Advitech Reports its Third Quarter Results and Highlights

QUEBEC CITY, QUEBEC, Nov 3, 2004 (CCNMatthews via COMTEX) -- Advitech Inc. (TSX-V: AVI) announced today its financial results for the third quarter ended September 30, 2004.

During the period, revenues totalled $160,172 compared to $108,954 for the same period last year, an increase of 47.0%. Operating expenses totalled $606,253 compared to $498,203 for the same period last year. The net loss amounted to $446,081 or $0.01 per share compared to a net loss of $264,520 or $0.01 per share for the third quarter of 2003.

For the nine month period ended September 30, 2004, revenues amounted to $1,194,299 compared to $816,193 for the same period in 2003, an increase of 46.3%. The net loss reached $902,435or $0.02 per share compared to $901,302 or $0.03 per share for the same period last year.

For the nine month period ended September 30, 2004, research and development gross expenses amounted to $565,112 compared to $527,675 for the same period in 2003. As at September 30 2004, cash and cash equivalents totalled $2,982,680.

"The third quarter was marked by several important events for Advitech, both in financing and development. The company now possesses the financial resources to execute the next phase of its plan, and, with the conclusion of Advitech's recent public financing, we are well positioned for the upcoming months", indicated Mr. Michel Lamontagne, Vice President and Chief Financial Officer at Advitech."

Highights for the Period

Next clinical study for XP-828L

The next clinical study on XP-828L for psoriasis is about to begin. This multicentre, double-blind, placebo-controlled study will be conducted on 76 patients. Its main objective is to confirm the positive results obtained during the recently completed open study. Enrolment will begin as soon as regulatory approvals are obtained. Results should be made available during the second quarter of 2005.

Addition to management team

Mr. Jean-Luc Martre joined the management team as Vice-President of Sales and Marketing. His mandate is to establish the marketing alliances needed to launch XP-828L at the beginning of 2006. Mr. Martre, previously with Shire Biological Products, has over 20 years of experience in the field of sales management among leading pharmaceutical companies.

Scientific communications

Advitech presented a scientific poster at the European Congress on Psoriasis, Psoriasis 2004, held in Paris from October 21 to 24. Similar presentations are planned for the United States in 2005.

Financing

On July 13, 2004, the Company completed an offering of 12,646,560 units at a price of $0.22 per unit for gross proceeds of $2,782,243.

Management Discussion and Analysis

The following management discussion and analysis of results of operations and financial condition should be read in conjunction with the information from the financial statements and related notes thereto.

Overview

The Company is specialized in the development of bioactive ingredients derived from milk proteins. The Company's core expertise lies in its ability to isolate, concentrate and purify proteins, bioactive peptides, growth factors and other biological components from bovine milk and whey. Bioactive components resulting from these patented processes are then used to formulate treatments for specific health conditions. Its technologies are focused in the area of immunology and inflammatory processes.

Results of Operations

The operating loss amounted to $446,081 for the third quarter ended September 30, 2004, compared to $389,249 for the third quarter ended September 30, 2003, an increase of $56,832 or 14.6%. This increase in operating losses for the third quarter of 2004 is due in large part to an increase in administration expenses and research and development expenses, net of tax credits and grants. The operating loss can be further explained by the addition of expenses for the stock-based compensation since the beginning of the fiscal year. However, the increase in the operating loss was compensated for by an increase in royalties and Lactium sales and a decrease in the financial expenses. The operating loss should remain at least at this level in the coming months, reflecting the Company's investment in the clinical development of XP-828L.

For the 9-month period ended September 30, 2004, the operating loss amounted to $921,094, compared to a loss of $803,589 for the same period last year. This increase of $117,505 or 14.6% is due largely to a decrease in research and development tax credits, an increase in administration expenses and the addition of expenses for the stock-based compensation. These elements were compensated in part by an increase in sales of Lactium ingredients.

Total revenues were $160,172 for the third quarter ended September 30, 2004 compared to $108,954 for the same period in 2003. Revenues derived from product sales increased by $55,830, or 141.4 %, due principally to an increase in sales of Lactium ingredients. Revenues derived from research contracts and payments from strategic partners declined from $69,461 to $31,817. This decrease of 54.2 % reflects the emphasis of the Company on internal R&D projects instead of third-party research contracts. During the third quarter of 2004, revenues derived from royalties amounted to $33,032 coming from royalty programs on discontinued products now manufactured and sold by third parties and for which the Company is entitled to receive royalties.

For the 9-month period ended September 30, 2004, total revenues were $1,194,299 compared to $816,193 for the same period in 2003, an increase of $378,106 or 46.3%. This increase in sales is mainly due to a growth in sales of the ingredient Lactium.

For the third quarter ended September 30, 2004, the cost of products sold was $59,788, representing a gross margin of 37.3% compared to $34,380 and a gross margin of 12.9% for the third quarter of 2003. This increase in gross margin is mainly due to more favorable raw material costs. Also, the sales of some products with a higher gross margin had a positive impact on gross margin percentage in the third quarter of 2004.

Sales and administrative expenses amounted to $326,122 for the third quarter ended September 30, 2004, compared to $246,796 for the third quarter ended September 30, 2003, an increase of $79,326 or 32.1%. The increase in administrative expenses is due mainly to additional fees, related to the public status of the Company, including legal fees, an increase in liability insurance expenses and fees associated with external communications and regulatory matters. During the third quarter, no significant changes were recorded for sales and marketing expenses. However, sales and marketing expenses are expected to increase in the coming months due to the hiring of marketing personnel and support for the XP-828L communication program.

Research and development gross expenses were $173,111 for the third quarter ended September 30, 2004, compared to $194,282 for the same period in 2003, a decrease of $21,171 or 10.9%. This decrease in research and development expenses can be explained mainly by the reduction of manpower (and the consequent reduction of salary expenses) due to the abandonment of some research and development projects undertaken for third-parties. Research and development tax credits and grants totalled $38,389 for the third quarter ended September 30, 200, compared to $122,708 for the third quarter ended September 30, 2003. The decrease of $84,319 or 68.7% for the scientific research and experimental development tax credits is due mainly to the change of the Company's status. As a public company, the Company is no longer eligible for federal tax credit reimbursement, until it will generate profits above the total reported losses for the previous years.

Financial expenses were $26,595 for the third quarter ended September 30, 2004, compared to $44,432 for the third quarter ended September 30, 2003, a decrease of $17,837 or 40.1 %. This decrease is largely due to the increase in interest revenues generated by the investment made last July.

Amortization of fixed assets totalled $12,411 for the third quarter ended September 30, 2004, compared to $13,876 for the third quarter ended September 30, 2003, a decrease of $1,465. No significant change has been recorded in the value of the fixed assets during this period.

Amortization of intangible assets and deferred costs totalled $6,839 for the third quarter ended September 30, 2004, compared to $25,083 for the same period in 2003, a decrease of $18,244 or 72.7%. The higher amortization costs in 2003 are due to the amortization of certain development and trademarks costs which were fully amortized at the end of 2003. No additional amortization costs will be recorded for these items in 2004.

The net loss of discontinued operations reflects the abandonment of the Company's contract manufacturing activities and its interest in a joint venture under the corporate name "Les Produits Laitiers Advidia Inc." On December 22, 2003, the Company terminated its manufacturing activities and sold all of the assets in this division. Accordingly, all revenues, expenses, assets and liabilities related to contract manufacturing activities have been classified as discontinued operations for 2003. In addition, until December 30, 2003, the company held a 50% interest in a joint venture, "Les Produits Laitiers Advidia Inc" or "Advidia", with Ingredia SA, a French-based manufacturer of dairy ingredients. Advidia's business activities consisted primarily of importing and distributing Ingredia's dairy ingredients to Canadian clients. Because this activity is no longer in line with the Company's strategy, its interests in Advidia were sold to Ingredia for a nominal value. Accordingly, all revenues, expenses, assets and liabilities related to this activity have been reclassified as discontinued operations for 2003, except for sales of one particular product, Lactium, which the Company still distributes.

For the 9-month period ending September 30, 2004, discontinued operations generated a net profit of $18,659, compared to a loss of $97,713 for the same period in 2003. Although manufacturing activities ceased in December 2003, some revenues come from the sale of products and raw materials related to the discontinued operations. In compensation, certain expenses associated with contractual commitments ending on June 30, 2004, such as the lease, have been recorded in 2004. Discontinued operations should not generate significant additional revenues for the rest of 2004.

Liquidity and Sources of Funds

As at September 30, 2004, the Company had $2,982,680 in cash and cash equivalents, compared to $368,758 as at September 30, 2003. This increase is mainly attributable to funds derived from financing activities, namely the common shares issue, which has provided net cash of $2,392,566, and the amalgamation transaction with Dupont Capital, which has provided net cash of $824,773.

Operating activities used $556,211 in cash during the third quarter ended September 30, 2004, compared to $466,906 during the third quarter ended September 30, 2003. For the third quarter of 2004, cash used for operating activities was derived from the net loss adjusted by items not affecting cash of $387,055 and also from an increase in working capital requirements of $169,156. For the third quarter of 2003, cash used for operating activities was derived from the adjusted net loss of $288,228 and also from an increase in working capital requirements of $178,678.

During the third quarter ended September 30, 2004, cash provided for investment activities amounted to $6,541. This variation can be explained by the acquisition of equipment for an amount of $2,915 and by the adjustment in the value of some intangible assets for an amount of $9,456. During the same period in 2003, cash used for investment activities was $7,541, represented by the acquisition of intangible assets.

During the third quarter of 2004, net cash provided by financing activities was $2,391,317, resulting mainly from an increase in cash and cash equivalents following the public issue of common shares for the amount of $2,793,672, for which we must subtract the share issue expenses for the amount of $401,106. During the third quarter of 2003, net cash provided by financing activities was $181,796, resulting from an increase in bank loans guaranteed by the research and development tax credits, for the amount of $203,056 and by the repayment of certain bank loans and capital leases for $21,260.

Discontinued operations provided cash of $15,922 during the third quarter ended September 30, 2004, compared to $462,603 for the same period in 2003. Although manufacturing activities were discontinued on December 31, 2003, the Company received a portion of an amount receivable associated with the sale of the assets of this division. For the third quarter ended September 30, 2004, the increase in cash from discontinued operations is due mainly to the receipt of cash from accounts receivable in the joint venture "Advidia."

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