Exhibit 99.1
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ALTAREX
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 2002
ALTAREX CORP.
610 LINCOLN STREET
WALTHAM, MA 02451
CONTACT:
SONDRA HENRICHON
DIRECTOR, INVESTOR RELATIONS AND CORPORATE COMMUNICATIONS
PHONE: 781-672-0138
FAX NUMBER: 781-672-0142
TOLL FREE: 888-801-6665
www.altarex.com
info@altarex.com
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ALTAREX
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE PERIOD ENDED MARCH 31, 2002
FIRST QUARTER HIGHLIGHTS
The first quarter of 2002 was predominantly marked by the Company's reporting of
Phase II clinical results from its largest (345-patient) OvaRex(R) (oregovomab)
trial in ovarian cancer. Additionally, the Company successfully filled its first
lot of new OvaRex(R) product using a cell culture manufacturing process, and
consequently initiated its ongoing (and now fully enrolled) 24-patient
pharmacokinetic study to establish comparability between cell culture product
and the ascites product used in six OvaRex(R) clinical efficacy trials to date.
In this regard, encouraging news came from the Company's meetings with European
regulatory authorities during the quarter, indicating that the approach
initiated in the United States to establish manufacturing comparability could
fulfill European requirements as well. Subsequent to the end of the quarter, the
Company announced its exclusive licensing agreement with Unither
Pharmaceuticals, Inc., a wholly-owned subsidiary of United Therapeutics
Corporation, for rights to OvaRex(R) and AltaRex's four additional cancer
antibody products for North America and many regions worldwide.
The timing of these important clinical and partnering milestones coincided with
a particularly challenging period in the Company's financial history; they are
nevertheless major accomplishments that validate AltaRex's novel and proprietary
technology platform, utilizing foreign antibodies to induce clinically
beneficial immune responses in cancer patients. These achievements also
establish a potential future revenue stream for the Company, based on milestone
payments and sales.
With regard to the Company's cash position, at March 31, 2002, the Company's
cash, cash equivalents and short-term investments totaled $2.3 million as
compared to $9.1 million at December 31, 2001. Subsequent to the end of the
first quarter, the Company announced its exclusive licensing agreement with
United Therapeutics Corporation. As part of that agreement, United Therapeutics
purchased 4.9 million common shares of the Company for a purchase price of
approximately $3.9 million. The Company also issued to United Therapeutics a
warrant and a right to purchase a convertible debenture (each of which expires
if not executed prior to August 20, 2002) that combined, if exercised, will
provide AltaRex an additional $4.0 million.
The events of first quarter 2002 and the subsequent agreement with United
Therapeutics in April mark a directional change for the Company moving forward.
As of the effective date of April 17, 2002 and during a 240-day initial
assessment period and thereafter (assuming a favorable completion thereof),
United Therapeutics assumed responsibility for all expenses associated with the
development and commercialization of OvaRex(R) and all five oncology products
for its licensed territories, as well as the personnel costs associated with
about one-half of AltaRex employees who as of mid-May became employees of
Unither Pharmaceuticals. a subsidiary of United Therapeutics. This group
includes the following previous officers of AltaRex - Peter Gonze, Senior Vice
President of Operations; Christopher Nicodemus, M.D., Senior Vice President of
Clinical Research and Development;
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and James Levin, D.V.M., Vice President of Manufacturing and Development. With
these changes, and including the resignation of Edward Fitzgerald as Senior Vice
President and Chief Financial Officer of AltaRex, the Company expects that its
research and development costs and supporting general and administrative
expenses will be significantly decreased for the remainder of 2002 and
thereafter.
Our employees are working with their former colleagues with regard to United
Therapeutics' territories, but are also focused on establishing corporate
alliances for the European Union countries, where AltaRex retains all rights to
its cancer antibody portfolio, although profit-sharing joint ventures have
already been established with regional market leaders in Southern Europe.
Notably, the still unlicensed territories of the world represent almost one-half
of the target patient population for OvaRex(R) MAb.
AltaRex expects to extend its technology to new areas in and outside of the
cancer field as resources allow. For example, the Company is accelerating
ongoing research and development activities with Epigen, Inc., a collaboration
structured for an equal sharing of research expenses. The Company will also
explore collaborations outside of cancer by joining with others to create the
necessary capability to support a meaningful effort.
As part of the many Company changes, our OvaRex(R) Investigational New Drug
Applications (INDs) for clinical studies in North America are being transferred
to United Therapeutics. It is expected that United Therapeutics will review the
OvaRex(R) clinical program to date, seek input from regulatory authorities, and
to design and implement a confirmatory clinical study (presumably phase III) to
the recently reported 345-patient phase IIb study, with the intention of
initiating patient treatment in such a trial during the first quarter of next
year.
We believe that the progress that AltaRex has made, although difficult, has
increased hope for the future of ovarian cancer patients, while validating our
research and development foundation from which to build Company and shareholder
value.
Richard E. Bagley
President and Chief Executive Officer
This quarterly report contains forward-looking statements that involve risks and
uncertainties, which may cause actual results to differ materially from the
statements made. For this purpose, any statements that are contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "intends," "expects" and similar expressions are intended to identify
forward-looking statements. Such risks and uncertainties include, but are not
limited to our need for capital and the risk that the Company can not raise
funds on a timely basis on satisfactory terms or at all, the need to obtain and
maintain corporate alliances, such as the alliance with United Therapeutics, and
the risk that the Company cannot establish corporate alliances on a timely
basis, on satisfactory terms, or at all, changing market conditions,
uncertainties regarding the timely and successful completion of clinical trials
and patient enrollment rates, uncertainty of pre-clinical, retrospective, early
and interim clinical trial results, which may not be indicative of results that
will be obtained in ongoing or future clinical trials, whether the Company
and/or its collaborators will file for regulatory approval on a timely basis,
uncertainties as to when, if at all, the FDA will accept or approve regulatory
filings for the Company's products, the need to establish and scale-up
manufacturing processes, uncertainty as to the timely development and market
acceptance of the Company's products, uncertainty as to whether patents will
issue from pending patent applications and, if issued, as to whether such
patents will be sufficiently broad to protect the Company's technology, and
other risks detailed from time-to-time in the Company's filings with the United
States Securities and Exchange Commission and Canadian securities authorities.
The Company does not assume any obligation to update any forward-looking
statement.
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ALTAREX
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Unaudited Consolidated Financial Statements and the notes thereto included
in this report. The Unaudited Consolidated Financial Statements have been
prepared in accordance with accounting principles generally accepted in Canada,
which conform in all materials respects with accounting principles generally
accepted in the United States except as disclosed in Note 3 to the Unaudited
Consolidated Financial Statements. All dollars in Canadian dollars unless
otherwise stated.
OVERVIEW
The Company's business is the research, development and commercialization
of biopharmaceutical products for the treatment of cancer and other diseases.
Substantially all of the Company's products are subject to regulation by the
Therapeutic Products Programme (TPP) of Health Canada in Canada, the Food and
Drug Administration (FDA) in the United States, the European Agency for the
Evaluation of Medicinal Products (EMEA) in Europe and similar agencies in other
countries. None of the Company's products have been approved by regulatory
agencies for sale to date. The Company has not been profitable since its
inception and expects to continue to incur substantial losses in continuing the
research, development and clinical trials of its products. The Company does not
expect to generate significant revenues until such time as, and unless, its
therapeutic products are approved by applicable regulatory agencies and become
commercially viable.
The Company commenced operations on December 1, 1995 and completed its
first full year of operations on December 31, 1996. As of March 31, 2002, the
Company has incurred cumulative losses of $101.4 million. This includes a loss
of $5.6 million for the three months ended March 31, 2002. These losses are
primarily due to the cost of clinical and product development activities,
supporting efforts in product commercialization and the settlement of
outstanding litigation in 1999.
On April 17, 2002, the Company entered into a license agreement (the
"License Agreement") with Unither Pharmaceuticals, Inc. ("Unither"), a
subsidiary of United Therapeutics Corporation ("United"), for the development of
OvaRex(R) MAb and four other monoclonal antibodies. Under the terms of this
agreement, Unither received exclusive rights for development and
commercialization of the licenses products worldwide, with the exception of
rights retained by the Company to the European Union and certain other
countries. The Company and United Therapeutics have agreed to work closely
together during the 240 day period commencing on April 17, 2002 (the "Initial
Assessment Period") for the purposes of assessing all aspects of the development
of the licensed technology conducted by or on behalf of the Company prior to
April 17, 2002 and to develop solutions and strategies going forward with
respect to all aspects of the successful development of the licensed technology.
During the Initial Assessment Period and thereafter so long as the license is
not terminated, United Therapeutics will fund all reasonable and direct ongoing
development costs incurred by either the Company or United Therapeutics in
accordance with the license agreement with respect to developing the licensed
technology, according to an approved budget. If United Therapeutics does not
provide written notice to the Company of its decision to develop products
utilizing or incorporating the licensed technology prior to the end of the
Initial Assessment Period, then the Company may, in its discretion, terminate
the license agreement upon 15 days' advance written notice to United
Therapeutics, unless United Therapeutics issues such notice of intention to the
Company within that 15-day period. Upon 15 days' written notice to the Company
at any time during the Initial Assessment Period or within 30 days following
completion of the Initial Assessment Period, United Therapeutics may terminate
the license. If United Therapeutics elects to proceed with such a development
program, United Therapeutics has agreed to pay the Company certain amounts based
upon the achievement of specified milestones together with royalties based upon
sales of products utilizing or incorporating the licensed technology sold in the
licensed territory. United Therapeutics has agreed to use commercially
reasonable efforts following completion of the Initial Assessment Period and,
assuming that neither party
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW (CONTINUED)
terminates the license agreement at that time, to develop, market and
commercialize such products utilizing the licensed technology as United
Therapeutics determines are commercially feasible, including the conduct of
related research, development and pre-clinical and clinical trials and obtaining
all necessary regulatory approvals. Pursuant to the agreement, in May 2002 a
number of employees of the Company became employees of Unither. As a result of
this transaction, the Company expects that its research and development costs
and supporting general and administrative expenses will decrease significantly
in the balance of 2002.
RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
The Company recorded a net loss for the quarter ended March 31, 2002 of
$5.6 million, or $(0.15) per share, compared to a net loss of $6.3 million, or
$(0.26) per share, for the same period in 2001. The decreased net loss for the
period is due primarily to the planned decreased spending on manufacturing and
clinical development and regulatory expenses as the Company focused on
financing, partnering and merger and acquisition activities to address its
critically limited cash position while continuing key clinical trials and
analysis work for its lead product, OvaRex(R) MAb.
REVENUES
Revenues for the three months ended March 31, 2002, consisting of interest
income, totaled $25,035, a decrease of $160,604 from the $185,639 recorded in
the same period in 2001 due primarily to lower levels of invested funds in 2002.
EXPENSES
Research and development expenses for the three months ended March 31, 2002
totaled $1.9 million, a decrease of $0.3 million from the $2.2 million recorded
in the same period in 2001. This decrease in research and development expenses
was related to the planned delay in certain development work with Abbott
Laboratories and other parties for the Company's lead product, OvaRex(R) MAb, as
the Company focused on financing, partnering and/or merger and acquisitions.
Clinical and regulatory expenses for the three months ended March 31, 2002
totaled $2.1 million, a decrease of $0.8 million from the $2.9 million recorded
in the same period in 2001. This decrease was primarily related to the lower
costs associated with the winding down of the analysis work related to the
primary endpoint of the Company's pivotal 345-patient OvaRex(R) trial, the
results of which were released in February 2002, and the completion of certain
other trials that were in process in the first quarter of 2001.
General and administrative expenses for the three months ended March 31,
2002 totaled $1.6 million, an increase of $0.1 from the $1.5 million recorded in
the same period in 2001. These variances are primarily related to additional
professional fees related to the Company's intellectual property portfolio and
other corporate matters.
As a result of the License Agreement with Unither, the Company anticipates
that research and development expenses and supporting general and administrative
expenses will decrease significantly for the balance of 2002. The actual levels
of research and development and general and administrative expenditures will
depend on many factors, including primarily the cash resources available to the
Company as well as the progress and results of discovery research and
preclinical studies, the cost, timing and outcome of the regulatory process, the
costs of materials, the cost of preparing, filing, prosecuting,
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
maintaining, defending and enforcing patent claims, the availability and cost of
required personnel, and the extent to which the Company enters into affiliations
with corporate partners for ongoing research and development activities. Going
forward, the Company will focus on establishing corporate alliances for the
European Union counties and securing additional cash resources, and the Company
may be required to delay, reduce the scope of, or eliminate one or more of its
research and development programs until such times as it secures additional cash
resources. See "Liquidity and Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company's cash, cash equivalents and short-term
investments totaled $2.3 million as compared to $9.1 million at December 31,
2001. Since its inception, the Company has financed its operations primarily
through private placements and public offerings of equity securities amounting
to approximately $99.1 million, interest income on invested balances amounting
to $3.5 million and amounts received under research contracts of $0.8 million.
The Company currently has no contributing cash flows from operations. As a
result, the Company relies on external sources of financing such, as the issue
of equity or debt securities, the exercise of options or warrants and investment
income.
The Company's net cash used in operating activities amounted to $6.9
million for the three months ended March 31, 2002 and $29.8 million for the year
ended December 31, 2001, and resulted primarily from its net operating losses.
Concurrently with the delivery and execution of the License Agreement, the
Company and United entered into a subscription agreement (the "Subscription
Agreement"), pursuant to which United purchased 4.9 million common shares of the
Company at a price of US$0.50 per share for total proceeds to the Company of
approximately $3.9 million (US$2.45 million). In addition, the Company issued to
United a convertible debenture (the "First Debenture") in the principal amount
of $80,000 (US$50,000), which is convertible into 100,000 common shares of the
Company at a price of US$0.50 per share.
The following table presents selected balance sheet items of the Company
has of March 31, 2002 on an "as reported" and a "pro forma" basis reflecting the
impact of the United purchase of 4.9 million common shares of the Company and
the First Debenture.
As of March 31, 2002
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As Reported Pro forma
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Cash and cash equivalents $2,316,555 $6,174,325
Working capital (2,862,392) 995,378
Total assets 3,781,275 7,639,045
Total shareholder's equity (2,043,018) 1,814,752
The Company also issued to United a warrant (the "Warrant") to purchase
3.25 million common shares of the Company at a price of US$0.50 per share. The
Warrant may only be exercised in full and must be exercised on or before August
20, 2002. Pursuant to the Subscription Agreement, the Company granted to United
the right to purchase a convertible debenture (the "Second Debenture") in the
principal amount of approximately $1.39 million (US$875,000). Subject to receipt
of approval by the Company's shareholders, US$441,690 of the principal amount of
the Second Debenture is automatically convertible into 883,380 common shares of
the Company upon issuance of the Second Debenture. United's right to purchase
the Second Debenture expires on August 14, 2002. If United does not exercise the
Warrant on or before August 20, 2002 or does not purchase the Second Debenture
on or before August 25, 2002, then the Company may terminate the License
Agreement immediately upon written notice to Unither. If United
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
exercises the Warrant and purchases the Second Debenture, the Company believes
that its available cash, cash equivalents and short-term investments and
interest earned thereon, including the proceeds from the United purchase of
common shares of the Company and the First Debenture, the exercise of the
Warrant and the purchase of the Second Debenture, should be sufficient to
finance its operations and capital needs into 2003. If United does not exercise
the Warrant and purchase the Second Debenture, the Company believes that its
available cash, cash equivalents and short-term investments and interest earned
thereon will be sufficient to finance its operations into the third quarter of
2002. However, there can be no assurance that United will exercise the warrantor
purchase the second debenture.
The Company's funding needs may vary depending on a number of factors,
including the progress of its research and development programs, the number and
breadth of these programs, the results of preclinical studies and clinical
trials, the cost, timing and outcome of the regulatory process, whether or not
United determines to proceed with the development of OvaRex(R) MAb and invest
further funds in the company, the establishment of collaborations, the cost of
preparing, filing, prosecuting, maintaining, defending and enforcing patent
claims, the status of competitive products and the availability of other
financing.
The Company will seek additional funding through public or private equity
or debt financings from time to time, as market conditions permit, or through
collaborative arrangements. The Company's ability to access the capital markets
or to enlist strategic partners is substantially dependent on the progress of
its research and development programs and regulatory approval of its products.
There can be no assurance that additional financing will be available on
acceptable terms, if at all. If adequate funds are not available, the Company
may be required to delay, reduce the scope of, or eliminate one or more of its
research and development programs or may be required to significantly scale back
or cease operations.
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ALTAREX
CONSOLIDATED BALANCE SHEETS
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(IN CANADIAN DOLLARS) MARCH 31, 2002 DECEMBER 31, 2001
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 2,316,555 $ 8,211,313
Short-term investments - 856,051
Accounts and other receivables 2,397 91,474
Prepaid expenses 662,949 761,678
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2,981,901 9,920,516
Deposits and other assets 235,671 235,671
Capital assets 563,703 634,870
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$ 3,781,275 $ 10,791,057
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $5,824,293 $ 7,383,751
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5,824,293 7,383,751
Shareholders' equity:
Share capital 99,331,514 99,143,441
Accumulated deficit during the development stage (101,374,532) (95,736,135)
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Total shareholders' equity (2,043,018) 3,407,306
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$ 3,781,275 $ 10,791,057
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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ALTAREX
CONSOLIDATED STATEMENTS OF LOSS
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FOR THE THREE MONTHS ENDED
MARCH 31,
(In Canadian dollars, except share amounts) 2002 2001
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(unaudited) (unaudited)
REVENUES
Interest income $25,035 $185,639
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Total revenues 25,035 185,639
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EXPENSES
Research & development 1,936,141 2,202,715
Clinical & regulatory 2,089,615 2,866,737
General & administrative 1,637,676 1,453,646
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Total expenses 5,663,432 6,523,098
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NET LOSS FOR THE PERIOD $(5,638,397) $(6,337,729)
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Net loss per common share ($0.15) ($0.26)
Weighted average number of common shares 36,678,716 24,282,170
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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ALTAREX
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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ACCUMULATED
DEFICIT
DURING THE TOTAL
DEVELOPMENT SHAREHOLDER'S
COMMON SHARES STAGE EQUITY
(In Canadian dollars, except share SHARES AMOUNT
amounts)
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BALANCE, DECEMBER 31, 2001 36,663,556 $99,143,441 $ (95,736,135) $ 3,407,306
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Issuance costs from special units
(unaudited) (11,927) - (11,927)
Exercise of warrants (unaudited) 100,000 200,000 - 200,000
Net loss (unaudited) - - (5,638,397) (5,638,397)
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BALANCE, MARCH 31, 2002 (UNAUDITED) 36,763,556 $99,331,514 $(101,374,532) $ (2,043,018)
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ACCUMULATED
DEFICIT
DURING THE TOTAL
COMMON SHARES DEVELOPMENT SHAREHOLDERS'
STAGE EQUITY
(In Canadian dollars, except share SHARES AMOUNT
amounts)
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BALANCE, DECEMBER 31, 2000 22,032,200 $72,894,559 $ (61,933,769) $10,960,790
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Issuance of common shares in public
offering (unaudited) 4,402,211 7,232,480 - 7,232,480
Net loss (unaudited) - - (6,337,729) (6,337,729)
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BALANCE, MARCH 31, 2001 (UNAUDITED) 26,434,411 $80,127,038 $ (68,271,498) $11,855,541
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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ALTAREX
CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED
MARCH 31,
2002 2001
(UNAUDITED) (UNAUDITED)
(IN CANADIAN DOLLARS)
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CASH USED IN OPERATING ACTIVITIES
Net loss $(5,638,398) ($6,337,729)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 71,977 78,702
Net changes in non-cash working capital balances (1,371,651) 1,091,211
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(6,938,072) (5,167,816)
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CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchase of capital assets (810) (85,608)
Maturities and purchases of short-term investments 856,051 (163,729)
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855,241 (249,337)
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CASH PROVIDED BY FINANCING ACTIVITIES
Issue of common shares, net - 7,232,480
Issuance costs from special units (11,927) -
Exercise of warrants 200,000 -
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188,073 7,232,480
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,894,758) 1,815,327
Cash and Cash Equivalents, Beginning of period 8,211,313 9,665,187
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,316,555 $11,480,514
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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ALTAREX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
AltaRex Corp. (the Company), incorporated under the Business Corporations
Act (Alberta), is a development-stage biotechnology company that is engaged in
the research, development and commercialization of biopharmaceutical products
for the treatment of cancer and other diseases.
GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. During the three
months ended March 31, 2002 and the year ended December 31, 2001, the Company
incurred losses of $5,638,398 and $33,802,366, respectively. As further
discussed in Note 4, in April 2002, the Company sold 4.9 million of its common
shares to United Therapeutics Corporation ("United") for total proceeds to the
Company of approximately $3,900,000 (US$2,450,000). In addition, the Company
issued to United a convertible debenture (the "First Debenture") in the
principal amount of $80,000 (US$50,000), which is convertible into 100,000
common shares of the Company at a price of US$0.50 per share. The Company also
issued to United a warrant (the "Warrant") to purchase 3.25 million common
shares of the Company at a price of US$0.50 per share. The Company also granted
to United the right to purchase a convertible debenture (the "Second Debenture")
in the principal amount of approximately $1,390,000 (US$875,000). The right to
exercise the Warrant expires on August 20, 2002. The right to purchase the
Second Debenture expires on August 14, 2002. In management's opinion, the
Company believes that its available cash, cash equivalents and short-term
investments and interest earned thereon, including proceeds from the United
purchase of common shares of the Company and the First Debenture and assuming
the exercise of the Warrant and the purchase of the Second Debenture, should be
sufficient to finance its operations and capital needs into 2003. However, as
there is no assurance that United will exercise the Warrant or purchase the
Second Debenture, there is substantial doubt as to the Company's ability to
continue as a going concern into 2003.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to (a) obtain additional financing
as may be required and (b) ultimately attain profitability. The Company is
pursuing additional financing through public or private equity or debt
instruments and through collaborative arrangements with potential partners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements as of March 31, 2002 and
for the three months ended March 31, 2002 and 2001 are unaudited. These
unaudited financial statements have been prepared on the same basis as the
audited financial statements of the Company and include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. Results for the three month
period ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the entire fiscal year or future periods.
The financial statements have been prepared by management in accordance
with accounting principles generally accepted in Canada, which conform in all
material respects to those established in the United States, except as disclosed
in Note 3. The preparation of financial statements in accordance with
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such principles requires management to make estimates and assumptions that
affect the reported amount 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 reporting periods.
Actual results could differ from those estimates and those differences could be
material.
NET LOSS PER SHARE
The Company uses the treasury stock method to determine the dilutive effect
of instruments such as warrants and options. Under the treasury stock method,
earnings per share are computed as if the instruments were exercised at the
beginning of the period (or the time of issuance, if later) and the funds
obtained were used to purchase common stock at the average market price during
the period.
Basic and diluted net loss per share are the same, as outstanding common
stock options and warrants are antidilutive as the Company has recorded a net
loss for all periods presented. Options and warrants to purchase a total of
12,484,704 and 2,932,037 common shares as of March 31, 2002 and 2000,
respectively, have been excluded from the computation of diluted weighted
average shares outstanding.
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
On January 1, 2002, the Company adopted the recommendations in Handbook
Section 3870 ("Section 3870"), Stock-Based Compensation and Other Stock-Based
Payments, issued by The Canadian Institute of Chartered Accountants. The new
recommendations are generally applicable only to awards granted after the date
of adoption. The adoption of the new recommendations did not impact the
financial statements.
Stock options and warrants awarded to non-employees are accounted for using
the fair value method. No compensation expense for stock options granted to
employees is recognized if the exercise price of these stock options equals the
price of the Company's common stock on the date of grant. However pro forma
disclosure of net loss and net loss per share is provided as if these awards
were accounted for using the fair value method by using the Black-Scholes
pricing model. Consideration paid on the exercise of stock options and warrants
is credited to share capital.
3. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada (Canadian GAAP), which conform in all
material respects to those accounting principles generally accepted in the
United States (U.S. GAAP), except as follows:
(a) Accounting for stock-based compensation
For any stock options and warrants issued prior to January 1, 2002, for
U.S. GAAP purposes, the Company would account for stock-based compensation to
employees in accordance with Accounting Principles Board (APB) Opinion No. 25.
For instruments issued after January 1, 2002, the Company would apply the
recommendation of Handbook Section 3870 (see Note 2) for U.S. GAAP purposes, no
compensation expense would be recognized on the Company's stock options and
warrants granted if the exercise price of these instruments equal the fair value
of the Company's stock as at the date of the grant. Stock-based compensation to
non-employees would be recorded at the fair value of the options and warrants
granted.
The compensation expense related to the fair value of stock based
compensation to non-employees and the value of options issued to employees at
less than fair value on the grant date or other appropriate
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED)
measurement date would be amortized over the appropriate vesting periods. For
Canadian GAAP purposes, no compensation expense or deferral would be recognized
in such circumstances.
As of March 31, 2002, the unamortized compensation benefit that the Company
would record as additional compensation expense in future periods amounts to
$0(December 31, 2001 -- $10,000).
Additionally, during 2001 and 2000 the Company issued 274,000 and 185,149
options, respectively, to agents of its offerings of common shares. The
compensation related to these issuances of $520,600 and $378,000, respectively,
would be recognized as a reduction in the net proceeds of the offering and an
increase in share capital for the value of the options. Accordingly, there would
be no net effect on the share capital of the Company.
(b) Reverse take-over costs
For Canadian GAAP purposes, costs incurred in connection with the Company's
reverse take-over are presented as a charge against share capital. For U.S. GAAP
purposes, these costs totaling $495,000 would be charged to expense.
Accordingly, net loss for the year ended December 31, 1996 and share capital for
each of the periods presented would increase by $495,000.
(c) Comprehensive income (loss)
For U.S. GAAP purposes, the Company would adopt the disclosure requirements
of Statement of Financial Accounting Standards No. 130 (SFAS 130). SFAS 130
requires the presentation of comprehensive income (loss) and its components.
Comprehensive income (loss) includes all changes in equity during a period
except shareholder transactions. For the periods presented, comprehensive income
(loss) would equal net loss determined for U.S. GAAP purposes as set out in the
following table.
The following table reconciles the net loss as reported on the statements
of loss to the net loss that would have been reported had the financial
statements been prepared in accordance with U.S. GAAP.
- -----------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
(In Canadian dollars, except share amounts) 2002 2001
- -----------------------------------------------------------------------------------------
Net loss per Canadian GAAP $ 5,638,397 $ 6,337,729
Adjustment for stock-based compensation - 129,000
- -----------------------------------------------------------------------------------------
Net loss per U.S. GAAP $ 5,638,397 $ 6,466,729
Basic and diluted net loss per share, U.S. GAAP $ (0.15) $ (0.27)
Basic and diluted weighted-average number of common shares 36,678,716 24,282,170
- -----------------------------------------------------------------------------------------
The following summarizes balance sheet items with material variations under U.S.
GAAP.
- --------------------------------------------------------------------------------
MARCH 31,2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------
Share capital $ 96,772,514 $96,584,441
Accumulated deficit $103,933,532 $98,295,135
- --------------------------------------------------------------------------------
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. SUBSEQUENT EVENT
On April 17, 2002, the Company entered into a license agreement (the
"License Agreement") with Unither Pharmaceuticals, Inc. ("Unither"), a
subsidiary of United, for the development of OvaRex(R) MAb and four other
monoclonal antibodies. Under the terms of this agreement, Unither received
exclusive rights for development and commercialization of the products
worldwide, with the exception of rights retained by the Company to the European
Union and certain other countries. The Company and United Therapeutics have
agreed to work closely together during the 240 day period commencing on April
17, 2002 (the "Initial Assessment Period") for the purposes of assessing all
aspects of the development of the licensed technology conducted by or on behalf
of the Company prior to April 17, 2002 and to develop solutions and strategies
going forward with respect to all aspects of the successful development of the
licensed technology. During the Initial Assessment Period and thereafter so long
as the license is not terminated, United Therapeutics will fund all reasonable
and direct ongoing development costs incurred by either the Company or United
Therapeutics in accordance with the license agreement with respect to developing
the licensed technology, according to an approved budget. If United Therapeutics
does not provide written notice to the Company of its decision to develop
products utilizing or incorporating the licensed technology prior to the end of
the Initial Assessment Period, then the Company may, in its discretion,
terminate the license agreement upon 15 days' advance written notice to United
Therapeutics, unless United Therapeutics issues such notice of intention to the
Company within that 15-day period. Upon 15 days' written notice to the Company
at any time during the Initial Assessment Period or within 30 days following
completion of the Initial Assessment Period, United Therapeutics may terminate
the license. If United Therapeutics elects to proceed with such a development
program, United Therapeutics has agreed to pay the Company certain amounts based
upon the achievement of specified milestones together with royalties based upon
sales of products utilizing or incorporating the licensed technology sold in the
licensed territory. United Therapeutics has agreed to use commercially
reasonable efforts following completion of the Initial Assessment Period and,
assuming that neither party terminates the license agreement at that time, to
develop, market and commercialize such products utilizing the licensed
technology as United Therapeutics determines are commercially feasible,
including the conduct of related research, development and pre-clinical and
clinical trials and obtaining all necessary regulatory approvals.
Concurrently with the delivery and execution of the License Agreement,, the
Company and United entered into a subscription agreement (the "Subscription
Agreement"), pursuant to which United purchased 4.9 million common shares of the
Company at a price of US$0.50 per share for total proceeds to the Company of
approximately $3,900,000 (US$2,450,000). In addition, the Company issued to
United a convertible debenture (the "First Debenture") in the principal amount
of $80,000 (US$50,000) which is convertible into 100,000 common shares of the
Company at a price of US$0.50 per share. The Company also issued to United a
warrant (the "Warrant") to purchase 3.25 million common shares of the Company at
a price of US$0.50 per share. The Warrant may only be exercised in full and must
be exercised on or before August 20, 2002. Pursuant to the Subscription
Agreement, the Company granted to United the right to purchase a convertible
debenture (the "Second Debenture") in the principal amount of approximately
$1,390,000 (US$875,000). Subject to receipt of approval by the Company's
shareholders, US$441,960 of the principal amount of the Second Debenture is
automatically convertible into 883,380 common shares of the Company upon
issuance of the Second Debenture. United's right to purchase the Second
Debenture expires on August 14, 2002. If United does not exercise the Warrant on
or before August 20, 2002 or does not purchase the Second Debenture on or before
August 25, 2002, then the Company may terminate the License Agreement
immediately upon written notice to Unither. Assuming the exercise of the Warrant
and purchase and conversion of the Second Debenture, United would own
approximately 19.9% of the then current outstanding common shares of the
Company. United also received rights to purchase 19.9% of the securities issued
by the Company in certain future financings of the Company.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. SUBSEQUENT EVENT (CONTINUED)
On March 5, 2002, the Company issued 185.7 special warrants to a group of
investors, as part of a private placement offering of up to 1,000 special
warrants. This offering anticipated maximum proceeds to the Company of
C$7,000,000 and the issuance of a maximum of 8,250,000 common shares of the
Company. The Company filed a preliminary prospectus dated March 5, 2002 in
connection with this offering. In light of the United Therapeutics transaction
described above and after discussion with securities regulatory authorities,
this offering was cancelled.
On April 26, 2002, ICN Pharmaceuticals, Inc. brought suit against the
Company in the Superior Court of Orange County, California claiming that the
Company breached a letter of intent between ICN and the Company and seeking
unspecified damages.
# # #
15