We have just accepted a new audit client, Pathobio Inc. (PI), and we will be performing the audit for the upcoming September 30, 2021 year end. Incorporated in 2015, PI is a biotechnology company focused on developing effective anticancer drugs through clinical trials. Despite the personal wealth of the company's owner, Lucas Wagner, PI approached a bank for financing in October 2020 because the company is expected to operate at a loss in fiscal 2021 and Lucas does not want to invest additional funds in the company. The bank has requested audited financial statements for the year ended September 30, 2021 to receive financing in fiscal 2022. The bank requires that the financial statements be prepared in accordance with ASPE. Lucas has agreed to provide a personal guarantee for the financing. It has always been Lucas's intention to keep PI as a family owned business.

Here is some industry information and background information on PI. Please write a memo that identifies and discusses the operating risks facing this company. Thank you!

INDUSTRY INFORMATION Biotechnology companies typically incur operating losses until one of their drugs receives regulatory approval and is successfully commercialized. It is common for products to take several years to become commercially viable, even after clinical trials and regulatory approval. Obtaining regulatory approval from Health Canada and the U.S. Food and Drug Administration can be difficult. Companies must demonstrate the safety and effectiveness of the drugs through successful clinical studies before submitting any regulatory applications. Clinical trials are long, expensive and uncertain processes. Positive clinical results may not be obtained or the drugs may cause undesirable side effects. As well, clinical trials may not be started or completed on schedule. Any delays in clinical trials increase the cost of the development process. Even if the results of preclinical studies or clinical trials are initially positive, different results may be obtained in the later stages of drug development. . Clinical trials require companies to identify and enroll a large number of patients with the illness under investigation. For the rarer types of diseases, it is often difficult to find enough patients to participate in the trials. . Biotechnology companies depend on the ability to maintain and enforce proprietary rights through patents. The process of obtaining patent protection for biotechnology companies is uncertain. Biotechnology companies also use confidentiality agreements with employees to protect intellectual property. . There is a lot of competition to attract and retain highly qualified scientific personnel to conduct research and development. Academic institutions, government entities and other organizations are always trying to recruit individuals from biotechnology companies. . There is intense competition amongst biotechnology companies. Many companies are researching treatments for the same illnesses. Prospective competing drugs may provide better results and decrease the profitability of current drugs. BACKGROUND INFORMATION ON PATHOBIO INC. PI's drug development process starts with preclinical studies to identify potential drugs and then proceeds through to Phase I, Phase II and Phase III clinical trials to develop and test the drugs. Each phase can take anywhere from six months to two years. Since the company's inception, PI has worked on the following projects: Phase III Cancelled PAT-100 Preclinical Completed in fiscal 2015 Phase I Phase II Completed Cancelled in fiscal in fiscal 2017 2020 Notes Clinical trials cancelled due to adverse side effects during Phase II PAT-200 Completed in fiscal 2016 Completed Completed Scheduled Phase III delayed due to in fiscal in fiscal to begin in difficulty in finding enough 2018 2020 2021 but patients with acute myeloid delayed leukemia (a rare form of until 2022 cancer) to participate in the trials PAT-300 Completed in fiscal 2017 Completed in process Scheduled Phase II began six months in fiscal and to begin in after the scheduled start date 2019 expected to 2023 due to delays experienced in be Phase I completed in 2022 PAT-400 PAT-400 relates to pancreatic cancer Completed Completed Completed Started in fiscal in fiscal in fiscal and 2017 2018 2019 completed in fiscal 2020 Only one of PI's drugs, PAT-400, has received regulatory approval for commercial use and sale in North America. This approval was received in June 2020. PI has submitted patent applications for all of its drugs. Patents have been granted for PAT-100 and PAT-400. One of PI's competitors, BioLab Ltd., just announced the successful completion of its clinical trials for one of its pancreatic cancer drugs, Zinpan. Regulatory approval is expected in 2021. PI's scientific research team is made up of several key personnel. In particular, Lexi Li is the Vice President of Research & Development and oversees the company's clinical trials. She recently rejected a job offer from The Manitoba Cancer Treatment and Research Foundation. PI does not have any long-term employment contracts in place for any of its staff. Beginning in 2020, new staff were required to sign confidentiality agreements upon commencing employment with PI