(ALTAREX LOGO)
EXHIBIT 99.1
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE & SIX MONTH PERIODS ENDED
JUNE 30, 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
(ALTAREX LOGO)
ALTAREX CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003
ALL DOLLAR FIGURES ARE IN CANADIAN DOLLARS UNLESS OTHERWISE STATED
SECOND QUARTER HIGHLIGHTS - MESSAGE TO OUR SHAREHOLDERS
Significant changes occurred in the second quarter of this year. On May 15,
2003, I assumed the position of President and Chief Executive Officer of the
company, Rob Salmon took on the position of Chief Financial Officer and Jeff
Fetterly joined us as Manager, Finance and Investor Relations. In an effort to
reduce spending, we took steps to immediately downsize the operations of the
Company. By the end of May, 6 of our 7 employees in Waltham and 2 of our 3
employees in Edmonton had either resigned or had been released. The Waltham
office has been closed and the corporate office relocated to Edmonton. These
changes have significantly reduced the Company's operating expenditures.
In June, we settled the ICN litigation.
Throughout this transition period, we have maintained a strong working
relationship with Unither Pharmaceuticals, Inc., a wholly owned subsidiary of
United Therapeutics, our strategic partner for the commercialization of
OvaRex(R) MAb and our four other monoclonal antibodies. On August 11, 2003,
AltaRex entered into an agreement with United Therapeutics to expand the
territory granted to it under the existing Exclusive License Agreement to
include Germany. For this extension, Unither Pharmaceuticals has made an initial
payment and has agreed on milestone payments. It has also agreed to the same
royalty payment structure on sales of products in Germany, as has already been
agreed with respect to the previously licensed territories. AltaRex will
continue to work with its other European partners, Dompe, Genesis and Medison to
develop markets in their licensed territories. Other European Union countries
such as France, the United Kingdom and the Benelux countries are still the
exclusive domain of AltaRex.
Together with Unither Pharmaceuticals, we anticipate continuing the development
of two of our other antibodies, BrevaRex(R) and ProstaRex(TM). Unither
Pharmaceuticals will incur the cost of such development. The present Phase III
clinical trials of OvaRex(R) are ongoing in more than 60 centers in the United
States with considerable resources being allocated by Unither Pharmaceuticals.
As I indicated to shareholders in the first quarter report, our first objective
is to prioritize and reduce operating expenditures to a manageable level,
secondly to refinance the company and thirdly to leverage and extend our present
technological base to create new opportunities in areas outside of cancer in the
fields of infectious and autoimmune diseases. In the second quarter we have made
excellent progress in controlling and reducing our expenditure levels. We have
also been working on various financing strategies to ensure the long-term
viability of the company. Refinancing the Company will be our focus in the third
and fourth quarters.
I wish to thank all of our shareholders for their continued support during these
difficult times.
Dr. Antoine Noujaim
President & Chief Executive Officer
Page 2 of 19
(ALTAREX LOGO)
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 June 30,
2003, the Company has incurred cumulative losses of $107.4 million. This
includes a loss of $3.2 million for the six months ended June 30, 2003. The
cumulative 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 loss for the six months ended
June 30, 2003 is also due to continuance of product development activities
together with the costs associated with relocating the corporate offices from
Waltham to Edmonton, terminating 8 of the company's 10 employees and closure of
the Waltham office.
The Company is 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. In addition, United Therapeutics
reimbursed the Company for $2.37 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.
The license agreement with United Therapeutics resulted in a reduction
of the Company's research and development costs and supporting general and
administrative expenses in the first six months of 2003. The Company expects
that its research and development costs and supporting general and
administrative expenses will be significantly lower for the remaining quarters
of 2003, as a result of the relocation of the corporate office from Waltham to
Edmonton.
Page 3 of 19
(ALTAREX LOGO)
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
should be sufficient to finance its operations and capital needs through October
2003. The Company will need to raise additional funds in order continue to
operate beyond October 2003. The Company is currently in discussions with third
parties regarding the Net Operating Loss (NOL) Financing. The Company expects
that the NOL Financing would involve a cash investment in the Company by the
third parties, which would be followed by a spinout to the Company's
shareholders of a subsidiary of the Company containing up to half of the cash
investment and all of the other assets and liabilities of the Company other than
the Company's net operating loss carry forwards. The Company has also sought and
will continue to seek additional funding through public or private equity or
debt financings, through additional collaborative arrangements and through other
strategic alternatives. The Company can provide no assurance that the proposed
NOL Financing or any additional financing will be available on acceptable terms,
on a timely basis, or at all. If the Company cannot reach agreement with the
third parties regarding the NOL Financing, obtain the required approvals to
proceed with the NOL Financing, or otherwise consummate the proposed NOL
Financing by the end of October 2003, it will be forced to cease operations.
Even if the Company consummates the NOL Financing or obtains other funding to
sustain its operations beyond October 2003, the Company will need to continue to
seek additional funding to fund its ongoing operations.
On May 15, 2003, Richard E. Bagley resigned as President, Chief
Executive Officer and Director of the Company. The Company appointed Dr. Antoine
A. Noujaim as President and Chief Executive Officer and Vice-Chairman of the
Board of Directors of the Company and Rob Salmon as its Chief Financial Officer.
In connection with the changes in management, the Company initiated a
restructuring program to prioritize its initiatives and reduce its operating
costs. As part of this program, the Company relocated its executive and
administrative offices to Edmonton, Alberta, reduced the number of full-time
employees of the Company, and closed its Waltham, Massachusetts office.
On June 17, 2003, the Company announced that the lawsuit filed by ICN
Pharmaceuticals Inc. of Costa Mesa, California has been resolved to the mutual
satisfaction of all parties. Pursuant to an agreement between ICN and Dr.
Noujaim, ICN agreed not to pursue its claims against the Company in exchange for
payment of U.S. $275,000, which was paid by Dr. Noujaim. In connection with this
agreement, the Company and Dr. Noujaim entered into an agreement pursuant to
which the Company agreed to pay Dr. Noujaim U.S. $275,000, reimburse him for all
related costs and expenses and indemnify him from any and all claims arising out
of his agreement with ICN. Pursuant to the agreement, the Company issued Dr.
Noujaim a promissory note in the principal amount of U.S. $275,000, which is
secured by all of the Company's personal property. Interest accrues on the note
at a rate of 10% per annum. Principal and interest on the note are payable on
demand. The promissory note was issued and signed after June 30, 2003.
(ALTAREX LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
The Company recorded a net loss for the quarter ended June 30, 2003 of
$1.8 million, or $(0.04) per share, compared to a net loss of $0.5 million, or
$(0.01) per share, for the same period in 2002. The net loss for the three
months ended June 30, 2002 included a reimbursement of $2.37 million by United
Therapeutics of associated costs, related to the licensed technology, for
research and development and clinical regulatory expenses incurred prior to the
effective date of the April 17, 2002 License agreement with United Therapeutics.
The net loss for the six months ended June 30, 2003 was $3.2 million, or $(0.07)
per share, compared to a net loss of $6.2 million, or $(0.17) per share, for the
same period in 2002.
REVENUES
Revenues for the three months ended June 30, 2003 consisted solely of
interest income and totaled $228, a decrease of $2,282 from the $2,510 recorded
in the same period in 2002. Revenue for the six months ended June 30, 2003,
consisted of interest income totaling $1,948, a decrease of $25,597 from the
$27,545 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 June 30,
2003 totaled $0.2 million, a decrease of $0.4 million from the $0.6 million
recorded in the same period in 2002. In 2002, the Company recorded a
reimbursement of $2.2 million resulting in net research and development expenses
of ($1.6) million. For the six months ended June 30, 2003, research and
development expenses totaled $0.4 million, a decrease of $2.1 million from the
$2.5 million incurred in the same period in 2002. The $2.2 reimbursement by
United reduced the net research and development expenses to $0.3 in 2002. The
reduction in gross research and development expenses was 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 June 30,
2003 totaled $277, a decrease of $0.3 million from the $0.3 million recorded in
the same period in 2002. For the six months ended June 30, 2003, clinical and
regulatory costs totaled $23,797, a decrease of $2.5 million from the $2.5
million recorded in the same period in 2002. This decrease for both periods
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 June 30,
2003 totaled $1.6 million, a decrease of $0.1 million from the $1.7 million
recorded in the same period in 2002. The expenses for the three months ended
June 30, 2003 reflect the expense of severance costs for the employees located
in the Waltham office, the write-off of the remaining assets located in the
Waltham office and closure of the Waltham office. For the six months ended June
30, 2003 general and administrative expenses totaled $2.7 million, a decrease of
$0.6 million from the $3.3 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.
As a result of the United Therapeutics license agreement and the recent
closure of the Waltham office, 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. See "Liquidity
and Capital Resources".
(ALTAREX LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company's cash and cash equivalents totaled $0.4
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 $3.5
million for the six months ended June 30, 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 payable and
accrued liabilities and the renewal of insurance premiums related to directors
and office insurance at the beginning of the second quarter.
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 $3.8 million in the second
quarter of 2002. 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. Upon issuance of the second debenture, $688,662 of
the principal amount of the second debenture automatically converted into
883,380 common shares of the Company. 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 through October 2003. The Company will need to raise additional
funds in order continue to operate beyond October 2003.
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
(ALTAREX LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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.
(ALTAREX LOGO)
CONSOLIDATED BALANCE SHEETS
(A Development Stage Company)
(IN CANADIAN DOLLARS) 30-JUN-03 31-DEC-02
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 391,367 $ 3,625,736
Accounts and other receivables 29,097 211,010
Prepaid expenses and other assets 673,820 341,340
------------- -------------
1,094,284 4,178,086
Deposits and other assets 36,838 42,935
Capital assets, net 26,801 325,846
------------- -------------
$ 1,157,923 $ 4,546,867
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 1,432,976 1,646,759
============= =============
1,432,976 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 -107,380,557 -104,205,396
------------- -------------
Total shareholders' equity (deficit) -949,816 2,225,345
------------- -------------
$ 1,157,923 $ 4,546,867
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
(ALTAREX LOGO)
CONSOLIDATED STATEMENTS OF LOSS
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In Canadian dollars, except share amounts) 2003 2002 2003 2002
- ------------------------------------------- ------------ ------------ ------------ ------------
REVENUES
Interest income $ 228 $ 2,510 $ 1,948 $ 27,545
------------ ------------ ------------ ------------
Total revenues 228 2,510 1,948 27,545
============ ============ ============ ============
EXPENSES
Research & development, net of reimbursement in 2002 228,163 (1,588,424) 443,619 347,717
Clinical & regulatory, net of reimbursement in 2002 277 347,717 23,797 2,527,595
General & administrative 1,596,413 1,682,412 2,709,693 3,320,088
------------ ------------ ------------ ------------
Total expenses 1,824,853 531,968 3,177,109 6,195,400
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD ($ 1,824,625) ($ 529,458) ($ 3,175,161) ($ 6,167,855)
============ ============ ============ ============
Net loss per common share ($ 0.04) ($ 0.01) ($ 0.07) ($ 0.17)
Weighted average number of common shares 45,896,936 40,823,056 45,896,936 36,751,956
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
(ALTAREX LOGO)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(A DEVELOPMENT STAGE COMPANY)
ACCUMULATED
DEFICIT
DURING THE TOTAL
DEVELOPMENT SHAREHOLDERS'
COMMON SHARES STAGE EQUITY (DEFICIT)
(In Canadian dollars, except share amounts) SHARES AMOUNT
- --------------------------------------------- ------------- ------------- -------------- ----------------
BALANCE, DECEMBER 31, 2002 45,896,936 $ 106,430,741 ($104,205,396) $ 2,225,345
============= ============= ============ =============
Net loss -- -- ($ 3,175,161) ($ 3,175,161)
============= ============= ============ =============
BALANCE, JUNE 30, 2003 (UNAUDITED) 45,896,936 $ 106,430,741 ($107,380,557) ($ 949,816)
============= ============= ============ =============
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
(11,927) -- (11,927)
Exercise of warrants 100,000 200,000 -- 200,000
Issuance of shares in private placement 4,900,000 3,803,627 -- 3,803,627
Net loss -- -- (6,167,855) (6,167,855)
============= ============= ============ =============
BALANCE, JUNE 30, 2002 (UNAUDITED) 41,663,556 $ 103,135,141 ($101,903,990) $ 1,231,151
============= ============= ============ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
(ALTAREX LOGO)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
(IN CANADIAN DOLLARS)
- --------------------- ------------- ------------- ------------- -------------
CASH USED IN OPERATING ACTIVITIES
Net loss ($ 1,824,625) ($ 529,458) ($ 3,175,161) ($ 6,167,855)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on Asset Disposal 134,631 -- 134,631 --
Depreciation and amortization 22,818 95,334 70,994 167,311
Net changes in non-cash working capital balances (531,210) (3,092,425) (358,254) (4,464,077)
------------- ------------- ------------- -------------
(2,198,386) (3,526,549) (3,327,790) (10,464,621)
------------- ------------- ------------- -------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sale (purchase) of capital assets 13,494 -- 93,691 (810)
Maturities and purchases of short-term investments -- -- -- 856,051
------------- ------------- ------------- -------------
13,494 -- 93,691 855,241
------------- ------------- ------------- -------------
CASH PROVIDED BY FINANCING ACTIVITIES
Issuance of common shares, net -- 3,803,627 -- 3,803,627
Issuance costs from special units -- -- -- (11,927)
Issuance of convertible debt -- 78,730 -- 78,730
Exercise of warrants -- -- -- 200,000
------------- ------------- ------------- -------------
-- 3,882,357 -- 4,070,430
------------- ------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,184,892) 355,808 (3,234,099) (5,538,950)
Cash and Cash Equivalents, Beginning of period 2,576,259 2,316,555 3,625,736 8,211,313
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 391,367 $ 2,672,363 $ 391,637 $ 2,672,363
============= ============= ============= =============
NONCASH:
Exchange of capital assets -- -- 91,754 --
Cash paid for interest 9,349 951 19,186 951
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
(ALTAREX LOGO)
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 six
months ended June 30, 2003 and the year ended December 31, 2002, the Company
incurred losses of $3,175,161 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 $3,800,000 (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 during the third quarter of 2002
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 June 30, 2003
and for the three months and six months ended June 30, 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 and six month periods ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the entire fiscal year or future
periods.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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
11,484,993 and 16,849,704 common shares as of June 30, 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.
During the second quarter of 2003, the Board of Directors of the
Company voted to extend the exercise period for options outstanding for certain
employees terminated during the period. In addition, the Company issued
4,950,000 options to management and directors under the plan. The exercise price
was set at the fair market value of the Company's common shares as at the date
of grant. The exercise price for these options ranges between $0.24 and $0.43.
Options representing 2,638,368 common shares are subject to shareholder
approval. No compensation expense was recorded for the new grants or the change
in exercise period, as the fair value of the stock on the new measurement dates
was less than or equal to the exercise price.
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
(ALTAREX LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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.
For the six months ended June 30, 2003 and 2002, the net loss reported
on the statements of loss and 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.
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Share capital $103,861,741 $103,861,741
Accumulated deficit $109,949,557 $106,774,396
(ALTAREX LOGO)
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 expensed by 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.
On August 11, 2003, AltaRex announced an extension to the Exclusive
License Agreement with United Therapeutics to include the territory of Germany.
In exchange for the extension, AltaRex received an upfront payment, and
commitment of milestone payments and royalties based on future sales.
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
(ALTAREX LOGO)
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.
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.
In June 2003, pursuant to an agreement between ICN and Dr. Noujaim, ICN
agreed to not to pursue its claims against the Company in exchange for payment
of U.S. $275,000, which was paid by Dr. Noujaim. In connection with this
agreement, the Company and Dr. Noujaim entered into an agreement pursuant to
which the Company agreed to pay Dr. Noujaim U.S. $275,000, reimburse him for all
related costs and expenses and indemnify him from any and all claims arising out
of his agreement with ICN. Pursuant to the agreement, the Company issued Dr.
Noujaim a promissory note in the principal amount of U.S. $275,000, which is
secured by all of the Company's personal property. Interest accrues on the note
at a rate of 10% per annum. The promissory note was issued and signed after June
30, 2003.
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