EXHIBIT 99.3
VASOGEN
2003 annual report
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Advancing the Treatment of
Chronic Inflammatory Disease
V A S O G E N I N C . 2 0 0 3
Vasogen is a leader in the research and commercial development of immune
modulation therapies targeting the chronic inflammation underlying
cardiovascular disorders. Vasogen's lead product, Celacade(TM) (immune
modulation therapy) is currently in phase III clinical trials for the
treatment of chronic heart failure and peripheral arterial disease.
Celacade(TM) is designed to target chronic inflammation by activating the
immune system's physiological anti-inflammatory response to apoptotic cells.
Celacade(TM) up-regulates the expression of cell surface molecules that
interact with specific receptors on antigen presenting cells (APCs) to
modulate the production of cytokines - potent chemical messengers that
initiate and control inflammation. Vasogen is also developing a new class of
phospholipid-based drugs designed to interact with APCs to regulate cytokine
levels and control inflammation in the nervous system, including the brain.
VP025, the first product candidate from this new class of drugs, is in
preclinical development for the treatment of neuro-inflammatory disorders.
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A D V A N C I N G T H E T R E A T M E N T O F
C H R O N I C I N F L A M M A T O R Y D I S E A S E
C O N T E N T S
Chairman's Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
President's Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Chronic Inflammation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Celacade(TM)for Chronic Heart Failure . . . . . . . . . . . . . . . . . . . . 8
Celacade(TM)for Peripheral Arterial Disease . . . . . . . . . . . . . . . . .10
VP025 for Neuro-inflammatory Diseases . . . . . . . . . . . . . . . . . . . .12
Management's Discussion and Analysis. . . . . . . . . . . . . . . . . . . . .16
Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Management's Responsibility . . . . . . . . . . . . . . . . . . . . . . . . .26
Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . .31
Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Scientific Advisory Board . . . . . . . . . . . . . . . . . . . . . . . . . .47
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
C H R O N I C I N F L A M M A T I O N
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CHRONIC INFLAMMATION MAY BE THE
ENGINE THAT DRIVES MANY OF THE MOST
FEARED ILLNESSES OF MIDDLE AND OLD AGE.
TIME MAGAZINE - "THE FIRES WITHIN" - FEB 04
2
C H A I R M A N ' S F O R E W A R D
Several years ago at Vasogen's annual meeting, I made the statement that our
lead product, Celacade(TM), has the potential to make a revolutionary
contribution to the practice of medicine. I am pleased to report that since that
time our Company has made considerable progress toward making that statement a
reality.
Supported by a world-class team of medical, scientific, and business
professionals, Vasogen is evolving as a leader targeting the chronic
inflammation underlying the development and progression of cardiovascular
disease. And while the critical role of chronic inflammation in cardiovascular
diseases has been highlighted in the popular press only recently, Vasogen
identified this deadly phenomenon early on, and has spent more than a decade
developing its technologies to safely address this important therapeutic target.
Celacade(TM), now in phase III clinical development, is a novel therapy designed
to target the ongoing inflammation involved in chronic heart failure and
peripheral arterial disease. The important unmet medical needs associated with
these two conditions, together with Vasogen's leadership position, provide
Celacade(TM)with the opportunity to become a standard-ofcare, first-in-class
therapy with the potential to make a significant impact on people's lives.
Drawing on our expertise in immune regulation, we have also identified a new
class of drugs designed to target chronic inflammation. We believe this exciting
discovery, which originated from our basic research program, has the potential
to provide new treatment options for such devastating neurodegenerative
disorders as Alzheimer's, Parkinson's, and Lou Gehrig's disease. Early results
from this program also suggest an opportunity to drive significant future growth
for Vasogen across additional indications characterized by chronic inflammation.
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The coming year promises to be as exciting for Vasogen as the past several
years. We will continue to unlock the potential of our technology both
clinically, as we move toward commercial reality, and strategically, as we grow
our product pipeline.
I would like to take this opportunity to express my appreciation to my fellow
directors. The Board is an active and productive one whose interests are aligned
with those of the shareholders. I am also pleased to note that the Board's
governance agenda continues to meet or exceed the requirements set forth by the
securities regulators in both the United States and Canada. We will continue to
strive for excellence in this area. Most importantly, I thank our shareholders
and loyal employees who share our vision for the future.
/s/ William R. Grant
WILLIAM R. GRANT, Chairman of the Board
Vasogen Inc. 2003 Annual Report 3
P R E S I D E N T ' S L E T T E R
T O S H A R E H O L D E R S
I believe Vasogen is now on the verge of major breakthroughs in the treatment of
chronic inflammatory disease. We are advancing pivotal phase III clinical trials
of Celacade(TM)in chronic heart failure and peripheral arterial disease -
cardiovascular conditions that affect large patient populations and drive annual
healthcare expenditures exceeding $25 billion in the United States alone. We
also enter 2004 with an important new product in our pipeline for the treatment
of chronic inflammation. VP025, the lead product candidate from our new class of
phospholipid-based drugs, is the result of our extensive research efforts over
the past several years, and has been optimized to target chronic inflammation
within the brain.
Perhaps our most significant accomplishment of the past year was the launch of
our pivotal phase III ACCLAIM trial, a major study in chronic heart failure,
which is progressing under the stewardship of pre-eminent cardiovascular
researchers at leading medical centers throughout North America. The design of
the ACCLAIM trial is based on the outcomes from our double-blind,
placebo-controlled phase II trial, which demonstrated the ability of
Celacade(TM)to have a significant impact on reducing the risk of death and
hospitalization in heart failure patients. These are the key endpoints in the
treatment of this devastating condition, which is becoming so prevalent that it
is often referred to as an epidemic. We have also positioned Celacade(TM)for
European market introduction upon the completion of ACCLAIM, having recently
received CE Mark regulatory approval in Europe for the treatment of chronic
heart failure.
The ACCLAIM trial is one of two phase III programs we have targeting a major
cardiovascular disease. Our pivotal phase III trial in peripheral arterial
disease, known as SIMPADICO, is also progressing at leading vascular research
centers across North America. SIMPADICO is designed to demonstrate the impact of
Celacade(TM)on maximal walking distance - a key measure of therapeutic efficacy
in this underserved cardiovascular disorder. Peripheral arterial disease, which
in its most advanced form leads to limb amputation, commonly manifests as pain
when walking that is so severe it restricts mobility and lowers the quality of
life for millions of people in North America and Europe.
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Beyond our considerable enthusiasm for Celacade(TM)and our primary focus on
cardiovascular disease, our basic research program yielded a breakthrough
discovery during 2003. Utilizing our proprietary knowledge base surrounding the
mechanism of action of Celacade(TM), our scientists have developed a new class
of drugs, also for the treatment of chronic inflammatory disorders. These drugs
are designed to interact with antigen presenting cells of the immune system,
leading to the modulation of multiple cytokines - potent chemical messengers
that control inflammation.
The first data concerning this new discovery were presented at the 33rd
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Annual Meeting of the Society for Neuroscience in New Orleans in November 2003.
Researchers from the Department of Physiology at Trinity College, Dublin,
presented preclinical results demonstrating the ability of VP025 to
significantly reduce levels of inflammation within the brain and improve key
biological measures of memory and learning function. Furthermore, related
studies involving a second product candidate from our new class of drugs have
shown an actual reversal of an established neural deficit resulting from the
accumulated inflammation associated with aging.
The advent of drugs that not only prevent the progression of neurological
diseases, but actually reverse the deleterious and devastating consequences of
such progression, would be a momentous step forward. Neurological diseases,
including Alzheimer's, Parkinson's, and Lou Gehrig's disease, are estimated to
affect more than 5 million people in North America. We are now advancing the
development of VP025 in collaboration with leading academic centers in North
America and Europe, who are further investigating the effectiveness of VP025 in
several models of neuro-inflammatory disease. Based on the outcomes from this
program, we expect to move VP025 into clinical development for the treatment of
one or more neurological conditions.
To support these important developments, in the first quarter of 2004 we
completed a successful public offering resulting in gross proceeds to the
Company of approximately US$58 million, placing our Company on the strongest
financial footing in its history. We intend to use these additional funds to
exploit the exciting opportunities that we see coming out of our new drug
development pipeline and to advance the research and commercial development of
Celacade(TM). The developments of the past year have also strengthened our
position in partnering discussions. We continue to execute a business
development strategy aimed at concluding additional strategic alliances to
complement our U.S. alliance with Quest Diagnostics and to provide the necessary
marketing strength to support the commercial introduction of Celacade(TM)in
North America and Europe.
If you were to ask a patient with advanced cardiovascular disease what they want
from a new treatment, they would likely tell you that they want to see new
therapies that improve their quality of life, keep them out of the hospital, and
have few or no side effects. We believe Celacade(TM)holds the promise to provide
such a treatment. For this reason, our ongoing phase III trials have been
designed to support Celacade(TM) being adopted as a standard-of-care therapy - a
product profile that typically enjoys widespread market acceptance.
We also believe that the promising preclinical results we have observed to date
with VP025 and our other novel drug formulations position Vasogen for growth
opportunities beyond cardiovascular disease.
Celacade(TM)is just the beginning.
On behalf of my colleagues at Vasogen, I thank you for your continued support,
and look forward with tremendous enthusiasm to further progress in the year
ahead.
/s/ David g. Elsley
DAVID G. ELSLEY, President and CEO
Vasogen Inc. 2003 Annual Report 5
Vasogen's immune modulation therapies
C H R O N I C are being developed to address the
I N F L A M M A T I O N chronic inflammation underlying the
development and progression of many
cardiovascular and neurodegenerative
diseases.
INFLAMMATION IS A NORMAL RESPONSE OF THE IMMUNE
SYSTEM TO CELLULAR INJURY CAUSED BY INFECTION,
TRAUMA, OR OTHER STIMULI. DURING THE INFLAMMATORY
PROCESS, IMMUNE CELLS ARE ATTRACTED TO THE SITE OF
INFLAMMATION WHERE THEY RELEASE CYTOKINES - POTENT
CHEMICAL MESSENGERS THAT CONTROL INFLAMMATION AND
FACILITATE THE HEALING PROCESS. WHILE INFLAMMATION IS
NORMALLY SELF-LIMITING, IT CAN PERSIST AND BECOME
CHRONIC. RECENT ADVANCES IN MEDICAL RESEARCH HAVE
ESTABLISHED THE FUNDAMENTAL ROLE OF CHRONIC
INFLAMMATION IN THE DEVELOPMENT AND PROGRESSION OF A
NUMBER OF SERIOUS CONDITIONS, INCLUDING HEART
FAILURE, ATHEROSCLEROSIS, AND NEURODEGENERATIVE
DISEASES.
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CELACADE(TM) FOR
CARDIOVASCULAR DISEASE
Celacade(TM)(immune modulation therapy) is in phase III clinical development for
the treatment of chronic heart failure and peripheral arterial disease.
Celacade(TM)is designed to target the chronic inflammation underlying
cardiovascular disease by activating the immune system's physiological
antiinflammatory response to cells undergoing apoptosis. Celacade(TM)is
administered to the patient once per month as a brief outpatient procedure.
During the treatment, a small sample of a patient's blood cells is drawn into
our single-use disposable cartridge, exposed to controlled oxidative stress
utilizing our proprietary medical device technology, and then administered to
the patient intramuscularly. Oxidative stress is known to induce cell apoptosis.
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During apoptosis, certain molecules normally expressed only on the inner bilayer
of cell membranes, including phosphatidylserine (PS) molecules, move to the cell
surface. The exposed PS molecules then interact with specific PS receptors
(PS-R) on the surface of antigen presenting cells (APCs) of the immune system,
including macrophages and dendritic cells. The interaction with macrophages
leads to an up-regulation in the production of the antiinflammatory cytokines
IL-10 and TGF-a. Dendritic cells that interact with apoptotic cells remain
immature and, in the presence of anti-inflammatory cytokines such as IL -10 and
TGF-a, cause the differentiation of some naive T cells to regulatory T cells.
These traffic through the tissues and inhibit inflammatory cells such as T1
cells by a process that includes cell-cell interaction and the production of
anti-inflammatory cytokines by the regulatory T cells. The end result is a
reduction in tissue levels of inflammatory cytokines such as TNF-a, IL-6, IFN-a,
and IL -1a, and a downregulation of chronic inflammation.
VP025 FOR NEUROINFLAMMATORY DISEASE
We are also developing a new class of phospholipid-based drugs designed to
interact with APCs to regulate cytokine levels and control inflammation. This
new class of drugs was discovered as a result of basic research concerning the
mechanism of Celacade(TM). While Celacade(TM)is designed to exploit the
anti-inflammatory immune response resulting from the interaction of apoptotic
cells with APCs, our new class of drugs is based on synthetic three-dimensional
phospholipid-based structures with specific groups of surface molecules that
interact with APCs to modulate cytokine levels. VP025, the lead product
candidate from this new class of drugs, has been optimized for the treatment of
neurological disorders.
Vasogen Inc. 2003 Annual Report 7
Celacade(TM) is in a pivotal phase
C H R O N I C III trial for heart failure. Chronic
I N F L A M M A T I O N heart failure is referred to as an
epedemic, affecting over five million
individuals in North America.
CHRONIC HEART FAILURE
Chronic heart failure, most frequently resulting from coronary artery disease or
hypertension, is a debilitating condition in which the heart's ability to
function as a pump is impaired. Patients with heart failure experience a
continuing decline in their health, resulting in an increased frequency of
hospitalization and premature death.
In North America alone, heart failure affects more than five million people and
is associated with more than 300,000 deaths each year. The cost of medical care,
primarily resulting from hospitalization, is estimated to exceed $19 billion
annually. These statistics suggest that important pathological mechanisms remain
active and unmodified by available therapies, particularly when the disease has
reached advanced stages. Chronic inflammation is recognized as an underlying
pathology contributing to the development and progression of chronic heart
failure.
ACCLAIM PHASE III TRIAL
We are currently advancing the pivotal phase III double-blind, placebo-
controlled ACCLAIM (Advanced Chronic Heart Failure CLinical Assessment of Immune
Modulation Therapy) trial, to further investigate the impact of Celacade(TM)on
reducing the risk of death and cardiovascular hospitalization in patients with
advanced chronic heart failure. The ACCLAIM trial is being conducted at cardiac
centers throughout the United States and Canada and is designed to
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support regulatory approval and marketing in North America and Europe.
The primary outcome measure of ACCLAIM is the composite endpoint of all-cause
mortality or hospitalization for cardiovascular causes (time to first event).
The trial, which has been approved to enroll up to 2,016 patients, will conclude
when a minimum of 701 outcome events have occurred and all patients have been
followed for at least six months.
The Global Principal Investigator and Chairman of the Steering Committee for
ACCLAIM is Dr. James B. Young, Chairman, Division of Medicine at The Cleveland
Clinic Foundation and Medical Director, Kaufman Center for Heart Failure in
Cleveland. Dr. Guillermo Torre-Amione, Medical Director of the Heart Transplant
Service at Baylor College of Medicine and the DeBakey Heart Center of The
Methodist Hospital in Houston, is Principal Investigator for the U.S. arm of the
study. Dr. Jean-Lucien Rouleau, Dean of Medicine, University of Montreal, is
Principal Investigator for the Canadian arm of the trial.
PHASE II RESULTS
The initiation of the ACCLAIM trial was based on the success of our 73-patient
double-blind, placebo-controlled phase II trial in advanced chronic heart
failure patients conducted at The Cleveland Clinic, Baylor College of Medicine,
the Texas Heart Institute, and the University of Montreal. The patients enrolled
into this study were receiving stable doses of pharmaceuticals that reflect the
standard of care.
The key finding from this clinical trial was a significant reduction in the risk
of death (p=0.022; 1 vs. 7 deaths) and all-cause hospitalization (p=0.008; 12
vs. 21 hospitalizations) for patients receiving Celacade(TM)compared to those
receiving placebo. In addition to reducing the risk of major events, there was
also an observation that patients receiving Celacade(TM)had significant
improvements in key electrocardiogram (ECG) measures. Approximately 50% of
patients diagnosed with chronic heart failure experience sudden death due to
serious ventricular arrhythmia (irregular heartbeat originating in the
ventricles of the heart), which has been linked to specific ECG abnormalities,
including an increased QTc interval. The study showed a significant reduction in
mean QTc interval of 18 milliseconds (msec) among assessable patients in the
active treatment group, compared to an increase of 12 msec in the placebo group,
resulting in a significant between-group difference at the end of the study
(429+45 vs. 463+45 msec, n=35, p=0.035).
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Celacade(TM)was also shown to be safe and well tolerated, with no reports of
treatmentrelated serious adverse events or withdrawals from the trial. The
results of the study were presented at the 2002 Scientific Sessions of the Heart
Failure Society of America and the American Heart Association.
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Vasogen Inc 2003 Annual Report 9
Celacade(TM) is in a pivotal phase
III trial for peripheral arterial
C E L A C A D E (TM) disease. PAD patients have decreased
quality of life, and a markedly
increased risk for heart attack or
stroke.
PERIPHERAL ARTERIAL DISEASE
Peripheral arterial disease (PAD) is a serious condition of impaired blood flow
to the extremities resulting from atherosclerosis. It is now well established
that inflammatory pathways are implicated in the development and progression of
atherosclerosis, and known risk factors such as aging, obesity, smoking, lack of
exercise, and diabetes contribute to the increasing incidence of PAD. The
disease often leads to reduced mobility and a marked impairment in the ability
to undertake the basic activities of daily independent living.
It is estimated that in the United States alone, PAD affects approximately seven
million people, with related healthcare costs exceeding $10 billion annually.
The condition is associated with a high level of morbidity, and an estimated 30%
of patients diagnosed with PAD will die within five years. Patients with PAD
often experience intermittent claudication (pain on walking), a symptom
associated with a threefold increase in the incidence of heart attack and
stroke. In approximately 80,000 patients each year, the progression of PAD
results in the need for amputation. Currently, there are limited effective
pharmacological therapies available for the treatment of intermittent
claudication, and there is a need for a more effective treatment option.
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SIMPADICO PHASE III TRIAL PHASE II RESULTS
We are advancing a pivotal phase III, double-blind, placebo-controlled clinical
trial of Celacade(TM)in patientS with peripheral arterial disease. Vasogen's
SIMPADICO (Study of Immune Modulation Therapy in Peripheral Arterial Disease and
Intermittent Claudication Outcomes) trial is investigating the impact of
Celacade(TM)on improving the symptom of intermittent claudication. The trial is
being conducted at cardiac and vascular centers throughout the United States and
Canada, and is designed to support regulatory approval and marketing in North
America and Europe.
The SIMPADICO trial is designed to enroll up to 500 patients with Fontaine stage
II disease (symptomatic PAD) who have intermittent claudication. The primary
endpoint of SIMPADICO is the change in maximal treadmill walking distance over
six months. Maximal treadmill walking distance is the primary efficacy endpoint
recognized by the FDA and other regulatory authorities for approving new
treatments for symptomatic PAD. The trial is also investigating the impact of
Celacade(TM)on quality of life and PADrelateD clinical outcomes.
The Principal Investigator and Chairman of the Steering Committee for Vasogen's
SIMPADICO trial is Dr. Jeffrey W. Olin, Director of the Vascular Medicine
Program at The Zena and Michael A. Wiener Cardiovascular Institute, Mount Sinai
School of Medicine in New York.
PHASE II RESULTS
The initiation of SIMPADICO was based on results from a double-blind,
placebocontrolled phase II clinical trial of Celacade(TM)in patients with
moderate to severe PAD. The primary endpoint of this trial, the difference in
the proportion of patients having a greater than 50% increase in their initial
claudication distance (ICD) at 24 weeks, was met in the per-protocol population
(n=81), with significantly more patients who received Celacade(TM)responding
compared to placebo (p=0.047). Sub-group analysis of the 69 severe claudication
patients in the per-protocol population at nine weeks post treatment showed that
56.3% of the Celacade(TM)patients responded compared to 29.7% of the placebo
group (p=0.031).
Celacade(TM)was also shown to be safe and well tolerated, with no
treatmentrelated serious adverse events. Results from this trial were presented
at the XV Annual Meeting of the European Society for Vascular Surgery and were
published in the EUROPEAN JOURNAL OF VASCULAR AND ENDOVASCULAR SURGERY in 2002.
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Vasogen Inc. 2003 Annual Report 11
VPO25 is being developed to target the
chronic inflammation underlying such
V P 0 2 5 devastating neurological conditions as
Alzheimer's disease, Parkinson's
disease, and ALS.
NEURO-INFLAMMATORY DISEASE
There are several neurological conditions associated with inflammation in the
brain and nervous system, including Alzheimer's disease, Parkinson's disease,
and amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig's disease. In
each of these conditions there is evidence of increased inflammatory mediators,
including cytokines, leading to the death of nerve cells and the eventual loss
of functional activity.
Due to the prevalence, morbidity, and mortality associated with
neuroinflammatory diseases, they represent a significant medical, social, and
financial burden. It is estimated that these neurological conditions affect more
than five million people in North America and generate costs of care that exceed
US$75 billion annually.
NEW CLASS OF DRUGS
We are developing a new class of phospholipid-based drugs designed to interact
with antigen presenting cells (APCs) to regulate cytokine levels and control
inflammation. This new class of drugs was discovered as a result of basic
research concerning the mechanism of action of Celacade(TM). While
Celacade(TM)is designed to exploit the anti-inflammatory immune response
resulting from the interaction of apoptotic cells with APCs, our new class of
drugs is based on synthetic three-dimensional phospholipid-based structures with
specific groups of surface molecules that interact with APCs to modulate
cytokine levels.
VP025, the lead product candidate from this new class of drugs, has been
optimized for the treatment of neurological disorders. Our preclinical research
has shown that the effects of VP025 cross the blood-brain barrier, produce
potent anti-inflammatory activity, including cytokine modulation, and result in
the preservation of the function of specific neural pathways involved in memory
and learning.
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Preclinical findings, demonstrating the ability of VP025 to significantly reduce
key measures of inflammation and cell death in the brain and to improve
physiological measurements that correlate with memory and learning activity,
were presented at the 33rd Annual Meeting of the Society for Neuroscience in New
Orleans in November 2003, by Professor Marina Lynch, PhD, and her team from the
Department of Physiology, Trinity College, Dublin, Ireland. This research
demonstrated that the inflammation-induced loss of
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memory function, measured by the ability to sustain long-term potentiation, was
significantly (p <0.001) reduced by VP025. This improvement was associated with
significant (p <0.05) reductions in inflammatory markers in the hippocampus, the
site of memory and learning in the brain, including the stress-activated kinase
c-Jun N-terminal kinase (JNK) and the pro-inflammatory cytokine interleukin 1-
B. Furthermore, VP025 administration resulted in an increase in the hippocampal
levels of the anti-inflammatory cytokine interleukin-4 (p <0.05) in this model.
Additional studies examining the ability of VP025 to reverse established neural
deficit resulting from the accumulated inflammation associated with aging are
ongoing.
We are also advancing an extensive preclinical research program at leading
centers of excellence for neuroscience research, designed to investigate the
impact of VP025 on several models of neuro-inflammatory disease, including
Parkinson's disease, Alzheimer's disease, and ALS. We expect this research
program to provide the basis for advancing VP025 into clinical development.
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Vasogen Inc. 2003 Annual Report 13
FINANCIAL REPORT
Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . .16
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Management's Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . .26
Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . .28
Consolidated Statements of Operations and Deficit. . . . . . . . . . . . . . .29
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . .30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .31
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with
Vasogen's audited consolidated financial statements and the accompanying notes.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Canada, which, except as
described in note 15, conform in all material respects with generally accepted
accounting principles in the United States. All amounts are expressed in
Canadian dollars unless otherwise noted. Annual references are to Vasogen's
fiscal years, which end on November 30. In this report, "we," "us," and "our"
refer to Vasogen Inc.
OVERVIEW
Our goal is to develop and successfully commercialize immune modulation
therapies for the treatment of cardiovascular, neurological, and other chronic
inflammatory diseases. Our lead product, Celacade(TM) (immune modulation
therapy), is currently in pivotal phase III clinical trials for the treatment of
chronic heart failure ("HF") and peripheral arterial disease ("PAD").
Celacade(TM) is designed to target chronic inflammation by activating the immune
system's physiological anti-inflammatory response to apoptotic cells.
Celacade(TM) up-regulates the expression of cell surface molecules that interact
with specific receptors on antigen presenting cells ("APCs") to modulate the
production of cytokines - potent chemical messengers that initiate and control
inflammation. Celacade(TM) is administered during an outpatient procedure
utilizing our proprietary medical device technology. We are also developing a
new class of phospholipid-based drugs designed to interact with specific
receptors on APCs to regulate cytokine levels and control inflammation in the
nervous system, including the brain. VP025, the first product candidate from
this new class of drugs, is in preclinical development for the treatment of
neuro-inflammatory disorders.
The following table sets out the stage of development for each of our product
candidates:
Product Candidate Indications Development Status
Celacade(TM) Chronic heart failure Pivotal phase III clinical trial
Celacade(TM) Peripheral arterial disease Pivotal phase III clinical trial
VP025 Neuro-inflammatory conditions Preclinical
We plan to achieve our goal by pursuing the following strategies:
DEVELOP AND SUCCESSFULLY COMMERCIALIZE CELACADE(TM) FOR UNMET MEDICAL NEEDS
We believe that Celacade(TM) has the potential to address unmet medical needs
and provide a safe and effective addition to the standard of care for chronic HF
and PAD. We also believe that Celacade(TM) has the potential to become a
first-in-class therapy targeting chronic inflammation in cardiovascular disease.
We are collaborating with opinion leaders in cardiovascular medicine to conduct
our phase III clinical trials and we believe that, upon successful completion of
these trials, these collaborations will enhance the potential for Celacade(TM)
to be adopted as part of the standard of care in these conditions. Our phase III
trials are designed to support regulatory approvals and market introduction in
North America and Europe. Through alliances with established healthcare
companies, we plan to establish the sales and marketing capability needed to
promote the adoption of Celacade(TM) by the medical community.
CONTINUE TO BUILD A PORTFOLIO OF IMMUNE MODULATION THERAPIES TARGETING
INFLAMMATORY DISEASES
VP025 is the first product candidate from a new class of drugs that we have
identified. This new class of drugs represents a platform technology from which
we may derive other product candidates for development and commercialization. We
are currently testing VP025 across a number of preclinical models of
neuro-inflammation and, based on this work, we expect to select an initial
disease target by the end of 2004 to advance into clinical development.
PARTNER WITH COMPANIES THAT CAN HELP US TO LEVERAGE OUR CORE COMPETENCIES
We have a strategic alliance with Quest Diagnostics for the outpatient delivery
of Celacade(TM) in the United States, we intend to establish additional
alliances, primarily to support marketing and sales of our products, in the
United States, Canada, and the rest of the world. We will seek to maximize our
long-term economic returns through alliances with established healthcare
companies with cardiovascular marketing and sales capabilities.
16 Vasogen Inc. 2003 Annual Report (A development stage company)
RESULTS OF OPERATIONS
Research and Development
We are a development-stage enterprise that dedicates the majority of our cash
resources to research and development ("R&D") activities. The changes in R&D
expenditures, and their key components, for the three years ended November 30
are reflected in the following table:
----------------------------------------------------------------------------------------------------
R&D Expenditures (in Increase Increase
millions of dollars, 2003 2002 (Decrease) 2002 2001 (Decrease)
except percentages
----------------------------------------------------------------------------------------------------
Clinical costs:
Direct $9.7 $3.1 $6.6 $3.1 $1.6 $1.5
Indirect $7.8 $5.5 $2.3 $5.5 $4.2 $1.3
Preclinical costs $2.0 $1.9 $0.1 $1.9 $1.3 $0.6
Intellectual property costs $1.6 $1.6 $0.0 $1.6 $1.3 $0.3
Other costs $0.6 $0.6 $0.0 $0.6 $0.8 $(0.2)
Total R&D $21.7 $12.7 $9.0 $12.7 $9.2 3.5
====================================================================================================
R&D expenditures as a 65% 62% 3% 62% 56% 6%
percentage of the sum of
R&D and General
Administrative
Expenditures
====================================================================================================
Our clinical programs in PAD and chronic HF, discussed in detail below, account
for the majority of the increase in R&D spending driven primarily by the
initiation of our ACCLAIM study and the ramping up of clinical sites
participating in our SIMPADICO study during the year. Direct costs to support
these programs include expenses for clinical site fees, study monitoring, and
technology support. Indirect costs to support these programs consist of
salaries, professional fees, and other support costs.
We are currently conducting a pivotal phase III clinical trial to further
investigate the impact of Celacade(TM) on reducing mortality and morbidity in
advanced heart failure patients. The trial, named ACCLAIM, is designed to
support regulatory approvals and commercial introduction in the United States,
Canada, and Europe. The Global Principal Investigator and Chairman of the
Steering Committee for the ACCLAIM trial is Dr. James Young, Chairman, Division
of Medicine, Cleveland Clinic Foundation and Medical Director of the Kaufman
Center for Heart Failure in Cleveland. Patient enrollment in the ACCLAIM trial
was initiated in the third quarter of 2003.
The primary outcome measure for the ACCLAIM trial is the composite endpoint of
all-cause mortality or cardiovascular hospitalization (time to first event). The
trial, which has been approved to enroll up to 2,016 patients at up to 160
sites, will conclude when a minimum of 701 events (defined as death or first
cardiovascular hospitalization) have occurred and all patients have been
followed for at least six months. We currently anticipate that patient
recruitment into the ACCLAIM trial will be completed during fiscal Q1 2005, and
subject to achieving the pre-specified number of minimum events, we expect the
primary endpoint of the study to be completed during fiscal Q3 2005.
The initiation of our ACCLAIM trial was based on our double-blind,
placebo-controlled, phase II clinical trial conducted in 73 patients with
advanced chronic HF. The results of this study, which were presented at the 2002
scientific sessions of the Heart Failure Society of America and the American
Heart Association, demonstrated a significant reduction in the risk of death and
hospitalization. Celacade(TM) was also shown to be well tolerated with no
treatment-related serious adverse side effects.
Vasogen Inc. 2003 Annual Report (A development stage company) 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
We are also currently enrolling patients with PAD in our pivotal phase III
clinical trial to further investigate the impact of Celacade(TM) on improving
the symptom of intermittent claudication. The trial, named SIMPADICO, is
designed to support regulatory approvals and commercial introduction in the
United States, Canada, and Europe. The Principal Investigator and Chairman of
the Steering Committee for the SIMPADICO trial is Dr. Jeffrey Olin, Director,
Vascular Medicine Program, The Zena and Michael A. Wiener Cardiovascular
Institute, Mount Sinai School of Medicine, New York.
The SIMPADICO trial is designed to enroll up to 500 patients with Fontaine stage
II disease (symptomatic PAD) at up to 60 sites. The primary endpoint of the
trial is the change in maximal treadmill walking distance over six months. We
currently anticipate that completion of patient recruitment for the SIMPADICO
trial will occur during fiscal Q3 2004 and expect the primary endpoint of the
study to be completed during fiscal Q1 2005. The trial design also calls for a
follow-up of all patients after 12 months of therapy.
The initiation of our SIMPADICO trial was based on results obtained from the
completion of a double-blind, placebo-controlled phase II clinical trial in 85
patients with moderate to severe PAD, which were published in the EUROPEAN
JOURNAL OF VASCULAR AND ENDOVASCULAR SURGERY. In addition to demonstrating that
patients with moderate and severe intermittent claudication receiving
Celacade(TM) walked further before the onset of pain, the study showed that
Celacade(TM) was well tolerated with no treatment-related serious adverse side
effects.
Several factors could affect the timelines for completion of the ACCLAIM and
SIMPADICO trials. A key risk factor is patient recruitment rates into these
trials, which are subject to the timely initiation of a sufficient number of
clinical sites that have both an appropriate patient population available and
the necessary research capacity. Site initiation activities include identifying
qualified sites, achieving the necessary internal approvals at the sites,
executing contracts with the sites, and providing our Celacade(TM) technology to
the sites. An additional key risk factor associated with the timeline specific
to the ACCLAIM trial is achieving the pre-defined number of events during a
reasonable timeframe. We believe the patient recruitment timeline projections
for both the SIMPADICO and ACCLAIM trials, which are based on the patient
recruitment rates observed in comparable phase III trials, are reasonable. We
also believe the ACCLAIM trial is designed to enroll sufficient patients to
ensure that the pre-defined number of events is achieved.
Our preclinical research is focused on developing a new class of
phospholipid-based drugs to treat diseases characterized by chronic
inflammation. Our first drug candidate, VP025, is in preclinical development for
the treatment of neurological conditions characterized by chronic inflammation,
which may include such disorders as Alzheimer's, Parkinson's, and amyotrophic
lateral sclerosis, also known as Lou Gehrig's disease. Preclinical research has
shown that the effects of VP025 cross the blood-brain barrier, produce potent
anti-inflammatory activity, and result in the preservation of the function of
specific neural pathways involved in memory and learning.
Our research and development initiatives have resulted in the filing of numerous
patent applications. We currently have 15 U.S. patents and 122 patents granted
in other jurisdictions. Our intellectual property expenditures primarily
comprise of fees paid to patent offices worldwide and to external patent
counsel. These costs are included in R&D expenditures and are expensed as
incurred.
More details on our clinical development and research programs can be found in
our Annual Report and our Annual Information Form.
We expense all research and development costs. The majority of our research is
outsourced to medical institutions, under contractual agreements, for which
expenditures are settled with cash payments that are aligned with the
achievement of pre-defined milestones. The costs of our prepaid clinical
supplies are deferred, on the basis that these supplies have future alternative
uses related to the various clinical applications of immune modulation therapy,
and are expensed as they are shipped to outsourced research centers or clinical
sites. The anticipated increase in the level of clinical activity, particularly
relating to the SIMPADICO and ACCLAIM trials, has resulted in a significant
increase in inventory levels of supplies to meet the clinical trial
requirements.
18 Vasogen Inc. 2003 Annual Report (A development stage company)
The cost of Vasogen's acquired technology, representing part of our platform
medical device technology, is amortized straight-line over 20 years in
recognition of the term of the acquired patent. On December 1, 2002, we adopted
the "Goodwill and Intangibles" recommendations of CICA Handbook Section 3062. As
these recommendations are consistent with our current policy, there was no
impact on our financial statements, as described further in Note 1(o)(ii) to the
consolidated financial statements.
Our ability to recover the carrying value of our technology and clinical
supplies is impacted by several factors including, but not limited to, the
progress of clinical trials, our ongoing ability to fund clinical trials,
feedback and decisions from the health regulators on the clinical trial results,
technological obsolescence, the development of our patent portfolio, the ability
to defend any claims made by third parties against our intellectual property,
and our financial ability to launch claims against those third parties who may
infringe upon the rights of our intellectual property. We are not aware of any
factors that would impair the carrying value of acquired technology or the
clinical supplies, which would result in a material loss to our company.
GENERAL AND ADMINISTRATION
The changes in general and administration expenditures, and its key components,
for the three years ended November 30 are reflected in the following table:
-----------------------------------------------------------------------------------------------------
General and Increase Increase
Administration 2003 2002 (Decrease) 2002 2001 (Decrease)
Expenditures (in millions of
dollars)
-----------------------------------------------------------------------------------------------------
Infrastructure and other support $7.8 $6.7 $1.1 $6.7 $6.5 $0.2
costs
Insurance $1.2 $0.4 $0.8 $0.4 $0.3 $0.1
Professional fees $0.8 $0.4 $0.4 $0.4 $0.5 ($0.1)
Fair value of options granted to $0.4 $0.0 $0.4 $0.0 $0.0 $0.0
non-employees
-----------------------------------------------------------------------------------------------------
Total General and Administration $10.2 $7.5 $2.7 $7.5 $7.3 $0.2
Expenditures
=====================================================================================================
Insurance costs are higher as a result of insurance required for our phase III
clinical programs and a general market increase in insurance premiums for
directors' and officers' liability insurance.
Infrastructure and other support costs include salaries and related employee
costs for those employees not directly involved in research development, as well
as all facility-related and information technology expenditures. Professional
fees include expenditures for legal, tax, accounting, and other specialized
services. Infrastructure support costs and professional fees have increased to
support our expanding clinical programs, and for corporate, marketing, legal,
and business development activities associated with preparing for the
commercialization of our products.
We have adopted CICA handbook section 3870, "Stock-based Compensation and Other
Stock-based Payments," effective for the fiscal period 2003. The adoption of
this new section has resulted in a non-cash charge of $0.4 million in 2003,
whereas no such expense existed for the comparable periods. These expenses
consist of the fair value of options, calculated using a Black-Scholes pricing
model, granted to non-employees. In addition, the fair value of compensation
options and warrants issued for services in connection with the private
placement of common shares (described further below), in the amount of $1.8
million, has been recorded as a cost of issuing the related common shares.
Subsequent amendments to Section 3870, issued in December 2003 require the use
of the fair value based method to account for all stock-based transactions with
employees in the financial statements of the Company in its
Vasogen Inc. 2003 Annual Report (A development stage company) 19
fiscal year beginning December 1, 2004. If the options granted to employees in
fiscal 2003 had been included in our financial statements, they would have been
ascribed a fair value of $1.1 million; however, this pro forma expense might not
be representative of the actual expense on adoption of the new amendment.
FOREIGN EXCHANGE
Foreign Exchange (in Increase Increase
millions of dollars) 2003 2002 (Decrease) 2002 2001 (Decrease)
------------------------------------------------------------------------------------------------------
Foreign exchange loss (gain) $1.1 $0.3 $0.8 $0.3 ($0.1) $0.4
------------------------------------------------------------------------------------------------------
Our functional currency is the Canadian dollar. The funds raised in the
financing that we completed in 2003 were in U.S. dollars, and they are subject
to fluctuations in the U.S. exchange rate. Our statement of operations includes
a foreign exchange loss because of the weakening of the U.S. dollar relative to
the Canadian dollar during the latter part of 2003. We are holding U.S. dollars
in anticipation of the significant U.S. dollar R&D expenses that we expect to
incur with respect to our clinical trials and therefore this exchange rate
fluctuation, though significant from an accounting point of view, does not
affect our ability to pay these U.S. dollar denominated R&D expenditures.
INVESTMENT INCOME
Investment Income (in millions of Increase Increase
dollars) 2003 2002 (Decrease) 2002 2001 (Decrease)
-----------------------------------------------------------------------------------------------------
Investment income $1.1 $1.0 $0.1 $1.0 $2.1 ($1.1)
-----------------------------------------------------------------------------------------------------
Investment income in 2003 was comparable to that in 2002, even though cash
invested in marketable securities has increased. This is a result of lower
returns on investments available in the marketplace in general, and an increased
weighting of lower-yielding U.S. investments. Investment income was lower in
2002, compared with the prior year primarily due to the decline in market yields
available on short-term investments, for the same period in 2001.
LOSS
Loss (in millions of dollars, Increase Increase
except per-share amounts) 2003 2002 (Decrease) 2002 2001 (Decrease)
--------------------------------------------------------------------------------------------------------
Loss $31.9 $19.5 $12.4 $19.5 $14.4 $5.1
Loss per share $0.57 $0.40 $0.17 $0.40 $0.32 $0.8
--------------------------------------------------------------------------------------------------------
As discussed above, the increased loss in both periods resulted mainly from
higher costs associated with the expansion of our clinical programs and the
corporate costs associated with supporting these activities.
20 Vasogen Inc. 2003 Annual Report (A development stage company)
The following table presents unaudited selected financial data for each of the
last eight quarters ending November 30, 2003:
Loss for the period Basic and diluted
(000's) loss per share
FEBRUARY 28, 2003 ($5,428) ($0.10)
MAY 31, 2003 ($7,335) ($0.14)
AUGUST 31, 2003 ($5,870) ($0.10)
NOVEMBER 30, 2003 ($13,315) ($0.22)
February 28, 2002 ($5,028) ($0.11)
May 31, 2002 ($4,478) ($0.09)
August 31, 2002 ($4,241) ($0.08)
November 30, 2002 ($5,760) ($0.12)
The increased loss in the fourth quarter of 2003, compared to the third quarter,
is mainly driven by the impact of a significant fluctuation in the value of the
U.S. dollar over this period and its impact on us as discussed above. The impact
of this exchange rate fluctuation is highlighted in the table below:
Q4 Q3
LOSS PER ABOVE 13.3 MILLION 5.9 MILLION
FX Gain (Loss) (3.0) million 2.2 million
LOSS BEFORE FOREIGN EXCHANGE 10.3 MILLION 8.1 MILLION
The increase in the loss before foreign exchange resulted mainly from higher
costs associated with the ramping up of our clinical programs and the corporate
costs associated with supporting these activities. The primary driver for the
increase in the fourth quarter was site initiation activities with respect to
our ACCLAIM study.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily from public and
private sales of equity, the exercise of warrants and stock options, and
interest on funds held for future investments.
During July 2003, we completed a private placement for gross proceeds of $50.7
million (US$37.9 million), resulting from the issuance of 9.5 million common
shares at a price of US$4.00 per share. Net proceeds raised through this
offering were approximately $46.5 million after share issuance costs. In
connection with the financing completed during 2003, we issued warrants and
options to the agent and other advisors to purchase up to 437,500 shares
exercisable at US$4.69 per common share until July 2, 2006, which have been
ascribed a fair value of $1.8 million. During 2002, we received net proceeds of
$23.1 million from the issuance of equity. In connection with the financing
completed during 2002, we issued warrants to the underwriters to purchase up to
250,000 shares exercisable at $5.39 per common share until November 24, 2003.
The warrants issued in connection with our financing in 2002 were exercised
during 2003.
During 2003, we received $1.9 million from the exercise of options and warrants,
compared with $0.5 million in 2002, and $0.4 million in 2001. The total number
of common shares outstanding at the end of 2003 increased to 62.0 million from
51.9 million at year-end 2002. The number of options and warrants outstanding at
year-end is 4.2 million and could generate $26.5 million if exercised.
At November 30, 2003, our cash, cash equivalents, and marketable securities held
to maturity totaled $60.1 million, compared with $42.7 million at the previous
year-end. The increase is a result of the cash raised in the private placement
completed during 2003. We invest our cash resources in liquid government and
corporate debt instruments having a single "A" credit rating or greater.
We are exposed to market-rate risk related to changes in interest rates and
foreign exchange rates between the Canadian and U.S. dollar, which could affect
the value of our marketable securities. We do not believe that the results of
operations or cash flows would be affected to any significant degree by a sudden
change in market interest rates relative to our investments, due to the relative
short-term nature of the investments.
During the year, we entered into swap agreements to exchange Canadian dollars to
U.S. dollars at specific times, for a total of US$31.4 million. These agreements
matured in December 2003 and February 2004. The Canadian dollars were required
to facilitate certain financial planning objectives. However, these swaps
permitted us to preserve our U.S. funds, even when converted to Canadian
dollars. Our U.S. funds will be used to cover U.S. expenditures associated with
our phase III clinical trials.
Vasogen Inc. 2003 Annual Report (A development stage company) 21
We have no debt, guarantees, off-balance sheet arrangements, capital lease, or
long-term obligations. Our operating obligations are as follows:
Contractual Obligations Less than 1 - 3 3 - 5 More
(in millions of dollars) Total 1 year years years 5 years
---------------------------------------------------------------------------------------------------
Operating lease obligations $0.6 $0.4 $0.2 $0.0 $0.0
---------------------------------------------------------------------------------------------------
Our net cash used in operating activities in 2003 was $30.1 million, compared
with $20.1 million in 2002, and $14.2 million in 2001. These increases are
primarily reflective of our net operating losses. The reasons for these higher
operating losses are elaborated on above. The increased burn rate for 2003
primarily reflects our expanded clinical development programs and the larger
infrastructure necessary to support these activities and expected growth. We
currently anticipate increasing our cash resources in 2004 through both
corporate finance and strategic alliance activities. We expect the combination
of these initiatives and cash resources on hand to provide adequate funds to
complete our phase III trials.
RELATED PARTY TRANSACTIONS AND INTERESTS OF MANAGEMENT IN MATERIAL TRANSACTIONS
Strategic Alliance with Quest Diagnostics Incorporated in the United States
We have a strategic alliance with Quest Diagnostics regarding the establishment
of an outpatient services delivery model to support the commercial development
of Celacade(TM) in the United States on an exclusive basis. The terms of our
strategic alliance with Quest Diagnostics are expected to be finalized prior to
our filing for FDA approval for Celacade(TM). In connection with this strategic
alliance, Quest Diagnostics made an equity investment in our common shares of
US$7.5 million in 2001 at a price of C$8.49 per share, resulting in the issuance
of 1,406,783 common shares. Quest Diagnostics also received warrants to acquire
625,237 common shares at an exercise price of C$12.73 per share. These warrants
are exercisable on or before November 6, 2006. Quest Diagnostics currently owns
3,056,783, or approximately 4.9%, of our common shares. We intend to pursue
additional partnering arrangements for the United States market and to support
marketing and sales activities, including medical education, promotion, and
physician detailing. We also intend to establish further alliances to support
marketing and sales of our products in the rest of the world.
Clinical Trial Services Agreements with Quest Diagnostics
Vasogen Ireland Limited has entered into clinical trial services agreements with
Quest Diagnostics to provide central laboratory testing and related services in
connection with the ACCLAIM and SIMPADICO trials. The agreements are on terms
customary for agreements of this nature.
RISKS AND UNCERTAINTIES
Our products are in development, have not yet been approved by regulatory
authorities in all relevant jurisdictions, and have not yet been marketed
commercially. Our business entails significant risks, including the costs and
time involved in obtaining the required regulatory approvals, our current
reliance on primarily one product, the adequacy of our patent protection, the
uncertainties involved in clinical testing, the availability of capital to
continue development and commercialization of our products, and competition from
pharmaceutical and other biotechnology companies. There can be no assurance that
our ongoing preclinical and clinical research activities will provide positive
outcomes or that the results of clinical trials will meet the desired clinical
endpoints established in the clinical study protocols. Even if the clinical
studies are successful, there can be no assurance that we will be successful in
obtaining necessary regulatory approvals or, once obtained, in maintaining these
approvals. There can also be no assurance that we will be successful in
marketing and distributing our products, or achieve reimbursement from
government or private health authorities. We have also not yet demonstrated the
ability to manufacture a product commercially.
We maintain product liability insurance consistent with current industry
practice. It is possible that this coverage might not provide full protection
against all risks.
22 Vasogen Inc. 2003 Annual Report (A development stage company)
We intend to raise additional financing, as required, through strategic alliance
arrangements, the exercise of options and warrants, and the issuance of new
share capital, as well as through other financing opportunities. However, there
can be no assurance that these financing efforts will be successful or that we
will continue to be able to meet our ongoing cash requirements. It is possible
that financing may not be available or, if available, will not be on favorable
terms. The availability of financing will be affected by the results of our
scientific and clinical research, our ability to attain regulatory approvals,
the market acceptance of our products, the state of the capital markets
generally (with particular reference to biotechnology and medical companies),
the status of strategic alliance agreements, and other relevant commercial
considerations.
A DETAILED LIST OF THE RISKS AND UNCERTAINTIES AFFECTING OUR COMPANY CAN BE
FOUND IN OUR ANNUAL INFORMATION FORM.
OUTLOOK
We expect to continue to incur operating losses as a result of the clinical
trial activity necessary to support regulatory approval of Celacade(TM) in the
United States, Canada, and other jurisdictions. Costs associated with phase III
clinical trials are generally substantially greater than those for phase II
trials, as the number of clinical sites and patients required is typically much
larger. We also anticipate that general and administration expenses will
continue to grow significantly to provide the necessary infrastructure to
support our expanding clinical activity as well as the development of
infrastructure and processes necessary to support commercialization of
Celacade(TM). We expect that our total expenditures will grow by approximately
50% in 2004 and continue to grow in 2005. We believe we have sufficient
resources to fund planned operations to the second quarter of 2005. We expect to
increase our cash resources in 2004 through the execution of additional
strategic alliance agreements and the issuance of new share capital, by means of
a corporate finance initiative. Over the long term, we expect that we will
require additional financing to grow and expand our operations, and we plan to
raise funds from time to time through either strategic partnering initiatives or
from the capital markets, even if we do not have an immediate need for
additional capital. Funding requirements may vary depending on a number of
factors, including the progress of our research and development programs; the
extent and breadth of these programs; the results of preclinical studies and
clinical trials; the cost, timing, and outcome of the regulatory approvals
process; the establishment of marketing and sales or research and development
collaborations; the cost of preparing, filing, prosecuting, maintaining,
defending, and enforcing patent claims; and competing technological and market
developments.
We have been granted CE Mark regulatory approval in Europe for Celacade(TM).
This regulatory approval enables Vasogen to market Celacade(TM) in the 15 member
countries of the European Union - a strategy we plan to pursue upon the
successful completion of our ongoing phase III trials. Assuming these trials are
successful, we also plan to file for regulatory approval with the applicable
regulatory authorities to market our products in the United States, Canada, and
potentially other jurisdictions. To commercialize our products, we intend to
enter into additional strategic alliances with established healthcare companies
that have the commercial infrastructure necessary to support successful market
introduction in various geographical jurisdictions.
Depending upon the results of our research and development programs and the
availability of financial resources, we could decide to accelerate, terminate,
or cut back on certain areas of research and development, or commence new areas
of research and development. These are complex decisions with the goal of
optimizing investment returns and managing the cash burn rate. We do not
presently know of any factors that would indicate that a change in direction is
needed in the next year.
Vasogen Inc. 2003 Annual Report (A development stage company) 23
CORPORATE GOVERNANCE
Vasogen Inc. (the "Company") is committed to the highest standards of corporate
governance. The Company has adopted formal governance practices in accordance
with and covering all aspects of the guidelines published by the Toronto Stock
Exchange (the "TSX"). The TSX guidelines deal with the responsibility of a board
of directors and its various committees and the operation and governance of a
corporation. They also cover the independence of the board from management, the
ongoing monitoring of the board's and management's performance and compensation,
the recruitment of new members to the board, the appointment and mandate of the
board's committees, and measures for receiving shareholder feedback. Canadian
securities regulatory authorities have recently indicated that they intend to
introduce a multilateral policy regarding best practices for corporate
governance. The Company complies and intends to continue to comply with all
requirements relating to corporate governance imposed by applicable Canadian
regulatory authorities from time to time. The Company also believes that it is
in compliance with the corporate governance requirements of the United States
Securities and Exchange Commission ("SEC") and of the NASDAQ National Market
established in connection with the Sarbanes-Oxley Act of 2002 as those
requirements are currently applicable to the Company.
Vasogen's Board of Directors (the "Board") has adopted a formal mandate
outlining its responsibilities. Codes of ethics for the Board and the Company's
employees have also been implemented. The mandate and the codes of ethics may be
viewed on the Company's Web site, www.vasogen.com. Vasogen's Board consists of
eight directors, six of whom are considered unrelated directors, independent of
the day-to-day operations of the Company. David G. Elsley, President and Chief
Executive Officer ("CEO"), and Dr. Eldon R. Smith, Vice President, Scientific
Affairs, are the only directors who are members of Management. William R. Grant,
Chairman of the Board, is independent of Management; therefore, the offices of
the Chairman and CEO are separate. Accordingly, the Board believes that the
appropriate structures and procedures are in place to ensure that it can
function independently of Management. The Board annually reviews the number of
directors on the Board in order to establish an optimum number for effective
decision making. The Board believes that it is able to operate effectively and
considers its size to be appropriate at this time and its composition to
represent the shareholders' interests.
The Board has the responsibility for the overall stewardship of the Company,
including the adoption of a strategic planning process and the approval of a
strategic plan, risk assessment, succession planning, communications policy, and
the integrity of internal controls and management information systems. The Board
oversees the management of the business and affairs of the Company with a view
to enhancing shareholder value. It also participates with Management in
developing and approving the mission of the Company, its objectives, and its
goals. The Board has the responsibility for the appointment and replacement of
the CEO. It has constituted an independent Scientific Advisory Board, which
advises Management and the Board on the direction of the Company's scientific,
technical, research, development, and marketing activities.
24 Vasogen Inc. 2003 Annual Report (A development stage company)
The Board has established a Compensation and Corporate Governance Committee and
an Audit Committee. Each committee consists of three members, all of whom are
unrelated directors.
The Compensation and Corporate Governance Committee reviews the compensation
strategy and policies of the Company, including the performance and compensation
of the CEO and senior executives. This committee also reviews the Company's
approach to succession planning and governance issues, which includes a periodic
review of the Company's corporate governance policies with reference to the TSX
guidelines, the NASDAQ National Market Requirements and the Sarbanes- Oxley Act
of 2002.
The Audit Committee monitors the Company's financial activities, policies, and
internal control procedures. In addition, the Audit Committee has established
procedures for (i) the receipt, retention, and treatment of complaints received
by the Company regarding accounting, internal accounting controls, or auditing
matters; and (ii) the confidential anonymous submission by Company employees of
concerns regarding questionable accounting or auditing matters. The Audit
Committee has adopted a charter covering the requirements of the TSX guidelines.
This charter can be viewed on the Company's Web site. Under the Sarbanes-Oxley
Act of 2002, Canadian issuers filing reports in the United States must disclose
whether their audit committees have at least one "financial expert". Benoit La
Salle, a member of Vasogen's audit committee, qualifies as a financial expert
under such legislation. In addition, the other members of the Audit Committee
are considered financially literate. The Board is of the opinion that it is
capable of dealing with many issues at the Board level and that, at the present
time, it only requires two active committees.
The Board reviews and approves the Company's financial statements and material
communications to shareholders and supervises the Company's regulatory
compliance. The Board has approved a Disclosure Policy for the Company, which,
amongst other things, establishes a Disclosure Policy Committee responsible for
overseeing the Company's disclosure practices. This committee sets benchmarks
for a preliminary assessment of materiality and determines when developments
justify public disclosure. Vasogen has investor relations personnel to assist in
corporate communications.
The effectiveness of the Board and the committees of the Board and the
contribution of individual directors are assessed on an ongoing basis by the
Compensation and Corporate Governance Committee. New candidates for Board
membership are actively sought, commensurate with growing corporate activities
and changing requirements. Board members are encouraged to recommend new
candidates. For these reasons and because the substantial majority of the Board
is unrelated, the Board is of the opinion that a nominating committee is not
necessary. New recruits to the Board are provided with extensive background
documentation with respect to Vasogen and meet with Management in order to
discuss and be informed of the Company's affairs.
For a complete discussion of Vasogen's corporate governance practices, please
refer to the Company's Management Proxy Circular.
Vasogen Inc. 2003 Annual Report (A development stage company) 25
MANAGEMENT'S RESPONSIBILITY
The accompanying consolidated financial statements of Vasogen Inc. and other
financial information contained in this annual report are the responsibility of
Management. The consolidated financial statements have been prepared in
conformity with Canadian generally accepted accounting principles, using
Management's best estimates and judgments where appropriate. In the opinion of
Management, these consolidated financial statements reflect fairly the financial
position and the results of operations and cash flows of the Company within
reasonable limits of materiality. The financial information contained elsewhere
in this annual report has been reviewed to ensure consistency with that in the
consolidated financial statements. The integrity and objectivity of data in the
financial statements and elsewhere in this annual report are the responsibility
of Management.
In fulfilling its responsibilities for the integrity of the data presented and
to safeguard the Company's assets, Management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded, and summarized. This system of internal
control is supported by the selection of qualified personnel, by organizational
assignments that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of written policies and procedures.
The Board of Directors is responsible for ensuring that Management fulfills its
responsibilities for financial reporting and internal controls. The Board
carries out this responsibility principally through its independent Audit
Committee, which is composed of unrelated independent directors. The Audit
Committee meets regularly during the year to review significant accounting and
auditing matters with Management and the independent auditor and to review the
interim and annual consolidated financial statements of the Company.
The consolidated financial statements have been audited by KPMG LLP, Chartered
Accountants, which has full and unrestricted access to the Audit Committee.
KPMG's report on the consolidated financial statements is presented herein.
/s/ Christopher J. Waddick /s/ David G. Elsley
Christopher J. Waddick David G. Elsley
Executive Vice President President and Chief Financial Officer
and Chief Executive Officer
26 Vasogen Inc. 2003 Annual Report (A development stage company)
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Vasogen
Inc. (a Development Stage Company) as at November 30, 2003
and 2002 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three-year
period ended November 30, 2003, and for the period from
December 1, 1987 to November 30, 2003. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian
generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at November 30, 2003 and 2002 and the results of
its operations and its cash flows for each of the years in the
three-year period ended November 30, 2003, and for the period
from December 1, 1987 to November 30, 2003 in accordance
with Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
December 23, 2003
Vasogen Inc. 2003 Annual Report (A development stage company) 27
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
NOVEMBER 30, November 30,
2003 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,476 $ 2,024
Marketable securities (note 2) 52,354 35,605
Clinical supplies 4,418 2,645
Tax credits recoverable 1,383 1,379
Prepaid expenses 1,021 518
Total current assets 63,652 42,171
Marketable securities (note 2) 3,255 5,086
Capital assets, net (note 3) 360 313
Acquired technology, net (note 4) 1,013 1,266
Other 503 --
Total assets $ 68,783 $ 48,836
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,831 $ 2,029
Accrued liabilities 2,487 1,301
Total current liabilities 6,318 3,330
SHAREHOLDERS' EQUITY:
Share capital (note 5):
Authorized: Unlimited common shares, without
par value Issued and outstanding: 62,023,000
common shares (2002 - 51,935,000) 173,380 126,673
Warrants (note 5(b)) 1,456 --
Options (note 5(b) and (c)) 744 --
Deficit (113,115) (81,167)
Total shareholders' equity 62,465 45,506
Commitments (notes 11 and 12)
Total liabilities and shareholders' equity $ 68,783 $ 48,836
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Benoit La Salle /s/ William R. Grant
Benoit La Salle William R. Grant
Director Director
28 Vasogen Inc. 2003 Annual Report (A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In thousands of Canadian dollars, except per share amounts)
Period from
Years ended November 30, December 1, 1987
----------------------------------------- to November 30,
2003 2002 2001 2003
---------------------------------------------------------------------------------------------------------
EXPENSES:
Research and development $ 21,730 $ 12,675 $ 9,208 $ 70,931
General and administration 10,250 7,542 7,304 45,740
Foreign exchange loss (gain) 1,111 267 (58) 1,320
---------------------------------------------------------------------------------------------------------
Loss before the undernoted (33,091) (20,484) (16,454) (117,991)
Investment income 1,143 977 2,065 6,386
---------------------------------------------------------------------------------------------------------
Loss for the period (31,948) (19,507) (14,389) (111,605)
Deficit, beginning of period (81,167) (61,660) (47,271) (1,510)
---------------------------------------------------------------------------------------------------------
Deficit, end of period $ (113,115) $ (81,167) $ (61,660) $ (113,115)
=========================================================================================================
Basic and diluted loss per share (note 6) $ (0.57) $ (0.40) $ (0.32) $ --
=========================================================================================================
See accompanying notes to consolidated financial statements.
Vasogen Inc. 2003 Annual Report (A development stage company) 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
Vasogen Inc. 2003 Annual Report (A development stage company)
Period from
Years ended November 30, December 1, 1987
----------------------------------------- to November 30,
2003 2002 2001 2003
---------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATIONS:
Loss for the period $ (31,948) $ (19,507) $ (14,389) $ (111,605)
Items not involving cash:
Amortization of capital assets
and acquired technology 393 377 345 3,823
Stock-based compensation costs 431 -- -- 431
Common shares issued for services -- -- -- 2,449
Foreign exchange loss (gain) 306 228 (20) 426
Other 4 -- -- (35)
Change in non-cash operating working
capital (note 7(a)) 708 (1,235) (126) (532)
---------------------------------------------------------------------------------------------------------
(30,106) (20,137) (14,190) (105,043)
FINANCING:
Shares issued for cash 50,669 25,000 11,941 156,492
Warrants exercised for cash 1,347 -- -- 16,941
Options exercised for cash 589 540 429 5,742
Share issue costs (4,129) (1,901) (121) (11,137)
Other (503) -- -- (503)
Issue of convertible debt, net -- -- -- 622
Payable to related parties -- -- -- (234)
---------------------------------------------------------------------------------------------------------
47,973 23,639 12,249 167,923
INVESTMENTS:
Increase in capital assets (192) (87) (190) (1,087)
Increase in acquired technology -- -- -- (1,283)
Purchases of marketable securities (49,151) (24,201) (13,246) (146,895)
Maturities of marketable securities 34,023 21,626 14,217 90,851
---------------------------------------------------------------------------------------------------------
(15,320) (2,662) 781 (58,414)
Foreign exchange gain (loss)
on cash held in foreign currency (95) (3) 20 10
---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 2,452 837 (1,140) 4,476
Cash and cash equivalents,
beginning of period 2,024 1,187 2,327 --
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 4,476 $ 2,024 $ 1,187 $ 4,476
=========================================================================================================
Supplemental disclosure and supplemental cash flow information (note 7(b)
and (c)).
See accompanying notes to consolidated financial statements.
30 Vasogen Inc. 2003 Annual Report (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular figures in thousands, except per share amounts)
Years ended Novermber 30, 2003, 2002, 2001, and period from
December 1, 1987 to November 30, 2003
Since its inception, the Company has been engaged in the research and commercial
development of its immune modulation therapies for the treatment of disease and
has had no commercial operations. The operations of the Company are not subject
to any seasonality or cyclicality factors.
The consolidated financial statements presented have been prepared on the basis
that the Company is considered a development stage enterprise and, accordingly,
the consolidated statements of operations and deficit and cash flows also
reflect the cumulative amounts from December 1, 1987 to November 30, 2003.
1. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada, which, except as described
in note 15, conform, in all material respects, with accounting principles
generally accepted in the United States.
(a) PRINCIPLES OF CONSOLIDATION:
These consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Vasogen Ireland Limited (incorporated in 1998). The
functional currency of the Irish subsidiary is the Canadian dollar. All material
intercompany balances and transactions have been eliminated.
(b) CASH AND CASH EQUIVALENTS:
The Company considers unrestricted cash on hand, in banks, in term deposits and
in commercial paper with original maturities of three months or less as cash and
cash equivalents.
(c) MARKETABLE SECURITIES:
Marketable securities are stated at amortized cost plus accrued interest. The
Company regularly reviews the carrying value of its investments. Should there be
a decline in value that is other than a temporary decline, the Company measures
the amount of the write-down based on the quoted market value of the investments
and charges such write-down to the consolidated statements of operations and
deficit. Interest income is recognized on an effective yield basis.
(d) CONCENTRATION OF CREDIT RISK:
Financial instruments potentially exposing the Company to a concentration of
credit risk consist principally of marketable securities.
Marketable securities include bonds issued by highly rated Canadian and U.S.
corporations, all having varying maturities between one and 24 months from the
date of purchase, trading in active markets and capable of prompt liquidation.
(e) CAPITAL ASSETS:
Capital assets are recorded at cost less any impairment losses recognized in
accordance with note 1(g) and amortized on a straight-line basis over their
estimated useful lives as follows:
Testing equipment 5 years
Computer and other equipment 5 years
Leasehold improvements Over term of lease
(f) ACQUIRED TECHNOLOGY:
Acquired technology, representing part of the Company's platform medical device
technology, is stated at cost less any impairment losses recognized in
accordance with note 1(g). Amortization is provided on a straight-line basis
over 20 years, representing the term of the acquired patent.
(g) IMPAIRMENT OF LONG-TERM ASSETS:
The Company periodically reviews the useful lives and the carrying values of its
long- lived assets. The Company reviews for impairment in long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. If the sum of the undiscounted
Vasogen Inc. 2003 Annual Report (A development stage company) 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular figures in thousands, except per share amounts)
Years ended Novermber 30, 2003, 2002, 2001, and period
from December 1, 1987 to November 30, 2003
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
expected future cash flows expected to result from the use and eventual
disposition of an asset is less than its carrying amount, it is considered to be
impaired. An impairment loss is measured at the amount by which the carrying
amount of the asset exceeds its fair value; which is estimated as the expected
future cash flows discounted at a rate commensurate with the risks associated
with the recovery of the asset (note 1(o)).
(h) RESEARCH AND DEVELOPMENT:
Research costs are expensed as incurred. Development costs are expensed as
incurred unless they meet the criteria under generally accepted accounting
principles in Canada for deferral and amortization. The Company has not
capitalized any such development costs to date. Total research and development
tax credits netted against research and development expenses on the consolidated
statements of operations and deficit were $200,000 in 2003 (2002 - $297,663;
2001 - $363,000; from December 1, 1987 to November 30, 2003 - $1,632,663).
Clinical supplies represent the devices and disposables on hand at year end that
will be consumed in the Company's future research and clinical trials. These
supplies are carried at the lower of cost on a first-in-first-out basis and net
realizable value and expensed as research and development expenses when shipped
to outsourced research centres or clinical sites.
(i) DERIVATIVE FINANCIAL INSTRUMENT:
The Company is party to forward foreign exchange contracts. These financial
instruments are measured at fair value. The unrealized gain or loss arising from
changes in fair value of the forward exchange contract is recognized in income
currently as the instrument is not considered a hedging instrument. The fair
value of the forward contract as at November 30, 2003, is negligible.
(j) TRANSLATION OF FOREIGN CURRENCY:
Monetary items denominated in a foreign currency are translated into Canadian
dollars at exchange rates in effect at the balance sheet dates and non-monetary
items are translated at rates of exchange in effect when the assets were
acquired or obligations incurred. Revenue and expenses are translated at rates
in effect at the time of the transactions. Foreign exchange gains and losses are
included in the determination of loss for the period.
(k) INCOME TAXES AND INVESTMENT TAX CREDITS:
The Company accounts for income taxes by the asset and liability method. Under
the asset and liability method, future tax assets and liabilities are recognized
for the future taxes attributable to temporary differences between the financial
statement carrying values of existing assets and liabilities and their
respective tax carrying values. Future tax assets and liabilities are measured
using enacted or substantively enacted tax rates expected to apply to taxable
income in the period in which those temporary differences are expected to be
recovered or settled.
Future tax assets initially recognized are reduced by a valuation allowance.
Management has provided a valuation allowance equivalent to the net future tax
asset balances, given the development stage of the Company's activities and the
uncertainty that it will generate sufficient income for tax purposes to utilize
the tax losses in the carryforward period.
The benefits of tax credits for scientific research and development expenditures
are recognized in the year the qualifying expenditures are made, provided there
is reasonable assurance of recoverability. The tax credits reduce the cost of
capital assets or research costs, as applicable.
32 Vasogen Inc. 2003 Annual Report (A development stage company)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(l) STOCK-BASED COMPENSATION PLAN:
The Company has a stock-based compensation plan as described in note 5. No
compensation expense is recognized when stock options or warrants are issued to
employees, officers, or directors. Any consideration paid on the exercise of
stock options or warrants, or on purchase of stock, is credited to share
capital.
The Company uses the fair value method of accounting for stock options granted
to non-employees and recognizes the expense over the performance period (note
1(o)(iii)).
(m) BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Basic earnings (loss) per common share is computed by dividing earnings (loss)
for the period by the weighted average number of shares outstanding during the
reporting period. Diluted earnings per share is computed similar to basic
earnings per share except that the weighted average number of shares outstanding
is increased to include additional shares from the assumed exercised stock
options and warrants, if dilutive. The number of additional shares is calculated
by assuming that outstanding stock options and warrants were exercised and that
proceeds from such exercises were used to acquire shares of common stock at the
average market price during the reporting period.
(n) MEASUREMENT UNCERTAINTY:
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
The Company has estimated the useful lives of all depreciable assets and the
recoverability of capital assets and acquired technology using estimates of
future cash flows and other measures of fair values. Significant changes in the
assumptions with respect to future business plans could result in impairment of
capital assets or acquired technology.
(o) CHANGE IN ACCOUNTING POLICY:
(i) In December 2002, the Accounting Standards Board of The Canadian
Institute of Chartered Accountants' ("CICA") issued Handbook Section
3063, "Impairment of Long-Lived Assets" ("Section 3063"). Section 3063
supersedes the write-down and disposal provisions of CICA 3061,
"Property, plant and equipment". Under Section 3063, long-lived assets
are tested for impairment whenever events or changes in circumstances
indicate that the assets might be impaired. The impairment test is
carried out in two steps. In the first step, the carrying amount of the
asset (or asset group) is compared with its recoverable amount. The
carrying amount of a long-lived asset is not recoverable if the carrying
amount exceeds the sum of the undiscounted cash flows expected to result
from its use and eventual disposition. The second step is carried out
when the carrying amount of a long-lived asset is not recoverable, in
which case the fair value of the long-lived asset is compared with its
carrying amount to measure the amount of the impairment loss, if any.
When an impairment loss is recognized, it is presented in income from
operations in the income statement. When quoted market prices are not
available, the fair value of the long-lived assets is determined using
the discounted estimated future cash flow method.
Vasogen Inc. 2003 Annual Report (A development stage company) 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular figures in thousands, except per share amounts)
Years ended Novermber 30, 2003, 2002, 2001, and period from
December 1, 1987 to November 30, 2003
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company has early adopted Section 3063, effective
December 1, 2002. In accordance with the requirements
of Section 3063, this change in accounting policy has been
applied prospectively and the amounts presented for prior
periods have not been restated for this change. The
adoption of Section 3063 had no impact on the Company's
financial position or results of operations.
(ii) GOODWILL AND OTHER INTANGIBLE ASSETS AND BUSINESS COMBINATIONS:
Effective December 1, 2002, the Company adopted prospectively, the new
CICA Handbook Section 3062, "Goodwill and Other Intangible Assets", which
requires that goodwill and indefinite life intangible assets no longer be
amortized but rather be tested for impairment at least annually and
written down only when impaired. Intangible assets with definite useful
lives are amortized over their useful life. The adoption of Section 3062
had no impact on the Company's financial position or results of
operations.
(iii) STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS:
Effective December 1, 2002, the Company adopted part of the new CICA
Handbook Section 3870, "Stock-based Compensation and Other Stock-based
Payments". The recommendations require all stock-based payments to
non-employees, and employee awards that are direct awards of stock, that
call for settlement in cash or other assets, or stock appreciation rights
that call for settlement by the issuance of equity instruments, granted
on or after December 1, 2002, to be accounted for using the fair value
based method. Subsequent amendments to Section 3870 issued in December
2003 require the use of the fair value based method to account for all
stock-based transactions with employees in the financial statements of
the Company in its fiscal year beginning December 1, 2004.
In 2003, the Company (a) maintained its current policy described in note
1(l) of accounting for employee stockbased compensation using the
settlement method, and (b) changed its policy to record compensation
costs for stockbased compensation issued on or after December 1, 2002 to
non-employees at fair value. Pro forma disclosures have been made in note
5.
(iv) GUARANTEES: Effective December 1, 2002, the Company adopted CICA
Accounting Guideline 14, "Disclosure of Guarantees" ("AcG-14"), that
requires a guarantor to disclose significant information about guarantees
it has provided, without regard to whether it will have to make any
payments under the guarantees and in addition to the accounting and
disclosure requirements of CICA Handbook 3290, "Contingencies". The
Company believes there are no material guarantees for disclosure.
(v) ASSET RETIREMENT OBLIGATIONS: Effective December 1, 2002, the Company
adopted the CICA Handbook Section 3110, "Asset Retirement Obligations",
which harmonize Canadian GAAP with SFAS No. 143, Accounting for Asset
Retirement Obligations. This Section establishes standards for the
recognition, measurement, and disclosure of liabilities for asset
retirement obligations and the associated retirement costs. This Section
applies to legal obligations associated with the retirement of a tangible
long-lived asset that result from its acquisition, construction,
development, or normal operation. The adoption of Section 3110 had no
impact on the Company's financial position or results of operations.
34 Vasogen Inc. 2003 Annual Report (A development stage company)
2. MARKETABLE SECURITIES:
Less than Greater than
one year one year Yield to
2003 maturities maturities Total maturity
-------------------------------------------------------------------------------------------------------------
Canadian corporate bonds $ 52,354 $ 3,255 $ 55,609 2.50% - 2.95%
=============================================================================================================
Less than Greater than
one year one year Yield to
2002 maturities maturities Total maturity
-------------------------------------------------------------------------------------------------------------
Canadian corporate bonds $ 35,605 $ 5,086 $ 40,691 2.70% - 4.08%
=============================================================================================================
At November 30, 2003, and 2002, the carrying value of marketable securities
approximated their quoted market value.
3. CAPITAL ASSETS:
Accumulated Net book
2003 Cost amortization value
Testing equipment $ 624 $ 321 $ 303
Computer and other equipment 214 171 43
Leasehold improvements 52 38 14
$ 890 $ 530 $ 360
Accumulated Net book
2002 Cost amortization value
Testing equipment $ 460 $ 222 $ 238
Computer and other equipment 195 144 51
Leasehold improvements 52 28 24
$ 707 $ 394 $ 313
In 2003, amortization expense amounted to $140,000 (2002 - $124,000;
2001 - $92,000).
4. ACQUIRED TECHNOLOGY:
2003 2002
Cost $ 4,081 $ 4,081
Less accumulated amortization 3,068 2,815
Net book value $ 1,013 $ 1,266
In 2003, amortization expense amounted to $253,000 (2002 - $253,000;
2001 - $253,000).
Vasogen Inc. 2003 Annual Report (A development stage company) 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular figures in thousands, except per share amounts)
Years ended Novermber 30, 2003, 2002, 2001, and period from
December 1, 1987 to November 30, 2003
Vasogen Inc. 2003 Annual Report (A development stage company)
5. SHAREHOLDERS' EQUITY:
(a) COMMON SHARES:
Authorized: Unlimited common shares, without par value
Issued:
Period from
December 1, 1987 to
2003 2002 2001 November 30, 2003
--------------------- --------------------- --------------------- ---------------------
Number Number Number Number
of shares Amount of shares Amount of shares Amount of shares Amount
-------------------------------------------------------------------------------------------------------------------------------
Balance,
beginning of period 51,935 $126,673 46,365 $103,034 44,742 $ 90,785 1,032 $ 1,213
Issued for:
Cash 9,478 50,669 5,155 25,000 1,407 11,941 41,446 156,492
Services -- -- -- -- -- -- 1,571 2,449
Technology -- -- -- -- -- -- 1,913 2,799
Warrants exercised 250 1,347 -- -- -- -- 11,279 16,941
Options exercised 360 589 415 540 216 429 4,358 5,742
Debt conversion -- -- -- -- -- -- 424 650
Share issue costs -- (5,898) -- (1,901) -- (121) -- (12,906)
-------------------------------------------------------------------------------------------------------------------------------
Balance, end of
period (note 5(b)) 62,023 $173,380 51,935 $126,673 46,365 $103,034 62,023 $173,380
===============================================================================================================================
Common shares issued for services or acquired technology are recorded at the
quoted market value of the shares at the respective issue date.
(b) PUBLIC OFFERING:
In July 2003, the Company issued 9,477,986 common shares for gross proceeds of
$50,669,313 (net proceeds of $46,540,313 after cost of issuance of $4,129,000,
which excludes $1,769,000 for the fair value of warrants and options granted to
the agent and other advisors as additional compensation).
In connection with the offering of common shares, the Company granted 360,000
warrants and 77,500 options to the agent and other advisors. These warrants and
options have been ascribed a fair value of $1,456,000 and $313,000,
respectively, with the associated cost reflected as a cost of issuing the
related common shares. Each warrant and option entitles the holder to purchase
one common share at U.S. $4.69 per share until July 2, 2006. As of November 30,
2003, none of these warrants or options had been exercised.
36 Vasogen Inc. 2003 Annual Report (A development stage company)
5. SHAREHOLDERS' EQUITY (CONTINUED):
(c) STOCK-BASED COMPENSATION PLANS:
In May 2003, the Company adopted two new stock option plans (the "2003 Employee
Plan" and the "2003 Director Plan") to eventually replace the Company's existing
stock option plan (the "Existing Plan"). All grants of options after May 2003
are made from the new plans and no further option grants will be made under the
Existing Plan. The Company reserved for issuance 2,000,000 common shares under
the 2003 Employee Plan and 250,000 common shares under the 2003 Director Plan.
Each option granted allows the holder to purchase one common share. Options
granted under these plans have a maximum term of 10 years and generally vest
over a period of up to four years. The exercise price must not be less than the
closing price of the Company's common shares on The Toronto Stock Exchange on
the last trading day prior to the grant of the option.
As at November 30, 2003, there were 1,496,366 (2002 - 732,561) options available
for grant.
2003 2002 2001
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 2,271 $ 4.68 2,037 $ 4.37 1,793 $ 2.94
Issued 1,460 5.01 805 4.34 487 8.79
Exercised (360) 1.64 (415) 1.30 (216) 1.99
Expired or cancelled (126) 8.87 (156) 7.96 (27) 8.32
------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 3,245 5.00 2,271 4.68 2,037 4.37
==============================================================================================================================
Exercisable, end of year 1,549 1,510 1,689
==============================================================================================================================
The table above includes 77,500 options granted to agents and other advisors
for a fair value of $313,000 (note 5(b)) and 267,609 options granted to other
non-employees for a fair value of $430,740.
The following table provides information on options outstanding and exercisable
as of November 30, 2003:
Options outstanding Options exercisable
--------------------------------------- ------------------------------
Weighted
Weighted average Weighted
average remaining average
Exercise Number exercise contractual Number exercise
price outstanding price life (years) exercisable price
-------------------------------------------------------------------------------------------------------
$ 1.25 - $ 3.39 933 $ 2.42 2.0 594 $ 2.18
$ 3.40 - $ 5.65 1,217 4.54 6.9 146 4.20
$ 5.66 - $ 9.04 923 7.23 3.2 639 7.08
$ 9.05 - $ 11.30 172 10.19 2.2 170 10.20
-------------------------------------------------------------------------------------------------------
3,245 5.00 4.2 1,549 5.27
=======================================================================================================
Vasogen Inc. 2003 Annual Report (A development stage company) 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular figures in thousands, except per share amounts)
Years ended Novermber 30, 2003, 2002, 2001, and period from
December 1, 1987 to November 30, 2003
5. SHAREHOLDERS' EQUITY (CONTINUED):
CICA Handbook Section 3870 does not require the recording of compensation cost
at fair value for options issued to employees; it does require disclosure of pro
forma net loss and loss per share information as if the Company had measured
options issued to employees under the fair value method and recognized the fair
value over the vesting period. This information is as follows:
2003
Loss for the year $ (31,948)
Pro forma compensation expense-employees