BUILDING
VALUE
THROUGH
PROGRESS
(L O R U S LOGO)
L O R U S THERAPEUTICS INC.
FIRST QUARTER
June 1, 2002 to August 31, 2002
LETTER TO SHAREHOLDERS
Dear Shareholders:
We are pleased to review with you the operating highlights for the first quarter
of 2003. An important regulatory success was achieved with the receipt of fast
track status for Virulizin(R) in the United States. Our lead antisense drug,
GTI-2040, received sponsorship from the National Cancer Institute to fund
multiple Phase II clinical trials. We presented results supporting the Company's
gene therapy platform, and announced the appointment of a prominent oncologist
as our external medical advisor.
The U.S. Food and Drug Administration ("FDA") granted Fast Track
Designation for Virulizin(R) in the treatment of pancreatic cancer. This
designation is granted to drugs that are intended for the treatment of a
life-threatening condition and have demonstrated the potential to address an
unmet medical need. The Phase III clinical trial of Virulizin(R) is a
double-blind, placebo-controlled, randomized clinical trial being conducted at
medical centres in North America. Virulizin(R) is being studied as a first line
therapy in combination with gemcitabine for the treatment of pancreatic cancer.
The Drug Development Group of the Division of Cancer Treatment and
Diagnosis, National Cancer Institute ("NCI") agreed to sponsor multiple clinical
trails conducted with GTI-2040. The NCI, the U.S. Government's principal
institute for cancer research and training, made their decision after an
analysis of preclinical, GLP toxicology and Phase I clinical data for GTI-2040.
This is the first time that the NCI has sponsored the Phase II program of a drug
developed from Canadian research. This financial support from the NCI provides
an opportunity to explore the full potential of this drug by evaluating its
efficacy in a range of cancers.
Data demonstrating the potential of the Company's proprietary R1 tumor
suppressor, supporting Lorus' emerging gene therapy platform, was presented at
the Fifth Annual Meeting of the American Society of Gene Therapy. With only a
modest budget for early-research, Lorus continues to show leadership with
innovative approaches to cancer drug development.
Subsequent to the quarter end, Lorus appointed Dr. Mace L. Rothenberg, an
internationally recognized oncologist, as an external medical advisor to provide
strategic medical advice on Lorus' growing international clinical and drug
development programs. Dr. Rothenberg is an Ingram Professor of Cancer Research
at the Vanderbilt-Ingram Cancer Center as well as Professor of Medicine at the
Vanderbilt University Medical Center, and a Director of Drug Development. The
Vanderbilt-Ingram Cancer Center in Nashville, Tennessee is one of the world's
leading institutions in cancer prevention, care and research. Dr. Rothenberg has
made significant contributions to the development and U.S. approval of several
important cancer drugs including gemcitabine for the treatment of pancreatic
cancer.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the unaudited
consolidated financial statements and notes prepared in accordance with Canadian
generally accepted accounting principles (GAAP) in this quarterly report, and
should also be read
in conjunction with the audited consolidated financial statements and notes, and
management's discussion and analysis contained in the Company's annual report
for the year ended May 31, 2002. All amounts are expressed in Canadian dollars
unless otherwise noted.
OVERVIEW
Lorus has incurred annual operating losses since inception related to the
research, manufacturing, and clinical development of its proprietary compounds.
The Company has not received any revenue from the sales of products to date.
Three products are in the clinical trial stage of development and several
potential compounds exist in preclinical studies. An agreement signed with Mayne
Pharma for sales and distribution of Virulizin(R) in Mexico is expected to
provide the Company with its first product revenue. Royalty revenue from this
agreement will partially offset future research and development costs, but
losses will continue as Lorus further invests in its drug development programs.
RESULTS OF OPERATIONS
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended August 31, 2002
increased to $3,047,000 from $2,142,000 for the comparable quarter last year due
primarily to higher manufacturing and clinical trial costs for Virulizin(R) for
the ongoing pivotal Phase III trial for the treatment of advanced pancreatic
cancer. The antisense clinical program which includes the GTI-2501 Phase I trial
and GTI-2040 Phase II trial in patients with renal cell carcinoma also
contributed to the increase in the current quarter. Research and development
costs are expected to increase during the year as the clinical trials progress.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended August 31, 2002
increased to $1,304,000 from $1,062,000 for the comparable quarter last year.
The increase was due mainly to employee related costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the quarter ended August 31, 2002 decreased to
$95,000 from $455,000 for the same quarter last year due mainly to the adoption
of the new CICA accounting guideline for goodwill and other intangible assets
whereby the Company ceased amortizing goodwill on June 1, 2002.
INTEREST INCOME
Interest income for the first quarter of fiscal 2003 decreased to $370,000 from
$603,000 for the same period last year. The decrease was due to lower cash and
short-term investments and due to lower investment returns caused by a decline
in market interest rates over the last twelve months.
NET LOSS
Net loss for the first quarter ended August 31, 2002 totaled $4,076,000 ($0.03
per share) compared to a loss of $3,056,000 ($0.02 per share) for the first
quarter last year. The increase relates primarily to costs for the Company's
expanded clinical development programs. On a comparable basis, the loss for the
three months ended August 31, 2001 would have been $2,692,000 or $0.02 per share
after adjustment to remove amortization of goodwill which commencing June 1,
2002 no longer needs to be amortized.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Lorus has financed its operations and technology acquisitions
primarily from equity financing, the exercise of warrants and stock options, and
interest income on funds held for future investment. The Company believes that
its available cash, cash equivalents and short-term investments, and the
interest earned thereon, should be sufficient to finance its operations and
capital needs for at least twelve months.
OPERATING CASH REQUIREMENTS
Lorus' cash burn (cash used in operating activities) decreased to $2,487,000 for
the quarter ended August 31, 2002 compared to $3,044,000 for the first quarter
last year. The decrease is due mainly to higher current liabilities at August
31, 2002, partially offset by higher product development costs in the first
quarter of fiscal 2003.
CASH POSITION
At August 31, 2002 Lorus had cash and cash equivalents and short-term
investments totaling $35.0 million compared to $37.8 million at May 31, 2002.
Working capital was $31.7 million at August 31, 2002 compared to $35.6 million
at May 31, 2002.
/s/ Jim A. Wright
DR. JIM A. WRIGHT
Chief Executive Officer
FORWARD LOOKING STATEMENTS
Except for historical information, this quarterly report contains
forward-looking statements, which reflect the Company's current expectation
regarding future events. These forward-looking statements involve risks and
uncertainties, which may cause actual results to differ materially from those
statements. Those risks and uncertainties include, but are not limited to,
changing market conditions, the successful and timely completion of clinical
studies, the establishment of corporate alliances, the impact of competitive
products and pricing, new product development, uncertainties related to the
regulatory approval process, and other risks detailed from time-to-time in the
Company's ongoing quarterly filings, annual information form, annual reports and
40-F filings. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events in this quarterly report might not occur.
For more information:
GRACE TSE
Lorus Therapeutics Inc.
T 416 798 1200 ext. 380
F 416 798 2200
E ir@lorusthera.com
www.lorusthera.com
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(unaudited)
Period
from
THREE Three inception
MONTHS months Sept. 5,
ENDED ended 1986 to
AUG. 31, Aug. 31, Aug. 31,
(Amounts in 000's except for per common share data) (Canadian Dollars) 2002 2001 2002
--------------------------------
Expenses
Research and development $ 3,047 $ 2,142 $49,556
General and administrative 1,304 1,062 29,892
Depreciation and amortization 95 455 7,496
Interest income (370) (603) (7,999)
--------------------------------
LOSS FOR THE PERIOD 4,076 3,056 78,945
Deficit, beginning of period 74,869 61,382 -
--------------------------------
DEFICIT, END OF PERIOD $ 78,945 $ 64,438 $78,945
================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ 0.03 $ 0.02
===================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING USED
IN THE CALCULATION OF BASIC AND DILUTED LOSS PER SHARE 144,416 142,444
===================
See accompanying notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Period
from
THREE Three inception
MONTHS months Sept. 5,
ENDED ended 1986 to
AUG. 31, Aug. 31, Aug. 31,
(Amounts in 000's) (Canadian Dollars) 2002 2001 2002
----------------------------------
Operating Activities
Loss for the period $(4,076) $(3,056) $(78,945)
Add items not requiring a current outlay of cash:
Depreciation and amortization 532 892 13,122
Other - - 500
Net change in non-cash working capital balances related to
operations 1,057 (880) 2,387
----------------------------------
CASH USED IN OPERATING ACTIVITIES (2,487) (3,044) (62,936)
==================================
Investing Activities
Sale (purchase) of short-term investments, net 3,478 7,422 (33,179)
Business acquisition, net of cash received - - (539)
Acquired research and development - - (715)
Additions to fixed assets (302) (81) (4,034)
Cash proceeds on sale of fixed assets - - 348
----------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,176 7,341 (38,119)
==================================
Financing Activities
Issuance of warrants - - 31,877
Issuance of common shares 4 40 71,036
----------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 4 40 102,913
==================================
INCREASE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD 693 4,337 1,858
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,165 2,783 -
----------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,858 $ 7,120 $ 1,858
==================================
See accompanying notes to unaudited consolidated financial statements
CONSOLIDATED BALANCE SHEETS
AUGUST 31, May 31,
2002 2002
(Amounts in 000's) (Canadian Dollars) (unaudited) (audited)
---------------------------
Assets
CURRENT ASSETS
Cash and cash equivalents $ 1,858 $ 1,165
Short-term investments 33,179 36,657
Prepaid expenses and amounts receivable 977 1,195
---------------------------
TOTAL CURRENT ASSETS 36,014 39,017
FIXED ASSETS 787 533
GOODWILL (note 3) 606 606
ACQUIRED RESEARCH AND DEVELOPMENT 6,979 7,416
---------------------------
$ 44,386 $ 47,572
===========================
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $ 696 $ 442
Accrued liabilities 3,575 2,990
---------------------------
TOTAL CURRENT LIABILITIES 4,271 3,432
SHAREHOLDERS' EQUITY
Share capital
Common shares
Authorized: unlimited number of
shares; Issued and outstanding
(000's):
August 31, 2002 - 144,422
May 31, 2002 - 144,412 119,172 119,168
Deferred stock-based compensation (112) (159)
Deficit accumulated during
development stage (78,945) (74,869)
---------------------------
TOTAL SHAREHOLDERS' EQUITY 40,115 44,140
---------------------------
$ 44,386 $ 47,572
===========================
See accompanying notes to unaudited consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
These unaudited consolidated interim financial statements of Lorus Therapeutics
Inc. ("the Company") have been prepared by the Company in accordance with
accounting principles generally accepted in Canada and comply in all material
respects with accounting principles generally accepted in the United States and
follow the same accounting policies and methods of application as the audited
annual financial statements for the year ended May 31, 2002 except for the
changes in accounting policies as described in note 2. These statements should
be read in conjunction with the audited consolidated financial statements for
the year ended May 31, 2002.
2. Changes in Accounting Policies
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective June 1, 2002, the Company prospectively adopted the recommendations of
the Canadian Accounting Standards Board Handbook Section 3062, "Goodwill and
Other Intangible Assets". Section 3062 requires that goodwill no longer be
amortized to earnings, but instead be periodically reviewed for impairment.
Section 3062 also requires that intangible assets be assessed to determine if
they have a finite life. Intangible assets with a finite life will continue to
be amortized systematically over their estimated useful life. Intangible assets
with an indefinite life are not to be amortized but are instead tested for
impairment annually.
The Company evaluated its goodwill as of June 1, 2002 in accordance with
Section 3062 and determined that its goodwill was not impaired as of that date.
The Company will perform an annual impairment test on goodwill as of a date on
or before May 31, 2003.
The Company assessed the useful lives of its intangible assets and
determined that they are of finite life and continued amortizing them over their
estimated useful lives.
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Effective June 1, 2002, the Company also adopted the Handbook Section 3870
"Stock-based Compensation and Other Stock-based Payments". Section 3870
establishes standards for the recognition, measurement, and disclosure of
stock-based compensation and other stock-based payments made in exchange for
goods and services provided by employees and non-employees. It applies to
transactions in which common shares, stock options, or other equity instruments
are granted or liabilities incurred based on the price of common stock or other
equity instruments.
Adoption of Section 3870 does not have a material impact on the Company's
financial condition or results of operations as the Company's existing
accounting policies, as disclosed in the audited annual financial statements for
the year ended May 31, 2002, comply with the new standard.
3. Goodwill
Effective June 1, 2002, the Company ceased amortizing its goodwill due to the
change in accounting policy as described in note 2. This change has not been
applied retroactively and the amounts presented for prior periods have not been
restated for the change. The impact of this change is as follows:
AUG. 31, Aug. 31,
(Amounts in 000's) 2002 2001
-----------------------
Loss for the period $4,076 $3,056
Less: Amortization of goodwill - (364)
-----------------------
Loss before amortization of goodwill $4,076 $2,692
-----------------------
Loss per share $ 0.03 $ 0.02
Loss per share before amortization of goodwill $ 0.03 $ 0.02
-----------------------
4. Share Capital
As of August 31, 2002, there were 5,146,015 options outstanding to acquire
common shares of the Company. During the three month period ended August 31,
2002, 10,000 options were exercised to purchase common shares of the Company.
5. Pro Forma Disclosure for Employee Stock Based Compensation
The Company accounts for its stock options granted to employees using the
intrinsic value method. Section 3870 requires that companies not using the fair
value method to measure the value of stock options disclose pro forma net
earnings and earnings per share information as if the Company had accounted for
employee stock options under the fair value method. The Company has elected to
disclose pro forma net loss and pro forma net loss per share as if the Company
had accounted for its options since 1995 under the fair value method.
A summary of the pro forma impact on the statement of loss is presented in
the table below.
AUG. 31,
(Amounts in 000's) 2002
--------
Loss for the period $4,076
Compensation expense related to the fair value of stock options 675
--------
Pro forma loss for the period $4,751
--------
Pro forma loss per common share $0.03
--------
The fair value of each option granted has been estimated at the date of grant or
the date when it became measurable using the Black-Scholes option pricing model
with the following assumptions used for options granted in the three months
ended August 31, 2002: (i) dividend yield of 0%; (ii) expected volatility of
80%; (iii) risk free interest rate of 3.5% and (iv) expected life of 5 years.
The Company has assumed no forfeiture rate as adjustments for actual forfeitures
are made in the year they occur. The weighted-average grant date fair values of
options issued in the three months ended August 31, 2002 were $0.59.