceptable pricing and adequate third-party reimbursement; and the effectiveness of marketing and distribution methods for the products. If our products do not gain market acceptance among physicians, patients, healthcare payers and others in the medical community, who may not accept or utilize our products, our ability to generate significant revenues from our products would be limited and our financial condition could be materially adversely affected. In addition, if we fail to penetrate our core markets and existing geographic markets or successfully expand

(23)

2015 Annual MD&A


our business into new markets, the growth in sales of our products, along with our operating results, could be negatively impacted.
We rely heavily on our proprietary information in developing and manufacturing our product candidates, and our success will depend, in large part, on our ability to protect our competitive position through patents, trade secrets, trademarks and other intellectual property rights. We may not obtain adequate protection for our products through our intellectual property, despite efforts to protect our proprietary rights from unauthorized use or disclosure. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected. In addition to patent protection, we may rely on other protections provided in the United States or elsewhere, such as new chemical entity or new formulation exclusivity, to provide market exclusivity for a product candidate. We cannot provide any assurance that Zoptrex™ or any of our drug candidates will obtain any market exclusivity, and, as a result, the absence of market exclusivity may have an adverse impact on our operating results, financial position and cash flows.
We are currently dependent on certain strategic relationships with third parties and may enter into future collaborations for the research and development of our product candidates. Our arrangements with these third parties may not provide us with the benefits we expect and may expose us to a number of risks. We are dependent on, and rely upon, third parties to perform various functions related to our business, including, but not limited to, the research and development of some of our product candidates. Our reliance on these relationships poses a number of risks. We may not realize the contemplated benefits of such agreements nor can we be certain that any of these parties will fulfill their obligations in a manner which maximizes our revenue. These arrangements may also require us to transfer certain material rights or issue our equity, voting or other securities to collaborators, licensees and others. Any license or sublicense of our commercial rights may reduce our product revenue.
We expect to rely on third parties to manufacture and supply marketed products. We also have or may have certain supply obligations vis-à-vis our existing and potential licensees, who are or will be responsible for the marketing of the products. To be successful, our products have to be manufactured in commercial quantities in compliance with quality controls and regulatory requirements. Even though it is our objective to minimize such risk by introducing alternative suppliers to ensure a constant supply at all times, we cannot guarantee that we will not experience supply shortfalls and, in such event, we may not be able to perform our obligations under contracts with our licensees.
We have incurred, and expect to continue to incur, substantial expenses in our efforts to develop and market products. Consequently, we have incurred operating losses historically and in each of the last several years, and our operating losses have adversely impacted, and will continue to adversely impact, our working capital, total assets, operating cash flows and shareholders' equity. We do not expect to reach operating profitability in the immediate future, and our operating expenses are likely to continue to represent a significant component of our overall cost profile as we continue our R&D and clinical study programs, seek regulatory approval for our product candidates and carry out commercial activities. Even if we succeed in developing, acquiring or in-licensing new commercial products, we could incur additional operating losses for at least the next several years. If we do not ultimately generate sufficient revenue from commercialized products and achieve or maintain operating profitability, an investment in our company could result in a significant or total loss.
In connection with our strategy to further transform the Company into a commercially operating specialty biopharmaceutical organization, we may enter into commercial arrangements with third parties, including but not limited to co-promotion, marketing, acquisition or in-licensing agreements, in efforts to establish and expand our commercial revenue base. We can provide no assurance that we will be able to identify potential product candidates or strategic commercial partners or, if we identify such product candidates or partners, that any related commercial arrangements will be consummated on terms that are favorable to us. To the extent that we are successful in entering into any strategic commercial arrangements or acquisition or in-licensing agreements with third parties, we cannot provide any assurance that any resulting initiatives or activities will be successful. To the extent that any related investments in such arrangements do not yield the expected benefits, our business, financial condition and results of operations may be materially adversely affected.
Future acquisitions or in-licensed products may not be successfully integrated. The failure to successfully integrate the personnel and operations of businesses that we may acquire or of products that we may in-license in the future with our existing operations, business and products could have a material adverse effect on our operations and results.

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2015 Annual MD&A


Risks Related to Our Financial Condition, Capital Requirements and Going Concern
We will require significant additional financing, and we may not have access to sufficient capital. We may require additional capital to pursue planned clinical trials, regulatory approvals, as well as further R&D and marketing efforts for our product candidates and potential products. We may attempt to raise additional funds through public or private financings, collaborations with other pharmaceutical companies or from other sources. Additional funding may not be available on terms which are acceptable to us. If adequate funding is not available to us on reasonable terms, we may need to delay, reduce or eliminate one or more of our product development programs or obtain funds on terms less favorable than we would otherwise accept. To the extent that additional capital is raised through the sale of equity securities or securities convertible into or exchangeable or exercisable for equity securities, the issuance of those securities could result in dilution to our shareholders. Moreover, the incurrence of debt financing or the issuance of dividend-paying preferred shares could result in a substantial portion of our future cash flows, if any, being dedicated to the payment of principal and interest on such indebtedness or the payment of dividends on such preferred shares and could impose restrictions on our operations and on our ability to make certain expenditures and/or incur additional indebtedness. This could render us more vulnerable to competitive pressures and economic downturns.
Risks Associated with Regulatory Matters
We will only receive regulatory approval for a product candidate if we can demonstrate in carefully designed and conducted clinical trials that the product candidate is both safe and effective. None of our current product candidates have to date received regulatory approval for their intended commercial sale. In general, significant R&D and clinical studies are required to demonstrate the safety and efficacy of our product candidates before we can submit regulatory applications. Though we may engage a contract research organization with experience in conducting regulatory trials, errors in the conduct, monitoring and/or auditing could invalidate the results from a regulatory perspective. Even if a product candidate is approved by the FDA, Health Canada's Therapeutic Products Directorate or any other regulatory authority, we may not obtain approval for an indication whose market is large enough to recover our investment in that product candidate. In addition, there can be no assurance that we will ever obtain all or any required regulatory approvals for any of our product candidates. Further, even if we receive marketing approval for our product candidates, such product approvals could be subject to restrictions or withdrawals. Regulatory requirements are subject to change.
We have limited experience in filing an NDA, or similar application for approval in the US or in any country for our current product candidates, which may result in a delay in, or the rejection of, our filing of an NDA or similar application. During the drug development process, regulatory agencies will typically ask questions of drug sponsors. While we endeavor to answer all such questions in a timely fashion, some questions may not be answered in time to prevent the delay of acceptance of an NDA or the rejection of the NDA.
Risks Related to Our Organizational Structure and Key Personnel
Aeterna Zentaris Inc. is a holding company, and a substantial portion of our non-cash assets is the share capital of our subsidiaries. Because Aeterna Zentaris Inc. is a holding company, our obligations to our creditors are structurally subordinated to all existing and future liabilities of our subsidiaries. Our rights and the rights of our creditors to participate in any distribution of the assets of any subsidiary in the event that such a subsidiary were to be liquidated or reorganized or in the event of any bankruptcy or insolvency proceeding relating to or involving such a subsidiary, and therefore the rights of the holders of our shares to participate in those assets, are subject to the prior claims of such subsidiary's creditors. To the extent that we may be a creditor with recognized claims against any such subsidiary, our claims would still be subject to the prior claims of our subsidiary's creditors to the extent that they are secured or senior to those held by us. Accordingly, in the event of any foreclosure, dissolution, winding-up, liquidation or reorganization, or a bankruptcy or insolvency proceeding relating to us or our property, or any subsidiary, there can be no assurance as to the value, if any, that would be available to holders of our shares.

(25)

2015 Annual MD&A


We are subject to intense competition for our skilled personnel, and the loss of key personnel or the inability to attract additional personnel could impair our ability to conduct our operations. We are highly dependent on our management and our clinical, regulatory and scientific staff, the loss of whose services might adversely impact our ability to achieve our objectives. Recruiting and retaining qualified management and clinical, scientific and regulatory personnel is critical to our success. Reductions in our staffing levels have eliminated redundancies in key capabilities and skill sets among our full-time staff and required us to rely more heavily on outside consultants and third parties. The competition for qualified personnel in the biopharmaceutical field is intense, and if we are not able to continue to attract and retain qualified personnel and/or maintain positive relationships with our outside consultants, we may not be able to achieve our strategic and operational objectives.
Risks Related to Our Listing on the NASDAQ and the TSX
There can be no assurance that our common shares will remain listed on the NASDAQ. If we fail to meet any of the NASDAQ's continued listing requirements, our common shares may be delisted. Any delisting of our common shares may adversely affect a shareholder's ability to dispose, or obtain quotations as to the market value, of such shares.
The market price of our common shares is subject to potentially significant fluctuations due to numerous developments directly affecting our business and by developments out of our control or unrelated to us. The stock market generally, and the biopharmaceutical sector in particular, are vulnerable to abrupt changes in investor sentiment. Prices of shares and trading volume of companies in the biopharmaceutical industry can swing dramatically in ways unrelated to, or that bear a disproportionate relationship to, operating performance. Our share price and trading volume may fluctuate based on a number of factors including, but not limited to: clinical and regulatory developments regarding our product candidates; delays in our anticipated development or commercialization timelines; developments regarding current or future third-party collaborators; other announcements by us regarding technological, product development or other matters; arrivals or departures of key personnel; governmental or regulatory action affecting our product candidates and our competitors' products in the US, Canada and other countries; developments or disputes concerning patent or proprietary rights; actual or anticipated fluctuations in our revenues or expenses; general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; and economic conditions in the US, Canada or abroad.
Our listing on both the NASDAQ and the TSX may increase price volatility due to various factors, including different ability to buy or sell our common shares, different market conditions in different capital markets and different trading volumes. In addition, low trading volume may increase the price volatility of our common shares. A thin trading market could cause the price of our common shares to fluctuate significantly more than the stock market as a whole.
Risk Associated with Class Action Lawsuit
The Company and certain of its current and former officers are defendants in a purported class-action lawsuit pending in the United States District Court for the District of New Jersey, brought on behalf of stockholders of the Company.
The lawsuit, which was filed on November 11, 2014, alleges violations of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the defendants between April 2, 2012 and November 6, 2014, or the Class Period, regarding the safety and efficacy of Macrilen™, a product that the we developed for use in the diagnosis of adult growth hormone deficiency, and the prospects for the approval of our new drug application for the product by the FDA. The plaintiffs seek to represent a class comprised of purchasers of our common shares during the Class Period and seek damages, costs and expenses and such other relief as determined by the court.
On September 14, 2015, the Court dismissed the lawsuit, but granted the plaintiffs leave to amend. In dismissing the lawsuit, the Court stated that "taking the complaint as a whole, plaintiffs have failed to state a claim" under the Private Securities Litigation Reform Act of 1995 or Rule 9 of the Federal Rules of Civil Procedure. On October 14, 2015, the plaintiffs filed a Second Amended Complaint against the Company. The Company filed a motion to dismiss the Second Amended Complaint on November 11, 2015, because management believes that the Second Amended Complaint also fails to state a claim. The hearing of the motion to dismiss the Second Amended Complaint occurred on January 19, 2016. On March 2, 2016, the Court issued an order granting our motion to dismiss the complaint in part and denying it in part.  The Court dismissed certain of our current and former officers from the lawsuit.  The Court allowed the claim that we omitted material facts from our public statements during the Class Period to proceed against us and our former CEO who departed in 2013, while dismissing such claims against other current and former officers.  The Court also allowed a claim for “controlling person” liability to proceed

(26)

2015 Annual MD&A


against certain current and former officers.  We disagree with the Court's decision and we filed a motion for reconsideration on March 16, 2016.
Our directors' and officers' insurance policies ("D&O Insurance") provide for reimbursement of costs and expenses incurred in connection with this lawsuit, including legal and professional fees, as well as potential damages awarded, if any, subject to certain policy restrictions, limits and deductibles. We believe that the D&O Insurance covers the lawsuit; however, the insurers have reserved their rights to raise all of the rights, entitlements and defenses available to them under the D&O Insurance. If the D&O Insurance does cover the lawsuit, we will be required to pay legal and professional fees, as well as potential damages awarded in an amount equal to a substantial self-insured retention. Legal and professional fees are expensed as incurred and no reserve is established for them.
While we believe that we have meritorious defenses and intend to defend this lawsuit vigorously, we cannot predict the outcome. Accordingly, we have not recorded any liability related to the lawsuit. No assurance can be given with respect to the ultimate outcome of such proceedings, and the amount of any damages awarded in such lawsuit could be substantial.
A more comprehensive list of the risks and uncertainties affecting us can be found in our most recent Annual Report on Form 20-F filed with the relevant Canadian securities regulatory authorities in lieu of an annual information form at www.sedar.com and with the SEC at www.sec.gov, and investors are urged to consult such risk factors.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and the acting principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as at December 31, 2015. Based on that evaluation, the Chief Executive Officer and acting principal financial officer have concluded that these disclosure controls and procedures were effective as at December 31, 2015.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS as issued by the IASB.
Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Aeterna Zentaris; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Company management; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework: 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as at December 31, 2015.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting during the year ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, including conditions that are remote.

(27)
Exhibit 99.3




Aeterna Zentaris Inc.

Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended
December 31, 2015, 2014 and 2013
(presented in thousands of US dollars)

































Aeterna Zentaris Inc.
Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013




(2)



Independent Auditor's Report

To the Shareholders of
Aeterna Zentaris Inc.


We have audited the accompanying consolidated financial statements of Aeterna Zentaris Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2015 and December 31, 2014 and the consolidated statements of changes in shareholders' equity, comprehensive (loss) income and cash flows for each of the three years in the period ended December 31, 2015, 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 also require that we comply with ethical requirements.

An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment 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 principles and 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 Aeterna Zentaris Inc. and its subsidiaries as at December 31, 2015 and December 31, 2014 and their financial performance and their cash flows for each of the three years in the period ended December 31, 2015 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.



Quebec, Quebec, Canada
March 29, 2016



1 CPA auditor, CA, public accountancy permit No. A121191

(3)


Aeterna Zentaris Inc.
Consolidated Statements of Financial Position
(in thousands of US dollars)

 
 
December 31, 2015
 
December 31, 2014
 
 
$
 
$
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents (note 7)
 
41,450

 
34,931

Trade and other receivables (note 8)
 
598

 
867

Prepaid expenses and other current assets
 
346

 
419

 
 
42,394

 
36,217

Restricted cash equivalents (note 9)
 
255

 
760

Property, plant and equipment (note 10)
 
256

 
797

Identifiable intangible assets (note 11)
 
237

 
352

Other non-current assets
 
520

 
622

Goodwill (note 12)
 
7,836

 
8,687

 
 
51,498

 
47,435

LIABILITIES
 
 
 
 
Current liabilities
 
 
 
 
Payables and accrued liabilities (note 13)
 
4,172

 
5,799

Provision for restructuring costs (note 14)
 
598

 
1,505

Current portion of deferred revenues (note 5)
 
244

 
270

Current portion of warrant liability (note 15)
 
1,411

 

 
 
6,425

 
7,574

Deferred revenues (note 5)
 
487

 
809

Warrant liability (note 15)
 
9,480

 
8,225

Employee future benefits (note 19)
 
12,656

 
15,053

Provisions and other non-current liabilities (note 16)
 
835

 
1,290

 
 
29,883

 
32,951

SHAREHOLDERS' EQUITY
 
 
 
 
Share capital (note 17)
 
204,596

 
150,544

Other capital
 
87,508

 
86,639

Deficit
 
(271,621
)
 
(222,322
)
Accumulated other comprehensive income (loss)
 
1,132

 
(377
)
 
 
21,615

 
14,484

 
 
51,498

 
47,435

Commitments and contingencies (note 25)
Subsequent event (note 28)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors

(4)


Aeterna Zentaris Inc.
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2015, 2014 and 2013
(in thousands of US dollars, except share data)

 
 
Common shares (number of)1, 2
 
Share capital
 
Pre-funded warrants
 
Other capital
 
Deficit
 
Accumulated other comprehensive income (loss)
 
Total
 
 
 
 
$
 
$
 
$
 
$
 
$
 
$
Balance - January 1, 2015
 
655,091

 
150,544

 

 
86,639

 
(222,322
)
 
(377
)
 
14,484

Net loss
 

 

 

 

 
(50,143
)
 

 
(50,143
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 

Foreign currency translation adjustments
 

 

 

 

 

 
1,509

 
1,509

Actuarial gain on defined benefit plans (note 19)
 

 

 

 

 
844

 

 
844

Comprehensive loss
 

 

 

 

 
(49,299
)
 
1,509

 
(47,790
)
Share issuances in connection with public offerings (note 17)
 
3,250,481

 
14,322

 

 

 

 

 
14,322

Pre-funded warrant issuances in connection with a public offering (note 17)
 

 

 
8,653

 

 

 

 
8,653

Share issuances pursuant to the exercise of pre-funded warrants (note 17)
 
346,294

 
8,653

 
(8,653
)
 

 

 

 

Share issuances pursuant to the exercise of warrants (other than pre-funded warrants) (notes 15 and 17)
 
5,676,831

 
31,077

 

 

 

 

 
31,077

Share-based compensation costs
 

 

 

 
869

 

 

 
869

Balance - December 31, 2015
 
9,928,697

 
204,596

 

 
87,508

 
(271,621
)
 
1,132

 
21,615

 
 
Common shares (number of)1, 2
 
Share capital
 
Other capital
 
Deficit
 
Accumulated other comprehensive (loss) income
 
Total
 
 
 
 
$
 
$
 
$
 
$
 
$
Balance - January 1, 2014
 
453,120

 
134,101

 
86,107

 
(203,925
)
 
781

 
17,064

Net loss
 

 

 

 
(16,564
)
 

 
(16,564
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 

 

 

 

 
(1,158
)
 
(1,158
)
Actuarial loss on defined benefit plans (note 19)
 

 

 

 
(1,833
)
 

 
(1,833
)
Comprehensive loss
 

 

 

 
(18,397
)
 
(1,158
)
 
(19,555
)
Share issuances in connection with a public offering (note 17)
 
110,000

 
4,340

 

 

 

 
4,340

Share issuances in connection with "At-the-Market" drawdowns (note 17)
 
91,971

 
12,103

 

 

 

 
12,103

Share-based compensation costs
 
 
 

 
532

 

 

 
532

Balance - December 31, 2014
 
655,091

 
150,544

 
86,639

 
(222,322
)
 
(377
)
 
14,484

_________________________
1    Issued and paid in full.
2 
Adjusted to reflect the November 17, 2015 100-to-1 Share Consolidation (see note 1 – Summary of business, liquidity risk, reporting entity, share consolidation and basis of preparation; and note 17 – Share capital).
The accompanying notes are an integral part of these consolidated financial statements.

(5)


Aeterna Zentaris Inc.
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2015, 2014 and 2013
(in thousands of US dollars, except share data)

 
 
Common shares (number of)1, 2
 
Share capital
 
Other capital
 
Deficit
 
Accumulated other comprehensive income (loss)
 
Total
 
 
 
 
$
 
$
 
$
 
$
 
$
Balance - January 1, 2013
 
253,293

 
122,791

 
83,892

 
(213,086
)
 
(292
)
 
(6,695
)
Net income
 

 

 

 
6,815

 

 
6,815

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 

 

 

 

 
1,073

 
1,073

Actuarial gain on defined benefit plans (note 19)
 

 

 

 
2,346

 

 
2,346

Comprehensive income
 

 

 

 
9,161

 
1,073

 
10,234

Share issuances in connection with registered direct and public offerings
 
183,000

 
8,573

 

 

 

 
8,573

Share issuances in connection with "At-the-Market" drawdowns
 
16,827

 
2,737

 

 

 

 
2,737

Share-based compensation costs
 

 

 
2,215

 

 

 
2,215

Balance - December 31, 2013
 
453,120

 
134,101

 
86,107

 
(203,925
)
 
781

 
17,064

_________________________
1 
Issued and paid in full.
2 
Adjusted to reflect the November 17, 2015 100-to-1 Share Consolidation (see note 1 – Summary of business, liquidity risk, reporting entity, share consolidation and basis of preparations; and note 17 – Share capital).















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

(6)


Aeterna Zentaris Inc.
Consolidated Statements of Comprehensive (Loss) Income
For the years ended December 31, 2015, 2014 and 2013

(in thousands of US dollars, except share and per share data)

 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
Sales commission and other
 
297

 

 
96

License fees (note 5)
 
248

 
11

 
6,079

 
 
545

 
11

 
6,175

Operating expenses (note 18)
 
 
 
 
 
 
Cost of sales
 

 

 
51

Research and development costs
 
17,234

 
23,716

 
21,284

General and administrative expenses
 
11,308

 
9,840

 
11,091

Selling expenses
 
6,887

 
3,850

 
1,225

 
 
35,429

 
37,406

 
33,651

Loss from operations
 
(34,884
)
 
(37,395
)
 
(27,476
)
 
 
 
 
 
 
 
Finance income (note 20)
 
305

 
20,319

 
1,748

Finance costs (note 20)
 
(15,649
)
 

 
(1,512
)
Net finance (costs) income
 
(15,344
)
 
20,319

 
236

Loss before income taxes
 
(50,228
)
 
(17,076
)
 
(27,240
)
Income tax expense (note 22)
 

 
(111
)
 

Net loss from continuing operations
 
(50,228
)
 
(17,187
)
 
(27,240
)
Net income from discontinued operations (note 6)
 
85

 
623

 
34,055

Net (loss) income
 
(50,143
)
 
(16,564
)
 
6,815

Other comprehensive (loss) income:
 
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss:
 
 
 
 
 
 
Foreign currency translation adjustments
 
1,509

 
(1,158
)
 
1,073

Items that will not be reclassified to profit or loss:
 
 
 
 
 
 
Actuarial gain (loss) on defined benefit plans (note 19)
 
844

 
(1,833
)
 
2,346

Comprehensive (loss) income
 
(47,790
)
 
(19,555
)
 
10,234

Net loss per share (basic and diluted) from continuing operations (note 26)1
 
(18.17
)
 
(29.12
)
 
(92.41
)
Net income per share (basic and diluted) from discontinued operations (notes 6 and 26)1
 
0.03

 
1.06

 
115.53

Net (loss) income per share (basic and diluted) (note 26)1
 
(18.14
)
 
(28.06
)
 
23.12

Weighted average number of shares outstanding
(notes 17 and 26):
1
 
 
 
 
 
 
Basic
 
2,763,603

 
590,247

 
294,765

Diluted
 
3,424,336

 
590,247

 
294,765

1 
Adjusted to reflect the November 17, 2015 100-to-1 Share Consolidation (see note 1 – Summary of business, liquidity risk, reporting entity, share consolidation and basis of preparation; and note 17 – Share capital).

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

(7)


Aeterna Zentaris Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2015, 2014 and 2013
(in thousands of US dollars)

 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Cash flows from operating activities
 
 
 
 
 
 
Net loss from continuing operations
 
(50,228
)
 
(17,187
)
 
(27,240
)
Items not affecting cash and cash equivalents:
 
 
 
 
 
 
Change in fair value of warrant liability (note 15)
 
10,956

 
(18,272
)
 
(1,563
)
Provision for restructuring costs (note 14)
 
932

 
2,489

 

Depreciation, amortization and impairment (notes 10 and 11)
 
341

 
878

 
949

Share-based compensation costs (note 17)
 
919

 
497

 
2,215

Employee future benefits (note 19)
 
351

 
605

 
470

Amortization of deferred revenues (note 5)
 
(248
)
 

 
(6,046
)
Foreign exchange loss (gain) on items denominated in foreign currencies
 
1,581

 
(1,164
)
 
1,078

Gain on disposal of property, plant and equipment
 
(264
)
 
(66
)
 

Amortization of prepaid expenses and other non-cash items
 
154

 
2,640

 
6,831

Gain associated with the extinguishment of warrant liability (note 17)
 
(162
)
 

 

Transaction costs allocated to warrants issued (note 17)
 
2,208

 
666

 
1,165

Series B Warrant exercise inducement fee (note 15)
 
2,926

 

 

Changes in operating assets and liabilities (note 21)
 
(3,395
)
 
(1,873
)
 
(7,990
)
Net cash provided by (used in) operating activities of discontinued operations (note 6)
 
85

 
(295
)
 
10,147

Net cash used in operating activities
 
(33,844
)
 
(31,082
)
 
(19,984
)
Cash flows from financing activities
 
 
 
 
 
 
Proceeds from issuances of common shares and warrants (including pre-funded warrants), net of cash transaction costs of $4,223 in 2015, $1,348 in 2014 and $2,119 in 2013 (note 17)
 
49,427

 
24,358

 
23,708

Series B Warrrant exercise inducement fee (note 17)
 
(2,926
)
 

 

Payment pursuant to warrant amendment agreements (note 15)
 
(5,703
)
 

 

Net cash provided by financing activities
 
40,798

 
24,358

 
23,708

Cash flows from investing activities
 
 
 
 
 
 
Purchase of property, plant and equipment (note 10)
 
(26
)
 
(127
)
 
(85
)
Disposals of property, plant and equipment (note 10)
 
505

 
66

 

Decrease in restricted cash equivalents
 
434

 

 

Net cash provided by investing activities of discontinued operations
 

 

 
113

Net cash provided by (used in) investing activities
 
913

 
(61
)
 
28

Effect of exchange rate changes on cash and cash equivalents
 
(1,348
)
 
(1,486
)
 
(71
)
Net change in cash and cash equivalents
 
6,519

 
(8,271
)
 
3,681

Cash and cash equivalents – Beginning of the year
 
34,931

 
43,202

 
39,521

Cash and cash equivalents – End of the year
 
41,450

 
34,931

 
43,202

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

(8)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)


1
Summary of business, liquidity risk, reporting entity, share consolidation and basis of preparation
Summary of business
Aeterna Zentaris Inc. (the "Company") is a specialty biopharmaceutical company engaged in developing and commercializing novel treatments in oncology, endocrinology and women's health.
Liquidity risk
The Company has a history of operating losses, due largely to significant research and development ("R&D") investment, as well as to the incurrence of substantial selling expenses and general and administrative expenses ("G&A"). The Company has financed its operations more recently through different sources, including the issuance of common shares and warrants and the conclusion of strategic alliances with licensee partners and other collaborators. The Company expects to continue to incur operating expenses and may require significant capital to fulfill its future obligations in absence of sufficient corresponding revenues. See note 23 – Capital disclosures and note 24(b) – Financial instruments and financial risk management – Liquidity risk.
Reporting entity
The accompanying consolidated financial statements include the accounts of Aeterna Zentaris Inc., an entity incorporated under the Canada Business Corporations Act, and its wholly owned subsidiaries (collectively referred to as the "Group"). Aeterna Zentaris Inc. is the ultimate parent company of the Group.
The Company currently has three wholly owned direct and indirect subsidiaries, Aeterna Zentaris GmbH ("AEZS Germany"), based in Frankfurt, Germany, Zentaris IVF GmbH, a wholly owned subsidiary of AEZS Germany, based in Frankfurt, Germany, and Aeterna Zentaris, Inc., an entity incorporated in the state of Delaware and with offices in Summerville, South Carolina, in the United States.
The registered office of the Company is located at 1 Place Ville Marie, Suite 2500, Montreal, Quebec H3B 1R1, Canada.
The Company's common shares are listed both on the Toronto Stock Exchange (the "TSX") and on the NASDAQ Capital Market (the "NASDAQ").
Share consolidation (reverse stock split)
On November 17, 2015, the Company effected a consolidation of its issued and outstanding common shares on a 100-to-1 basis (the "Share Consolidation"). The Share Consolidation affected all shareholders, option holders and warrant holders uniformly and thus did not materially affect any security holder's percentage of ownership interest. All references in these consolidated financial statements to common shares, options and share purchase warrants have been retroactively adjusted to reflect the Share Consolidation.
Basis of preparation
(a)
Statement of compliance
The consolidated financial statements as at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013 have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
These consolidated financial statements were approved by the Company's Board of Directors on March 29, 2016.
The accompanying consolidated financial statements were prepared on a going concern basis, under the historical cost convention, except for the warrant liability, which is measured at fair value.
The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates and the exercise of management's judgment in applying the Company's accounting policies. Areas involving a high

(9)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

degree of judgment or complexity and areas where assumptions and estimates are significant to the Company's consolidated financial statements are discussed in note 3 – Critical accounting estimates and judgments.
(b)
Principles of consolidation
These consolidated financial statements include any entity in which the Company directly or indirectly holds more than 50% of the voting rights or over which the Company exercises control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. An entity is included in the consolidation from the date that control is transferred to the Company, while any entities that are sold are excluded from the consolidation from the date that control ceases. All inter-company balances and transactions are eliminated on consolidation.
(c)
Foreign currency
Items included in the financial statements of the Group's entities are measured using the currency of the primary economic environment in which the entities operate (the "functional currency"). On January 1, 2015, the Company and its US subsidiary, Aeterna Zentaris, Inc., changed their functional currency from the Euro ("EUR") to the US dollar, given that changes to underlying transactions, events and conditions indicated that the US dollar more appropriately reflects the primary economic environment in which these entities operate. This change in functional currency was accounted for prospectively. The functional currency of the German subsidiaries remains the EUR.
Assets and liabilities of the German subsidiaries are translated from EUR balances at the period-end exchange rates, and the results of operations are translated from EUR amounts at average rates of exchange for the period. The resulting translation adjustments are included in accumulated other comprehensive (loss) income within shareholders' equity.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the underlying transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities not denominated in the functional currency are recognized in the consolidated statement of comprehensive (loss) income.
Foreign exchange gains and losses that relate to cash and cash equivalents are presented within finance income or finance costs in the consolidated statement of comprehensive (loss) income. All other foreign exchange gains and losses are presented in the consolidated statement of comprehensive (loss) income within operating expenses.
(d)
Reclassification
In light of the increased level of commercial initiatives, management determined that in order to appropriately reflect the current nature of the Company's operations, the former consolidated statement of comprehensive loss line item "Selling, general and administrative expenses" should be disaggregated into two separate line items: "General and administrative expenses" and "Selling expenses". Comparative amounts have been disaggregated consistently.
2
Summary of significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements and have been applied consistently by all Group entities.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash on hand and balances with banks, as well as short-term interest-bearing deposits, such as money market accounts, that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value, with a maturity of three months or less from the date of acquisition.
Restricted cash equivalents
Restricted cash equivalents are comprised of a bank deposit, related to a guarantee for a long-term operating lease obligation, that cannot be used for current purposes.

(10)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Property, plant and equipment and depreciation
Items of property, plant and equipment are recorded at cost, net of related government grants and accumulated depreciation and impairment charges. Depreciation is calculated using the following methods, annual rates and period:
 
 
Methods
 
Annual rates and period
Equipment
 
Declining balance and straight-line
 
20%
Furniture and fixtures
 
Declining balance and straight-line
 
10% and 20%
Computer equipment
 
Straight-line
 
25% and 331/3%
Leasehold improvements
 
Straight-line
 
Remaining lease term
Depreciation expense, which is recorded in the consolidated statement of comprehensive (loss) income, is allocated to the appropriate functional expense categories to which the underlying items of property, plant and equipment relate.
Identifiable intangible assets and amortization
Identifiable intangible assets with finite useful lives consist of in-process R&D acquired in business combinations, patents and trademarks. In-process R&D acquired in business combinations is recognized at fair value at the acquisition date. Patents and trademarks are comprised of costs, including professional fees incurred in connection with the filing of patents and the registration of trademarks for product marketing and manufacturing purposes, net of related government grants, impairment losses, where applicable, and accumulated amortization. Identifiable intangible assets with finite useful lives are amortized, from the time at which the assets are available for use, on a straight-line basis over their estimated useful lives of eight to fifteen years for in-process R&D and patents and ten years for trademarks. Amortization expense, which is recorded in the consolidated statement of comprehensive (loss) income, is allocated to the appropriate functional expense categories to which the underlying identifiable intangible assets relate.
Goodwill
Goodwill represents the excess of the purchase price over the fair values of the net assets of entities acquired at their respective dates of acquisition. Goodwill is carried at cost less accumulated impairment losses. Goodwill is allocated to each cash-generating unit ("CGU") or group of CGUs that are expected to benefit from the related business combination.
Impairment of assets
Items of property, plant and equipment and identifiable intangible assets with finite lives subject to depreciation or amortization, respectively, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Management is required to assess at each reporting date whether there is any indication that an asset may be impaired. Where such an indication exists, the asset's recoverable amount is compared to its carrying value, and an impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, or CGU. In determining value in use of a given asset or CGU, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are allocated to the appropriate functional expense categories to which the underlying identifiable intangible assets relate, and are recorded in the consolidated statement of comprehensive (loss) income.
Items of property, plant and equipment and amortizable identifiable intangible assets with finite lives that suffered impairment are reviewed for possible reversal of the impairment if there has been a change, since the date of the most recent impairment test, in the estimates used to determine the impaired asset's recoverable amount. However, an asset's carrying amount, increased due to the reversal of a prior impairment loss, must not exceed the carrying amount that would have been determined, net of depreciation or amortization, had the original impairment not occurred.
Goodwill is not subject to amortization and instead is tested for impairment annually or more often if there is an indication that the CGU to which the goodwill has been allocated may be impaired. Impairment is determined for goodwill by assessing

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Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

whether the carrying value of a CGU, including the allocated goodwill, exceeds its recoverable amount, which is the higher of fair value less costs to sell and value in use. In the event that the carrying amount of goodwill exceeds its recoverable amount, an impairment loss is recognized in an amount equal to the excess. Impairment losses related to goodwill are not subsequently reversed.
Share purchase warrants
Share purchase warrants are classified as liabilities when the Company does not have the unconditional right to avoid delivering cash to the holders in the future. Each of the Company's share purchase warrants contains a written put option, arising upon the occurrence of a Fundamental Transaction, as that term is defined in the share purchase warrants, including a change of control. As a result of the existence of these put options, and despite the fact that the repurchase feature is conditional on a defined contingency, the share purchase warrants are required to be classified as a financial liability, since such contingency could ultimately result in the transfer of assets by the Company.
The warrant liability is initially measured at fair value, and any subsequent changes in fair value are recognized as gains or losses through profit or loss. Any transaction costs related to the share purchase warrants are expensed as incurred.
The warrant liability is classified as non-current, unless the underlying share purchase warrants are about to expire or be settled within 12 months from the end of a given reporting period.
Employee benefits
Salaries and other short-term benefits
Salaries and other short-term benefit obligations are measured on an undiscounted basis and are recognized in the consolidated statement of comprehensive (loss) income over the related service period or when the Company has a present legal or constructive obligation to make payments as a result of past events and when the amount payable can be estimated reliably.
Post-employment benefits
The Company's subsidiary in Germany maintains defined contribution and unfunded defined benefit plans, as well as other benefit plans for its employees. For defined benefit pension plans and other post-employment benefits, net periodic pension expense is actuarially determined on a quarterly basis using the projected unit credit method. The cost of pension and other benefits earned by employees is determined by applying certain assumptions, including discount rates, the projected age of employees upon retirement, the expected rate of future compensation and employee turnover.
The employee future benefits liability is recognized at its present value, which is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related future benefit liability. Actuarial gains and losses that arise in calculating the present value of the defined benefit obligation are recognized in other comprehensive (loss) income, net of tax, and simultaneously reclassified in the deficit in the consolidated statement of financial position in the year in which the actuarial gains and losses arise and without recycling to the consolidated statement of comprehensive (loss) income in subsequent periods.
For defined contribution plans, expenses are recorded in the consolidated statement of comprehensive (loss) income as incurred–namely, over the period that the related employee service is rendered.
Termination benefits
Termination benefits are recognized in the consolidated statement of comprehensive (loss) income when the Company is demonstrably committed, without the realistic possibility of withdrawal, to a formal detailed plan to terminate employment earlier than originally expected. Termination benefit liabilities expected to be settled after 12 months from the end of a given reporting period are discounted to their present value, where material.

(12)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Financial instruments
The Company classifies its financial instruments in the following categories: "Financial assets at fair value through profit or loss ("FVTPL"); "Loans and receivables"; "Financial liabilities at "FVTPL"; and "Other financial liabilities".
Financial assets and liabilities are offset, and the net amount is reported in the consolidated statement of financial position, 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.
(a)
Classification
Financial assets at fair value through profit or loss
Financial assets at FVTPL are financial assets held for trading. Fair value is defined as the amount at which the financial assets could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. A financial asset is classified as at FVTPL if the instrument is acquired or received as consideration principally for the purpose of selling in the short-term. Financial assets at FVTPL are classified as current assets if expected to be settled within 12 months from the end of a given reporting period; otherwise, the assets are classified as non-current.
As at December 31, 2015 and 2014, the Company held no assets classified as financial assets at FVTPL.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are included in current assets, except for instruments with maturities greater than 12 months after the end of a given reporting period or where restrictions apply that limit the Company from using the instrument for current purposes, which are classified as non-current assets.
The Company's loans and receivables are comprised of cash and cash equivalents, trade and other receivables and restricted cash equivalents.
Financial liabilities at fair value through profit or loss
Financial liabilities at FVTPL are financial liabilities held for trading. A financial liability is classified as at FVTPL if the instrument is acquired or incurred principally for the purpose of selling or repurchasing in the short-term or where the Company does not have the unconditional right to avoid delivering cash or another financial asset to the holders in certain circumstances. Financial liabilities at FVTPL are classified as current liabilities if required to be settled within 12 months from the end of a given reporting period; otherwise, the liabilities are classified as non-current.
Financial liabilities at FVTPL are currently comprised of the Company's warrant liability.
Other financial liabilities
Other financial liabilities include trade accounts payable and accrued liabilities, provision for restructuring and other non-current liabilities.
(b)
Recognition and measurement
Financial assets at fair value through profit or loss
Financial assets at FVTPL are recognized on the settlement date, which is the date on which the asset is delivered to the Company. Financial assets at FVTPL are initially recognized at fair value, and transaction costs are expensed immediately in the consolidated statement of comprehensive (loss) income. Financial assets at FVTPL are derecognized when the right to receive cash flows from the underlying investment have expired or have been transferred and when the Group has transferred substantially all risks and rewards of ownership. Gains and losses arising from changes in the fair value of financial assets at FVTPL are presented in the consolidated statement of comprehensive (loss) income within finance income or finance costs in the period in which they arise.

(13)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Loans and receivables
Loans and receivables are recognized on the settlement date and are measured initially at fair value and subsequently at amortized cost using the effective interest rate method.
Financial liabilities at fair value through profit or loss
Financial liabilities at FVTPL are recognized on the settlement date. Financial liabilities at FVTPL are initially recognized at fair value, and transaction costs are expensed immediately in the consolidated statement of comprehensive (loss) income. Gains and losses arising from changes in the fair value of financial liabilities at FVTPL are presented in the consolidated statement of comprehensive (loss) income within finance income or finance costs in the period in which they arise.
Other financial liabilities
Financial instruments classified as "Other financial liabilities" are measured initially at fair value and subsequently at amortized cost using the effective interest rate method.
(c)
Impairment
Financial assets measured at amortized cost are reviewed for impairment at each reporting date. Where there is objective evidence that impairment exists for a financial asset measured at amortized cost, an impairment charge equivalent to the difference between the asset's carrying amount and the present value of estimated future cash flows is recorded in the consolidated statement of comprehensive (loss) income. The expected cash flows exclude future credit losses that have not been incurred and are discounted at the financial asset's original effective interest rate.
Impairment charges related to financial assets carried at amortized cost are reversed 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. However, the reversal cannot result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed.
Share capital
Common shares are classified as equity. Incremental costs that are directly attributable to the issue of common shares and stock options are recognized as a deduction from equity, net of any tax effects.
Where offerings result in the issuance of units (where each unit is comprised of a common share of the Company and a share purchase warrant, exercisable in order to purchase a common share or fraction thereof), proceeds received in connection with those offerings are allocated between Share capital and Share purchase warrants based on the residual method. Proceeds are allocated to warrant liability based on the share purchase warrants fair value, and the residual amount of proceeds is allocated to Share capital. Transaction costs in connection with such offerings are allocated to the liability and equity units components in proportion to the allocation of proceeds.
Provisions
Provisions represent liabilities to the Company for which the amount or timing is uncertain. Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, such as organizational restructuring, when it is probable that an outflow of resources will be required to settle the obligation and where the amount can be reliably estimated. Provisions are not recognized for future operating losses.
Provisions are made for any contracts which are deemed onerous. A contract is onerous if the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Provisions for onerous contracts are measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Present value is determined based on expected future cash flows that are discounted at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized in finance costs.

(14)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Revenue recognition
Sales of products
Revenues from the sale of goods are recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods (which is at the time the goods are shipped), when the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, when the amount of revenues can be measured reliably, when it is probable that the economic benefits associated with the transaction will flow to the Company and when the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Royalty revenues
The Company had deferred recognition of proceeds received in December 2008 from Healthcare Royalty Partners L.P. (formerly Cowen Healthcare Royalty Partners L.P. ) ("HRP") relating to the Company's rights to royalties on future sales of Cetrotide® covered by a license agreement with ARES Trading S.A. ("Merck Serono") in which the latter had been granted worldwide marketing, distribution and selling rights, except in Japan, for Cetrotide®, a compound used for in vitro fertilization.
The Company recognized the proceeds received from HRP as royalty revenues over the life of the underlying royalty sale arrangement, pursuant to the "units-of-revenue" method. Under that method, periodic royalty revenues are calculated as the ratio of the remaining deferred revenue amount to the total estimated remaining royalties that Merck Serono expected to pay to HRP over the term of the underlying arrangement multiplied by the royalty payments due to HRP for the period.
As mentioned in note 6 – Discontinued operations, from April 3, 2013 to October 1, 2013, the Company accelerated the amortization of the remaining deferred revenues.
Licensing revenues and multiple element arrangements
The Company is currently in a phase in which certain potential products are being further developed or marketed jointly with partners and licensees. Existing licensing agreements usually foresee one-time payments (upfront payments), payments for R&D services in the form of cost reimbursements, milestone payments and royalty receipts for licensing and marketing product candidates. Revenues associated with those multiple-element arrangements are allocated to the various elements based on their relative fair value.
Agreements containing multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered obligation(s). The consideration received is allocated among the separate units based on each unit's fair value, and the applicable revenue recognition criteria are applied to each of the separate units.
License fees representing non-refundable payments received at the time of signature of license agreements are recognized as revenue upon signature of the license agreements when the Company has no significant future performance obligations and collectibility of the fees is probable. Upfront payments received at the beginning of licensing agreements are deferred and recognized as revenue on a systematic basis over the period during which the related services are rendered and all obligations are performed.
Milestone payments
Milestone payments, which are generally based on developmental or regulatory events, are recognized as revenue when the milestones are achieved, collectibility is assured, and when the Company has no significant future performance obligations in connection with the milestones.

(15)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Share-based compensation costs
The Company operates an equity-settled share-based compensation plan under which the Company receives services from directors, senior executives, employees and other collaborators as consideration for equity instruments of the Company.
The Company accounts for all forms of share-based compensation using the fair value-based method. Fair value of stock options is determined at the date of grant using the Black-Scholes option pricing model, which includes estimates of the number of awards that are expected to vest over the vesting period. Where granted share options vest in installments over the vesting period (defined as graded vesting), the Company treats each installment as a separate share option grant. Share-based compensation expense is recognized over the vesting period, or as specified vesting conditions are satisfied, and credited to Other Capital.
Any consideration received by the Company in connection with the exercise of stock options is credited to Share Capital. Any Other Capital component of the share-based compensation is transferred to Share Capital upon the issuance of shares.
Current and deferred income tax
Income tax on profit or loss comprises current and deferred tax. Tax is recognized in profit or loss, except that a change attributable to an item of income or expense recognized as other comprehensive (loss) income or directly in equity is also recognized directly in other comprehensive (loss) income or directly in equity. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
The current income tax charge is calculated in accordance with tax rates and laws that have been enacted or substantively enacted by the reporting date in the countries where the Company's subsidiaries operate and generate taxable income.
Deferred income tax is recognized on temporary differences (other than, where applicable, temporary differences associated with unremitted earnings from foreign subsidiaries and associates to the extent that the investment is essentially permanent in duration, and temporary differences associated with the initial recognition of goodwill) arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements and on unused tax losses or R&D non-refundable tax credits in the Group. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Research and development costs
Research costs are expensed as incurred. Development costs are expensed as incurred, except for those that meet generally accepted criteria for deferral, in which case the costs are capitalized and amortized to operations over the estimated period of benefit. No development costs have been capitalized during any of the periods presented.
Discontinued operations
A discontinued operation is a component of the Company that has been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operations and/or is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations. Classification as a discontinued operation occurs upon the earlier of the disposal of the operation (or disposal group) or the date at which the operation meets the criteria for classification as held for sale. When an operation is classified as discontinued, comparative statements of comprehensive (loss) income and cash flows are presented as if the operations had been discontinued at the beginning of the earliest comparative period presented.

(16)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Net (loss) income per share
Basic net (loss) income per share is calculated using the weighted average number of common shares outstanding during the year.
Diluted net (loss) income per share is calculated based on the weighted average number of common shares outstanding during the year, plus the effects of dilutive common share equivalents, such as stock options and share purchase warrants. This method requires that diluted net (loss) income per share be calculated using the treasury stock method, as if all common share equivalents had been exercised at the beginning of the reporting period, or period of issuance, as the case may be, and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of the common shares during the period.
3
Critical accounting estimates and judgments
The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of the Company's assets, liabilities, revenues, expenses and related disclosures. Judgments, estimates and assumptions are based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which the Company's consolidated financial statements are prepared.
Management reviews, on a regular basis, the Company's accounting policies, assumptions, estimates and judgments in order to ensure that the consolidated financial statements are presented fairly and in accordance with IFRS. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
(a)
Critical accounting estimates and assumptions
Critical accounting estimates and assumptions are those that have a significant risk of causing material adjustment and are often applied to matters or outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and expectations and that estimates routinely require adjustment.
The following discusses the most significant accounting estimates and assumptions that the Company has made in the preparation of the consolidated financial statements.
Fair value of the warrant liability and stock options
Determining the fair value of the warrant liability and stock options requires judgment related to the choice of a pricing model, the estimation of stock price volatility and the expected term of the underlying instruments. Any changes in the estimates or inputs utilized to determine fair value could result in a significant impact on the Company's future operating results, liabilities or other components of shareholders' equity. Fair value assumptions used are described in notes 15 – Warrant liability and 17 – Share capital.
Goodwill impairment
The annual impairment assessment related to goodwill requires to estimate the recoverable amount, which has been determined using fair value less costs of disposal. This evaluation is based on estimates that are derived from current market capitalization and on other factors, including assumptions related to relevant industry-specific market analyses and potential costs to dispose. The Company also concluded that there was only one CGU as management monitors goodwill on an overall entity basis. Future events, including a significant reduction in the Company's share price, could cause the assumptions utilized in the impairment tests to change, resulting in a potentially adverse effect on the Company's future results due to increased impairment charges.
Employee future benefits
The determination of expenses and obligations associated with employee future benefits requires the use of assumptions, such as the discount rate to measure obligations, the projected age of employees upon retirement, the expected rate of future compensation and estimated employee turnover. Because the determination of the cost and obligations associated

(17)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

with employee future benefits requires the use of various assumptions, there is measurement uncertainty inherent in the actuarial valuation process. Actual results will differ from results that are estimated based on the aforementioned assumptions. Additional information is included in note 19 – Employee future benefits.
Income taxes
The estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of Group entities' ability to utilize the underlying future tax deductions against future taxable income prior to expiry of those deductions. Management assesses whether it is probable that some or all of the deferred income tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income, which in turn is dependent upon the successful commercialization of the Company's products. To the extent that management's assessment of any Group entity's ability to utilize future tax deductions changes, the Company would be required to recognize more or fewer deferred tax assets, and future income tax provisions or recoveries could be affected. Additional information is included in note 22 – Income taxes.
(b)
Critical judgments in applying the Company's accounting policies
Revenue recognition
Management's assessments related to the recognition of revenues related to arrangements containing multiple elements are based on judgment. Judgment is necessary to identify separate units of accounting and to allocate related consideration to each separate unit of accounting. Where deferral of upfront payments or license fees is deemed appropriate, subsequent revenue recognition is often determined based upon the assessment of the Company's continuing involvement in the arrangement, the benefits expected to be derived by the customer and, where applicable, expected patent lives. Additional information is included in note 5 – Development, commercialization and licensing arrangements.
4
Recent accounting pronouncements
Not yet adopted
Annual improvements to IFRS (2012-2014) cycle: On September 25, 2014 the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements process. The amendments will apply for annual periods beginning on or after January 1, 2016. Amendments were made to clarify the following in their respective standards:

Changes in method for disposal under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations
("IFRS 5");
Continuing involvement for servicing contracts and offsetting disclosures in condensed interim financial statements under IFRS 7, Financial Instruments: Disclosures (“IFRS 7”);
Discount rate in a regional market sharing the same currency under International Accounting Standard ("IAS") 19, Employee Benefits;
Disclosure of information "elsewhere in the interim financial reports" under IAS 34, Interim Financial Reporting;

The Company is currently assessing the impact that these amendments may have on the Company’s consolidated financial statements.

The final version of IFRS 9, Financial Instruments ("IFRS 9"), was issued by the IASB in July 2014 and will replace IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39"). IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle-based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of an entity's own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity's own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9, which is to be applied retrospectively, is effective for annual periods beginning on or after January 1, 2018

(18)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

and is available for early adoption. In addition, an entity's own credit risk changes can be applied early in isolation without otherwise changing the accounting for financial instruments. In addition, there are amendments to IFRS 7 which require additional disclosures on transition from IAS 39 to IFRS 9. These amendments are effective upon adoption of IFRS 9. The Company is currently assessing the impact, if any, that these new standards will have on the Company's consolidated financial statements.
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers ("IFRS 15"). The objective of this new standard is to provide a single, comprehensive revenue recognition framework for all contracts with customers to improve comparability of financial statements of companies globally. This new standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to receive in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company is currently assessing the impact that this new standard may have on the Company's consolidated financial statements.
In January 2016 the IASB issued IFRS 16, Leases ("IFRS 16"), which supersedes IAS 17, Leases, and the related interpretations on leases: IFRIC 4, Determining Whether an Arrangement Contains a Lease; Standard Interpretations Committee ("SIC") 15, Operating Leases - Incentives; and SIC 27, Evaluating the Substance of Transactions in the Legal Form of a Lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted for companies that also apply IFRS 15. The Company is currently assessing the impact that this new standard may have on the Company's consolidated financial statements.
5
Development, commercialization and licensing arrangements
Sinopharm arrangement
On December 1, 2014, the Company entered into a Master Collaboration Agreement, a Technology Transfer and Technical Assistance Agreement ("TTA") and a License Agreement ("LA") with Sinopharm A-Think Pharmaceuticals Co., Ltd. ("Sinopharm") for the development, manufacture and commercialization of Zoptrex™ (zoptarelin doxorubicin) in all human uses, in the People's Republic of China, including Hong Kong and Macau (collectively, "the Territory"). Under the terms of the TTA, Sinopharm made a one-time, non-refundable payment of $1,101,000 (the "Transfer Fee") to the Company in consideration for the transfer of technical documentation and materials, know-how and technical assistance services. Additionally, per the LA, the Company will be entitled to receive additional consideration upon achieving certain milestones, including the occurrence of certain regulatory and commercial events in the Territory. Furthermore, the Company will be entitled to royalties on future net sales of Zoptrex™ in the Territory.
The Company has substantial continuing involvement in the aforementioned arrangements, including the transfer of documentation, know-how and materials, as well as the provision of technical assistance, such as quality systems implementation, analytical and stability testing, territory-specific development initiatives, and other services.
The Company has applied the provisions of IAS 18, Revenue ("IAS 18"), and has determined that all deliverables and performance obligations contemplated by the agreements with Sinopharm should be accounted for as a single unit of accounting, limited to amounts that are not contingent upon the delivery of additional items or the meeting of other specified performance conditions which are not known, probable or estimable at the time at which the agreements with Sinopharm were entered into.
The Company has deferred the non-refundable Transfer Fee and is amortizing the related payment as revenue on a straight-line basis over the period during which the aforementioned services are rendered and obligations are performed.
In determining the period over which Transfer Fee revenues are to be recognized, the Company concluded that its significant continuing involvement in the aforementioned agreements will span approximately four years, commencing in late December 2014. However, the Company may adjust the amortization period based on appropriate facts and circumstances not yet known, that would significantly change the duration of the Company's continuing involvement and performance obligations or benefits expected to be derived by Sinopharm.

(19)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Future milestones will be recognized as revenue individually and in full upon the actual achievement of the related milestone, given the substantive nature of each milestone. Lastly, upon initial commercialization and sale of the developed product, the Company will recognize royalty revenues as earned, based on the contractual percentage applied to the actual net sales achieved by Sinopharm, as per the LA.
Pursuant to the aforementioned agreements, the Company was required to remit to the Chinese tax authorities $111,000 of the gross proceeds received from Sinopharm. This amount, which was withheld at source, was recognized as income tax expense in the consolidated statement of comprehensive (loss) income, in 2014, in accordance with the provision of IAS 12, Income Taxes.
Ergomed agreement
On April 10, 2013, the Company entered into a co-development and revenue-sharing agreement ("CDRSA") with Ergomed Clinical Research Limited ("Ergomed"), pursuant to which Ergomed has agreed to assist the Company in the clinical development program for Zoptrex™ for the purpose of maximizing the commercialization potential of Zoptrex™ with the ultimate aim of selling or licensing Zoptrex™. Concurrently with the execution of the CDRSA, the Company entered into a master services agreement ("MSA") with Ergomed for a clinical Phase 3 trial of Zoptrex™ in endometrial cancer, pursuant to which Ergomed will provide clinical development services with respect to the co-development initiative referred to above.
Under the CDRSA, Ergomed will not charge the Company for 30% of the total costs up to a maximum of $10,000,000 for which an amount of $2,330,000 remains to be claimed as of December 31, 2015. While Ergomed will not directly contribute any cash proceeds towards the completion of the activities contemplated by the CDRSA, Ergomed, as primary supplier of a substantial portion of Zoptrex™ related clinical and regulatory activities, will contribute to the overall funding of the initiative via the application of a 30% discount from the costs set forth in the MSA until the cumulative total of such reductions reaches a maximum of $10,000,000. Ergomed will be entitled to receive an agreed upon single-digit percentage of any future net income (as defined in the CDRSA) or other proceeds related to the licensing of received zoptarelin doxorubicin in endometrial cancer indication, up to a specified maximum amount.
The Company recognizes R&D costs associated with the CDRSA and MSA net of the 30% discount, as services are rendered by Ergomed in the consolidated statement of comprehensive (loss) income. During the years ended December 31, 2015, 2014 and 2013, the Company expensed a total of $7,140,000, $7,195,000 and $3,560,000, respectively, pursuant to the CDRSA and MSA.
Yakult agreement
On March 8, 2011, the Company entered into an agreement with Yakult Honsha Co., Ltd. ("Yakult") for the development, manufacture and commercialization of perifosine in all human uses, excluding leishmaniasis, in Japan. Under the terms of this agreement, Yakult had made an initial, non-refundable gross upfront payment to the Company of €6,000,000 (approximately $8,412,000). The Company applied the provisions of IAS 18 and recognized deferred revenue, which was being amortized on a straight-line basis through the estimated end of the estimated life cycle of perifosine in colorectal cancer ("CRC") and multiple myeloma ("MM").
On April 1, 2012, following disclosure of the results of the Phase 3 study of perifosine in CRC, the Company discontinued the perifosine program in that indication. Furthermore, in March 2013, following an analysis of interim results of the Phase 3 study of perifosine in MM, the Company also discontinued the development of perifosine in the MM indication.
Based on these events, the Company determined that it no longer had significant obligations under the agreement with Yakult to continue with the development of perifosine. Accordingly, the Company recognized, in March 2013, the remaining amount of deferred revenue of $5,860,000 related to the above licensing agreement within License fees in the consolidated statement of comprehensive (loss) income.



(20)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

6
Discontinued operations
On April 3, 2013 (the "Cetrotide® Effective Date"), the Company entered into a transfer and service agreement ("TSA") and concurrent agreements with various partners and licensees with respect to the manufacturing rights for Cetrotide®, marketed for therapeutic use as part of in vitro fertilization programs. The principal effect of these agreements was to transfer, effective October 1, 2013 (the "Cetrotide® Closing Date"), the manufacturing rights for Cetrotide® and to grant a license to Merck Serono for the manufacture, testing, assembling, packaging, storage and release of Cetrotide® in all territories. Also per the TSA, the Company agreed to provide certain transition services to Merck Serono over a period of 36 months from the Cetrotide® Effective Date in order to assist Merck Serono in managing overall responsibility for the manufacturing of Cetrotide® and related activities (collectively, the "Cetrotide® Business").
Under the TSA, during the period commencing on the Cetrotide® Effective Date and ending on the Cetrotide® Closing Date (the "Interim Period"), the Company was obligated to continue to conduct the Cetrotide® Business in the ordinary course in a manner consistent with past practices, subject to certain conditions.
Per the TSA, the Company received a non-refundable, one-time payment of €2,500,000 (approximately $3,300,000) in consideration for the transfer of the manufacturing rights referred to above, as well as other payments in exchange for the transfer, also on the Cetrotide® Closing Date, of certain assets and equipment (see note 10 – Property, plant and equipment) used solely for the manufacture of Cetrotide®.
The Company has agreed to provide the aforementioned transition services in exchange for a monthly service fee, which is payable by Merck Serono. The related transition services revenues are recognized as License fees and other within net income from discontinued operations in the Company's consolidated statement of comprehensive (loss) income as the transition services are provided over the corresponding term of the transition services contract.
Impact of the TSA on previously deferred revenues
In 2008, the Company had monetized its royalty stream related to Cetrotide® via a transaction with HRP, which resulted, among other things, in the payment by HRP to the Company of $52,500,000, less certain transaction costs, in exchange for the Company's rights to royalties on future net sales of Cetrotide® generated by Merck Serono. The Company initially recorded the proceeds received from HRP as deferred revenue due to the Company's significant continuing involvement with the Cetrotide® Business. Since then, the Company amortized the deferred revenue into income (as Sales and royalties within net income from discontinued operations in the Company's consolidated statement of comprehensive (loss) income) over the life of the underlying license agreement, based on the "units-of-revenue" method. Under that method, periodic royalty revenues were calculated by multiplying the ratio of the unamortized deferred revenue amount to the total estimated remaining royalties that Merck Serono expected to pay to HRP over the term of the underlying arrangement by the royalty payments due to HRP for the period.
Management has determined that, as of the Cetrotide® Closing Date, there is no basis to continue amortizing the deferred revenue associated with HRP, primarily due to the fact that the Company no longer has significant continuing involvement in the Cetrotide® Business, as discussed above. As such, commencing on the Cetrotide® Effective Date, the Company accelerated the amortization of the remaining deferred revenues of approximately $31,875,000 over the Interim Period, by continuing to apply the units-of-revenue method, which is consistent with past practice. The remaining deferred revenues were fully amortized in 2013 and were recorded as Sales and royalties within net income from discontinued operations in the Company's consolidated statement of comprehensive (loss) income.
Presentation of Cetrotide® Business subsequent to the Cetrotide®Closing Date
In accordance with the provisions of IFRS 5, upon the transfer of substantially all of the risks and rewards associated with the Cetrotide® Business on the Cetrotide® Closing Date, the Cetrotide® Business was classified as a discontinued operation. As such, relevant amounts in the consolidated statements of comprehensive (loss) income and cash flows have been retroactively reclassified to reflect the Cetrotide® Business as a discontinued operation.

(21)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Components of the Company's net income from discontinued operations are summarized below.
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Revenues*
 
 
 
 
 
 
Sales and royalties
 

 

 
63,755

License fees and other
 
331

 
1,037

 
4,589

 
 
331

 
1,037

 
68,344

Operating expenses
 
 
 
 
 
 
Cost of sales
 

 

 
30,002

Research and development costs
 
31

 
25

 
8

General and administrative expenses
 

 
1

 
15

Selling expenses
 
215

 
388

 
4,264

 
 
246

 
414

 
34,289

Net income from discontinued operations
 
85

 
623

 
34,055

Components of operating expenses presented as discontinued include the following:
 
 
 
 
 
 
Subcontractor fees
 

 

 
24,930

Raw material purchases
 

 

 
579

Change in inventory
 

 

 
4,173

Impairment of equipment
 

 

 
268

Depreciation of equipment
 

 

 
52

Cost of sales
 

 

 
30,002

Goods and services**
 
32

 
191

 
2,987

Royalty and patent expenses related to onerous contracts
 
214

 
223

 
1,300

 
 
246

 
414

 
34,289

_________________________
*
In addition to recurring sales of Cetrotide®, the revenues presented above include the aforementioned non-refundable, one-time payment of €2,500,000 (approximately $3,300,000), as well as royalty revenues of $33,631,000 in 2013, which represent the amortization of proceeds received in connection with the Company's transaction with HRP.
**
Goods and services include professional fees, marketing services, insurance, travel and representation costs.
The general and administrative expenses presented above for the year ended December 31, 2013 also include $1,300,000 associated with the initial recognition of a provision for certain non-cancellable contracts related to the Cetrotide® Business that were deemed onerous due to the fact that management expected no economic benefits to flow to the Company following the transfer of the Cetrotide® Business on the Cetrotide® Closing Date. The provisions for onerous contracts represent the present value of estimated unavoidable future royalty and patent costs associated with the intellectual property underlying Cetrotide®. The estimate may vary as a result of changes in estimated future royalty and patent costs. The unexpired term of these contracts is seven years as at December 31, 2015. See also note 16 – Provisions and other non-current liabilities.

(22)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Components of the Company's net cash (used in) provided by operating activities of discontinued operations are summarized below.
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Cash flows from operating activities
 
 
 
 
 
 
Net income from discontinued operations
 
85

 
623

 
34,055

Items not affecting cash and cash equivalents:
 
 
 
 
 
 
Provision for onerous contracts
 
214

 
223

 
1,300

Depreciation, amortization and impairment
 

 

 
320

Amortization of deferred revenues
 

 

 
(33,631
)
Other non-cash items
 

 
96

 

Changes in operating assets and liabilities:
 
 
 
 
 
 
Trade and other receivables
 
15

 
1,460

 
6,212

Inventory
 

 

 
4,061

Prepaid expenses and other current assets
 

 

 
882

Payables and accrued liabilities
 
(78
)
 
(2,300
)
 
(2,996
)
Provisions and other non-current liabilities
 
(151
)
 
(397
)
 
(56
)
Net cash provided by (used in) operating activities of discontinued operations
 
85

 
(295
)
 
10,147


7
Cash and cash equivalents
 
 
As at December 31,
 
 
2015
 
2014
 
 
$
 
$
Cash on hand and balances with banks
 
11,233

 
10,803

Interest-bearing deposits with maturities of three months or less
 
30,217

 
24,128

 
 
41,450

 
34,931

8
Trade and other receivables
 
 
As at December 31,
 
 
2015
 
2014
 
 
$
 
$
Trade accounts receivable
 
180

 
583

Value added tax
 
291

 
47

Other
 
127

 
237

 
 
598

 
867





(23)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

9
Restricted cash equivalents
In support of the Company's long-term operating lease obligation in Germany and in replacement of a related bank guarantee, the Company transferred funds to a restricted cash account. These funds, including any interest earned thereon, are restricted for as long as the underlying lease arrangement (note 25 – Commitments and contingencies) has not expired and therefore cannot be utilized for current purposes as at December 31, 2015.
10
Property, plant and equipment
Components of the Company's property, plant and equipment are summarized below.
 
 
Cost
 
 
Equipment
 
Furniture and fixtures
 
Computer equipment
 
Leasehold improvements
 
Total
 
 
$
 
$
 
$
 
$
 
$
At January 1, 2014
 
9,054

 
1,237

 
1,852

 
1,196

 
13,339

Additions
 
16

 
20

 
86

 
5

 
127

Disposals / Retirements
 
(1,212
)
 

 
(182
)
 

 
(1,394
)
Impact of foreign exchange rate changes
 
(1,046
)
 
(151
)
 
(222
)
 
(146
)
 
(1,565
)
At December 31, 2014
 
6,812

 
1,106

 
1,534

 
1,055

 
10,507

Additions
 
2

 
8

 
16

 

 
26

Disposals / Retirements
 
(2,108
)
 
(1,021
)
 
(719
)
 
(962
)
 
(4,810
)
Impact of foreign exchange rate changes
 
(667
)
 
(74
)
 
(85
)
 
(74
)
 
(900
)
At December 31, 2015
 
4,039

 
19

 
746

 
19

 
4,823



 
 
Accumulated depreciation
 
 
Equipment
 
Furniture and fixtures
 
Computer equipment
 
Leasehold improvements
 
Total
 
 
$
 
$
 
$
 
$
 
$
At January 1, 2014
 
8,016

 
1,222

 
1,821

 
929

 
11,988

Disposals / Retirements
 
(1,212
)
 

 
(182
)
 

 
(1,394
)
Impairment loss*
 
206

 

 

 

 
206

Recurring depreciation expense
 
282

 
17

 
21

 
51

 
371

Impact of foreign exchange rate changes
 
(979
)
 
(152
)
 
(212
)
 
(118
)
 
(1,461
)
At December 31, 2014
 
6,313

 
1,087

 
1,448

 
862

 
9,710

Disposals / Retirements
 
(1,957
)
 
(1,015
)
 
(719
)
 
(882
)
 
(4,573
)
Impairment loss*
 

 

 

 
70

 
70

Recurring depreciation expense
 
138

 
1

 
36

 
15

 
190

Impact of foreign exchange rate changes
 
(621
)
 
(73
)
 
(82
)
 
(54
)
 
(830
)
At December 31, 2015
 
3,873

 

 
683

 
11

 
4,567

_________________________
*Related to R&D equipment impaired as a result of a restructuring (note 14 – Restructuring).

(24)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

 
 
Carrying amount
 
 
Equipment
 
Furniture and fixtures
 
Computer equipment
 
Leasehold improvements
 
Total
 
 
$
 
$
 
$
 
$
 
$
At December 31, 2014
 
499

 
19

 
86

 
193

 
797

At December 31, 2015
 
166

 
19

 
63

 
8

 
256

Depreciation of $260,000 ($577,000 in 2014 and $495,000 in 2013) is presented in the consolidated statement of comprehensive (loss) income as follows: $231,000 ($530,000 in 2014 and $480,000 in 2013) in R&D costs, $13,000 ($47,000 in 2014 and $15,000 in 2013) in general and administrative ("G&A") expenses and $16,000 (nil in 2014 and 2013) in selling expenses. See also note 6 – Discontinued operations for depreciation expense related to discontinued operations.
11
Identifiable intangible assets
Identifiable intangible assets with finite useful lives consist entirely of in-process R&D costs, patents and trademarks. Changes in the carrying value of the Company's identifiable intangible assets with finite useful lives are summarized below.
 
 
Year ended December 31, 2015
 
Year ended December 31, 2014
 
 
Cost
 
Accumulated amortization
 
Carrying value
 
Cost
 
Accumulated amortization
 
Carrying value
 
 
$
 
$
 
$
 
$
 
$
 
$
Balances – Beginning of the year
 
35,032

 
(34,680
)
 
352

 
39,890

 
(39,182
)
 
708

Disposal/Retirements
 
(538
)
 
538

 

 

 

 

Impairment loss*
 

 

 

 

 
(184
)
 
(184
)
Recurring amortization expense*
 

 
(81
)
 
(81
)
 

 
(117
)
 
(117
)
Impact of foreign exchange rate changes
 
(3,343
)
 
3,309

 
(34
)
 
(4,858
)
 
4,803

 
(55
)
Balances – End of the year
 
31,151

 
(30,914
)
 
237

 
35,032

 
(34,680
)
 
352

_________________________
* Recorded as R&D costs in the consolidated statements of comprehensive (loss) income.
12
Goodwill
The change in carrying value is as follows:
 
 
Cost
 
Accumulated impairment loss
 
Carrying amount
 
 
$
 
$
 
$
At January 1, 2014
 
9,892

 

 
9,892

Impact of foreign exchange rate changes
 
(1,205
)
 

 
(1,205
)
At December 31, 2014
 
8,687

 

 
8,687

Impact of foreign exchange rate changes
 
(851
)
 

 
(851
)
At December 31, 2015
 
7,836

 

 
7,836


(25)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

13    Payables and accrued liabilities
 
 
As at December 31,
 
 
2015
 
2014
 
 
$
 
$
Trade accounts payable
 
2,488

 
3,153

Accrued research and development costs
 
312

 
1,073

Salaries, employment taxes and benefits
 
256

 
560

Current portion of onerous contract provisions (note 16)
 
334

 
322

Other accrued liabilities
 
782

 
691

 
 
4,172

 
5,799

14
Restructuring
On August 7, 2014, the Company's Nominating, Governance and Compensation Committee and Board of Directors approved the Company's global resources optimization program (the "Resource Optimization Program"), which was rolled out as part of a strategy to transition Aeterna Zentaris into a commercially operating specialty biopharmaceutical organization. The Resource Optimization Program, the goal of which was to streamline R&D activities and to increase commercial operations and flexibility, resulted in the termination of 28 employees at the Company. As at December 31, 2015, the Resource Optimization Program was substantially complete.
Upon approval of the Resource Optimization Program, a provision for restructuring costs was recorded. Total restructuring costs associated with the Resource Optimization Program included severance payments, onerous lease provision and other directly related costs, and were recorded as follows in the accompanying consolidated statement of comprehensive (loss) income: $2,201,000 in R&D costs, and $288,000 in G&A expenses. All the changes in the provision recorded in 2015 for the Resource optimization Program was recorded in R&D costs.
On October 9, 2015, the Company's Board of Directors approved a plan to restructure the finance and accounting operations and to close the Company's Quebec City office (the "Corporate Restructuring"). The Company transferred all functions performed by the five employees in its Quebec City office to other personnel and will be adding new finance and accounting personnel, including a new Chief Financial Officer, in the Company's Summerville, South Carolina, office. As of December 31, 2015, management estimates that the Corporate Restructuring will be completed by the end of September 2016.
Upon approval of the Corporate Restructuring, a provision for severance payments, lease cancellation fees and other directly related costs was recorded in G&A expenses in the accompanying consolidated statement of comprehensive (loss) income. This estimate may vary as a result of changes in the underlying assumptions applied thereto.
Restructuring costs are recognized in the consolidated statement of comprehensive (loss) income when the Company has a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing the plan's main features to those affected by it.

(26)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

The change in the Company's provision for restructuring costs can be summarized as follows:
 
 
Resource Optimization Program
 
Corporate Restructuring
 
Total
 
 
$
 
$
 
$
At January 1, 2014
 

 

 

Provision recognized
 
2,489

 

 
2,489

Utilization of provision
 
(687
)
 

 
(687
)
Impact of foreign exchange rate changes
 
(151
)
 

 
(151
)
At December 31, 2014
 
1,651

 

 
1,651

Less: non current portion (note 16)
 
(146
)
 

 
(146
)
 
 
1,505

 

 
1,505

 
 
 
 
 
 
 
At December 31, 2014
 
1,651

 

 
1,651

Provision Recognized
 

 
1,244

 
1,244

Utilization of provision
 
(1,154
)
 
(636
)
 
(1,790
)
Change in the provision
 
(265
)
 
(47
)
 
(312
)
Impact of foreign exchange rate changes
 
(157
)
 
(4
)
 
(161
)
At December 31, 2015
 
75

 
557

 
632

Less: non-current portion (note 16)
 
(34
)
 

 
(34
)
 
 
41

 
557

 
598


15
Warrant liability
The change in the Company's warrant liability can be summarized as follows:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Balance – Beginning of the year
 
8,225

 
18,010

 
6,176

Share purchase warrants issued during the year (note 17)
 
28,678

 
8,487

 
13,397

Derecognition due to early expiry (note 17)
 
(5,865
)
 

 

Share purchase warrants exercised during the year
 
(31,103
)
 

 

Change in fair value of share purchase warrants (note 20)
 
10,956

 
(18,272
)
 
(1,563
)
Balance - End of the year
 
10,891

 
8,225

 
18,010

Less: current portion
 
(1,411
)
 

 

 
 
9,480

 
8,225

 
18,010



(27)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

A summary of the activity related to the Company's share purchase warrants is provided below.
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
Number
 
Weighted average exercise price (US$)
 
Number
 
Weighted average exercise price (US$)
 
Number
 
Weighted average exercise price (US$)
Balance – Beginning of the year
 
287,852

 
187.00

 
201,074

 
234.00

 
44,074

 
514.00

Issued (note 17)
 
3,076,956

**
6.58

*
88,000

 
125.00

*
157,000

 
155.00

Exercised
 
(298,088
)
 
4.94

 

 

 

 

Expired (note 17)
 
(224.411
)
 
66.90

 
(1,222
)
 
75.00

 

 

Balance – End of the year
 
2,842,309

 
11.91

 
287,852

 
187.00

 
201,074

 
234.00

_________________________
* As adjusted (note 17 – Share capital)
** 298,382 of which represent the Series B Warrants (see note 17 - Share Capital), which may be exercised on an alternate cashless basis, as discussed below.
The following table summarizes the share purchase warrants outstanding and exercisable as at December 31, 2015:
 
 
 
Exercise price ($)
 
Number
 
Weighted average remaining contractual life (years)
4.95
 
455,638

 
4.14

7.10
 
2,331,000

 
4.95

185.00
 
25,996

 
2.58

345.00
 
29,675

 
1.80

 
 
2,842,309

 
4.77


(28)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

The table presented below shows the inputs and assumptions applied to the Black-Scholes option pricing model in order to determine the fair value of warrants outstanding as at December 31, 2015 in order to determine the fair value of all outstanding warrants, with the exception of the Series B Warrants, as defined and discussed below. The Black-Scholes option pricing model uses "Level 2" inputs, as defined by IFRS 13, Fair value measurement ("IFRS 13") and as discussed in note 24 - Financial instruments and financial risk management.
 
 
Number of equivalent shares
 
Market-value per share price ($)
 
Weighted average exercise price ($)
 
Risk-free annual interest rate (a)
 
Expected volatility
(b)
 
Expected life (years) (c)
 
Expected dividend yield
(d)
October 2012 Investor Warrants
 
29,675

 
4.48

 
345.00

 
0.97
%
 
141.94
%
 
1.80

 
0.00%
July 2013 Warrants
 
25,996

 
4.48

 
185.00

 
1.20
%
 
125.35
%
 
2.58

 
0.00%
March 2015 Series A Warrants (e)
 
447,574

 
4.48

 
4.95


1.57
%
 
121.27
%
 
4.19

 
0.00%
December 2015 Warrants
 
2,331,000

 
4.48

 
7.10


1.74
%
 
113.75
%
 
4.95

 
0.00%
_________________________
(a)
Based on United States Treasury Government Bond interest rates with a term that is consistent with the expected life of the warrants.
(b)
Based on the historical volatility of the Company's stock price over the most recent period consistent with the expected life of the warrants, as well as on future expectations.
(c)
Based upon time to expiry from the reporting period date.
(d)
The Company has not paid dividends and it does not intend to pay dividends in the foreseeable future.
(e)
For the March 2015 Series A Warrants, the inputs and assumptions applied to the Black-Scholes option pricing model have been further adjusted to take into consideration the value attributed to certain anti-dilution provisions. Specifically, the weighted average exercise price is subject to adjustment (see note 17 – Share capital).

Series B Warrants
In addition to the availability of standard cashless exercise provisions, the Series B Warrants (defined and discussed in note 17 – Share capital) were entitled to be exercised on an alternate cashless basis in accordance with their terms. Such an exercise permitted the holder to obtain a number of common shares equal to: 200% of (i) the total number of common shares with respect to which the Series B Warrant is then being exercised multiplied by (ii) 81.00 divided by (iii) 85% of the quotient of (A) the sum of the per share volume weighted average price ("VWAP") of the common share for each of the five lowest trading days during the fifteen trading day period ending on and including the trading day immediately prior to the applicable Exercise Date, divided by (B) five, less (iv) the total number of common shares with respect to which the Series B Warrant is then being exercised.
Exercises of Series B Warrants that are performed on an alternate cashless basis results in the issuance of a substantially larger number of the Company's common shares than otherwise would be issued following a standard cash or cashless exercise of the Series B Warrants.
Management has determined that, in light of the alternate cashless exercise feature and of actual Series B Warrant exercises since original issuance, application of the Black-Scholes option pricing model does not appropriately reflect the fair value of the Series B Warrants outstanding at a given statement of financial position date. Instead, management has determined that the application of an intrinsic valuation method is more representative of the market value of the Series B Warrants.
On November 2, 2015, the Company announced that the holders (the "Participating Holders") of substantially all of the remaining outstanding Series B Warrants at that time had agreed to exercise all Series B Warrants held by them, at a maximum exercise ratio of approximately 33.23 common shares per warrant in accordance with the alternate cashless exercise feature in such Series B Warrants. Following the exercise of Series B Warrants by the Participating Holders in accordance with the terms of the agreements, 8,064 Series B Warrants, expiring in September 2016, remain outstanding, representing approximately 2.7% of the originally issued number of Series B Warrants. A total of $2,925,653 was paid to the Participating Holders pursuant to the aforementioned agreements. (see note 20 - Finance income and finance costs)

(29)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

As such, the Company has attributed a value to the remaining Series B Warrants via the application of the aforementioned alternate cashless exercise formula, reflecting relevant market data as at December 31, 2015, summarized as follows:
Number of Series B Warrants outstanding
 
8,064

 
Estimated potential number of equivalent shares
(a)
325,254

 
Applicable VWAP, as calculated per above
 
$4.502
 
Market value per share price
 
$4.48
 
Estimated intrinsic value per Series B Warrant
 
$175
 
Fair value of Series B Warrants outstanding
 
$1,411
 
(a) The number of common shares that would be issued pursuant to an alternative cashless exercise if the exercise of all of the
Series B Warrants had occurred on December 31, 2015.
The intrinsic valuation model described above applies "Level 2" inputs, as defined by IFRS 13.

16
Provisions and other non-current liabilities
 
 
As at December 31,
 
 
2015
 
2014
 
 
$
 
$
Onerous contract provisions (detailed below)
 
703

 
1,014

Non-current portion of provision for restructuring costs (note 14)
 
34

 
146

Other
 
98

 
130

 
 
835

 
1,290



(30)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Onerous contract provisions
 
 
Cetrotide® onerous contracts*
 
Onerous lease**
 
Total
 
 
$
 
$
 
$
At January 1, 2014
 
1,296

 
436

 
1,732

Additional provision recognized
 
223

 

 
223

Utilization of provision
 
(397
)
 
(102
)
 
(499
)
Unwinding of discount and effect of change in the discount rate
 
(124
)
 
4

 
(120
)
At December 31, 2014
 
998

 
338

 
1,336

Less: current portion (note 13)
 
(218
)
 
(104
)
 
(322
)
 
 
780

 
234

 
1,014

 
 
 
 
 
 
 
At January 1, 2015
 
998

 
338

 
1,336

Additional provision recognized
 
170

 

 
170

Utilization of provision
 
(278
)
 
(108
)
 
(386
)
Unwinding of discount and effect of change in the discount rate
 
(87
)
 
4

 
(83
)
At December 31, 2015
 
803

 
234

 
1,037

Less: current portion (note 13)
 
(225
)
 
(109
)
 
(334
)
 
 
578

 
125

 
703

_________________________
*
Recorded following the transfer of the Cetrotide® Business, as discussed in note 6 – Discontinued operations.
**
Represents the present value of the future lease payments that the Company is obligated to make pursuant to a non-cancellable operating lease in the United States, net of estimated future sublease income. The estimate may vary as a result of changes in the utilization of the leased premises and of the sublease arrangement. The remaining term of the lease is two years as at December 31, 2015.
17
Share capital
The Company has an unlimited number of authorized common shares (being voting and participating shares) with no par value, as well as an unlimited number of preferred, first and second ranking shares, issuable in series, with rights and privileges specific to each class, with no par value.
Share consolidation
The 655,984,512 common shares issued and outstanding immediately prior to the Share Consolidation, which became legally effective on November 17, 2015, were consolidated into 6,559,846 common shares (the "Post-Consolidation Shares"). The Post-Consolidation Shares began trading on each of the TSX and NASDAQ at the opening of markets on November 20, 2015. The number of outstanding stock options and share purchase warrants were adjusted on the same basis with proportionate adjustments being made to each stock option and share purchase warrant exercise price.
All share, option and share purchase warrant and per share, option and share purchase warrant data have been retroactively adjusted in these consolidated financial statements to reflect and give effect to the Share Consolidation as if it occurred at the beginning of the earliest period presented.



(31)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Common shares issued in connection with "At-the-Market" ("ATM") drawdowns
May 2013 ATM Program
On May 22, 2013, the Company entered into an ATM sales agreement (the "May 2013 ATM Program"), under which the Company was able, at its discretion and from time to time, to sell up to 25,000 of its common shares through ATM issuances on the NASDAQ for aggregate gross proceeds not to exceed $4,600,000. The May 2013 ATM Program provided that common shares were to be sold at market prices prevailing at the time of sale and, as a result, prices may have varied.
Between January 1, 2014 and March 31, 2014, the Company issued a total of 2,020 common shares under the May 2013 ATM Program at an average price of approximately $143.00 per share, resulting in aggregate gross proceeds of approximately $288,000, less cash transaction costs of $8,600 and previously deferred transaction costs of $17,000. The May 2013 ATM Program was subsequently discontinued in connection with the implementation of the May 2014 ATM Program described below.
May 2014 ATM Program
On May 9, 2014, the Company entered into an ATM sales agreement (the "May 2014 ATM Program"), under which the Company is able, at its discretion and from time to time, to sell up to 140,187 of its common shares through ATM issuances on the NASDAQ for aggregate gross proceeds not to exceed $15,000,000. The May 2014 ATM Program provides that common shares are to be sold at market prices prevailing at the time of sale and, as a result, prices may vary.
Between July 1, 2014 and December 31, 2014, the Company issued a total of 89,951common shares under the May 2014 ATM Program at an average price of approximately $136.00 per share for aggregate gross proceeds of approximately $12,200,000 less cash transaction costs of $305,430 and previously deferred transaction costs of $71,575.
Public offerings
January 2014 Offering
On January 14, 2014, the Company completed a public offering (the "January 2014 Offering") of 110,000 units, at a purchase price of $120.00 per unit, with each unit consisting of one common share and 0.8 of a warrant to purchase a common share. The related warrants (the "January 2014 Warrants") represent the right to acquire an aggregate of 88,000 common shares, as discussed below.
Total gross cash proceeds raised through the January 2014 Offering amounted to $13,200,000, less cash transaction costs of approximately $1,034,000 and previously deferred transaction costs of $5,000.
The Company issued the January 2014 Warrants to the investors who participated in the January 2014 Offering at an exercise price of $125.00 per share, with the January 2014 Warrants containing certain anti-dilution provisions. These warrants were exercisable at any time during their five-year term and, upon complete exercise, would have resulted in the issuance of an aggregate of 88,000 common shares that would generate additional proceeds for an amount that would be determined based on the then adjusted exercise price.
The Company estimated the fair value attributable to the January 2014 Warrants as of the date of grant by applying the Black-Scholes pricing model, to which the following additional assumptions were applied: a risk-free annual interest rate of 1.64%, an expected volatility of 102.31%, an expected life of 5 years and a dividend yield of 0.0%. As a result, the fair value of the share purchase warrants was estimated at $8,487,000.
Total gross proceeds of the January 2014 Offering were allocated as follows: $8,487,000 was allocated to Warrant liability, and the balance of $4,713,000 was allocated to Share capital. Transaction costs were allocated to the liability and equity components in proportion to the allocation of proceeds. As such, an amount of $666,000 was allocated to the share purchase warrants and immediately recognized in general and administrative expenses in the consolidated statement of comprehensive (loss) income, and an amount of $373,000 was allocated to Share capital.
In connection with the January 2014 Offering, the holders of warrants issued as part of a financing in November 2013 (the "November 2013 Warrants"), who participated in the January 2014 Offering agreed to waive certain anti-dilution provisions

(32)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

of such warrants solely in connection with the January 2014 Offering, and agreed to an adjustment of the exercise price of such warrants following the closing of the January 2014 Offering from their original exercise price of $160.00 per share to an exercise price equal to $125.00 per share. The exercise price of the November 2013 Warrants held by the sole holder who did not participate in the January 2014 Offering, was further reduced by $5.00 per share.
March 2015 Offering
On March 11, 2015, the Company completed a public offering of 596,775 units (the "Units"), with each Unit consisting of either one common share or one pre-funded warrant to purchase one common share ("Series C Warrant"), 0.75 of a warrant to purchase one common share ("Series A Warrant") and 0.50 of a warrant to purchase one common share ("Series B Warrant"), at a purchase price of $62.00 per Unit (the "March 2015 Offering").
Total gross cash proceeds raised through the March 2015 Offering amounted to $37,000,000, less cash transaction costs of approximately $2,560,000 and previously deferred transaction costs of $7,000.
The Series A Warrants are exercisable during a five-year term at an initial exercise price of $81.00 per share, and the Series B Warrants are exercisable during an 18-month term at an initial exercise price of $81.00 per share. Both the Series A and Series B Warrants are subject to certain anti-dilution provision and may at any time be exercised on a standard cashless basis and, in addition, the Series B Warrants may be exercised on an alternate net cashless basis. The exercise of Series B Warrants performed on an alternate net cashless basis results in the issuance of a substantially larger number of the Company's common shares than otherwise would be issued following a standard cash or cashless exercise. See also note 15 – Warrant liability. The remaining 8,064 Series B Warrants expire in September 2016.
Between May 26, 2015 and December 31, 2015, 290,318 of the Series B Warrants were exercised on an alternate cashless basis, resulting in the issuance of 5,670,118 common shares.
The Company estimated the fair value attributable to the Series A and Series B warrants as of the date of grant by applying the Black-Scholes pricing model, to which the following additional assumptions were applied: Series A warrants: a risk-free annual interest rate of 1.59%, an expected volatility of 95.11%, an expected life of 5 years and a dividend yield of 0.0%; Series B warrants: a risk-free annual interest rate of 0.47%, an expected volatility of 97.34%, an expected life of 18 months and a dividend yield of 0.0%. As a result, on March 11, 2015, the total fair value of the share purchase warrants was estimated at $20,980,000.
The Series C Warrants were offered in the March 2015 Offering to investors whose purchase of Units would have resulted in their beneficially owning more than an "initial beneficial ownership limitation" of either 4.9% or 9.9% of our common shares following the offering. The Series C Warrants, which were exercisable immediately upon issuance and for a period of five years at an exercise price of $62.00 per share, were fully exercised between March 23, 2015 and June 15, 2015. Total gross proceeds payable to the Company in connection with the exercise of the Series C Warrants were pre-funded by investors and therefore were included in the proceeds of the offering. No additional consideration was required to be paid to the Company upon exercise of the Series C Warrants.
Total gross proceeds of the March 2015 Offering were allocated as follows: $20,980,000 was allocated to the warrant liability, $9,296,000 was allocated to pre-funded warrants, and the balance of $6,724,000 was allocated to Share capital. Transaction costs were allocated to the liability and equity components in proportion to the allocation of proceeds. As such, an amount of $1,451,000 was allocated to the warrant liability and immediately recognized in general and administrative expenses in the consolidated statement of comprehensive loss, an amount of $473,000 was allocated to Share capital and an amount of $643,000 was allocated to pre-funded warrants. Upon exercise of the Series C Warrants, the net proceeds initially allocated to the pre-funded warrants were re-allocated to Share capital.
In connection with the March 2015 Offering, the holders of 211,230 of the 219,000 then outstanding warrants issued by the Company in connection with public offerings completed in November 2013 and January 2014 entered into an amendment agreement that caused such previously issued warrants to expire and terminate. The Company made a cash payment in the aggregate amount of $5,703,000 out of the proceeds of the March 2015 Offering as consideration to the relevant warrantholders in exchange for the latter agreeing to the aforementioned amendment. Upon expiry of the warrants in question, the Company recognized a gain of $5,865,000 and derecognized the expired warrants. The gain on derecognition was

(33)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

recorded, net of the aforementioned amendment fee, within finance income in the accompanying condensed interim consolidated statement of comprehensive loss (see note 20 – Finance income and finance costs). For holders of the remaining 7,770 outstanding warrants issued by the Company in connection with the November 2013 and the January 2014 offerings who did not enter into a warrant amendment agreement, the exercise price of the corresponding warrants was reduced to $14.00 per share in accordance with the terms thereof.
December 2015 Offering
On December 14, 2015, the Company completed a public offering of 3,000,000 common shares at a purchase price of $5.54 per share and 2,100,000 warrants to purchase one common share at a purchase price of $0.01 per warrant (the "December 2015 Offering").
In connection with the December 2015 Offering, the Company granted the underwriter a 45-day over-allotment option to separately acquire up to an additional 330,000 common shares at the same purchase price of $5.54 per share and/or up to an additional 231,000 warrants at the same purchase price of $0.01 per warrants. The underwriter exercised its option in full with respect to the 231,000 warrants for market stabilization purposes but did not exercise any of its option in respect of common shares.
Total gross cash proceeds raised through the December 2015 Offering amounted to approximately $16,650,000, less cash transaction costs of approximately $1,638,000.
The warrants are exercisable for a period of five years at an exercise price of $7.10 per share. Upon complete exercise for cash, these warrants would result in the issuance of an aggregate of 2,331,000 common shares that would generate additional proceeds for an amount of $16,550,100. However, those warrants may at any time be exercised on a "net" or "cashless" basis.
The Company estimated the fair value attributable to the warrants as of the date of grant by applying the Black-Scholes pricing model, to which the following additional assumptions were applied: a risk-free annual interest rate of 1.68%, an expected volatility of 107.57%, an expected life of 5 years and a dividend yield of 0.0%. As a result, on December 14, 2015, the total fair value of the share purchase warrants was estimated at $7,698,000.
Total gross proceeds of the December 2015 Offering were allocated as follows: $7,698,000 was allocated to the warrant liability and $8,952,000 was allocated to Share capital. Transaction costs were allocated to the liability and equity components in proportion to the allocation of proceeds. As such, an amount of $757,000 was allocated to the warrant liability and immediately recognized in general and administrative expenses in the consolidated statement of comprehensive loss, an amount of $881,000 was allocated to Share capital.
In connection with the December 2015 Offering and in accordance with the anti-dilution provisions, the exercise prices of the January 2014 and March 2015 Series A and Series B warrants were adjusted at $0.00 and $4.95, respectively. The remaining January 2014 Warrants were exercised on December 30, 2015 and no longer remain outstanding.
Shareholder rights plan
The Company has a shareholder rights plan (the "Rights Plan") that provides the Board of Directors and the Company's shareholders with additional time to assess any unsolicited take-over bid for the Company and, where appropriate, to pursue other alternatives for maximizing shareholder value. Under the Rights Plan, one right has been issued for each currently issued common share, and one right will be issued with each additional common share to be issued. The Rights Plan was most recently re-confirmed and approved by the Company's shareholders at its annual meeting of shareholders held on May 8, 2013.
Stock options
In December 1995, the Company's Board of Directors adopted a stock option plan (the "Stock Option Plan") for its directors, senior executives, employees and other collaborators who provide services to the Company. The total number of common shares that may be issued under the Stock Option Plan cannot exceed 11.4% of the total number of issued and outstanding common shares at any given time. The Company's Board of Directors amended the Stock Option Plan on March 20, 2014.

(34)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Options granted under the Stock Option Plan prior to the 2014 amendment expire after a maximum period of ten years following the date of grant. Options granted after the 2014 amendment expire after a maximum period of seven years following the date of grant.
The following tables summarize the activity under the Stock Option Plan.
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
US dollar-denominated options
 
Number
 
Weighted
average
exercise
price
(US$)
 
Number
 
Weighted
average
exercise
price
(US$)
 
Number
 
Weighted
average
exercise
price
(US$)
Balance – Beginning of the year
 
33,956

 
187.36

 
17,575

 
339.61

 
13,260

 
426.22

Granted
 
243,000

 
5.17

 
19,515

 
93.03

 
6,300

 
156.48

Forfeited
 
(4,082
)
 
136.17

 
(3,134
)
 
453.77

 
(1,985
)
 
336.97

Balance – End of the year
 
272,874

 
25.88

 
33,956

 
187.36

 
17,575

 
339.61


 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
Canadian dollar-denominated options
 
Number
 
Weighted
average
exercise
price
(CAN$)
 
Number
 
Weighted
average
exercise
price
(CAN$)
 
Number
 
Weighted
average
exercise
price
(CAN$)
Balance – Beginning of the year
 
4,909

 
1,010.4

 
6,484

 
1,290.50

 
7,232

 
1,270.57

Exercised
 

 

 

 

 

 

Forfeited
 
(271
)
 
923.20

 
(810
)
 
748.53

 
(97
)
 
1,254.56

Expired
 
(851
)
 
1,772.17

 
(765
)
 
3,661.77

 
(651
)
 
1,074.38

Balance – End of the year
 
3,787

 
845.46

 
4,909

 
1,010.40

 
6,484

 
1,290.50


 
 
US$ options outstanding as at December 31, 2015
Exercise price
(US$)
 
Number
 
Weighted average remaining
contractual life (years)
 
Weighted average exercise price
(US$)
4.58 to 28.54
 
240,000

 
6.97

 
4.58

28.55 to 91.50
 
11,852

 
6.01

 
71.24

91.51 to 122.50
 
7,300

 
6.13

 
109.73

122.51 to 207.50
 
6,250

 
7.08

 
165.60

207.51 to 2,178.00
 
7,472

 
6.05

 
439.41

 
 
272,874

 
6.89

 
25.88


 
 
US$ options exercisable as at December 31, 2015
Exercise price
(US$)
 
Number
 
Weighted average remaining
contractual life (years)
 
Weighted average exercise price
(US$)
28.55 to 91.50
 
3,199

 
5.93

 
76.00

91.51 to 122.50
 
3,352

 
6.53

 
110.35

122.51 to 207.50
 
3,170

 
7.14

 
176.38

207.51 to 2,178.00
 
7,472

 
6.05

 
439.41

 
 
17,193

 
6.32

 
259.14


(35)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

 
 
CAN$ options both outstanding and exercisable as at December 31, 2015
Exercise price
(CAN$)
 
Number
 
Weighted average remaining
contractual life (years)
 
Weighted average exercise price
(CAN$)
330.00 to 480.00
 
862

 
2.89

 
364.73

480.01 to 741.00
 
1,192

 
3.94

 
570.00

741.01 to 1,002.00
 
983

 
4.91

 
912.00

1,002.01 to 1,941.00
 
460

 
1.94

 
1,092.00

1,941.01 to 2,790.00
 
290

 
1.01

 
2,790.00

 
 
3,787

 
3.48

 
845.46

As at December 31, 2015, the total compensation cost related to unvested US Dollar stock options not yet recognized amounted to $1,221,998 ($1,126,261 in 2014). This amount is expected to be recognized over a weighted average period of 1.70 years (1.70 years in 2014).
The Company settles stock options exercised through the issuance of new common shares as opposed to purchasing common shares on the market to settle stock option exercises.
Fair value input assumptions for US dollar-denominated options granted
The table below shows the assumptions, or weighted average parameters, applied to the Black-Scholes option pricing model in order to determine share-based compensation costs over the life of the awards.
 
 
 
 
Years ended December 31,
 
 
 
 
2015
 
2014
Expected dividend yield
 
(a)
 
0.0%

 
0.0%
Expected volatility
 
(b)
 
110.5
%
 
101.6%
Risk-free annual interest rate
 
(c)
 
1.79
%
 
1.87%
Expected life (years)
 
(d)
 
5.77

 
6.16
Weighted average share price
 
 
 
$5.65
 
$93.00
Weighted average exercise price
 
 
 
$5.17
 
$93.00
Weighted average grant date fair value
 
 
 
$4.69
 
$75.00
_________________________
(a)
The Company has not paid dividends and it does not intend to pay dividends in the foreseeable future.
(b)
Based on the historical volatility of the Company's stock price over the most recent period consistent with the expected life of the stock options, as well as on future expectations.
(c)
Based on United States Treasury Government Bond interest rates with a term that is consistent with the expected life of the stock options.
(d)
Based upon historical data related to the exercise of stock options, on post-vesting employment terminations and on future expectations related to exercise behavior.
The Black-Scholes pricing models referred above use "Level 2" inputs in calculating fair value, as defined by IFRS 7, and as discussed in note 24 – Financial instruments and financial risk management.

(36)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

18
Operating expenses
Components of the Company's operating expenses from continuing operations include the following:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Subcontractor fees
 

 

 
51

Cost of sales
 

 

 
51

Key management personnel compensation(1)
 
 
 
 
 
 
Salaries and short-term employee benefits
 
2,957

 
2,405

 
2,280

Termination benefits
 
843

 
439

 
1,438

Post-employment benefits
 
119

 
77

 
58

Share-based compensation costs
 
828

 
392

 
1,795

 
 
4,747

 
3,313

 
5,571

Other employees compensation:
 
 
 
 
 
 
Salaries and short-term employee benefits
 
4,431

 
7,663

 
7,955

Termination benefits (note 14)
 
245

 
1,984

 
7

Post-employment benefits
 
511

 
832

 
626

Share-based compensation costs
 
91

 
105

 
572

 
 
5,278

 
10,584

 
9,160

Goods and services(2)
 
21,429

 
19,016

 
15,954

Leasing costs, net of sublease receipts of $155,000 in 2015, $344,000 in 2014 and $226,000 in 2013(3)
 
1,452

 
1,802

 
1,879

Refundable tax credits and grants
 
(23
)
 
(131
)
 
(517
)
Onerous contract expenses resulting from the Resource Optimization Program and from the Corporate Restructuring (note 14)
 
(202
)
 
563

 

Share-based compensation costs related to collaborators
 

 

 
(148
)
Transaction costs related to share purchase warrants
 
2,208

 
666

 
1,165

Depreciation and amortization
 
271

 
488

 
949

Impairment losses
 
70

 
390

 

Operating foreign exchange losses (gains)
 
199

 
715

 
(413
)
 
 
25,404

 
23,509

 
18,869

 
 
35,429

 
37,406

 
33,651

_________________________
(1) 
Key management includes the Company's directors and members of the executive management team.
(2) 
Goods and services include third-party R&D costs, laboratory supplies, professional fees, contracted sales force costs, marketing services, insurance and travel expenses.
(3) 
Leasing costs also include changes in the onerous lease provision (note 16 – Provisions and other non-current liabilities), other than attributable to the unwinding of the discount.

(37)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

On April 15, 2013, the Company appointed a new President and Chief Executive Officer (the "CEO"), who also was appointed and subsequently elected to the Company's Board of Directors. In accordance with his employment agreement, the Company's new President and CEO was granted, as a retention bonus, 375,000 share appreciation rights ("SARs"), pursuant to which he would have been entitled to receive a future cash payment if he remained employed through a certain date. The retention bonus was to be based on the increase, if any, in the company's share price from $198.00 over a specified period of time. 175,000 SARs vested (and expired) on December 31, 2014, and 200,000 SARs vested (and expired) on December 31, 2015. As a result of the share price, the CEO did not receive any payment under the SARs prior to their expiry.
The Company's former President and CEO received, upon termination of his employment, benefits of approximately $1,438,000. Additionally, the Company's former President and CEO was permitted to retain all of his stock options, which, pursuant to IFRS 2, Share-based Payment, constitutes a modification to the terms of the existing stock options granted in a share-based payment transaction, by allowing such stock options to expire at the original expiry date, based on the original date of grant, despite the termination of employment. As a result of this modification, an amount of $682,000, which corresponds to the compensation cost related to unvested stock options not yet recognized immediately before the modification and to the incremental fair value of the stock options, measured by comparing the stock options immediately before and immediately after the modification date, was recognized during the year ended December 31, 2013 within G&A expenses in the consolidated statement of comprehensive (loss) income.
Most of the employment agreements entered into between the Company and its executive officers include termination provisions, whereby the executive officers would be entitled to receive benefits that would be payable if the Company were to terminate the executive officers' employment without cause or if their employment is terminated following a change of control. Separation benefits generally are calculated based on an agreed-upon multiple of applicable base salary and incentive compensation and, in certain cases, other benefit amounts.
In addition to payments made to members of the Company's key management team, during the years ended December 31, 2013, 2014 and 2015 the Company paid $76,800; $38,000; and nil respectively, in professional fees to one of the members of the Company's Board of Directors for special tasks mandated by the Company's Nominating, Corporate Governance and Compensation Committee.
19
Employee future benefits
The Company's subsidiary in Germany provides unfunded defined benefit pension plans and unfunded post-employment benefit plans for certain groups of employees. Provisions for pension obligations are established for benefits payable in the form of retirement, disability and surviving dependent pensions.
The unfunded defined benefit pension plans are final salary pension plans, which provide benefits to members (or to their surviving dependents) in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on the member’s length of service and on his or her base salary in the final years leading up to retirement. Current pensions vary in accordance with applicable statutory requirements, which foresee an adjustment every three years on an individual basis that is based on inflationary increases or in relation to salaries of comparable groups of active employees in the Company. An adjustment may be denied by the Company if the Company's financial situation does not allow for an increase in pensions. These plans are unfunded, and the Company meets benefit payment obligations as they fall due.








(38)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

The following table presents the changes in the aforementioned plans' accrued benefit obligations:
 
 
Pension benefit plans
Years ended December 31,
 
Other benefit plans
Years ended December 31,
 
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
 
$
 
$
 
$
Balance – Beginning of year
 
14,619

 
14,646

 
16,062

 
433

 
762

 
1,169

Current service cost
 
103

 
176

 
219

 
14

 
24

 
57

Interest cost
 
260

 
476

 
421

 
8

 
25

 
31

Actuarial loss (gain) arising from changes in financial assumptions
 
(844
)
 
1,833

 
(2,346
)
 
(34
)
 
(96
)
 
(258
)
Benefits paid
 
(410
)
 
(411
)
 
(357
)
 
(97
)
 
(210
)
 
(274
)
Impact of foreign exchange rate changes
 
(1,353
)
 
(2,101
)
 
647

 
(43
)
 
(72
)
 
36

Balance – End of year
 
12,375

 
14,619

 
14,646

 
281

 
433

 
761

Amounts recognized:
 
 
 
 
 
 
 
 
 
 
 
 
In comprehensive (loss) income
 
(363
)
 
(652
)
 
(640
)
 
12

 
47

 
170

In other comprehensive income(loss)
 
2,197

 
268

 
1,699

 
43

 
72

 
(36
)

The cumulative amount of actuarial net losses recognized in other comprehensive (loss) income as at December 31, 2015 is approximately $3,492,000 (approximately $4,336,000 as at December 31, 2014 and approximately $2,503,000 as at December 31, 2013).
The significant actuarial assumptions applied to determine the Company's accrued benefit obligations are as follows:
 
 
Pension benefit plans
 
Other benefit plans
 
 
Years ended December 31,
 
Years ended December 31,
Actuarial assumptions
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
 
 
%
 
%
 
%
 
%
 
%
 
%
Discount rate
 
2.40
 
2.00
 
3.37
 
2.40
 
2.00
 
3.37
Pension benefits increase
 
1.80
 
1.80
 
2.00
 
2.40
 
1.80
 
2.00
Rate of compensation increase
 
2.00
 
2.00
 
2.75 to 3.75
 
2.00
 
2.00
 
2.75

The calculation of the pension benefit obligation is sensitive to the discount rate assumption. Since January 1, 2015, management determined that the discount rate assumption should be adjusted from 2.0% to 2.4% as a result of changes in the European economic environment.













(39)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in Germany. These assumptions translate into an average remaining life expectancy in years for a pensioner retiring at age 65:
 
 
2015
 
2014
 
2013
Retiring at the end of the reporting period:
 
 
 
 
 
 
Male
 
20

 
19

 
19

Female
 
24

 
23

 
23

Retiring 20 years after the end of the reporting period:
 
 
 
 
 
 
Male
 
22

 
22

 
22

Female
 
26

 
26

 
26

The most recent actuarial reports give effect to the pension and post-employment benefit obligations as at December 31, 2015. The next actuarial reports are planned for December 31, 2016.

In accordance with the assumptions used as at December 31, 2015, undiscounted defined pension benefits expected to be paid are as follows:
 
 
$
2016
 
453

2017
 
463

2018
 
481

2019
 
502

2020
 
514

Thereafter
 
17,439

 
 
19,852

The weighted average duration of the defined benefit obligation is 16.3 years.
Total expenses for the Company's defined contribution plan in its German subsidiary amounted to approximately $159,000 for the year ended December 31, 2015 ($232,954 for 2014 and $228,771 for 2013).

(40)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

20
Finance income and finance costs
Components of the Company's finance income and finance costs can be summarized as follows:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Finance income
 
 
 
 
 
 
Change in fair value of warrant liability
 

 
18,272

 
1,563

Gain associated with the extinguishment of warrant liability (note 17)
 
162

 

 

Gains due to changes in foreign currency exchange rates
 

 
1,879

 

Interest income
 
143

 
168

 
185

 
 
305

 
20,319

 
1,748

Finance costs
 
 
 
 
 
 
Change in fair value of warrant liability
 
(10,956
)
 

 

Warrant exercise inducement fee (note 15)
 
(2,926
)
 

 

Losses due to changes in foreign currency exchange rates
 
(1,767
)
 

 
(1,512
)
 
 
(15,649
)
 

 
(1,512
)
 
 
(15,344
)
 
20,319

 
236

 21
Supplemental disclosure of cash flow information
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Changes in operating assets and liabilities:
 
 
 
 
 
 
Trade and other receivables
 
270

 
(578
)
 
(3
)
Inventory
 

 

 
112

Prepaid expenses and other current assets
 
(111
)
 
(2,453
)
 
(6,454
)
Other non-current assets
 
58

 
(204
)
 
(124
)
Payables and accrued liabilities
 
(1,013
)
 
1,732

 
(900
)
Deferred revenues
 

 
1,101

 

Provision for restructuring costs (note 14)
 
(1,840
)
 
(687
)
 

Employee future benefits (note 19)
 
(507
)
 
(621
)
 
(631
)
Provisions and other non-current liabilities
 
(252
)
 
(163
)
 
10

 
 
(3,395
)
 
(1,873
)
 
(7,990
)

During the year ended December 31, 2014, the Company paid approximately $111,000 in income taxes in the form of foreign jurisdiction withholding tax on payments received pursuant to the agreements entered into with Sinopharm, as discussed in note 5 – Development, commercialization and license arrangements.



(41)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

22
Income taxes
Significant components of current and deferred income tax expense are as follows:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Current tax expense
 

 
111

 

Deferred tax:
 
 
 
 
 
 
Origination and reversal of temporary differences
 
8,920

 
10,246

 
(4,253
)
Adjustments in respect of prior years
 

 
5

 
418

Change in unrecognized tax assets
 
(8,920
)
 
(10,251
)
 
3,835

Income tax expense
 

 
111

 


The reconciliation of the combined Canadian federal and provincial income tax rate to the income tax expense is provided below:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
Combined Canadian federal and provincial statutory income tax rate
 
26.9
%
 
26.9
%
 
26.9
%

 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Income tax recovery (expense) based on combined statutory income tax rate
 
13,511

 
4,426

 
(1,833
)
Change in unrecognized tax assets
 
(8,581
)
 
(10,251
)
 
3,835

Permanent difference attributable to the use of local currency for tax reporting
 
(1,297
)
 
145

 
(892
)
Permanent difference attributable to net change in fair value of warrant liability
 
(3,754
)
 
4,408

 
(217
)
Share-based compensation costs
 
(248
)
 
(133
)
 
(596
)
Difference in statutory income tax rate of foreign subsidiaries
 
1,135

 
1,398

 
(809
)
Permanent difference attributable to expiring loss carry forward
 
(563
)
 
 
 
 
Permanent difference attributable to unrealized foreign exchange gain/loss
 

 
18

 
131

Foreign witholding tax
 

 
(111
)
 

Adjustments in respect of prior years
 

 
5

 
418

Other
 
(203
)
 
(16
)
 
(37
)
 
 

 
(111
)
 

Income tax expense of $111,000 for the year ended December 31, 2014 represents current taxation in the form of foreign jurisdiction tax withholdings on payments pursuant to the licensing agreement entered into with Sinopharm (note 5 – Development, commercialization and licensing arrangements).

(42)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Deferred income tax assets are recognized to the extent that the realization of the related tax benefit through reversal of temporary differences and future taxable profits is probable.
Loss before income taxes
Loss before income taxes is attributable to the Company's tax jurisdictions as follows:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Germany
 
(20,500
)
 
(29,672
)
 
(19,784
)
Canada
 
(29,496
)
 
12,867

 
(7,639
)
United States
 
(232
)
 
(271
)
 
183

 
 
(50,228
)
 
(17,076
)
 
(27,240
)
Significant components of deferred tax assets and liabilities are as follows:
 
 
As at December 31,
 
 
2015
 
2014
 
 
$
 
$
Deferred tax assets
 
 
 
 
Non-current:
 
 
 
 
Operating losses carried forward
 
1,355

 
2,139

Intangible assets
 
6,242

 
7,918

 
 
7,597

 
10,057

Deferred tax liabilities
 
 
 
 
Current:
 
 
 
 
Deferred revenues
 
327

 
941

 
 
327

 
941

Non-current:
 
 
 
 
Property, plant and equipment
 
9

 
17

Deferred revenues
 
6,868

 
7,979

Warrant liability
 
390

 
1,116

Other
 
3

 
4

 
 
7,270

 
9,116

 
 
7,597

 
10,057

Deferred tax assets (liabilities), net
 

 


(43)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Significant components of unrecognized deferred tax assets are as follows:
 
 
As at December 31,
 
 
2015
 
2014
 
 
$
 
$
Deferred tax assets
 
 
 
 
Current:
 
 
 
 
Onerous contract and other provisions
 
167

 
102

 
 
167

 
102

Non-current:
 
 
 
 
Deferred Revenues
 
155

 

Operating losses carried forward
 
64,471

 
62,094

Research and development costs
 
9,207

 
10,987

Unused tax credits
 
7,977

 
9,517

Employee future benefits
 
1,919

 
2,455

Property, plant and equipment
 
219

 
1,175

Share issue expenses
 
1,226

 
817

Onerous contract provisions
 
96

 
198

Intangible assets
 
190

 
227

Other
 
197

 
296

 
 
85,657

 
87,766

Unrecognized deferred tax assets
 
85,824

 
87,868

As at December 31, 2015, amounts and expiry dates of tax attributes to be deferred for which no deferred tax asset was recognized were as follows:
 
 
Canada
 
 
Federal
 
 Provincial
 
 
$
 
$
2028
 
6,592

 
5,206

2029
 
4,791

 
4,773

2030
 
4,105

 
4,089

2031
 
1,753

 
1,738

2032
 
4,250

 
4,250

2033
 
3,721

 
3,721

2034
 
4,154

 
4,154

2035
 
9,587

 
9,625

 
 
38,953

 
37,556

The Company has estimated non-refundable R&D investment tax credits of approximately $7,977,000 which can be carried forward to reduce Canadian federal income taxes payable and which expire at dates ranging from 2018 to 2034.

(44)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Furthermore, the Company has unrecognized tax assets in respect of operating losses to be carried forward in Germany and in the United States. The losses amount to approximately $171,064,000 in Germany, for which there is no expiry date, and to $1,145,000 in the United States, which expire as follows:
 
 
 United States
 
 
$
2028
 
369

2029
 
178

2034
 
151

2035
 
447

 
 
1,145

The operating loss carryforwards and the tax credits claimed are subject to review, and potential adjustment, by tax authorities.
Other deductible temporary differences for which tax assets have not been booked are not subject to a time limit, except for share issue expenses which are amortizable over five years.
23
Capital disclosures
The Company's objective in managing capital, consisting of shareholders' equity, with cash and cash equivalents and restricted cash equivalents being its primary components, is to ensure sufficient liquidity to fund R&D activities, selling and G&A expenses, working capital and capital expenditures.
Over the past several years, the Company has increasingly raised capital via public equity offerings and drawdowns under various ATM sales programs as its primary source of liquidity, as discussed in note 17 – Share capital.
The capital management objective of the Company remains the same as that in previous periods. The policy on dividends is to retain cash to keep funds available to finance the activities required to advance the Company's product development portfolio and to pursue appropriate commercial opportunities as they may arise.
The Company is not subject to any capital requirements imposed by any regulators or by any other external source.
24
Financial instruments and financial risk management
Financial assets (liabilities) as at December 31, 2015 and December 31, 2014 are presented below.
December 31, 2015
 
Loans and
receivables
 
Financial
liabilities at
FVTPL
 
Other
financial
liabilities
 
Total
 
 
$
 
$
 
$
 
$
Cash and cash equivalents (note 7)
 
41,450

 

 

 
41,450

Trade and other receivables (note 8)
 
297

 

 

 
297

Restricted cash equivalents (note 9)
 
255

 

 

 
255

Payables and accrued liabilities (note 13)
 

 

 
(3,837
)
 
(3,837
)
Provision for restructuring costs (note 14)
 

 

 
(625
)
 
(625
)
Warrant liability including current portion (note 15)
 

 
(10,891
)
 

 
(10,891
)
Other non-current liabilities (note 16)
 

 

 
(98
)
 
(98
)
 
 
42,002

 
(10,891
)
 
(4,560
)
 
26,551



(45)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

December 31, 2014
 
Loans and receivables
 
Financial liabilities at FVTPL
 
Other financial liabilities
 
Total
 
 
$
 
$
 
$
 
$
Cash and cash equivalents (note 7)
 
34,931

 

 

 
34,931

Trade and other receivables (note 8)
 
796

 

 

 
796

Restricted cash equivalents (note 9)
 
760

 

 

 
760

Payables and accrued liabilities (note 13)
 

 

 
(5,256
)
 
(5,256
)
Provision for restructuring costs (note 14)
 

 

 
(1,105
)
 
(1,105
)
Warrant liability (note 15)
 

 
(8,225
)
 

 
(8,225
)
Other non-current liabilities (note 16)
 

 

 
(130
)
 
(130
)
 
 
36,487

 
(8,225
)
 
(6,491
)
 
21,771

Fair value
The Black-Scholes valuation methodology uses "Level 2" inputs in calculating fair value, as defined in IFRS 7, which establishes a hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The input levels discussed in IFRS 7 are:
Level 1 –
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 –
Inputs other than quoted prices included within Level 1 that are observable for an asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices).
Level 3 –
Inputs for an asset or liability that are not based on observable market data (unobservable inputs).
The carrying values of the Company's cash and cash equivalents, trade and other receivables, restricted cash equivalents, payables and accrued liabilities, provision for restructuring costs and other non-current liabilities approximate their fair values due to their short-term maturities or to the prevailing interest rates of the related instruments, which are comparable to those of the market.
Financial risk factors
The following provides disclosures relating to the nature and extent of the Company's exposure to risks arising from financial instruments, including credit risk, liquidity risk and market risk (share price risk), and how the Company manages those risks. 
(a)
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company regularly monitors credit risk exposure and takes steps to mitigate the likelihood of this exposure resulting in losses. The Company's exposure to credit risk currently relates to cash and cash equivalents, trade and other receivables and restricted cash equivalents. The Company holds its available cash in amounts that are readily convertible to known amounts of cash and deposits its cash balances with financial institutions that have an investment grade credit rating of at least "A" or the equivalent. This information is supplied by independent rating agencies where available and, if not available, the Company uses publicly available financial information to ensure that it invests its cash in creditworthy and reputable financial institutions.
As at December 31, 2015, trade accounts receivable for an amount of approximately $122,000 were with two counterparties, and no trade accounts receivable were past due or impaired.

(46)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

Generally, the Company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended following an evaluation of creditworthiness. In addition, the Company performs ongoing credit reviews of all of its customers and establishes an allowance for doubtful accounts when accounts are determined to be uncollectible.
The maximum exposure to credit risk approximates the amount recognized in the Company's consolidated statement of financial position.
(b)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. As indicated in note 23 – Capital disclosures, the Company manages this risk through the management of its capital structure. It also manages liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves the Company's operating and capital budgets, as well as any material transactions occurring outside of the ordinary course of business. The Company has adopted an investment policy in respect of the safety and preservation of its capital to ensure the Company's liquidity needs are met. The instruments are selected with regard to the expected timing of expenditures and prevailing interest rates.
The Company expects to continue to incur operating expenses and may require significant capital to fulfill its future obligations in absence of sufficient corresponding revenues. The Company's ability to continue future operations beyond December 31, 2016 and to fund its activities is dependent on its ability to secure additional financings, which may be completed in a number of ways, including but not limited to licensing arrangements, partnerships, promotional arrangements, the issuance of securities and other financing activities. Management will pursue such additional sources of financing when required, and while the Company has been successful in securing financing in the past, there can be no assurance it will be able to do so in the future or that these sources of funding or initiatives will be available or on terms acceptable to the Company.
(c)
Market risk
Share price risk
The change in fair value of the Company's warrant liability, which is measured at FVTPL, results from the periodic "mark-to-market" revaluation, via the application of the intrinsic valuation and the Black-Scholes option pricing model. These valuation models are impacted, among other inputs, by the market price of the Company's common shares. As a result, the change in fair value of the warrant liability, which is reported as finance income (costs) in the accompanying consolidated statements of comprehensive (loss) income, has been and may continue in future periods to be materially affected most notably by changes in the Company's common share closing price, which on the NASDAQ, has ranged from $4.00 to $84.20 during the year ended December 31, 2015.
If variations in the market price of our common shares of -10% and +10% were to occur, the impact on the Company's net (loss) related to the warrant liability held at December 31, 2015 would be as follows:
 
 
Carrying
amount
 
-10%
 
+10%
 
 
$
 
$
 
$
Warrant liability, including current portion
 
10,891

 
1,059

 
(1,067
)
Total impact on net loss – decrease / (increase)
 
 
 
1,059

 
(1,067
)



(47)


Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

25
Commitments and contingencies
The Company is committed to various operating leases for its premises. Expected future minimum lease payments which also include future payments in connection with utility service agreements and future minimum sublease receipts under non-cancellable operating leases (subleases), as well as future payments in connection with service and manufacturing agreements, as at December 31, 2015 are as follows:
 
 
Minimum lease payments
 
Minimum sublease receipts
 
Service and manufacturing
 
 
$
 
$
 
$
Less than 1 year
 
1,367

 
(385
)
 
639

1 - 3 years
 
2,394

 
(487
)
 
370

4 - 5 years
 
1,837

 
(23
)
 

More than 5 years
 
286

 

 

Total
 
5,884

 
(895
)
 
1,009

During the quarter, the Company's lease agreement in Germany for laboratory, office, and storage space was terminated, and the Company entered into a new lease agreement for the rental of less space on the same premises as compared to the Company's former arrangement. The new lease expires on April 30, 2021 and is subject to renewal upon notice by the Company for two additional four-year periods. Under the terms of the arrangement, the minimum lease payment may be increased or decreased in accordance with the fluctuations in the German consumer price index up to 5% on a cumulative basis.
Contingencies
In the normal course of operations, the Company may become involved in various claims and legal proceedings related to, for example, contract terminations and employee-related and other matters. No contingent liabilities have been accrued as at December 31, 2015 or 2014.
Class Action Lawsuit
The Company and certain of its current and former officers are defendants in a class-action lawsuit pending in the United States District Court for the District of New Jersey (the "Court"), brought on behalf of shareholders of the Company. The pending lawsuit is the result of the consolidation of several lawsuits, the first of which was filed on November 11, 2014. The plaintiffs filed their amended consolidated complaint on April 10, 2015. The amended complaint alleged violations of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the defendants between August 30, 2011 and November 6, 2014 (the "Class Period"), regarding the safety and efficacy of Macrilen™, a product that the Company developed for use in the diagnosis of adult growth hormone deficiency, and the prospects for the approval of the Company's new drug application for the product by the US Food and Drug Administration. The plaintiffs seek to represent a class comprised of purchasers of the Company's common shares during the Class Period and seek unspecified damages, costs and expenses and such other relief as determined by the court.
On September 14, 2015, the Court dismissed the lawsuit, but granted the plaintiffs leave to amend. In dismissing the lawsuit, the Court stated that "taking the complaint as a whole, plaintiffs have failed to state a claim" under the Private Securities Litigation Reform Act of 1995 or Rule 9 of the Federal Rules of Civil Procedure. On October 14, 2015, the plaintiffs filed a Second Amended Complaint against the Company. The Company filed a motion to dismiss the Second Amended Complaint on November 11, 2015, because management believes that the Second Amended Complaint also fails to state a claim. See note 28 Subsequent event.
The Company's directors' and officers' insurance policies ("D&O Insurance") provide for reimbursement of certain costs and expenses incurred in connection with the defense of this lawsuit, including legal and professional fees, as well as other loss (damages, settlements, and judgments), if any, subject to certain policy exclusions, restrictions, limits, deductibles and other terms. The Company believes that the D&O Insurance applies to the purported lawsuit; however, the insurers have

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Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

issued standard reservations of rights letters reserving all rights under the D&O Insurance. Legal and professional fees are expensed as incurred, and no reserve is established for them.
While the Company believes that it has meritorious defenses and intends to defend this purported lawsuit vigorously, management cannot currently predict the outcome of this suit or reasonably estimate any potential loss that may result from this suit. Accordingly, the Company has not recorded any liability related to the lawsuit. No assurance can be given with respect to the ultimate outcome of such proceedings, and the Company could incur substantial unreimbursed legal fees, damages, settlements, judgments, and other expenses in connection with these proceedings that may not qualify for coverage under, or may exceed the limits of, its applicable D&O Insurance and could have a material adverse impact on the Company's financial condition, results of operations, liquidity, and cash flows.

26
Net (loss) income per share
The following table sets forth pertinent data relating to the computation of basic and diluted net (loss) income per share attributable to common shareholders.
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Net loss from continuing operations
 
(50,228
)
 
(17,187
)
 
(27,240
)
Net income from discontinued operations
 
85

 
623

 
34,055

Net (loss) income
 
(50,143
)
 
(16,564
)
 
6,815

Basic weighted average number of shares outstanding
 
2,763,603

 
590,247

 
294,765

Dilutive effect of stock options
 
5,094

 

 

Dilutive effect of share purchase warrants
 
655,639

 

 

Diluted weighted average number of shares outstanding
 
3,424,336

 
590,247

 
294,765

Items excluded from the calculation of diluted net (loss) income per share because the exercise price was greater than the average market price of the common shares or due to their anti-dilutive effect.
 

 

 

Stock options
 
36,661

 
23,242

 
21,155

Warrants (number of equivalent shares)
 
55,671

 
287,852

 
71,419

For the year ended December 31, 2015, the diluted net loss per share was the same as the basic net loss per share, since the effect of the assumed exercise of stock options and warrants to purchase common shares is anti-dilutive. Accordingly, the diluted net loss per share for this period was calculated using the basic weighted average number of shares outstanding.

The weighted average number of shares is influenced most notably by share issuances made in connection with financing activities, such as registered direct and public offerings and ATM drawdowns, which resulted in the issuance of a total of 3,250,481 common shares during the year (201,971 and 199,827 common shares during the years ended December 31, 2014 and 2013, respectively). Additionally, during the year ended December 31, 2015, 6,023,125 common shares were issued in connection with the exercise of warrants (see note 15 - Warrant liability and note 17 - Share capital).



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Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

27
Segment information
The Company operates in a single operating segment, being the biopharmaceutical segment.
Geographical information
Revenues by geographical area are detailed as follows:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
United States
 
217

 
6

 
33,640

Switzerland
 
312

 
956

 
34,081

Japan
 
18

 
61

 
6,586

China
 
302

 

 

Other
 
27

 
25

 
212

 
 
876

 
1,048

 
74,519

Amounts presented:
 
 
 
 
 
 
Within discontinued operations
 
331

 
1,037

 
68,344

Within continuing operations
 
545

 
11

 
6,175

 
 
876

 
1,048

 
74,519

Revenues have been allocated to geographic regions based on the country of residence of the Company's external customers or licensees.
Non-current assets* by geographical area are detailed as follows:
 
 
As at December 31,
 
 
2015
 
2014
 
 
$
 
$
Germany
 
8,280

 
9,778

Canada
 
49

 
58

 
 
8,329

 
9,836

_______________________________    
* Non-current assets include property, plant and equipment, identifiable intangible assets and goodwill.
Major customers representing 10% or more of the Company's revenues in each of the last three years are as follows:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
 
 
$
 
$
 
$
Company 1*
 
312

 
956

 
34,081

Company 2*
 

 

 
33,640

Company 3
 

 

 
5,952

Company 4
 
217

 

 

Company 5
 
302

 

 

_______________________________
*Related to the Cetrotide® Business (see note 6 – Discontinued operations).


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Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015, 2014 and 2013
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)

28
Subsequent event
Class Action Lawsuit
The hearing of the motion to dismiss the Second Amended Complaint occurred on January 19, 2016. On March 2, 2016, the Court issued an order granting the Company's motion to dismiss the complaint in part and denying it in part.  The Court dismissed certain of the Company's' current and former officers from the lawsuit.  The Court allowed the claim that the Company omitted material facts from public statements during the Class Period to proceed against the Company and the former CEO who departed in 2013, while dismissing such claims against other current and former officers.  The Court also allowed a claim for “controlling person” liability to proceed against certain current and former officers.  The Company disagrees with the Court's decision and filed a motion for reconsideration on March 16, 2016.


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