The consolidated financial statements have been prepared in accordance with the International Finan-cial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and effective for 2014. The accounting policies set forth below have been consistently applied to all years presented.
The consolidated financial statements have been prepared under the historical cost convention, as modified by financial assets and liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4, “Critical accounting estimates and judgments”.
For better readability the amounts in the Group’s financial statements and notes are presented in thousand Swiss francs (TCHF) unless stated otherwise.
Uncertainties and ability to continue operations
The Company is subject to various risks and uncertainties, including, but not limited to the time of achieving sustainable profitability and the uncertainty of the discovery, development, and commer-cialization of product candidates, which includes uncertainty of the outcome of clinical trials and sig-nificant regulatory approval requirements.
On April 14, 2014 Cytos announced that the Phase 2b study of the Company‘s lead product CYT003 in patients with moderate to severe allergic asthma did not achieve a statistically significant reduction of the Asthma Control Questionnaire (ACQ) score at week 12 in the target patient population compared to placebo. Patients on placebo and at all dose levels of CYT003 achieved a clinically relevant improvement in their asthma control measured by ACQ. Additional endpoints, including lung function also failed to show a statistically significant difference to placebo. As the study did not reach the pre-defined end points after three months of treatment, the clinical study was un-blinded and upon full review of the data terminated.
The Company has several product candidates in its portfolio. However, most of these products are licensed to third parties and it is not likely at this point in time, that these products will contribute in a significant manner to the financial situation of the Company within the next year or two. Because of that, Cytos conducted a wind-down of key operational activities, in particular related to the develop-ment and manufacturing of CYT003. The company executed a mass dismissal of employees to minimize operating costs and has been evaluating the feasibility of a sale of pre-clinical programs and technology assets. At this point in time, it is uncertain to what extend such sales could bring in cash.
Cytos carries a substantial amount of debt in the form of senior convertible loan notes issued in 2012 and a subordinated traded bond issued in 2007 and restructured in 2012. Both debt inst-ruments become due for repayment in February 2015. In total, the debt repayable in February amounts to CHF 46 million, whereas the cash as of December 31, 2014 amounted to CHF 16.9 million. In order to avoid a state of over-indebtedness, the four convertible loan note holders - Abingworth, Amgen, venBio and Aisling - have agreed in April 2014 to subordinate part of their loan notes to ordinary creditors. The non-subordinated part of the loan notes remains senior to the convertible bonds.
In order for Cytos to remain a going concern, the debt needs to be restructured, repaid or conver-ted into equity. While at least a partial repayment of the non-subordinaconver-ted part of the convertible loan notes might be possible, the convertible bonds will need to be converted into equity.
Assuming that the debt can be removed, the Board of Directors and management remain confident in their ability to maintain the Company’s liquidity at satisfactory levels. For this reason, the Board of Directors and the management believe that it is appropriate to prepare these financial state-ments on a going concern basis, which is also supported by the facts as disclosed in the subsequent event note (Note 27).
New accounting standards and IFRIC interpretations
New standards and interpretations and amendments to standards and interpretations mandatory for the first time for the financial year beginning January 1, 2014 and adopted by the group in 2014.
• IAS 32 (Amendment), Financial instruments: Presentation – Offsetting financial assets and finan-cial liabilities (effective on January 1, 2014). The Group applies this standard since January 1, 2014, but it does not have any impact on the Group’s account.
• IAS 36 (Amendment), “Impairment of assets” on recoverable amount disclosures; This amend-ment addresses the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal (effective on January 1, 2014). The Group applies this standard since January 1, 2014, but it does not have any impact on the Group’s account.
• IAS 39 (Amendment), Financial Instruments: Recognition and measurement: This amendment provides relief from discontinuing hedge accounting when novation at a hedging instrument to a central counter party meets specified criteria (effective on January 1, 2014). The Group applies this standard since January 1, 2014, but it does not have any impact on the Group’s account.
• IFRS 10/12/IAS 27 (Amendment); These amendments mean that many funds and similar entities will be exempt from consolidating most of their subsidiaries. Instead, they will measure them at fair value through profit or loss. The amendments give an exception to entities that meet an
“investment entity” definition and which display particular characteristics. Changes have also been made IFRS 12 to introduce disclosures that an investment entity needs to make (effective on January 1, 2014). The Group applies this standard since January 1, 2014, but it does not have
• IFRIC 21, “Levies”: This is an interpretation of IAS 37, “Provisions, contingent liabilities and con-tingent assets”. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy (effective on January 1, 2014). The Group applies this standard since January 1, 2014, but it does not have any impact on the Group’s account.
New standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2014 and not adopted early
• IAS 19 (Amendment), Defined benefit plans: Employee contributions: The amendment applies to contributions from employees or third parties to defined benefit plans and clarifies the treatment of such contributions. The amendment distinguishes between contributions that are linked to service only in the period in which they arise and those linked to service in more than one period.
The objective of the amendment is to simplify the accounting for contributions that are indepen-dent of the number of years of employee service, for example employee contributions that are calculated according to a fixed percentage of salary. Entities with plans that require contributions that vary with service will be required to recognise the benefit of those contributions over employee’s working lives (effective on July 1, 2014). The Group will apply this standard from January 1, 2015. It is not expected to have an impact on the Group’s accounts.
• Annual improvements 2012. These annual improvements amend standards from the 2010 – 2012 reporting cycle. It includes changes to: IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, and IAS 24 (effective on July 1, 2014). The Group will apply this standard from January 1, 2015. It is not expected to have an impact on the Group’s accounts.
• Annual improvements 2013. These annual improvements amend standards from the 2011 – 2013 reporting cycle. It includes changes to: IFRS 1, IFRS 3, IFRS 13 and IAS 40 (effective on July 1, 2014). The Group will apply this standard from January 1, 2015. It is not expected to have an impact on the Group’s accounts.
• Annual improvements 2014. These annual improvements amend standards from the 2012 – 2014 reporting cycle. It includes changes to: IFRS 5, IFRS 7, IAS 19 and IAS 34 (effective on July 1, 2016).
The Group will apply this standard from January 1, 2017. It is not expected to have an impact on the Group’s accounts.
• IFRS 11 (Amendment), “Joint arrangements” regarding acquisition of an interest in a joint opera-tion. This amendment provides new guidance on how to account for the acquisition of an interest in a joint venture operation that constitutes a business. The amendments require an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a business’. The amendments are applicable to both the acquisition of the initial interest in a joint operation and the acquisition of additional interest in the same joint operation. However, a previously held interest is not remeasured when the acquisition of an additional interest in the same joint operation results in retaining joint control (effective on Jan-uary 2016). The Group will apply this standard from JanJan-uary 1, 2016. It is not expected to have an impact on the Group’s accounts.
• IAS 16 (Amendment), “property, plant and equipment” and IAS 38, “Intangible assets” regarding depreciation and amortisation. This amendment clarifies that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an
embodied in an intangible asset. The presumption may only be rebutted in certain limited circum-stances. These are where the intangible asset is expressed as a measure of revenue; or where it can be demonstrated that revenue and the consumption of the economic benefits of the intan-gible asset are highly correlated (effective on January 2015). The Group will apply this standard from January 1, 2015. It is not expected to have an impact on the Group’s accounts.
• IAS 16 (Amendment), “Property, plant and equipment” and IAS 41, “Argiculture” regarding bearer plants. These amendments change the reporting for bearer plants, such as grape vines, rubber trees and oil palms. Bearer plants should be accounted for in the same way as property, plant and equipment because their operation is similar to that of manufacturing. The amendments include them in the scope of IAS 16 rather than IAS 41. The produce on bearer plants will remain in the scope of IAS 41 (effective on January 2016). The Group will apply this standard from January 1, 2016. It is not expected to have an impact on the Group’s accounts.
• IFRS 10/IAS 28 (Ammendment), regarding the sale of contribution of assets between an investor and its asociate or joint venture.These amendments address an inconsistency between IFRS 10 and IAS 28 in the sale or contribution of assets between an investor and its associate or joint venture. A full gain or loss is recognised when a transaction involves a business. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary (effective on January 2016). The Group will apply this standard from January 1, 2016. It is not expected to have an impact on the Group’s accounts.
• IAS 27 (Amendment), “Separate financial statements” regarding the equity method. The amend-ment allow entities to use the equity method to account for investamend-ments in subsidiaries, joint ventures and associates in their separate financial statements. (effective on January 2016). The Group will apply this standard from January 1, 2016. It is not expected to have an impact on the Group’s accounts.
• IFRS 14 “regulatory deferrai accounts”. This standard permits first-time adopters of IFRS to con-tinue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items (effective on January 2016). The Group will apply this standard from January 1, 2016. It is not expected to have an impact on the Group’s accounts.
• IFRS 15 “Revenue from contracts with customers”. This is the converged standard on revenue recognition. It replaces IAS 11, ‘Construction contracts’, IAS 18,’Revenue’ and related interpreta-tions. Revenue is recognised when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying 5 steps the following steps. (effective on January 2016). The Group will apply this standard from January 1, 2016. It is not expected to
Consolidation
Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of a subsidiary by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instru-ments issued and liabilities incurred or assumed at the date of exchange. Costs directly attributable to acquisitions are directly expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acqui-sition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the income statement.
The Group applies the equity method of accounting for investments in companies that are considered associated companies and for which it has the ability to exercise significant influence, but not control. This generally exists when it owns between 20% and 50% of the voting rights of an asso ciated company. The Group’s share of its associates’ post-acquisition profits or losses is nized in the income statement, and its share of post-acquisition movements in reserves is recog-nized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.
If the ownership interest in an associate is reduced but significant influence is retained, only a pro-portionate share of the amounts previously recognized in other comprehensive income is reclassi-fied to profit or loss where appropriate.
All inter-company balances, transactions and unrealized gains on transactions have been eliminated in consolidation. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The consolidated financial statements include the accounts of Cytos Biotech nology Ltd, Schlieren, Switzerland, and its wholly-owned subsidiary Proteome Therapeutics GmbH, Singen, Germany, non-operative, (partner’s capital: EUR 25,000).
Segment reporting
The Group operates in one segment, focusing on the development and prospective commercializa-tion of a new class of biopharmaceutical products that are intended for use in the treatment and prevention of chronic diseases. The segment is reported in a manner consistent with the internal reporting provided to the CEO who is the chief operating decision-maker.
Foreign currency translation and transactions
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional cur-rency”). The consolidated financial statements are presented in Swiss Francs (“CHF”), which is the Company’s functional and presentation currency.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.
Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss.
Translation differences on non-monetary financial assets, such as equities classified as available for sale, are included in other comprehensive income.
Assets and liabilities of companies whose functional currency is other than CHF are included in the consolidation by translating the assets and liabilities into the presentation currency at the exchange rates applicable at the end of the reporting period. Income and expenses for each income state-ment are translated at average exchange rates (unless this average is not a reasonable approxima-tion of the cumulative effect of the rates prevailing on the transacapproxima-tion dates, in which case income and expenses are translated at the dates of the transaction). All resulting exchange differences are recognized as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities and from borrowings are brought into shareholders’ equity. When a foreign operation is sold, such exchange differences are recognized in the income statement as part of the gain or loss on sale.
Impairment of assets
Non-financial assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount.
An impairment loss is recognized for this difference. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash- generating units).
Cash and cash equivalents
The Group considers all short-term, highly liquid investments convertible into known amounts of cash with original maturities of three months or less at the date of the purchase to be cash equiva-lents. The cash flow statement is based on cash and cash equivaequiva-lents.
Trade and other receivables
Trade and other receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method (unless considered immaterial). A provision for impairment of trade receivables is established when there is objective evidence that the Group
Financial assets at fair value through profit or loss
This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if so designated by management. Deriva-tives are also categorized as held for trading unless they are designated as hedges. Financial assets at fair value through profit or loss are measured at their fair value plus initial transaction costs. Fair value changes on financial assets at fair value through profit or loss are included in financial income
This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if so designated by management. Deriva-tives are also categorized as held for trading unless they are designated as hedges. Financial assets at fair value through profit or loss are measured at their fair value plus initial transaction costs. Fair value changes on financial assets at fair value through profit or loss are included in financial income