UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission File Number: 0-27239
GENEMAX CORP.
(Exact name of registrant as specified in its charter)
Nevada 88-0277072
(State of incorporation) (I.R.S. Employer Identification No.)
1681 Chestnut Street, Suite 400
Vancouver, British Columbia
Canada V6J 4M6
(Address of Principal Executive Offices)
(604) 331-0400
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Number of shares outstanding of the issuer's Common Stock:
CLASS OUTSTANDING AT MARCH 31, 2004
Common Stock, $0.001 par value 20,103,875
i
FORM 10-QSB
INDEX
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Interim Consolidated Balance Sheets, March 31, 2004
and March 31, 2003 (unaudited) 1
Consolidated Statements of Operations
for the three months ended March 31, 2004 and 2003
(unaudited) and for the period from July 27, 1999
(inception) to March 31, 2004 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (unaudited) and for the
period from July 27, 1999 (inception) to March 31, 2004
(unaudited) 3
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Controls and Procedures 19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENEMAX CORP.
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31,
2003
---------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 17,758 $ 19,451
Prepaid expenses 11,624 1,033
---------------------------------------------------------------------------------------------------------------------------
29,382 20,484
FURNITURE AND EQUIPMENT, (Note 5)
62,654 72,722
net of depreciation of $131,574 (2003 - $121,506)
DEFERRRED FINANCE FEES 61,876 -
---------------------------------------------------------------------------------------------------------------------------
$ 153,912 $ 93,206
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 587,293 $ 661,755
Due to related parties (Note 6) 108,366 75,196
---------------------------------------------------------------------------------------------------------------------------
695,659 736,951
---------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 4 and 6)
STOCKHOLDERS' EQUITY
Capital stock (Note 7)
Common stock, $0.001 par value, 50,000,000 shares authorized
20,093,875 shares issued and outstanding (2003 - 18,808,034) 20,094 18,808
Additional paid-in capital 9,109,623 8,401,949
Common stock purchase warrants 792,085 734,085
Deficit accumulated during the development stage (10,420,739) (9,751,665)
Accumulated other comprehensive income (loss) (42,810) (46,922)
---------------------------------------------------------------------------------------------------------------------------
(541,747) (643,745)
---------------------------------------------------------------------------------------------------------------------------
$ 153,912 $ 93,206
===========================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
1
GENEMAX CORP.
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
July 27, 1999
(inception) to
Three months Ended March 31 March 31, 2004
2004 2003
------------------------------------------------------------------------------------------ ----------------------------------
INTEREST INCOME $ - $ - $ 26,571
------------------------------------------------------------------------------------------ ----------------------------------
Consulting fees 11,832 56,000 632,692
Consulting fees - stock based (Note 8) 11,875 11,875 2,763,150
Depreciation 10,068 10,682 131,574
License fees 61,240 - 268,483
Management fees 67,862 54,846 782,434
Office and general 93,414 365,757 1,266,041
Professional fees 110,726 85,754 854,634
Research and development 251,600 247,776 2,899,284
Research and development-stock based (Note 7) - - 612,000
Travel 50,457 14,958 193,018
------------------------------------------------------------------------------------------ ----------------------------------
669,659 847,648 10,403,310
------------------------------------------------------------------------------------------ ----------------------------------
NET LOSS FOR THE PERIOD $ (669,659) $ (847,648) $(10,376,739)
========================================================================================== ==================================
BASIC NET LOSS PER SHARE $ (0.03) $ (0.05)
========================================================================================== =================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 19,428,959 16,245,975
========================================================================================== =================
The accompanying notes are an integral part of these interim consolidated
financial statements
2
GENEMAX CORP.
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
July 27, 1999
(inception) to
Three months Ended March 31 March 31, 2004
2004 2003
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (669,074) $ (874,648) $(10,376,739)
Adjustments to reconcile net loss to net cash from operating
activities:
- depreciation 10,068 10,682 131,574
- non-cash consulting fees - - 5,750
- non-cash license fees - - 10,500
- stock-based compensation 11,875 11,875 3,375,150
- prepaid expenses (10,591) - (5,624)
- accounts payable 80,623 80,381 684,094
-----------------------------------------------------------------------------------------------------------------------------
(577,099) (771,710) (6,175,295)
NET CASH USED IN OPERATING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of furniture and equipment - (492) (194,228)
Pre reverse acquisition advances from Eduverse (Note 3) - - 250,000
Cash acquired on reverse acquisition of Eduverse (Note 3) - - 173,373
-----------------------------------------------------------------------------------------------------------------------------
- (492) 229,145
NET CASH FROM (USED IN) INVESTING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on sale and subscriptions of common stock 550,000 485,000 5,695,360
Deferred finance fees (11,876) (11,876)
Loans payable - - 136,245
Advances from related parties 33,170 26,607 186,989
-----------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 571,294 513,607 6,006,718
-----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES 4,112 (8,615) (42,810)
-----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (1,693) (267,210) 17,758
CASH, BEGINNING OF PERIOD 19,451 642,589 -
-----------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 17,758 $ 375,379 $ 17,758
=============================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
3
NON-CASH TRANSACTIONS:
Refer to Note 7.
4
GENEMAX CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
On May 9, 2002, GeneMax Corp. ("GMC" or "the Company"), a Nevada
corporation entered into a letter of intent to acquire 100% of the issued and
outstanding common shares of GeneMax Pharmaceuticals Inc. (a development stage
company) ("GPI"), in exchange for a total of 11,431,965 restricted shares of
common stock of GMC. During July and August 2002, the Company completed the
transaction pursuant to a definitive Share Exchange Agreement and issued
11,231,965 restricted shares of common stock to the GPI stockholders and 200,000
shares of common stock as a finders' fee.
GPI is a private Delaware company incorporated on July 27, 1999 which
has a wholly-owned subsidiary, GeneMax Pharmaceuticals Canada Inc. ("GPC"), a
private British Columbia company incorporated May 12, 2000. GPI is a development
stage company which was formed for the purpose of building a biotechnology
business specializing in the discovery and development of immunotherapeutics
aimed at the treatment and eradication of cancer, and therapies for infectious
diseases, autoimmune disorders and transplant tissue rejection.
During 2000 GPI and the University of British Columbia ("UBC") entered
into a world-wide license agreement providing GPI the exclusive license rights
to certain patented and unpatented technologies originally invented and
developed by UBC. Also during 2000, GPI and UBC entered into a Collaborative
Research Agreement ("CRA") appointing UBC to carry out further development of
the licensed technology and providing GPI the option to acquire the rights to
commercialize any additional technologies developed within the CRA in
consideration for certain funding commitments (See Note 4). The lead product
resulting from these licenses is a cancer immunotherapy vaccine, on which the
Company has been completing pre-clinical work in anticipation of clinical
trials. Specifically, the Company has moved the technology through issuance of a
U.S. patent, tested various viral vectors needed to deliver the gene that forms
the basis for the vaccine, licensed a preferred viral vector and contracted out
production of clinical grade vaccine (See Note 4). The Company plans to continue
development of the lead product vaccine through clinical trials. The other
technologies licensed include assays, which the Company plans to use for
generation of a pipeline of immune-modulation products. The assay technology
acquired has received patent protection.
The consolidated financial statements have been prepared on the basis of a going
concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has a working capital
deficiency of $666,277, a capital deficiency of $541,747 and has incurred
significant losses since inception and further losses are anticipated in the
development of its products raising substantial doubt as to the Company's
5
ability to continue as a going concern. The ability of the Company to continue
as a going concern is dependent on raising additional capital to fund ongoing
research and development and ultimately on generating future profitable
operations. Costs relating to future clinical trials of the Company's cancer
immunotherapy vaccine are imminent as part of normal product development and
advancement. Since internally generated cash flow will not fund development and
commercialization of the Company's products, the Company will require
significant additional financial resources and will be dependant on future
financings to fund its ongoing research and development as well as other working
capital requirements. The Company's future capital requirements will depend on
many factors including the rate and extent of scientific progress in its
research and development programs, the timing, cost and scope involved in its
clinical trials, obtaining regulatory approvals and pursuing further patent
protections and the timing and costs of its commercialization activities. There
can be no assurance that we will be able to raise sufficient additional capital
or eventually positive cash flow from operations to address all of our cash flow
needs. If we were not able to find alternative sources of cash or generate
positive cash flow from operations, our business and shareholders would be
materially and adversely affected.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and conforms with instructions to Form 10-QSB
of Regulation S-B. They may not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material changes in the
information disclosed in the notes to the financial statements for the year
ended December 31, 2003 included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission. The interim unaudited
financial statements should be read in conjunction with those financial
statements included in the Form 10-KSB. In the opinion of Management, all
adjustments considered necessary for a fair presentation, consisting solely of
normal recurring adjustments, have been made. Operating results for the three
months ended March 31, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been presented in United
States dollars and prepared in accordance with United States Generally Accepted
Accounting Principles ("US GAAP").
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries GPI and GPC as described in Notes 1 and 3. All
significant intercompany balances and transactions are eliminated on
consolidation.
6
USE OF ESTIMATES AND ASSUMPTIONS
Preparation of the Company's financial statements in conformity with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed at
the following rates over the estimated useful lives of the assets: Office
furniture and equipment - 36 months straight-line; Laboratory equipment - 60
months straight-line.
DEFERRED FINANCE FEES
The Company defers direct costs incurred in connection with the sale of
common shares which are offset against the proceeds of the financing upon
completion.
RESEARCH AND DEVELOPMENT COSTS
The Company has acquired exclusive development and marketing rights to
certain technologies through a License Agreement and the Collaborative Research
Agreement with UBC. The rights and license acquired are considered rights to
unproven technology which may not have alternate future uses and therefore, have
been expensed as incurred as research and development costs. Also, ongoing costs
incurred in connection with the CRA are considered costs incurred in the
development of unproven technology which may not have alternate future uses and
therefore, have been expensed as incurred as research and development costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of SFAS No. 107, the Company has
determined the estimated fair value of financial instruments using available
market information and appropriate valuation methodologies. The fair value of
financial instruments classified as current assets or liabilities including
cash, prepaid expense, loans and accounts payable and due to related parties
approximate carrying value due to the short-term maturity of the instruments.
NET LOSS PER COMMON SHARE
Basic earnings (loss) per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Dilutive earnings (loss) per share
reflect the potential dilution of securities that could share in the earnings of
the Company. The accompanying presentation is only of basic loss per share as
the potentially dilutive factors are anti-dilutive to basic loss per share.
FOREIGN CURRENCY TRANSLATION
The financial statements are presented in United States dollars. In
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", foreign denominated monetary assets and liabilities are
7
translated to their United States dollar equivalents using foreign exchange
rates which prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.
INCOME TAXES
The Company follows the liability method of accounting for income
taxes. Under this method, deferred income tax assets and liabilities are
recognized for the estimated tax consequences attributable to differences
between the financial statement carrying values and their respective income tax
basis (temporary differences). The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. At March 31, 2004, a full deferred tax asset
valuation allowance has been provided and no deferred tax asset benefit has been
recorded.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation, (2) amend the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation, and (3) to require disclosure of those effects in interim
financial information. The disclosure provisions of SFAS No. 148 were effective
for the Company for the year ended December 31, 2003.
The Company has elected to continue to account for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB No. 25") and comply with the disclosure provisions of SFAS No. 123 as
amended by SFAS No. 148 as described above. In addition, in accordance with SFAS
No. 123 the Company applies the fair value method using the Black-Scholes
option-pricing model in accounting for options granted to consultants. Under APB
No. 25, compensation expense for employees is recognized based on the
difference, if any, on the date of grant between the estimated fair value of the
Company's stock and the amount an employee must pay to acquire the stock.
Compensation expense is recognized immediately for past services and pro-rata
for future services over the option-vesting period.
In accordance with SFAS No. 123, the Company applies the fair value
method using the Black-Scholes option-pricing model in accounting for options
granted to consultants.
The Company accounts for equity instruments issued in exchange for the
receipt of goods or services from other than employees in accordance with SFAS
No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF
8
96-18"). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services as defined by EITF 96-18.
The Company has also adopted the provisions of the Financial Accounting
Standards Board Interpretation No.44, Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25 ("FIN
44"), which provides guidance as to certain applications of APB 25. FIN 44 is
generally effective July 1, 2000 with the exception of certain events occurring
after December 15, 1998.
NOTE 3 - REVERSE ACQUISITION
Effective May 9, 2002, the Company entered into a letter of intent to
acquire 100% of the issued shares in the capital of GPI in exchange for
11,231,965 restricted shares of common stock plus 200,000 restricted shares of
common stock for a finder's fee. The Company also agreed to issue an additional
188,154 restricted shares of common stock in settlement of $188,154 of accrued
GPI management, consulting and research and development fees. Effective July 15,
2002, pursuant to a definitive Share Exchange Agreement, the Company commenced
the closing and acquired 5,880,304 shares of GPI from non-British Columbia
shareholders of GPI in exchange for the issuance of 5,880,304 restricted shares
of common stock.
The Company also issued a take-over bid circular to British Columbia
GPI shareholders and acquired a further 4,487,001 shares of GPI in exchange for
4,487,001 restricted shares of common stock effective August 13, 2002. Also
during 2002, the Company completed the acquisition by acquiring the remaining
864,660 shares of GPI in exchange for 864,660 restricted shares of common stock.
Also, 744,494 outstanding GPI common stock purchase warrants were exchanged on a
one for one basis for the Company's common stock purchase warrants with
identical terms and conditions and the Company issued 2,135,000 stock options to
holders of GPI stock options (refer to Note 7). All GPI stock options and common
stock purchase warrants were then cancelled. As a result of this transaction,
the former stockholders of GPI owned 75% of the 15,320,119 total issued and
outstanding shares of the Company as at July 15, 2002.
This acquisition has been accounted for as a recapitalization using
accounting principles applicable to reverse acquisitions with GPI being treated
as the accounting parent (acquirer) and GMC being treated as the accounting
subsidiary (acquiree). The value assigned to the capital stock of consolidated
GMC on acquisition of GPI is equal to the book value of the capital stock of GPI
plus the book value of the net assets of GMC as at the date of the acquisition.
The book value of GMC's capital stock subsequent to the reverse
acquisition is calculated and allocated as follows:
9
GPI capital stock $1,924,725
GMC net assets 493,712
-----------
$2,418,437
===========
Capital stock $ 15,320
Additional paid-in capital 620,600
Share purchase warrants 1,867,517
-----------
2,503,437
GMC subscriptions receivable pre reverse
acquisition (100,000)
GMC subscriptions received pre reverse
acquisition 15,000
-----------
Consolidated Capital accounts post reverse
acquisition $2,418,437
===========
These consolidated financial statements include the results of
operations of GPI since July 27, 1999 (inception) and the results of operations
of GMC since the date of the reverse merger effective July 15, 2002.
For the period from October 13, 1999 (inception) to July 14, 2002 the
weighted average number of common shares outstanding is deemed to be 11,431,965
being the number of shares issued by GMC (including 200,000 common shares issued
as finders' fees) to effect the reverse acquisition of GPI.
NOTE 4 - RESEARCH AGREEMENTS
UNIVERSITY OF BRITISH COLUMBIA ("UBC")
Effective September 14, 1999, GPI entered into an Option Agreement
("Option") whereby UBC granted GPI an option to obtain a world-wide license from
UBC providing GPI the exclusive license rights to certain patented and
unpatented cancer immuno-therapy technologies originally invented and developed
by UBC. The Option was for a term of 180 days and prior to being eligible to
exercise the Option, GPI was to make a reasonable commercial effort to raise
equity funding in an amount not less than CAN$1,000,000 to fund ongoing research
and issue 500,000 founders' common shares to UBC and an additional 3,600,000
founders' common shares to certain principals involved in the UBC research.
Having satisfied all of the conditions on or before March 6, 2000, GPI exercised
the Option and obtained from UBC, the exclusive license rights as described
above for meeting the specific terms of the Option plus a further payment of
$78,743. The License will terminate after 15 years or upon the expiration of the
last patent obtained relating to the licensed technology. The cost of obtaining
10
any patents will be the responsibility of GPI. The technology remains the
property of UBC, however, it may be utilized and improved by GPI. Concurrent
with the execution of the license the head researcher at UBC became a director
of GPI.
GPI and UBC entered into a Collaborative Research Agreement ("CRA")
dated September 1, 2000 appointing UBC to carry out further development of the
licensed technology and providing GPI the option to acquire the rights to
commercialize any additional technologies developed within the CRA in
consideration for certain funding commitments totaling CAN$498,980 to be paid in
four equal installments of CAN$124,725 due upon execution of the CRA, September
30, 2000, January 1, 2001 and March 31, 2001 of which $374,215 was paid. Through
a series of amendments between November 28, 2000 and September 9, 2002, the
funding commitment was increased to a total of CAN$2,973,049 of which
CAN$991,515 was to be paid for the year ended December 31, 2002, CAN$1,135,801
to be paid in 2003 and CAN$471,518 to be paid in 2004. As at March 31, 2004,
CAN$235,759 (December 31, 2003 - CAN$471,5181 is payable in connection with the
CRA and the Company is in default of the Agreement. Pursuant to the terms of the
CRA. In addition, as required by the CRA, GPI has purchased certain laboratory
equipment in connection with the on-going research.
During the first quarter of 2004, the Company entered in to an
exclusive worldwide license agreement with UBC for the use of a novel assay
technology intended to be used to screen and select new drugs that regulate
immune responses. The term of the license is for the longer of 20 years and the
last expiry of a patent obtained in connection with the technology. In
consideration for the license, during 2003 the Company paid to UBC 10,000
restricted shares of common stock with a fair value of $10,000 and must pay an
annual maintenance fee of $500 and all costs required to obtain any patents
related thereto.
CANADIAN NETWORK FOR VACCINES AND IMMUNOTHERAPEUTICS OF CANCER AND
CHRONIC VIRAL DISEASES ("CANVAC")
Effective January 1, 2001 GPI and UBC entered into a one year Network
Affiliate Agreement with CANVAC (the "CANVAC Agreement") whereby CANVAC would
provide a grant to GPI and UBC to further fund the research activities in
connection with the CRA. Under the terms of the CANVAC Agreement, CANVAC would
provide a CAN$85,000 research grant to UBC upon GPI contributing CAN$117,300
towards the UBC research. The amounts paid by GPI do not qualify as amounts paid
under the CRA funding schedule outlined above. During 2001, all amounts required
under the CANVAC agreement were paid to UBC by GPI. During 2002 CANVAC
contributed a further CAN$56,100 to continue funding the research activities
until June 30, 2003. As at March 31, 2004 GPI owes CAN$38,709 to UBC to fund
GPI's obligations under the CANVAC Agreement.
CRUCELL HOLLAND B.V.("CRUCELL") - RESEARCH LICENSE AND OPTION AGREEMENT
Effective August 7, 2003, Crucell and GPI entered into a five year
Research License and Option Agreement whereby Crucell granted to GPI a
non-exclusive worldwide license for the research use of its adenovirus
technology. The Research License and Option Agreement includes an option for a
non-exclusive worldwide commercial license to manufacture, use, offer for sale,
sell and import products using the technology. Under the terms of the agreement,
the Company is required to make initial and ongoing option maintenance payments
11
over the five year term totaling 450,000 Euros. As of December 31, 2003, the
Company had made all payments required totaling $115,490 (100,000 Euros) and a
further $60,864 was incurred during the first quarter of 2004 leaving $60,864
(50,000 Euros) owing as at March 31, 2004. A further (50,000 Euros) will be due
and payable to Crucell pursuant to the Research License and Option Agreement on
August 7, 2004.
NOTE 5 - FURNITURE AND EQUIPMENT
March 31, 2004 December 31,
2003
---------------- -----------------
Office furniture and equipment $ 10,425 $ 10,425
Laboratory equipment 183,803 183,803
---------------- -----------------
194,228 194,228
Less: accumulated depreciation (131,574) (121,506)
---------------- -----------------
$ 62,654 $ 72,722
================ =================
NOTE 6 -RELATED PARTY TRANSACTIONS
Effective December 31, 2003, the Board of Directors of the Company
approved the amendment of an existing consulting agreement and an existing
management services agreement between the Company and two directors of the
Company. Under the terms of the amended agreements, the two directors will be
paid base monthly salaries of CAN$14,167 (CDN) and $12,500 (CDN) respectively
commencing January 1, 2004 for terms ending February 1, 2005 and July 31, 2005.
Also the Board of Directors of the Company agreed to grant to Dr. Wilf
Jefferies, one of the above noted directors and the head researcher at UBC
(refer to Note 4), up to a five year anti-dilution right whereby Dr. Jefferies
will be guaranteed the rights, subject to achieving certain developmental
milestones, allowing him to purchase and own (by way of stock options, and/or
convertible preferred shares or as otherwise determined by the Board of
Directors) not less than 25% of the fully diluted outstanding shares of common
stock of the Company, with such anti-dilution rights, terms and conditions being
subject to applicable regulatory approvals. As at March 31, 2004, Dr. Jefferies
owned or had rights to 18.2% (December 31, 2003 - 19.4%) of the Company's fully
diluted shares of common stock.
Effective December 31, 2003 the Board of Directors of the Company
approved entering into a month to month management consulting agreement with
another director for services for the period for January 1, 2004 to April 15,
2004 for a total of $32,400.
12
The following amounts have been incurred to these related parties:
Three months ended March 31,
2004 2003
----------------- ------------------
Consulting fees $ - $ 22,500
Management fees 57,862 54,846
Research and development 34,513 31,814
----------------- ------------------
$ 92,375 $ 109,160
================= ==================
The Company has total commitments relating to the above management and
consulting agreements for the years ended December 31, 2004 and 2005 of
approximately $263,400 and $94,600 respectively.
During the period ended March 31, 2004 GPI and the Company incurred
$92,375 in fees to these related parties and made repayments of $59,205
resulting in $108,366 owing to these related parties as at March 31, 2004
(December 31, 2003 - $75,196). Amounts due to related parties are unsecured,
non-interest bearing and have no specific terms of repayment.
Refer to Notes 3, 4 and 7.
NOTE 7 - CAPITAL STOCK
The authorized capital of the Company consists of 50,000,000 voting
common shares with $0.001 par value and 5,000,000 non-voting preferred shares
with $.001 par value. Effective December 31, 2003 the Company's board of
directors approved an increase in the authorized capital to 300,000,000 voting
common shares and 50,000,000 non-voting preferred shares subject to shareholder
approval.
During the period the Company issued 52,900 shares of common stock on
the exercise of stock options at $1.00 per share the consideration of which was
the settlement of debt owed to a former director totaling $52,900.
During the period the Company issued 304,370 shares of common stock on
the exercise of stock options at $0.50 per share for proceeds of $152,185, which
was paid by way of offset of amounts originally owed by the Company to certain
consultants of the Company which were assigned by these consultants to certain
option holders. These amounts were originally owing by the Company as a result
of cash advances made to the Company totaling $50,000 and expenses incurred on
behalf of the Company totaling $102,185.
During the period the Company commenced a private placement of units at
$0.70 per unit. Each unit consists of one common share and one share purchase
warrant. Each share purchase warrant entitles the holder to purchase an
additional common share of the Company at a price of $0.70 per share for a
period of two years. The Company issued 857,143 shares of common stock on the
purchase of 857,143 units for total proceeds of $600,000. The Company issued
71,428 shares of common stock as a placement fee in connection with this
financing. The fair value of the warrants was estimated to be $60,000 and was
recorded as separate component of stockholders' equity.
13
STOCK OPTION PLAN
On September 30, 2002 the Board of Directors of the Company approved
the adoption of a new stock option plan (the "Plan") allowing for the granting
of up to 3,500,000 options to directors, officers, employees and consultants of
the Company and its subsidiaries. Options granted under the Plan shall be at
prices and for terms as determined by the Board of Directors with terms not to
exceed 10 years. The Plan further provides that the Board of Directors may grant
to any key personnel of the Company who is eligible to receive options, one or
more Incentive Stock Options at a price not less than fair market value and for
a period not to exceed 10 years from the date of grant. Options and Incentive
Stock Options granted under the Plan may have vesting requirements as determined
by the Board of Directors.
Effective April 16, 2003 the Board of Directors approved an increase in
the number of options available under the Plan from 3,500,000 to 4,500,000. Also
effective July 9, 2003 the Company filed a Form S-8 Registration Statement to
register 500,000 shares in connection with the Plan. Effective December 16,
2003, the Board of Directors approved the further increase in the number of
options available under the Plan from 4,500,000 to 10,000,000, and during the
period filed a further Form S-8 Registration Statement effective January 26,
2004 to register a further 2,250,000 shares in connection with the Plan.
STOCK OPTIONS
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of APB No. 25 and complies with the disclosure
provisions of SFAS No. 123 and SFAS No. 148. In accordance with SFAS No. 123 the
Company applies the fair value method using the Black-Scholes option-pricing
model in connection with accounting for options granted to consultants and the
disclosure provision relating to options granted to employees.
In connection with the reverse acquisition of GPI, the Company granted
a total of 2,135,000 stock options to previous holders of stock options of GPI
with terms and conditions consistent with their original GPI stock options. Of
these stock options, 150,000 are subject to straight line vesting for a period
of 36 months commencing October 1, 2002. The fair value of these incentive stock
options will be recorded as compensation expense over the vesting period. The
fair value of these options at the date of grant of $142,500 was estimated using
the Black-Scholes option pricing model with an expected life of three years, a
risk-free interest rate of 4% and an expected volatility of 226%. To March 31,
2004 a total of $71,250 (December 31, 2003 - $59,375) has been recorded as
consulting fees in connection with these options.
Of the stock options granted to date, a total of 160,000 originally
granted at prices ranging from $1.90 per share to $8.50 per share have been
repriced to $1.00 per share and as a result, are subject to variable accounting
in accordance with the provisions of the Financial Accounting Standards Board
Interpretation No.44, Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25 ("FIN 44"). No adjustment
14
was required during the period relating the variable accounting for these
incentive stock options.
The Company's stock option activity is as follows:
Weighted Average
Remaining
Number of Weighted Average Contractual Life
options Exercise Price
-------------- -------------------- ---------------------
Balance, December 31, 2002 3,168,000 $ 0.86 2.27 years
Granted during the year 4,325,000 0.59
Forfeited during the year (420,000) 1.00
Exercised during the year (2,318,630) 0.61
-------------- -------------------- ---------------------
Balance, December 31, 2003 4,754,370 0.74 5.55 years
Exercised during the period (357,270) 0.57
-------------- -------------------- ---------------------
Balance, March 31, 2004 4,397,100 $ 0.76 5.10 years
============== ==================== =====================
SHARE PURCHASE WARRANTS
The Company's share purchase warrant activity is as follows:
Weighted Average
Remaining
Number of Weighted Average Contractual Life
warrants Exercise Price
----------------- -------------------- ---------------------
Balance, December 31, 2002 846,860 $ 1.95 2.71 years
Issued during the year 299,175 1.93
Exercised during the year - -
Expired during the year (69,500) 2.82
----------------- -------------------- ---------------------
Balance, December 31, 2003 1,076,535 1.89 1.53 years
Issued during the period 857,143 0.70
Exercised during the period - -
Expired during the period (2,000) 7.50
----------------- -------------------- ---------------------
Balance, March 31, 2004 1,931,678 $ 1.36 1.55 years
================= ==================== =====================
15
NOTE 8 - INCOME TAXES
There were no temporary differences between GPI's tax and financial
bases that result in deferred tax assets, except for the Company's net operating
loss carryforwards amounting to approximately $7,046,000 at March 31, 2004
(December 31, 2003 - $6,388,000) which may be available to reduce future year's
taxable income. These carryforwards will expire, if not utilized, commencing in
2008. Management believes that the realization of the benefits from these
deferred tax assets appears uncertain due to the Company's limited operating
history and continuing losses. Accordingly a full, deferred tax asset valuation
allowance has been provided and no deferred tax asset benefit has been recorded.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. The Company
intends that such forward-looking statements be subject to the safe harbors for
such statements. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Any forward-looking statements represent management's best judgment as to
what may occur in the future. However, forward-looking statements are subject to
risks, uncertainties and important factors beyond the control of the Company
that could cause actual results and events to differ materially from historical
results of operations and events and those presently anticipated or projected.
The Company disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statement
or to reflect the occurrence of anticipated or unanticipated events.
OVERVIEW
The Company has raised $4,758,850 in funding since the May 2002
announcement of the GeneMax Pharmaceuticals acquisition for all issuances of the
Company's common stock. Management believes that an estimated $14,000,000 is
required over the next three years for expenses associated with the balance of
pre-clinical development and commencement of Phase I-II clinical trials for the
TAP Cancer Vaccine and for various operating expenses.
The Company has not generated any cash flow to fund its operations and
activities due primarily to the nature of lengthy product development cycles
that are normal to the biotech industry. Therefore, the Company must raise
additional funds in the future to continue operations. The Company intends
finance its operating expenses with further issuances of common stock. The
Company believes that any anticipated private placements of equity capital and
debt financing, if successful, may be adequate to fund the Company's operations
over the next twelve months. Thereafter, the Company expects it will need to
raise additional capital to meet long-term operating requirements.
During the quarter we advanced work on the Molecular Medicine contract.
Management believes that the first phase of the contract is essentially complete
with the delivery of vector clones to the Company. We are currently in the
process of evaluating the vector clones. We also entered into an exclusive
worldwide license agreement with UBC for the use of a novel assay technology
intended to be used to screen and select drugs that regulate immune responses.
17
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Net revenues during the quarters ended March 31, 2004 and 2003 were $0.
The lack of revenues during these quarters were the result of our continued
focus on research and development of the TAP technologies.
Consulting fees during the quarter ended March 31, 2004 was $11,832 as
compared to $56,000 during the quarter ended March 31, 2003, a decrease of
approximately 78.9%. The decreased consulting fees were primarily the result of
the reduction in stock option grants to consultants.
License fees during the quarter ended March 31, 2004 was $61,240 as
compared to $0 during the quarter ended March 31, 2003. The increase in license
fees was the result of our obligations to Crucell pursuant to the Research
License and Option Agreement.
Management fees during the quarter ended March 31, 2004 was $67,862 as
compared to $54,846 during the quarter ended March 31, 2003, an increase of
approximately 23.7%. The increase in management fees was primarily the result of
the direct payment in 2004 to an officer who previously provided services
through a contractor, Investor Communications International, Inc.
Office and general expenses incurred during the quarter ended March 31,
2004 was $93,414 as compared to $365,757 during the quarter ended March 31,
2003, a decrease of approximately 74.5%. The decreased office and general
expenses were primarily the result of a reduction in investor relations
expenditures, including media production, mailing, and printing.
Professional fees during the quarter ended March 31, 2004 was $110,726
as compared to $85,754 during the quarter ended March 31, 2003, a increase of
approximately 29.1%. The increased professional fees were primarily the result
of higher legal costs relating to potential financing opportunities and more
complicated accounting policies and regulatory requirements.
Travel expenses during the quarter ended March 31, 2004 was $50,457 as
compared to $14,958 during the quarter ended March 31, 2003, an increase of
approximately 237.3%. The increased travel expenses were primarily the result of
increased travel for financing and investor relations purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, the Company had $17,758 in cash. Generally, the
Company has financed operations to date through the proceeds of the private
placement of equity securities. The Company received proceeds of $550,000 during
the quarter ended March 31, 2004 from the sale of common stock and $33,170 from
advances from related parties.
18
Net cash used in operating activities during the quarter year ended
March 31, 2004 was $577,099. The Company had no revenues during the fiscal 2003.
Expenditures were primarily the result of payments required under the external
contracts with UBC, Crucell and Molecular Medicine, as well as legal and
accounting activities.
As of March 31, 2004, we anticipate that we will need significant
financing to enable us to meet our anticipated expenditures for the next 18
months, which is anticipated to be $6 million assuming a single Phase 1 clinical
trial commences within that time frame.
The Company is currently in breach of the Collaborative Research
Agreement with UBC, Research License and Option Agreement with UBC, Biological
Materials Transfer Agreement with NIAID and the Production Service Agreement
with Molecular Medicine because of failure to make certain payments pursuant to
these agreements. The Company's failure to cure the breach of these agreements
within the time frames specified may result is termination of these agreements.
The termination any of these agreements would have a material adverse effect
upon the Company and its business.
The Company's financial statements have been prepared assuming that it
will continue as a going concern and, accordingly, do not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might be necessary should the Company be unable to continue in
operation. Our ability to continue as a going concern is dependent upon our
ability to obtain the necessary financing to meet our obligations and pay our
liabilities arising from our business operations when they come due. We will be
unable to continue as a going concern if we are unable to obtain sufficient
financing. The Company's future capital requirements will depend on many factors
including the rate and extent of scientific progress in its research and
development programs, the timing, cost and scope involved in its clinical
trials, obtaining regulatory approvals and pursuing further patent protections
and the timing and costs of its commercialization activities.
The Company's future success and viability are dependent on the
Company's ability to raise additional capital through further private offerings
of its stock or loans from private investors. Additional financing may not be
available upon acceptable terms, or at all. If adequate funds are not available
or are not available on acceptable terms, the Company may not be able to conduct
its proposed business operations successfully, which could significantly and
materially restrict or delay the Company's overall business operations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was conducted under the supervision and with the
participation of the Company's management, including Ronald L. Handford, the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
19
and procedures as of March 31, 2004. Based on that evaluation, Mr. Handford
concluded that the Company's disclosure controls and procedures were effective
as of such date to ensure that information required to be disclosed in the
reports that it files or submits under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in Commission rules
and forms. Such officers also confirm that there was no change in the Company's
internal control over financial reporting during the quarter ended March 31,
2004 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GLOBAL SECURITIES LITIGATION
On approximately September 4, 2002, the Company initiated litigation
against Global Securities Corporation and Union Securities Limited (the
"Defendants") by filing a Writ of Summons and Statement of Claim in the Supreme
Court of British Columbia, Registry No. S024914 (the "British Columbia
Complaint"). The British Columbia Complaint was modified in December 2002 to
include further individual brokers as defendants and John or Jane Does 1-10 and
to better define the causes of action (the "Amended British Columbia
Complaint"). The claims made by the Company against the Defendants involve the
alleged illegal naked short selling of the Company's shares of common stock. The
Company is seeking damages from the Defendants that include loss of investment
opportunity, injury to reputation, artificial issuance of shares that results in
devaluation of the Company's securities, and other damages.
The Defendants have filed an amended statement of defense and
counterclaim in response to the Amended British Columbia Complaint generally
denying the allegations and counterclaiming for defamation relating to
statements made by the Company about the litigation in news releases. The
Company has filed a motion for document production and for records from the
Canadian Depository for Securities Limited. The Defendants' motion to obtain a
summary hearing on whether the actions of the Defendants were unlawful was heard
on January 28, 2004. The Court dismissed the Defendants' motion. The Defendants
have filed another motion to obtain a summary hearing on whether the actions of
the Defendants were unlawful and a motion to dismiss the Company's document
motion and the Defendant's motions are scheduled to be heard by the Court at the
end of June 2004.
NEVADA LITIGATION
On November 14, 2003, the Company and Alexander Cox, a shareholder of
the Company filed a complaint against various broker-dealers, market makers and
clearing agents allegedly involved in naked short sales in the Second Judicial
District Court of the State of Nevada (Case No. CV-N-03-0656-ECR-RAM). The
complaint alleges the defendants engaged in the unlawful "shorting" of the
Company's shares of common stock, fraud, statutory misrepresentation, securities
law violations pursuant to the Nevada Securities Act, negligence, common law
misrepresentation, breach of the covenant of good faith and fair dealing,
conversion, deceptive trade practices, racketeering, interference with
contracts, interference with prospective economic advantages, prima facie tort,
and conspiracy. The defendants have filed an answer to our complaint and on
March 8, 2004 filed a motion to dismiss the claims in the complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 2004, the Company filed a registration statement on Form
S-8 registering 1,825,000 stock options under the Stock Option Plan exercisable
at $0.50 per share and 425,000 stock options exercisable at $1.00 per share for
an aggregate amount of 2,250,000 shares.
21
From November 2003 until February 2004, the Company engaged in a
private placement offering of up to 1,428,572 units of the Company, at a
subscription price of $0.70 per unit, with each such unit being comprised of one
share of restricted common stock and one warrant. Each warrant entitles the
holder to purchase one share of restricted common stock at an exercise price of
$0.70 within two years of the date of issuance. The Company sold 857,143 units
at $0.70 per unit, for gross proceeds of $600,000. The offering provides the
investors with piggy-back registration rights relating to any follow on
financing conducted that requires registration of the subject financing shares.
The Offering was exempt from registration pursuant to Regulation S and Rule 506
of Regulation D of the Securities Act. No underwriter was involved in the
transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
On May 10, 2004, the Board of Directors amended and restated the
Company's bylaws to remove the provision that the Company's shares of common
stock be transferred only within the provisions of "certificate only" or
"custody only" and to remove the provision that each director participating in a
meeting shall sign the minutes. Based upon the amendment to the bylaws, the
Company's shares of common stock may become depository eligible and management
anticipates that this will occur. Previously, management had exited the
depository system to counteract naked short selling. The board of directors
believes it in the best interests of the Company to remove the "certificate
only" or "custody only" provisions. A copy of the revised bylaws is attached to
the quarterly report as Exhibit 3.1.
Also, on May 10, 2004 the Company issued a press release announced that
its patented TAP-1 anti-cancer technology is effective in generating immune
responses against melanoma in mice. A copy of the press release is attached to
the quarterly report as Exhibit 99.1.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
3.1 Amended and Restated Bylaws of Genemax Corp. Effective May 10,
2004
31.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1933, as amended.
32.1 Certification Pursuant to 18 U.S.C. 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
22
99.1 Press Release dated May 10, 2004 Announcing TAP-1 anti-cancer
technology is effective in generating immune responses against
melanoma in mice
2. Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 20, 2004 GENEMAX CORP.
/s/ RONALD L. HANDFORD
____________________________________
Ronald L. Handford, Chief Executive
Officer and Chief Financial Officer
23