Isotec. hose potential shines a company whose innovation shines a company whose ideas sh

Transcription

1

2 Isotec hose potential shines a company whose innovation shines a company whose ideas sh

3 1999 Annual Report Table of Contents Company Profile 2 Chairman s Letter to our Shareholders 4 President s Message to our Shareholders 6 ISA TX 247 A Novel Drug for Immunosuppression 8 Diagnostics Revenue from Commercialization 12 Management s Discussion and Analysis of Financial Condition and Results of Operations 14 Financials 18 Management s and Auditor s Reports 19 Consolidated Balance Sheets 20 Consolidated Statements of Operations and Deficit 21 Consolidated Statements of Cash Flows 22 Notes to Consolidated Financial Statements 23 Corporate Information 33 hnika ine a company whose thinking shines a company whose growth shines a company who

4 Company l we have found such a drug molecule.

5 Profile Isotechnika Inc. is a Life Sciences Company located in Edmonton, Alberta, Canada. The company s scientific research team is dedicated to the discovery, research, and development of new drugs using well known principles of organic medicinal chemistry. Isotechnika s research endeavors have thus far led to the discovery of several drug candidates for immunosuppressive therapy, lowering of blood pressure, and treatment of certain cancers. The company has moved its immunosuppressive class of drugs to the forefront of its drug development program, as in-house expertise in this area is recognized as world-class. Furthermore, immunosuppressive therapy indications, including treatment of organ transplant rejection, rheumatoid arthritis, and psoriasis, to name a few, represent a growing healthcare concern. Isotechnika s lead drug candidate, ISA TX 247, thus far has several advantages over currently used treatments for prevention of organ transplant rejection and will be entering human clinical trials in early Spring, The company will maintain a sharp focus in the area of immunosuppressive drug research to maximize the benefit to all shareholders. Isotechnika Inc. also operates a diagnostic division that sells non-invasive point-of-care diagnostic breath kits that were developed and commercialized by the company. The company s lead diagnostic kit, Helikit TM, is for the detection of the bacteria causing the majority of ulcers. The revenue generated from the sale of these kits assists the overall research efforts of Isotechnika Inc. Based on the completed pre-clinical stu 3

6 Chairman s Letter to our The year ended 1999 has been one of considerable advancement for our company. During the past year, our management team has taken considerable care in identifying our most promising therapeutic drug and diagnostic products. It is abundantly clear to all of us within the company that our product research and development programs must have a razor sharp focus to offer the best opportunities of success to the company. Therapeutic Drug Division At the beginning of 1999, our company was examining an immunosuppressive drug platform that appeared to have significant therapeutic advantages. As the year advanced, we identified one specific drug, called ISA TX 247, as the leader of our therapeutic drug candidate products. This drug has been identified as our lead drug candidate for a number of reasons, itemized as follows: 1. Superior Transplant Survival and Reduced Toxicity During early stage analysis of the potency and efficacy of ISA TX 247, we quickly realized that we had produced an immunosuppressive drug molecule quite unlike any before. When medicating patients following organ transplantation surgery, a drug called cyclosporine is routinely used to avoid organ rejection. In fact, use of cyclosporine is considered standard clinical practice. However, administration of cyclosporine is associated with possible severe adverse effects on the kidneys and other organ systems. These limitations have compromised the quality of life of patients. ISA TX 247 appears to have substantially reduced side effects while enhancing the drug s potency (efficacy) on a milligram basis. At this point in time, therefore, ISA TX 247 appears to have several beneficial properties over the currently used cyclosporine; a drug with well over $2 billion US per year in sales. 2. In-House Expertise and Proven Track Record We have globally recognized expertise in the area of organ transplantation and immunosuppression. Our President, Dr. Randall Yatscoff has worked in the area of immunosuppression for over 18 years as an academic and consultant, publishing several hundred scientifically peer-reviewed articles in internationally circulated journals and books. Dr. Yatscoff has also been invited to present his research findings at numerous international transplant and clinical biochemistry meetings over the years. Added to his considerable expertise are another 150 publications on drug analysis and disposition that I have published over the past 15 years. Our track record in the area of drug development and immunosuppression is world caliber, extensive and internationally recognized. 3. Large Market Potential Cyclosporine s annual sales can be attributed virtually exclusively to transplantation therapy. Sales from other immunosuppressive therapy, including rheumatoid arthritis, Crohn s disease and psoriasis, to name a few, are limited by cyclosporine s toxicity. It is likely, therefore, that a drug with reduced toxic side effects and enhanced potency, such as ISA TX 247, would have greater sales compared with cyclosporine. The other potential clinical indications for use associated with ISA TX 247 would obviously enhance the market potential beyond that of organ transplants, thus creating a platform of therapeutic indications. 4. Competitive Forces Limited Competition within the immunosuppressive drug development field is less than it is for our other drug candidates developed for the anticancer and antihypertension indications. While our company s drug molecules for treating certain forms of cancer and hypertension have all been carefully evaluated, management has decided to focus in the area of transplantation and immunosuppression. Drug candidates for the former indications will be further evaluated when ISA TX 247 is well entrenched in human clinical trials. 4

7 Shareholders 5. Scientific Peer Review Adds to Credibility Virtually all of our research on ISA TX 247 has been scientifically peer-reviewed. Our scientific team is confident that we have thoroughly scrutinized ISA TX 247 in the usual rigorous scientific manner. However, we have also utilized the expertise of others well recognized in the field of immunosuppression to lend independent scientific peer review to our overall evaluation process. Diagnostic Division Our diagnostic testing division continues to evolve. During 1999, we initiated the approval applications necessary to market our non-invasive breath-based diagnostic kits (e.g. Helikit ) in the European community. We expect to receive European approval later in the year We also received approval to sell our kits in mainland China, with shipments scheduled throughout the year Closer to home, our kit sales have been increasing due, in part, to a co-marketing agreement between Isotechnika Inc. and AstraZeneca (makers of Losec and Losec ). Having the diagnostic division within our company enables Isotechnika Inc. to have sales, a true rarity in the biotechnology community. Together with our sales revenue, our intellectual property strength, our novel lead drug (ISA TX 247), our scientific and business teams, and our positive bank position, we have assembled the necessary ingredients to enable us to be very successful. We are excited about our future and look forward to advancing our products to the benefit of human health and to our shareholders. I would like to extend best wishes and thanks to our outstanding team at Isotechnika Inc. and to our Board of Directors and our advisors. Finally, thanks are especially due to all shareholders for their continued support of our company. Sincerely, Robert T. Foster Robert T. Foster, Ph.D. Chairman & CEO 5

8 President s Message to our Shareholders O During the past year Isotechnika scientists have significantly advanced the development of our new immunosuppressive drug ISA TX 247. In November 1999 we completed our pre-clinical evaluation of the drug in a time-span of less than one year. This was made possible only through the dedication and perseverance of our drug development team, Drs. Launa Aspeslet, Raj Naicker, Derrick Freitag, Dan Trepanier and Mark Abel. The data from these studies confirmed that our drug was significantly more potent and less toxic than the drug Cyclosporine currently in use for prevention of organ rejection after transplantation. The increased safety margin of ISA TX 247 will allow Isotechnika to develop the drug not only for use in preventing organ rejection but also for treatment of numerous immune-related diseases (autoimmune diseases) such as rheumatoid arthritis and Crohn s disease. ISA TX 247 can therefore be considered as a platform technology from which numerous drugs for different indications can be developed. d c Clinical trials for drugs used in humans requires completion of three phases of trials: Phase One, Phase Two and Phase Three. Phase One involves the evaluation of the safety of the drug in healthy individuals. Applications were filed with the Canadian Health Protection Branch (HPB) and the United States Food and Drug Administration (FDA) on January 24 and March 20, 2000 respectively for approval to start phase one human trials. On March 9, 2000 a no objection letter was received from the HPB. Phase one clinical trials will commence in Canada on April 24, It is anticipated that phase one clinical trials will commence in the United States in May 2000 upon approval from the FDA. Phase one clinical trials will be completed in the fall of Phase Two trials involve the short-term evaluation of ISA TX 247 in patients who either have an autoimmune disease or have undergone transplantation to evaluate drug potency (efficacy). These trials will usually involve the substitution of the patient s current medication with ISA TX 247 for a short period of time (weeks) to determine whether there is improvement in the patient s condition. We plan to conduct phase two trials for two or more indications for the drug starting with renal transplantation and rheumatoid arthritis. It is projected that these trials will commence in early 2001 and be completed by the end of that year. Phase Three trials involve the long-term evaluation of the efficacy and toxicity of the drug in patients commencing at the time of diagnosis of the disease or at the time of transplantation. Patients will be evaluated for a period of at least one year. These studies will be conducted on a global basis throughout numerous clinical sites. It is anticipated that these trials will commence immediately following completion of phase two and should take two years to complete. We have received numerous enquires from global pharmaceutical companies regarding the possibilities of collaboration on the development of ISA TX 247. Although it may be premature to consider a partnership with other companies on co-development of the drug at this stage, these enquires help to validate the science and business potential of the drug. I am very optimistic about the potential of ISA TX 247 completing its trials rapidly and obtaining a substantial portion of the transplantation and autoimmune drug market which is anticipated to be in excess of $6 billion USD by I am also excited regarding the potential of our drug to increase the quality of life for patients receiving it. Sincerely 6 Randall W. Yatscoff Randall W. Yatscoff Ph.D. FCACB President

9 ver 3000 analogues of this drug have been tested None were found to e more potent than cyclosporine. The exception to this is Isotechnika s rug ISA TX 247. In vitro, 3 fold more potent than cyclosporine. In vivo rolongs graft survival 3 fold longer than cyclosporine. Our drug exhibits onsiderably less toxicity than cyclosporine even though it is more otent. This indicates that our drug has a wider therapeutic range and sa

10 ISA TX 247 ug. These results confirm that our drug

11 A Novel Drug for Immunosuppression ISA TX 247 is a novel immunosuppressive drug, which can be used to prevent organ rejection after transplantation and for treatment of autoimmune diseases. The list of some potential indications for use of the drug is shown below. USE OF ISA TX 247 FOR THE PREVENTION OF ORGAN REJECTION AFTER TRANSPLANTATION AND TREATMENT OF AUTOIMMUNE DISEASES RHEUMATOID ARTHRITIS PSORIASIS HEART LUNG TYPE I DIABETES ISLET LIVER KIDNEY CROHN S DISEASE LUPUS is significantly less toxic than cyclospor 9

12 GRAFT SURVIVAL In Vivo Efficancy Survival in the Rat Heart Transplant Model (1.75 mg/kg/day) SERUM CREATININE LEVELS (MEAN) A Average Survival (Days) Control (9 Days) Cyclosporine A (16 Days) Percent Survival Days Post Transplant % Change From Day 0 (Baseline) Day 15 Day 30 Over the past year we have competed the following: In vitro efficacy - Calcineurin assay In vivo efficacy - rat heart transplant survival Genotoxicity testing Ames test Chromosome aberration test In vitro metabolism Rabbit and pooled human liver microsomes In vivo metabolism Rabbit and dog model Preclinical evaluation of ISA TX 247 in a rabbit model Preclinical evaluation of ISA TX 247 using a rat model Preclinical evaluation of ISA TX 247 using a dog model Oral formulation Bioavailability of formulation Chemistry and manufacturing Submission of IND in Canada and United States Increased Potency of ISA TX 247 versus Cyclosporine The in vivo efficacy of ISA TX 247 was compared to that for cyclosporine in a rat heart transplant model. In this study both drugs were administered at the same dose for 30 days post-transplant after which the animals were monitored for a period of 100 days or until rejection of the heart, whichever came first. The doses used in the study are similar to those used clinically for cyclosporine. In the graphs shown above it can be seen that ISA TX 247 resulted in a minimum of a three-fold increase in heart graft survival as compared to cyclosporine. In the study, all the animals receiving cyclosporine rejected their heart during the dosing period of 30 days while only 15% of the animals receiving ISA TX 247 rejected their heart during this time period. Some animals receiving ISA TX 247 survived until the end of the study day 100, which is 70 days after the discontinuation of the drug. These results confirm that our drug is significantly more potent (efficacious) than cyclosporine. ISA TX 247 Exhibits Reduced Toxicity One of the major limitations of the use of cyclosporine is its organ toxicity. The drug causes kidney, liver and nerve toxicity, to name a few. To confirm that ISA TX 247 is less toxic than cyclosporine, studies were performed in three animals models: the rabbit, rat and dog. The rabbit is one of the best animal models to evaluate the kidney toxicity of immunosuppressive drugs. Kidney function of rabbits administered ISA TX 247 and cyclosporine was evaluated during a 30 day period of dosing. A primary indicator of kidney function is the concentration of a compound called creatinine, found in the blood. This compound is excreted by the kidneys into the urine. When kidney function decreases, the concentration of creatinine in blood increases. The graph shown above indicates the concentration of creatinine in rabbits receiving no drug (control), cyclosporine and ISA TX 247 at the same dose as cyclosporine and a dose 50% higher. It can be seen that in animals that received cyclosporine, there was a progressive increase in the creatinine in blood indicating a Regulatory approval in Canada

13 TOXICITY AND EFFICACY COMPARISON Toxicity index is a factor of glucose homeostasis, hepatic function and renal function. The score is based on the increase in the analytes used to measure each factor. Efficacy is the average survival observed in a rat heart transplant model Comparison of the Toxicity Indices of Cyclosprine A & ISA TX 247 in Rats Comparison of the Efficacy of Cyclosprine A & ISA TX 247 in Rats Toxicity Index Average Surviavl (Days) Dose (mg/kg) Dose (mg/kg) deterioration of kidney function. In the animals, receiving ISA TX 247, no significant loss of kidney function was seen as compared to the control animals. Upon completion of the study, animals receiving ISA TX 247 had normal kidneys, as noted by microscopic examination. This indicates that ISA TX 247 is less toxic to the kidneys than is cyclosporine. The reduced toxicity of ISA TX 247 was also confirmed in studies of rats and dogs. A study was conducted in rats, where animals received ISA TX 247 up to 40 times greater than was required for therapeutic effect. After administration for 28 days, we found no functional changes in the kidneys as measured by blood creatinine concentration. In contrast, animals receiving cyclosporine at approximately one-third of the ISA TX 247 dose exhibited a significant 4-fold increase in creatinine, indicating significant kidney toxicity. A summary of the toxicology and efficacy finding is shown above. The toxicity observed with our drug at 80 mg/kg/d is less than that observed with cyclosporine at 30 mg/kg/d. In addition, our drug is more potent at lower doses evidenced by the heart graft survival studies. The toxicity results were also confirmed in dogs. In the three animal models tested, our drug exhibits considerably less toxicity than cyclosporine even though it is more potent. This indicates that our drug has a wider therapeutic range and safety margin compared with cyclosporine. 11

14 Diagnostics 000 plans to be a very exciting year for In 2000, Isotechnika will be focusing on obtaining approval for the diagnostic breath test platform as well as expanding its distribution network. The company is focusing on European approval and has many parties interested in distribution rights for individual countries. As well, the company will focus on Japan, with its sophisticated health care system and high prevalence of Helicobacter pylori. With the approval of the breath test technology in Brazil, Isotechnika will expand its distribution networks throughout South America and Mexico plans to be a very exciting year for diagnostic breath test growth.

15 Revenue from Commercialization 1999 was a development year for the diagnostics division of Isotechnika Inc. Through its wholly-owned subsidiary, Isodiagnostika Inc. the diagnostic products have matured with new research and new partnerships. The company now has the following array of diagnostic products: Helikit TM Malitest TM Lactitest TM Xylotest TM Diatest TM Isomax 2000 TM Our first product is a diagnostic breath test kit to detect a bacterium known as Helicobacter pylori. This bacterium is known to be the cause of most stomach ulcers. This unique product is a diagnostic breath test kit to detect fat malabsorption. Fat malabsorption is a symptom of diseases such as Cystic Fibrosis or Crohn s disease. The current testing for fat malabsorption is the fecal fat test, an unpleasant and difficult test to collect and analyze. Numerous individuals suffer from lactose intolerance, but an accurate test to diagnose this problem is only now available with our Lactitest TM. This kit for the diagnosis of small bowel bacterial overgrowth, is a specific test needed by Gastroenterologists. Until the development of Xylotest TM, the diagnosis of this illness required an expensive endoscopy. The newest kit in our family is used to test individuals with glucose intolerance as well as to monitor their insulin resistance. The management of insulin resistance is an important aspect of diabetic control. Our unique point-of-care instrument allows hospitals, labs and clinics to analyze our tests in a cost effective manner. Throughout the course of 1999, we have increased our sales revenue by developing key partnerships in Canada and throughout the world. Some of these partnerships include: Astra Zeneca MDS, Gamma Dynacare and DKML Laboratories As a key pharmaceutical company involved in the treatment of Helicobacter pylori, Astra Zeneca co-markets our Helikit TM to family physicians and gastroenterologists throughout Canada. Are national laboratories who distribute Helikit TM and Malitest TM in Canada through a series of collection sites. diagnostic test growth. Isotechnika is a Meridian (Korea) As our first distributor of Helikit, Meridian has expanded their marketing efforts in Korea through their introduction of ISOMAX 2000 TM to this market. Proto Corporation In China, Taiwan and Hong Kong, Proto Corporation has organized a series of hospitals and clinics to distribute Isotechnika s breath test technology to this vast network. A strong distribution base will allow for increased revenue from this sector. Cansul Products In Brazil, Cansul has obtained regulatory approval and has placed its initial orders. Cansul has developed key customers in this large South American market. 13

16 Management s Discussion and Analysis e Company reported $2.1 million in

17 Of Financial Condition and Results of Operations The following information, prepared in accordance with generally accepted accounting principles in Canada, should be read in conjunction with the consolidated financial statements and accompanying notes. OVERVIEW Isotechnika Inc. is a life sciences company headquartered in Edmonton, Alberta, focused on the research and development of novel immunosuppressive drug therapy. The Company s lead drug ISA TX 247 is designed for the prevention of organ rejection following transplantation surgery and the treatment of autoimmune diseases such as arthritis and psoriasis. To fund its operations, the Company relies upon the proceeds of public and private offerings of equity securities and sales revenues generated from its diagnostic division. The Company s diagnostic division generates revenue from the sale of its diagnostic breath-based kits, including the Helikit TM for the detection of H. pylori, the bacteria associated with most gastric and duodenal ulcers, from the Isomax 2000 (the Company s point of care analytical instrument for use with the breath kits) and, to a lesser extent, from contract research analysis. RESULTS OF OPERATIONS Net consolidated loss for the year ended November 30, 1999 was $1,778,987 or $0.07 per share as compared to a consolidated loss of $3,421,941 or $0.14 per share for the previous year. The improved financial results in 1999 were primarily the result of a reduction in selling and administrative expenses totaling $601,141 from the previous year and other income of $1,096,246 resulting from the receipt of refundable research and development tax credits during the year as compared to $210,277 in REVENUE The Company reported $2.1 million in revenue for the year ended November 30, 1999 as compared to $1.9 million for A significant portion of the Company s revenues in 1999 was generated from the Helikit, one of the Company s breath-based kit products. Other revenue sources included contract research analysis, licensing agreements and interest income. revenue for the year ended Novemb The Company will continue to market the breath-based kits, and explore further licensing opportunities and collaborative alliances for some of its technologies, which may contribute to future revenue generation. 15

18 EXPENSES Total consolidated expenses for the year ended November 30, 1999 were $4,988,287 as compared to $5,455,243 for The decrease in expenditures in 1999 was primarily due to a significant reduction in selling and administration expenses. The company focused its financial and human resources into the research and development of its lead immunosuppressive drug, ISA TX 247, and increasing sales of its diagnostic breath-based kits. Research and development Research and development expenses declined slightly in 1999 to $2,143,211 from $2,179,868 in the previous year. The research and development in 1999 was focused on the Company s lead drug compound, ISA TX 247. The Therapeutic Drug Division incurred $1,530,673 in research and development expenses in 1999 as compared to $1,490,136 in The Company s decision to proceed with ISA TX 247 as the Company s lead drug allowed the Therapeutic Drug Division personnel to dedicate their efforts to moving this important drug into human trials in the fiscal year The Diagnostic Division also incurred research and development expenses of $612,538 in 1999 as compared to $689,732 in Research and development carried out by the Diagnostic Division was primarily directed towards the development of breath-based kits for the diagnosis of diabetes and insulin resistance, for small bowel bacterial overgrowth and for lactose intolerance and the point-of-care analytical instrument, the Isomax 2000, which is designed to be used with the Company s diagnostic kits. Selling and administration Selling and administration expenses decreased by $601,141 to $1,480,771 from $2,081,912 the previous year. During 1999 the Company focused its financial and human resources on the research and development of its lead drug compound ISA TX 247. The process to reduce administration expenses commenced in the 1998 fiscal year and continued throughout Contract analysis and product sales Contract analysis and product sales expenses increased by $270,643 to $1,033,187 from $762,544 the previous year. This increase was the result of increased contract analysis and product sales in 1999 and a change in mix as Helikit sales increased while contract analysis services declined from the previous year. Liquidity and capital resources Cash and short-term investments totaled $3,758,055 as at November 30, Since its inception, the Company has financed its research programs, operations and capital expenditures from several sources. These have included revenue obtained from the Diagnostic Division (breath-based kit sales, contract research services and research collaboration agreements with both government and industry partners), interest income, refundable research and development tax credits and public and private placements of the Company s common shares. 16

19 On January 26, 1999, the Company completed its initial public offering by issuing 2,560,000 shares for net proceeds of $2,540,627. During the year, Isotechnika Inc. also raised an additional $5,254,975 by way of private placements. Subsequent to the year end, the Company closed additional private placements for gross proceeds of $2,298,794. Isotechnika Inc. currently invests its cash reserves in liquid, high-grade investment securities with terms to maturity not currently exceeding one year. The terms to maturity are selected based on prevailing interest rates and the expected timing of expenditures for operations and capital assets. The Company s net cash used in operating activities amounted to $1,998,320 for the year ended November 30, 1999 as compared to $2,671,955 for the previous year, and resulted primarily from the Company s net operating losses. The Company s net cash used in investing activities amounted to $207,354 in 1999 compared to $26,942 in 1998 and resulted primarily from the patent costs incurred and capitalized by the Company. Based on current operating budgets, the management of Isotechnika Inc. believes that the capital resources of the Company should be sufficient to finance its operations and capital needs through fiscal year The Company s funding needs may vary depending on a number of factors including the amount of revenue that the Diagnostic Division can generate, the progress of the Company s research and development programs, the number and scope of these programs, the results of clinical trials, the cost, timing and outcome of the regulatory process, the establishment of collaborations, the cost of preparing, filing, maintaining, defending and enforcing patent claims and the availability of other funding. The Company may need to raise additional capital to fund its operations in the future. It would seek such additional funding through public or private equity financing from time to time as market conditions permit, or through collaborative arrangements. RISKS AND UNCERTAINTIES The future performance of Isotechnika Inc. is dependent on a number of factors, including its success in bringing new products to the marketplace, generating royalty revenues from licensed technology, developing collaborative agreements with corporate partners and continuing to increase sales of its commercialized diagnostic breath-based kit products. This success is dependent on the effectiveness and safety of the Company s products, timely regulatory approval for new products and new indications, and the degree of patent protection afforded to particular products. Due to the nature of the Company s business, the market price of the Company s shares has been subject to significant speculation and volatility. The expectations of securities analysts about the Company s financial or scientific results could have a significant effect on the trading price of the Company s shares. Except for historical information, the matters discussed in this report are by their nature forward-looking. For reasons stated in this report or for various unanticipated reasons, actual results may differ materially. 17

20 FINANCIALS

21 Management s and Auditor s Reports MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying consolidated financial statements of Isotechnika Inc. and all information in this annual report are the responsibility of management and have been approved by the Board of Directors. The consolidated financial statements have been prepared by management, in accordance with Canadian generally accepted accounting principles. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. Management maintains a system of internal controls to provide reasonable assurance as to the reliability of financial information and the safeguarding of assets. The financial statements include amounts which are based on the best estimates of management. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board exercises this responsibility through the Audit Committee of the Board. The Audit Committee consists of three directors not involved in the daily operations of the company. The Audit Committee meets with management and the external auditors to satisfy itself that management s responsibilities are properly discharged and to review the consolidated financial statements prior to their presentation to the Board of Directors for approval. The shareholders auditors have full access to the Audit Committee, with and without management being present. These consolidated financial statements have been audited by the shareholders auditors, PriceWaterhouseCoopers LLP. Robert T. Foster Robert T. Foster, M.Pharm., Ph.D. Chairman and Chief Executive Officer Dennis Bourgeault Dennis Bourgeault, C.A. Chief Financial Officer AUDITORS REPORT To the Shareholders of Isotechnika Inc: We have audited the consolidated balance sheets of Isotechnika Inc. as at November 30, 1999 and 1998 and the consolidated statements of operations and deficit and cash flows for the years then ended. These financial statements are the responsibility of the company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at November 30, 1999 and 1998 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. PricewaterhouseCoopers LLP Chartered Accountants January 7, 2000 Edmonton, Canada (except note 15, which is as of January 13, 2000) 19

22 Consolidated Balance Sheets As at November 30, 1999 and $ $ ASSETS Current assets Cash and short-term investments 3,758,055 Accounts receivable 242, ,536 Inventory 516, ,016 Prepaid expenses and deferred costs 12, ,810 4,529, ,362 Capital assets (note 2) 748, ,504 Patent costs (note 3) 831, ,230 6,110,104 2,403,096 LIABILITIES Current liabilities Bank indebtedness (note 4) 223,019 Accounts payable and accrued liabilities 1,108,232 1,751,482 Promissory notes and loans payable (note 5) 1,542,000 Current portion of obligations under capital leases (note 6) 72,693 56,207 Current portion of long-term debt (note 7) 75,000 1,255,925 3,572,708 Obligations under capital leases (note 6) 143,144 60,968 Long-term debt (note 7) 75,000 1,399,069 3,708,676 Commitments (note 8) SHAREHOLDERS EQUITY Share capital (note 9) 14,865,456 7,069,854 Deficit (10,154,421) (8,375,434) 4,711,035 (1,305,580) 6,110,104 2,403,096 Approved by the Board: Robert T. Foster Director Donald Cameron Director 20

23 Consolidated Statements of Operations and Deficit For the years ended November 30, 1999 and $ $ Revenue (note 12) Contract analysis and product sales 1,430,486 1,184,490 Licensing, royalties and other 595, ,604 Interest 90,602 61,391 2,116,354 1,893,485 Expenses (note 12) Research and development 2,143,211 2,179,868 Selling and administration 1,480,771 2,081,912 Contract analysis and product sales 1,033, ,544 Depreciation and amortization 317, ,812 Interest on long-term debt and obligations under capital leases 13,990 36,107 4,988,287 5,455,243 (2,871,933) (3,561,758) Other income (expense) Research and development tax credits 1,096, ,277 Loss on sale of capital assets (3,300) (24,922) Write off of deferred start-up costs (45,538) 1,092, ,817 Net loss for the year (1,778,987) (3,421,941) Loss per common share (0.07) (0.14) Deficit Beginning of year (8,375,434) (4,667,649) Net loss for the year (1,778,987) (3,421,941) Unsuccessful offering costs (285,844) Deficit End of year (10,154,421) (8,375,434) 21

24 Consolidated Statements of Cash Flows For the years ended November 30, 1999 and $ $ CASH PROVIDED BY (USED IN) Operating activities Net loss for the year (1,778,987) (3,421,941) Items not affecting cash Depreciation and amortization 317, ,812 Loss on sale of capital assets 3,300 24,922 Write off of deferred start-up costs 45,538 (1,458,559) (2,956,669) Net change in other operating assets and liabilities (note 13) (539,761) 284,714 (1,998,320) (2,671,955) Investing activities Purchase of capital assets (27,225) (118,625) Proceeds on sale of capital assets 233,000 Research and development tax credit related to capital assets 38,903 71,568 Patent costs (219,032) (212,885) (207,354) (26,942) Financing activities (Repayment of) proceeds from promissory notes and loans payable (1,542,000) 1,542,000 Repayment of capital leases (66,854) (189,840) Repayment of long-term debt (117,848) Issuance of share capital 7,795,602 1,296,686 Unsuccessful offering costs (285,844) 6,186,748 2,245,154 Increase (decrease) in cash and short-term investments 3,981,074 (453,743) (Bank indebtedness) cash and short-term investments Beginning of year (223,019) 230,724 Cash and short-term investments (bank indebtedness) End of year 3,758,055 (223,019) 22

25 Notes to Consolidated Financial Statements November 30, 1999 and 1998 DESCRIPTION OF BUSINESS The company was incorporated under the Business Corporations Act of Alberta as a life sciences company which develops therapeutic drugs. It also develops, licenses and sells a number of diagnostic products and services. 1. SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements include the accounts of Isotechnika Inc. and its wholly owned subsidiary corporations, Isopharmika Inc. and Isodiagnostika Inc. The consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada. Because the precise determination of certain assets and liabilities is dependent upon future events, the preparation of these consolidated financial statements necessarily includes the use of estimates and approximations which have been made using careful judgement. Actual results could differ from those estimates. The consolidated financial statements have, in management s opinion, been prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below. Inventories Inventories are recorded at the lower of cost (specific item basis) and net realizable value. Capital assets Capital assets are recorded at cost net of investment tax credits. Depreciation and amortization is provided over the estimated useful lives of the assets using the straight-line method at the following annual rates: Scientific equipment 20% Computer and office equipment 20% Scientific equipment under capital lease 20% Computer and office equipment under capital lease 20% Patent costs Patent costs consist of expenditures on specific patent applications. If the patent application is successful, the costs incurred on that application are amortized straight-line over a period of five years, commencing in the year of commercial production. If a patent application is rejected or the specific drug or process is no longer considered commercially viable, the costs incurred on that application are written off at that time. 23

26 Notes to Consolidated Financial Statements November 30, 1999 and 1998 Research and development costs Research costs are expensed in the period incurred. Development costs are also expensed in the period incurred unless the company believes a development project meets generally accepted accounting principles for deferral and amortization. No development costs have been deferred to date. Revenue recognition Revenue from contract analysis and product sales is recognized as the service is provided or the product is shipped. Licensing, royalties and other revenue is recognized on an accrual basis in accordance with the contractual agreements with third parties. Translation of foreign currencies Transactions in foreign currencies are translated into Canadian dollars at rates of exchange at the time of such transactions. Monetary assets and liabilities are translated at current rates of exchange. Gains or losses resulting from these translation adjustments are included in income. Loss per common share Loss per common share is based on the weighted average number of common shares outstanding during the period. Fully diluted loss per share has not been presented as the conversion of warrants and options is anti-dilutive. Income taxes Income taxes have been provided for on the tax allocation basis of accounting whereby the provision for income taxes each year is determined on the basis of income and expense included in the statement of operations and deficit rather than the related amounts reported in the company s income tax return. 24

27 Notes to Consolidated Financial Statements November 30, 1999 and CAPITAL ASSETS 1999 Accumulated Cost amortization Net $ $ $ Scientific equipment 1,093, , ,746 Computer and office equipment 177, ,013 77,951 Scientific equipment under capital lease 277,360 39, ,660 Computer and office equipment under capital lease 39,177 11,904 27,273 1,587, , , Accumulated Cost amortization Net $ $ $ Scientific equipment 864, , ,744 Computer and office equipment 206,886 76, ,466 Scientific equipment under capital lease 343, , ,835 Computer and office equipment under capital lease 42,718 22,259 20,459 1,457, , ,504 During the year ended November 30, 1999, depreciation of $290,411 (1998 $363,834) was recorded. 3. PATENT COSTS $ $ Cost of patent applications 865, ,950 Less: Accumulated amortization 34,436 7, , , BANK INDEBTEDNESS The operating line, which bears interest at prime plus 1%, is secured by a general assignment of book debts and a general security agreement. 25

28 Notes to Consolidated Financial Statements November 30, 1999 and PROMISSORY NOTES AND LOANS PAYABLE $ $ Promissory note, bearing interest at 10% per annum, interest payable monthly, principal due January 1, 1999, unsecured 150,000 Promissory note, issued January 15, 1998 to Dr. Foster, a shareholder of the company, bearing interest at 14% per annum, interest payable annually, principal due January 15, 1999, unsecured 40,000 Promissory note, bearing interest at 24% per annum, interest payable monthly, due September 30, 1999, collateralized by an assignment of a specific sales agreement 500,000 Loan payable, bearing interest at 30% per annum, interest payable monthly, due March 21, 1999 collateralized by a general security agreement and a specific assignment of the company s scientific research and experimental development tax credit refund 600,000 Convertible loan payable, bearing interest at 50% per annum 252,000 1,542, OBLIGATIONS UNDER CAPITAL LEASES $ $ Triple G lease, with monthly payments of $2,575 due September 1, 2001, collateralized by specific equipment with a net book value of $72,905 (1998 $93,735) 52,208 77,390 Hewlett Packard leases, with monthly payments of $4,018 due June 2003 collateralized by specific equipment with a net book value of $152, ,119 Other leases, with combined monthly payments of $1,475 (1998 $6,634) due from March 2000 to November 2002, collateralized by specific equipment with a net book value of $35,915 (1998 $109,234) 25,510 39, , ,175 Less: Current portion 72,693 56, ,144 60,968 Interest is charged on lease obligations at rates ranging from 8% to 15% per annum. Monthly payments are blended payments of interest and principal. 26

29 Notes to Consolidated Financial Statements November 30, 1999 and 1998 Future annual principal payments required to retire the lease obligations are as follows: $ $ , ,693 35, ,900 25, , , , , LONG-TERM DEBT $ $ Amount due the Alberta Heritage Foundation for Medical Research, with annual payments of an amount equal to the lesser of 5% of gross revenues from the process of drug identification, or $15,000, non-interest bearing 75,000 75,000 Less: Current portion 75,000 75, COMMITMENTS The future minimum lease payments required in each of the next four years and in total under operating leases for office premises and for equipment are as follows: $ , , , , ,180 The company has an agreement with the National Research Council of Canada to jointly fund development of breath kits and a point of care instrument for breath test analysis with Isotechnika Inc. owning and controlling all of the technology. Funding recorded in licenses, royalties and other revenue in 1999 totalled $206,294. The company is required to repay this funding, commencing April 1, 2001 at the rate of 1.5% of the company s gross revenues. 27

30 Notes to Consolidated Financial Statements November 30, 1999 and SHARE CAPITAL Authorized Unlimited number of common, voting shares Issued and outstanding Common shares Special warrants Total # $ # $ $ Balance November 30, ,083,200 5,773,168 5,773,168 Issue of special warrants 3,262 1,296,686 1,296,686 Balance November 30, ,083,200 5,773,168 3,262 1,296,686 7,069,854 Shares issued pursuant to prospectus on initial public offering 2,560,000 2,540,627 2,540,627 Shares issued on conversion of special warrants 1,135,176 1,296,686 (3,262) (1,296,686) Shares issued in private placements 680, , ,196 Shares issued in private placement of units 4,764,600 4,506,779 4,506,779 Balance November 30, ,222,976 14,865,456 14,865,456 Effective May 29, 1998, the shareholders approved an amendment to the articles of the company to split the shares of the company on a seventy for one basis. In addition, effective September 16,1998, shareholders approved another amendment to the articles of the company to split the shares on a three for one basis. During the period March to August 1998, the company issued 3,262 special warrants for net cash proceeds of $1,296,686. Each special warrant entitled the holder to acquire, at no additional cost, 348 common shares of the company and one share purchase warrant. Each share purchase warrant entitled the holder thereof to acquire 348 common shares of the company at an exercise price of $435. On January 26, 1999, pursuant to a prospectus dated November 17, 1998, the company completed an initial public offering of the common shares of the company by issuing 2,560,000 common shares at $1.25 per share for proceeds of $2,540,627, (net of offering costs of $659,373). Also pursuant to the prospectus 1,135,175 common shares and 3,262 common share purchase warrants were issued upon the deemed exercise of special warrants issued by the company during the period March to August During the period October to November 1999, the company issued 4,764,600 common shares at a price of $1.05 per share, on the exercise of private Placement Units, for net proceeds of $4,506,779 (net of issue costs of $496,050). The units consisted of 4,764,600 common shares and common share purchase warrants that are exercisable into 4,764,600 common shares under the terms noted below. These units are subject to a four-month hold period. 28

31 Notes to Consolidated Financial Statements November 30, 1999 and 1998 Share purchase warrants At November 30, 1999, 4,764,600 common share purchase warrants issued pursuant to the private placement of units remain outstanding. Each warrant entitles the holder to purchase one common share at $1.25 per share for 12 months and thereafter until 18 months following the date of issuance of the units at a price of $1.50 per share. These warrants expire in May As additional consideration for the services rendered by the underwriter related to the initial public offering on January 26, 1999 a compensation option was granted. The compensation option consisted of 268,096 options exercisable into 268,096 common shares at a price of $1.25 per share. These options expire in January The 3,262 common share purchase warrants attached to the special warrants issued during the period March to August 1998, expired November 21, Escrow agreements At November 30, 1999, a total of 14,404,068 common shares of the company are held in escrow for regulatory purposes and will be released on the following basis: # August 17, ,200,904 August 17, ,200,904 August 17, ,200,904 August 17, ,801,356 Share option plan Details of directors, executives, consultants and employees share options are as follows: Number of options Price of share Expiry date 2,228, fiscal years 2000 through , During the year, the company issued 155,000 options exercisable at $1.06 and cancelled 223,950 options exercisable at $

32 Notes to Consolidated Financial Statements November 30, 1999 and INCOME TAX BENEFITS A reconciliation of the income tax provision at the statutory rate to the provision for income tax at the effective rate is as follows: $ % $ % Net loss for the year (1,778,987) (3,421,941) Income tax recoveries at statutory rates (793,429) 44.6 (1,526,786) 44.6 Decrease resulting from benefit of tax losses not recognized in financial statements 793, ,526, Income taxes at effective rate The company has accumulated non-capital losses for income tax purposes of approximately $7,073,000 which can be used to reduce income in future periods. These losses expire at varying times in the fiscal years 2002 through 2006 if not utilized. The company also has investment tax credit carry forwards of approximately $530,000 that will expire in fiscal years 2003 through 2009 if not utilized to reduce federal income tax otherwise payable. Scientific research and experimental development expenditures of approximately $3,320,000 are available to reduce income in future periods. These expenditures may be utilized in any period and may be carried forward indefinitely. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments consist of accounts receivable which will result in future cash receipts as well as accounts payable and accrued liabilities, obligations under capital leases, long-term debt and promissory notes and loans payable which will result in future cash outlays. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Cash and short-term investments, accounts receivable, bank indebtedness, accounts payable and accrued liabilities and promissory notes and loans payable The fair values of cash and short-term investments, accounts receivable, bank indebtedness, accounts payable and accrued liabilities and promissory notes and loans payable approximate their carrying values due to the short terms to maturity. Long-term debt and capital lease obligations The fair values of the long-term debt and obligations under the capital leases approximate their carrying values due to the fact that their interest rates approximate the market interest rates at November 30, 1999 and November 30,