EXHIBIT 99.1
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 2003
ALTAREX CORP.
1123 DENTISTRY/PHARMACY BUILDING
UNIVERSITY OF ALBERTA
EDMONTON, ALBERTA T6G 2N8
CONTACT:
ROB SALMON OR ANTOINE NOUJAIM
PHONE: 780-944-9993
FAX NUMBER: 780-433-1158
www.altarex.com
info@altarex.com
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A L T A R E X
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2003
ALL DOLLAR FIGURES ARE IN CANADIAN DOLLARS UNLESS OTHERWISE STATED
FIRST QUARTER HIGHLIGHTS - MESSAGE TO OUR SHAREHOLDERS
On May 15th of this year, I agreed to accept the position of President and CEO
of AltaRex Corporation with the view of inserting a new vision to the Company. I
am pleased to share such a vision with our loyal shareholders. I would be less
than candid in not mentioning to you that we are financially challenged and
within this context, I will outline to you the steps that the new management
intends to take over the coming months to reinvent AltaRex to its full
potential.
The first step already underway is to reduce our expenses dramatically by
closing down our corporate executive offices in Boston and to relocate such
offices to our Canadian headquarters in Edmonton, Alberta. This particular
action entailed the painful termination of a number of employees and the
suspension of any cash remuneration to the present management team in the spirit
of prudent management of our financial resources during these difficult times. A
seasoned management team consisting of Jacques Lapointe, (Chairman of the Board
of our Company), Mr. Rob Salmon, our new Chief Financial Officer who previously
held a partnership at KPMG and who is an expert in Corporate financial
restructuring, as well as myself form the core team undertaking the
implementation of the new strategy. Additionally, we have previously announced
that changes at the Board level will be proposed at our next scheduled annual
shareholders meeting. We believe that these changes will bring together the
committed expertise necessary for revitalizing our Company in its new
directions. Mr. Richard Bagley, our past President and CEO, has left the Company
to pursue other opportunities and the Company wishes to thank him for his
dedication and considerable efforts during the past five years.
The second task which we are already pursuing is to restructure the Company
financially through innovative mechanisms that will enhance the cash position.
If we are able to do this, we believe these funds would allow AltaRex to launch
its long-term strategy to rebuild the necessary infrastructure to sustain the
growth of the Company. We hope to accomplish this over the next few months.
The third objective of the new management team is to leverage our rich
technology base in the field of antibodies and immunodulation with complementary
technologies through strategic partnerships to expand our product line and
explore the potential in the field of antiviral therapies. We are hopeful that
this technology will be the basis for the future growth of AltaRex.
Our continued collaboration with our strategic partner United Therapeutics
Corporation is now progressing where our lead product, OvaRex(R), is now the
subject of two phase III trials in the United States with anticipated enrollment
of 350 advanced ovarian cancer patients. Close to 80 cancer centers are expected
to be engaged in this process with completed patient enrollment expected in mid
2004. All costs associated with product development, clinical trials, and
registrations are carried by United Therapeutics Corporation. A production
facility for OvaRex(R) is under an advanced stage of design. We are extremely
delighted by this process which we believe bodes well for the future.
In the first quarter of this year our Company scientists have contributed
extensively in several International Meetings with particular emphasis on the
role of our technology in enhancing the immune process in the area of cancer and
other disease conditions.
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A L T A R E X
Assuming we are able to obtain the financing necessary to fund our business, I
feel very bullish about the new directions and vision of the Company. Your
continued support during these difficult times will provide the new management
team with the tools to reinvent AltaRex in the months and years to come.
Dr. Antoine Noujaim
President & Chief Executive Officer
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A L T A R E X
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. Until revenues are generated the Company is dependent upon
its existing limited cash resources, interest income and its ability to obtain
financing from equity offerings, debt financings and collaborative research and
development alliances to finance its operations.
The Company commenced operations on December 1, 1995. As of March 31, 2003,
the Company has incurred cumulative losses of $105.6 million. This includes a
loss of $1.4 million for the three months ended March 31, 2003. 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.
The Company is also highly dependent on the success of its license
agreement with United Therapeutics Corporation ("United Therapeutics"). On April
17, 2002, the Company entered into a license agreement with Unither
Pharmaceuticals, Inc., a subsidiary of United Therapeutics ("Unither
Pharmaceuticals") for the development of OvaRex(R) MAb and four other monoclonal
antibodies. Under the terms of this agreement, United Therapeutics, through its
subsidiary, received exclusive rights for development and commercialization of
the five antibody products worldwide, with the exception of rights retained by
the Company to member nations of the European Union and certain other countries.
United Therapeutics is now developing OvaRex(R) MAb in the licensed territories.
As a result of the license agreement, personnel formerly employed by the Company
and involved in the clinical development, manufacturing and regulatory aspects
of the OvaRex(R) MAb development program became employees of United
Therapeutics, leaving the Company with 10 employees. The Company now has 8
employees. In addition, United Therapeutics reimbursed the Company for $2.5
million in costs in 2002 incurred in the development of the licensed products
prior to April 17, 2002, and will pay to the Company development milestone
payments and royalty fees from product sales. In connection with the license
agreement, United Therapeutics purchased an aggregate of 9,133,380 common shares
of the Company, for gross proceeds to the Company of approximately $7.2 million,
and a debenture in the principal amount of $674,463.
As a result of the license agreement with United Therapeutics, the
Company's research and development costs and supporting general and
administrative expenses were significantly reduced in the first quarter of 2003
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 second quarter of 2003.
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A L T A R E X
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company has been working closely with United Therapeutics on conducting
experiments in support of the licensed antibodies. In January 2003, Unither
Pharmaceuticals announced a phase III U.S. program consisting of two trials of
177 patients each comprising a population having shown clinical benefit in a
previously reported phase IIb trial. The focus of the Company's research and
development has been and is subject to the availability of additional cash
resources to continue the Company's support of United Therapeutics' preclinical
development of licensed monoclonal antibodies.
The Company believes that its available cash and cash equivalents and
interest earned thereon should be sufficient to finance its operations and
capital needs into the third quarter of 2003. The Company will need to raise
additional funds by the end of June 2003 in order continue to operate beyond the
third quarter of 2003. If the Company cannot obtain additional financing, it
will be forced to cease operations.
On May 15, 2003, the Company announced a restructuring program to
prioritize its initiatives and reduce operating costs. This program includes a
reduction of the Company's full-time employees, the planned closure of the
Company's Boston-area offices and the relocation of its executive and
administrative offices to Edmonton, Alberta. As of the end of May 2003, the
Company will have effectively notified all of the employees located in the
Waltham office that their positions will be relocated back to Edmonton, Alberta.
None of those employees will be relocating back to Edmonton, Alberta.
RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
The Company recorded a net loss for the quarter ended March 31, 2003 of
$1.4 million, or $(0.03) per share, compared to a net loss of $5.6 million, or
$(0.15) per share, for the same period in 2002.
REVENUES
Revenues for the three months ended March 31, 2003 consisted solely of
interest income and totaled $1,720, a decrease of $23,315 from the $25,035
recorded in the same period in 2002. The decrease is due primarily to lower
levels of invested funds and lower interest rates during 2003.
EXPENSES
Research and development expenses for the three months ended March 31, 2003
totaled $0.2 million, a decrease of $1.7 million from the $1.9 million recorded
in the same period in 2002. This decrease in research and development expenses
reflects the assumption by United Therapeutics of the funding of all reasonable
and direct ongoing development costs incurred in the development of OvaRex(R)
and the other products covered by the license agreement, decreased compensation
expense as a result of the lower number of employees of the Company in the 2003
period and the Company's efforts to reduce expenses in light of its limited
resources.
Clinical and regulatory expenses for the three months ended March 31, 2003
totaled $23,522, a decrease of $2.08 million from the $2.1 million recorded in
the same period in 2002. This decrease reflects the impact of the assumption of
responsibility for costs relating to the development of the licensed products by
United Therapeutics subsequent to the April 17, 2002 effective date of the
license agreement.
General and administrative expenses for the three months ended March 31,
2003 totaled $1.1 million, a decrease of $0.5 from the $1.6 million recorded in
the same period in 2002. This decrease is primarily related to lower
professional fees for the Company's intellectual property portfolio and lower
payroll costs, facility related costs and other corporate costs all as a result
of United Therapeutics' assumption of ongoing development responsibilities and
associated expenses and hiring of former personnel of the Company in connection
with the license agreement described above.
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A L T A R E X
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
As a result of the United Therapeutics license agreement, the Company
anticipates that research and development expenses, and supporting general and
administrative expenses, will continue to decrease significantly in 2003. The
actual levels of research and development and general and administrative
expenditures by the Company will depend primarily on the cash resources
available to the Company. These levels will also depend on 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 arrangements with corporate collaborators for ongoing
research and development activities. See "Liquidity and Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company's cash and cash equivalents totaled $2.6
million as compared to $3.6 million at December 31, 2002. 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 and
payments under the license agreement with United Therapeutics.
The Company's net cash used in operating activities amounted to $1.05
million for the three months ended March 31, 2003 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.
As part of the United Therapeutics license agreement, United Therapeutics
purchased 4.9 million common shares of the Company, resulting in gross proceeds
to the Company of approximately $3.9 million. In addition, United Therapeutics
purchased a convertible debenture from the Company for approximately $80,000
that was converted by United Therapeutics into 100,000 common shares of the
Company on August 21, 2002. The Company also issued to United Therapeutics a
warrant, which United Therapeutics subsequently exercised, to purchase an
additional 3.25 million common shares of the Company for an aggregate purchase
price of approximately $2.5 million. Further, United Therapeutics exercised its
right to purchase a second convertible debenture from the Company in the
principal amount of approximately $1.4 million. As part of the license
agreement, United Therapeutics purchased an aggregate of 9,133,380 common shares
of the Company, for gross proceeds to the Company of approximately $7.2 million,
and a debenture in the principal amount of $674,463.
The Company believes that its available cash and cash equivalents and
interest earned thereon should be sufficient to finance its operations and
capital needs into the third quarter of 2003. The Company will need to raise
additional funds by the end of June in order to continue to operate beyond the
third quarter of 2003. The Company is seeking additional funding through public
or private equity or debt financings and additional collaborative arrangements
and is also exploring other strategic alternatives. The Company can provide no
assurance that additional financing will be available on acceptable terms, or at
all. If the Company cannot obtain additional financing by the end of June 2003,
it will be forced to cease operations.
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A L T A R E X
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's future funding needs would 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, 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.
FORWARD-LOOKING STATEMENTS
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 the Company's need for capital;
the risk that the Company cannot 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 other 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; 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 regulatory authorities. The Company does not assume any
obligation to update any forward-looking statement.
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A L T A R E X
CONSOLIDATED BALANCE SHEETS
(A DEVELOPMENT STAGE COMPANY)
(IN CANADIAN DOLLARS) MARCH 31, 2003 DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 2,576,259 $ 3,625,736
Accounts and other receivables 101,834 211,010
Prepaid expenses and other assets 261,959 341,340
- -----------------------------------------------------------------------------------------------------
2,940,052 4,178,086
Deposits and other assets 39,936 42,935
Capital assets 197,742 325,846
- -----------------------------------------------------------------------------------------------------
$ 3,177,730 $ 4,546,867
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 1,628,160 1,646,759
=====================================================================================================
1,628,160 1,646,759
Note Payable 674,763 674,763
Shareholders' equity:
Share capital 106,430,741 106,430,741
Accumulated deficit during the development stage (105,555,934) (104,205,396)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 874,807 2,225,345
- -----------------------------------------------------------------------------------------------------
$ 3,177,730 $ 4,546,867
=====================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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A L T A R E X
CONSOLIDATED STATEMENTS OF LOSS
(A DEVELOPMENT STAGE COMPANY)
FOR THE THREE MONTHS ENDED
MARCH 31,
(In Canadian dollars, except share amounts) 2003 2002
- --------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Interest income $ 1,720 $ 25,035
- --------------------------------------------------------------------------------------
Total revenues 1,720 25,035
======================================================================================
EXPENSES
Research & development 215,456 1,936,141
Clinical & regulatory 23,522 2,089,615
General & administrative 1,113,280 1,637,676
- --------------------------------------------------------------------------------------
Total expenses 1,352,258 5,663,432
- --------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (1,350,538) $ (5,638,397)
======================================================================================
Net loss per common share $ (0.03) $ (0.15)
Weighted average number of common shares 45,896,936 36,678,716
======================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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A L T A R E X
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(A DEVELOPMENT STAGE COMPANY)
ACCUMULATED
DEFICIT
DURING THE TOTAL
COMMON SHARES DEVELOPMENT SHAREHOLDERS'
(In Canadian dollars, except share amounts) SHARES AMOUNT STAGE EQUITY
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 45,896,936 $106,430,741 ($104,205,396) $ 2,225,345
- ------------------------------------------------------------------------------------------------------------------------
Net loss (unaudited) -- -- (1,350,538) (1,350,538)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2003 (UNAUDITED) 45,896,936 $106,430,741 ($105,555,934) $ 874,807
- ------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
DEFICIT
DURING THE TOTAL
COMMON SHARES DEVELOPMENT SHAREHOLDERS'
(In Canadian dollars, except share amounts) SHARES AMOUNT STAGE EQUITY
- --------------------------------------------------------------------------------------------------------------------------
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
Net loss (unaudited) -- -- (5,638,397) (5,638,397)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2002 (UNAUDITED) 36,763,556 $ 99,331,514 ($101,374,532) $(2,403,018)
- --------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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A L T A R E X
CONSOLIDATED STATEMENTS OF CASH FLOWS
(A DEVELOPMENT STAGE COMPANY)
THREE MONTHS ENDED
MARCH 31,
2003 2002
(IN CANADIAN DOLLARS) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES
Net loss ($1,350,538) ($5,638,397)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 48,176 71,977
Net changes in non-cash working capital balances 172,957 (1,371,652)
- -----------------------------------------------------------------------------------------------------------
(1,129,405) (6,938,072)
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchase of capital assets, net of disposals 79,928 (810)
Maturities and purchases of short-term investments -- 856,051
- -----------------------------------------------------------------------------------------------------------
79,928 855,241
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES
Issuance costs from special units -- (11,927)
Exercise of warrants -- 200,000
- -----------------------------------------------------------------------------------------------------------
-- 188,073
- -----------------------------------------------------------------------------------------------------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,049,477) (5,894,758)
Cash and Cash Equivalents, Beginning of period 3,625,736 8,211,313
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,576,259 $ 2,316,555
===========================================================================================================
NONCASH:
Exchange of capital assets 91,754 --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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A L T A R E X
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, 2003 and the year ended December 31, 2002, the Company
incurred losses of $1,350,538 and $8,469,261, 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 and cash equivalents and
interest earned thereon should be sufficient to finance its operations and
capital needs into the third 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.
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, or
at all. If the Company cannot obtain additional funding, it will cease
operations. Even if the Company obtains additional financing, 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements as of March 31, 2003
and for the three months ended March 31, 2003 and 2002 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, 2003 are not necessarily indicative of the results that
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A L T A R E X
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
12,181,701 and 12,484,704 common shares as of March 31, 2003 and 2002,
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 accounted 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
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A L T A R E X
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED)
measurement date was 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.
Additionally, during 2001 and 2000 the Company issued 994,000 and
185,149 options, respectively, to agents of its offerings of common shares. The
compensation related to these issuances of $1,431,000 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 shareholders' equity 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.
For the three months ended March 31, 2003 and 2002, the net loss
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 are the
same.
The following summarizes balance sheet items with material variations under U.S.
GAAP.
MARCH 31, 2003 DECEMBER 31, 2002
- -------------------------------------------------------------------------
Share capital $103,861,741 $103,861,741
Accumulated deficit $108,124,934 $106,774,396
- -------------------------------------------------------------------------
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A L T A R E X
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LICENSING AGREEMENT
On April 17, 2002, the Company entered into the License Agreement with
a subsidiary of United Therapeutics for the development of five monoclonal
antibodies, including OvaRex(R) MAb, the Company's lead product in late stage
development for ovarian cancer. Under the terms of the agreement, the United
Therapeutic subsidiary 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.
United will be responsible for the costs of clinical trials, manufacturing and
other development expenses for each product and will pay development milestone
payments and royalties from product sales to the Company.
As part of this transaction, United Therapeutics reimbursed the
Company, in accordance with the License Agreement, for approximately $2.5
million of costs related to the licensed technology, which have been reflected
as a reduction to research and development expenses. These costs reimbursed by
United Therapeutics were expenses to the Company in 2001 and 2002. Accounts and
other receivables at December 31, 2002 consists primarily of amounts billed to
United Therapeutics for 2002 reimbursable costs and received subsequent to
year-end.
As part of this transaction, United Therapeutics purchased 4.9 million
common shares of the Company for gross proceeds to the Company of approximately
$3,900,000 (US$2,450,000). In addition, the Company issued a nominal $78,730
(US$50,000) convertible debenture (the "first debenture") to United Therapeutics
that was converted into 100,000 common shares on August 21, 2002. The Company
also issued United Therapeutics a warrant (the "warrant") which was exercised at
the option of United Therapeutics into an additional 3.25 million common shares
of the Company for proceeds to the Company of approximately $2,528,000
(US$1,625,000). Further, the Company granted to United Therapeutics a right to
purchase a second debenture (the "second debenture") in the principal amount of
approximately $1,360,000 (US$875,000). United Therapeutics 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 Therapeutics 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 Therapeutics represent approximately 19.9% of the current
outstanding common shares of the Company. United Therapeutics has also received
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 Therapeutics purchased the second debenture
in the principal amount of approximately $1,360,000 (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) and is secured by the
Company's intellectual property. 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.
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A L T A R E X
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. That lawsuit has since been removed to Federal
Court, also in Orange County, California.
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