[ALTAREX LOGO]
EXHIBIT 99.1
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2002
ALTAREX CORP.
1601 TRAPELO ROAD, SUITE 350
WALTHAM, MA 02451
CONTACT:
TRUDY CHIMKO
MANAGER, CORPORATE COMMUNICATIONS
PHONE: 781-672-0138
FAX NUMBER: 781-672-0142
TOLL FREE: 888-801-6665
www.altarex.com
info@altarex.com
[ALTAREX LOGO]
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002
ALL DOLLARS ARE IN CANADIAN DOLLARS UNLESS OTHERWISE STATED
THIRD QUARTER HIGHLIGHTS
At September 30, 2002, the Company's cash, cash equivalents and short-term
investments totaled $4.8 million as compared to $9.1 million at December 31,
2001. In the third quarter, in connection with its exclusive license agreement
with the Company, United Therapeutics Corporation exercised its rights under a
warrant and purchased 3.25 million common shares of the Company and a
convertible debenture in the principal amount of $1.36 million, of which
$688,662 was subsequently converted into 883,380 common shares, for aggregate
proceeds to AltaRex of approximately $3.9 million.
In the third quarter, the Company announced that the European Commission has
granted orphan medicinal product designation to OvaRex(R) MAb for the treatment
of ovarian cancer, which makes OvaRex(R) eligible for orphan drug exclusivity,
enables the Company to receive regulatory guidance from the European Commission
and entitles the Company to reduced filing fees. If the Company applies for and
receives the first marketing approval from the European Commission for OvaRex(R)
for the treatment of ovarian cancer, then the Company would be entitled to
orphan drug exclusivity from the European Commission with respect to OvaRex(R).
If the Company were to receive a grant of orphan drug exclusivity with respect
to OvaRex(R), then, for a period of up to 10 years, applications by other
parties to market the same product for the same use would not be approved by the
European Commission, except in very limited circumstances.
Pursuant to its license agreement with the Company, United Therapeutics has
assumed responsibility for all expenses associated with the development and
commercialization of OvaRex(R) and four other oncology products for its licensed
territories, as well as the personnel costs associated with about one-half of
AltaRex employees who are now employees of Unither Pharmaceuticals, Inc., a
subsidiary of United Therapeutics. As a result of these changes, and other
resignations, the Company's research and development costs and supporting
general and administrative expenses significantly decreased in the third quarter
of 2002 and the Company expects that these costs and expenses will remain at
approximately the same levels for the fourth quarter of 2002.
The OvaRex(R) Investigational New Drug Applications (INDs) for clinical studies
in North America have been transferred to United Therapeutics. The Company
expects that United Therapeutics will seek input from regulatory authorities
regarding the design of a confirmatory phase III clinical study program for
OvaRex(R) MAb, with the intention of initiating patient treatment in such a
program during the first quarter of next year.
We are continuing in our collaboration with United Therapeutics for the
development and commercialization of OvaRex(R) MAb in United's territories, but
we are primarily focused on establishing a corporate alliance for the European
Union countries, where AltaRex retains all rights to its cancer antibody
portfolio, although profit-sharing ventures have already been established with
regional market leaders. We have also refocused our research efforts, conducted
in our laboratories in Edmonton, on earlier stage projects, while continuing to
support our OvaRex(R) immunology program.
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We believe that our continued progress in developing our Phase III product
OvaRex(R) MAb and expanding the breadth and building the intellectual property
strength of our novel use of antibodies to induce or alter immunity is the
foundation from which we can 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; 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, such as the
alliance in Northern Europe that the Company is seeking, 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, the risk that the claims allowed under any issued patent owned or
licensed by the Company, will not be sufficiently broad to protect the Company's
technology, that any patents issued to the Company will not be sustained if
challenged in court proceedings or otherwise or that third parties will be able
to develop products or processes that do not infringe valid patents owned or
licensed by the Company; 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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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 are in Canadian dollars
unless otherwise stated.
OVERVIEW
The Company's business is the research, development and
commercialization of biopharmaceutical products for the treatment of certain
cancers 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. As of September
30, 2002, the Company has incurred cumulative losses of $103.4 million. This
includes a loss of $7.6 million for the nine months ended September 30, 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 Therapeutics"), for the
development of OvaRex(R) MAb and four other monoclonal antibodies. For the
remainder of this document Unither and United Therapeutics will be referred to
as "United". Under the terms of this License Agreement, United received
exclusive rights for development and commercialization of the licensed products
worldwide, with the exception of rights retained by the Company to the European
Union and certain other countries. The Company and United 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 will fund all reasonable and direct ongoing
development costs incurred by either the Company or United in accordance with
the License Agreement with respect to developing the licensed technology,
according to an approved budget. If United 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, unless United 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 may terminate the
license.
If United elects to proceed with such a development program, it 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 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW (CONTINUED)
and commercialize such products utilizing the licensed technology as United
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 United. As a result of this
transaction, the Company's research and development costs and supporting general
and administrative expenses were significantly reduced in the third quarter of
2002 and the Company expects that its research and development costs and
supporting general and administrative expenses will remain at approximately the
same levels for the fourth quarter of 2002.
RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
The Company recorded a net loss for the quarter ended September 30,
2002 of $1.5 million, or $(0.03) per share, compared to a net loss of $9.9
million, or $(0.35) per share, for the same period in 2001. The net loss for the
nine months ended September 30, 2002 was $7.6 million, or $(0.19) per share,
compared to a net loss of $23.7 million, or $(0.90) per share, for the same
period in 2001.
REVENUES
Revenues for the three months ended September 30, 2002 consisted solely
of interest income and totaled $1,505, a decrease of $125,246 from the $126,751
recorded in the same period in 2001. Revenues for the nine months ended
September 30, 2002 consisted solely of interest income, and totaled $29,050, a
decrease of $424,308 from the $453,358 recorded in the same period in 2001. The
decrease is due primarily to lower levels of invested funds in both periods
during 2002.
EXPENSES
Research and development expenses for the three months ended September
30, 2002 totaled $200,000, a decrease of $4.8 million from the $5.0 million
recorded in the same period in 2001. For the nine months ended September 30,
2002, research and development expenses totaled $500,000, a decrease of $9.7
million from the $10.2 million recorded in the same period in 2001. This
decrease in research and development expenses reflects the assumption by United
of the funding of all reasonable and direct ongoing development costs incurred
for development of OvaRex(R) and the other products covered by the License
Agreement and compensation expense, the reimbursement of $2.37 million by United
of costs incurred by the Company prior to the effective date of the License
Agreement (April 17, 2002) associated with the research and development as
related to the licensed technology, and the Company's efforts to reduce expenses
in light of its limited resources.
Clinical and regulatory expenses for the three months ended September
30, 2002 totaled $(20,000), net of a $83,000 reimbursement for clinical related
costs from United, a decrease of $2.9 million from the $2.9 million recorded in
the same period in 2001. For the nine months ended September 30, 2002, clinical
and regulatory costs totaled $2.5 million, net of a $170,000 reimbursement for
clinical costs, a decrease of $5.9 million from $8.4 million in the same period
in 2001. This decrease reflects the impact of the funding of costs for the
development of the licensed products by United subsequent to the effective date
of April 17, 2002.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses for the three months ended
September 30, 2002 totaled $1.3 million, a decrease of $900,000 from the $2.2
million recorded in the same period in 2001. For the nine months ended September
30, 2002, general and administrative costs totaled $4.6 million, a decrease of
$1.0 million from $5.6 million in the same period in 2001. This decrease is
primarily related to lower professional fees related to the Company's
intellectual property portfolio and lower headcount, facility related costs and
other corporate matters due to the signing of the License Agreement with United.
As a result of the License Agreement with United, the Company
anticipates that research and development expenses and supporting general and
administrative expenses decreased significantly in the third quarter and the
Company anticipates that they will remain at this level in the fourth quarter 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, 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. The Company has been focusing and will continue to focus
on establishing corporate alliances for the European Union countries 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 September 30, 2002, the Company's cash, cash equivalents and
short-term investments totaled $4.8 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
and debt amounting to approximately $107.1 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 $12.2
million for the nine months ended September 30, 2002 and reflects the Company's
use of cash to fund its net operating losses and the net changes in non-cash
working balances which primarily is a result of a reduction in accounts payables
and accrued liabilities.
Concurrent 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 $78,730 (US$50,000), which was subsequently converted 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 and granted to United the right to
purchase a convertible debenture (the "Second Debenture") in the principal
amount of approximately $1.36 million (US$875,000).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On August 15, 2002, United exercised the Warrant in full and purchased the
Second Debenture, resulting in gross proceeds to the Company of approximately
$3.9 million. Upon issuance of the Second Debenture, $688,662 (US$441,690) of
the principal amount of the Second Debenture automatically converted into
883,380 common shares of the Company.
The Company believes, based on its current operating plan, that its
available cash, cash equivalents and short-term investments and interest earned
thereon should be sufficient to finance its operations and capital needs into
the second quarter of 2003.
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, 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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CONSOLIDATED BALANCE SHEETS
(A DEVELOPMENT STAGE COMPANY)
(IN CANADIAN DOLLARS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 4,764,611 $ 8,211,313
Short-term investments -- 856,051
Accounts and other receivables 150,543 91,474
Prepaid expenses and other assets 1,115,966 761,678
-------------- -------------
6,031,120 9,920,516
Deposits and other assets 43,104 235,671
Capital assets 384,088 634,870
-------------- -------------
$ 6,458,312 $ 10,791,057
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,725,074 $ 7,383,751
-------------- -------------
2,725,074 7,383,751
Note Payable 674,763 --
SHAREHOLDERS' EQUITY:
Share capital 106,430,741 99,143,441
Accumulated deficit during the development stage (103,372,266) (95,736,135)
-------------- -------------
Total shareholders' equity 3,058,475 3,407,306
-------------- -------------
$ 6,458,312 $ 10,791,057
============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF LOSS
(A DEVELOPMENT STAGE COMPANY)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In Canadian dollars, except share amounts) 2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES
Interest income $ 1,505 $ 126,751 $ 29,050 $ 453,358
----------- ----------- ----------- ------------
Total revenues 1,505 126,751 29,050 453,358
----------- ----------- ----------- ------------
EXPENSES
Research & development * 189,920 4,962,452 537,637 10,184,362
Clinical & regulatory * (21,291) 2,853,417 2,506,304 8,373,857
General & administrative 1,301,152 2,209,945 4,621,240 5,601,849
----------- ----------- ----------- ------------
Total expenses 1,469,781 10,025,814 7,665,181 24,160,068
----------- ----------- ----------- ------------
NET LOSS FOR THE PERIOD $(1,468,276) $(9,899,063) $(7,636,131) $(23,706,710)
=========== =========== =========== ============
Net loss per common share ($0.03) ($0.35) ($0.19) ($0.90)
Weighted average number of common shares 43,801,413 28,586,029 40,448,881 26,442,278
============ ============ =========== ============
* Net of reimbursement in 2002 (See Note 4)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(A DEVELOPMENT STAGE COMPANY)
ACCUMULATED
DEFICIT
DURING THE TOTAL
DEVELOPMENT SHAREHOLDERS'
COMMON SHARES STAGE EQUITY
(In Canadian dollars, except share amounts) SHARES AMOUNT
---------- ------------ ------------- ----------
BALANCE, DECEMBER 31, 2001 36,663,556 $ 99,143,441 $ (95,736,135) $3,407,306
---------- ------------ ------------- ----------
Issuance costs from special units
(unaudited) -- (11,927) (11,927)
Exercise of warrants (unaudited) 100,000 200,000 -- 200,000
Issuance of shares in private placement, net
(unaudited) 4,900,000 3,803,627 -- 3,803,627
Exercise of warrants by United Therapeutics
(unaudited) 3,250,000 2,528,208 -- 2,528,208
Conversion of debentures by United
Therapeutics (unaudited) 983,380 767,392 -- 767,392
Net loss (unaudited) -- -- (7,636,131) (7,636,131)
---------- ------------ ------------- ----------
BALANCE, SEPTEMBER 30, 2002 (UNAUDITED) 45,896,936 $106,430,741 $(103,372,266) $3,058,475
========== ============ ============= ==========
ACCUMULATED
DEFICIT
DURING THE TOTAL
COMMON SHARES DEVELOPMENT SHAREHOLDERS'
STAGE EQUITY
(In Canadian dollars, except share amounts) SHARES AMOUNT
---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 2000 22,032,200 $ 72,894,559 $(61,933,769) $10,960,790
---------- ------------ ------------ -----------
Issuance of common shares in public
offering (unaudited) 4,402,211 7,232,087 -- 7,232,087
Issuance of common shares as payment for
services (unaudited) 29,145 56,832 -- 56,832
Exercise of special warrants (unaudited) 3,000,000 7,872,195 -- 7,872,195
Net loss (unaudited) -- -- (23,706,710) (23,706,710)
---------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30,2001 (UNAUDITED) 29,463,556 $ 88,055,673 $(85,640,479) $ 2,415,194
========== ============ ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(A DEVELOPMENT STAGE COMPANY)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN CANADIAN DOLLARS)
------------ ------------ ----------- -------------
CASH USED IN OPERATING ACTIVITIES
Net loss $(1,468,276) $(9,899,063) $(7,636,131) $(23,706,710)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 79,181 119,845 246,493 304,752
Issuance of common shares, net -- 56,832 -- 56,832
Net changes in non-cash working capital
balances (415,392) 2,289,087 (4,879,467) 3,832,966
------------ ------------ ------------ ------------
(1,804,487) (7,433,299) (12,269,105) (19,512,160)
------------ ------------ ------------ ------------
CASH PROVIDED BY INVESTING ACTIVITIES
Disposal (purchase) of capital assets 5,099 (226,522) 4,289 (442,685)
Maturities and purchases of short-term
investments -- 1,376,257 856,051 1,215,200
------------ ------------ ------------ -------------
5,099 1,149,735 860,340 772,515
------------ ------------ ------------ -------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issuance of common shares, net 688,662 -- 4,492,291 7,232,087
Issuance costs from special units -- -- (11,927) --
Issuance of convertible debt 674,763 -- 753,493 --
Exercise of special warrants, net -- (86,456) -- 7,872,195
Exercise of warrants 2,528,208 -- 2,728,206 --
------------ ------------ ------------ ------------
3,891,633 (86,456) 7,962,063 15,104,282
------------ ------------ ------------ ------------
NET INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS 2,092,245 (6,370,020) (3,446,702) (3,635,363)
Cash and Cash Equivalents, Beginning of period
2,672,366 12,399,844 8,211,313 9,665,187
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,764,611 $ 6,029,824 $ 4,764,611 $ 6,029,824
============ ============ =========== ============
SUPPLEMENTAL DISCLOSURE
Conversion of convertible debt $ 767,392 -- $ 767,392 --
============ ============ =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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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 nine
months ended September 30, 2002 and the year ended December 31, 2001, the
Company incurred losses of $7,636,131 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 $78,730 (US$50,000), which was converted 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 $1,363,000 (US$875,000). In August 2002,
United exercised the Warrant and the right to purchase the Second Debenture for
total proceeds of approximately $3.9 million. The Company believes, based on its
current operating plan, that its available cash, cash equivalents and short-term
investments and interest earned thereon should be sufficient to finance its
operations and capital needs into the second quarter of 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 September 30,
2002 and for the three and nine months ended September 30, 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 and nine month periods ended September 30, 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
13,045,991 and 4,677,287 common shares as of September 30, 2002 and 2001,
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.
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
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. For instruments issued after January 1, 2002, the Company
applies 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.
As of December 31, 2001, the unamortized compensation benefit that the
Company would record as additional compensation expense in future periods
amounts to $10,000 which has been fully amortized as of June 30, 2002.
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 in 1996 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- ----------- -----------
Net loss per Canadian GAAP $1,468,276 $9,899,063 $ 7,636,131 $23,706,710
Adjustments for stock-based compensation -- 114,000 10,000 360,000
---------- ----------- ----------- -----------
Net loss per U.S. GAAP $1,468,276 $10,013,063 $ 7,646,131 $24,066,710
Basic and diluted net loss per share, US
GAAP $(0.03) $(0.35) $(0.19) $(0.91)
Basic and diluted weighted-average number
of common shares 43,801,413 28,586,029 40,448,881 26,442,278
---------- ---------- ----------- -----------
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED)
The following summarizes balance sheet items with material variations under U.S.
GAAP.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Share capital $103,861,741 $96,584,441
Accumulated deficit $105,941,266 $98,295,135
------------ -----------
4. LICENSING AGREEMENT
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 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 will fund all reasonable and direct ongoing
development costs incurred by either the Company or United in accordance with
the License Agreement with respect to developing the licensed technology,
according to an approved budget. In the three month period ended June 30, 2002,
United reimbursed the Company, in accordance with the License Agreement, for
certain costs related to the licensed technology, which have been reflected as a
reduction to research and development and clinical and regulatory expenses.
These costs reimbursed by United were expenses of the Company in 2001 and 2002.
If United 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,
unless United 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 may terminate the license. If United elects to proceed
with such a development program, United 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 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 determines are commercially feasible, including the conduct
of related research, development and pre-clinical and clinical trials and
obtaining all necessary regulatory approvals.
[ALTAREX LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LICENSING AGREEMENT (CONTINUED)
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 $78,730 (US$50,000) which was converted into 100,000 common shares of the
Company at a price of US$0.50 per share on August 21, 2002. 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 and granted to United the
right to purchase a convertible debenture (the "Second Debenture") in the
principal amount of $1,363,425 (US$875,000). United exercised the Warrant in
full and purchased the Second Debenture on August 15, 2002 resulting in total
proceeds to the Company of approximately $3.9 million. Upon issuance of the
Second Debenture, $688,662 (US$441,960) of the principal amount of the Second
Debenture automatically converted into 883,380 common shares of the Company.
In total, United purchased 9,133,380 common shares and a debenture in
the principal amount of $674,763. The 9,133,380 common shares purchased by
United represent approximately 19.9% of the current outstanding common shares of
the Company. The Company also granted to United rights to purchase 19.9% of the
securities issued by the Company in certain future financings of the Company.
5. DEBT
On August 15, 2002, United purchased the Second Debenture (see Note 4)
in the principal amount of approximately $1,363,425 (US$875,000) of which
$688,662 (US$441,960) automatically converted into 883,380 common shares of the
Company. A note payable (the "Note Payable") was issued in exchange for the
remaining proceeds received for $674,763 (US$433,310). Interest is due on the
Note Payable quarterly and accrues at 6% per annum. The unpaid principal and
interest on the Note Payable is due in full in August 2005. The Note Payable is
convertible into common shares of the Company at a price of US$0.50 per share at
any time at the option of United.
6. LEGAL PROCEEDINGS
On April 26, 2002, ICN Pharmaceuticals, Inc. ("ICN") 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.
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