**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

_______________

 

**FORM10-KSB**

 
| **(Mark One)** |   |
|----------------|--------|

 

| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|
|       |                                                                                      |
|       | **For the fiscal year ended December 31, 2001**                                           |

** **

** **

OR

 

| o      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                             |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                      |
|   | **For the  transition period from                   to                  ** |

 

 

**Commission filenumber:                    **

 

**GENESIS BIOVENTURES, INC.**

(Name of small business issuer in its charter)

 

| **New York**                                                               |   | **98-0163232**                       |
|----------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)             |   | (I.R.S. Employer Identification No.) |
|                                                                       |
| **3033  King George Highway , Suite 1A  Surrey, British Columbia, Canada** |   | **V4P  1B8**                         |
| (Address of principal executive offices)                                   |   | (Zip / Postal Code)                  |
|                                                                       |
| **(604)  542-0820**                                                        |
| (Issuer’s telephone number, including area code)                      |

 

Securities registered pursuantto Section 12(b) of the Act:

 

| **Common  Stock, $.0001 par value** |   | **American  Stock Exchange**           |
|-------------------------------------|--------|----------------------------------------|
| (Title of Class)                    |   | (Name of Exchange on which Registered) |

 

Securities registered pursuantto Section 12(g) of the Act:  None

 

Check whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ýNo o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. ý

 

Issuer’s revenues for its most recent fiscal year were $Nil.

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates of the Registrant, as of March 18, 2002, wasapproximately $13,025,794 (based upon the closing price for shares of theIssuer’s Common Stock as reported by The American Stock Exchange for the lasttrading date prior to that date). Shares of Common Stock held by each officer, director and holder of 5%or more of the outstanding Common Stock have been excluded in that such personsmay be deemed to be affiliates.  Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

As of March 18, 2002, 20,237,006 shares of the Issuer’s Common Stock,$.0001 par value, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE.

 

[None.]

 

Transitional Small BusinessDisclosure Format (Check one):  YES o NO ý

 

 

 

**GENESIS BIOVENTURES, INC.**

 

FORM 10-KSB

TABLE OF CONTENTS
| **Part** |   | **Item(s)** |   |                                                                                                              |
|----------|--------|-------------|--------|-------------------------------------------------------------------------------------------------------------------|
| I        |   | 1           |   | Description of Business                                                                                           |
|     |   | 2           |   | Description of Properties                                                                                         |
|     |   | 3           |   | Legal  Proceedings                                                                                                |
|     |   | 4           |   | Submission  of Matters to a Vote of Security Holders                                                              |
|     |   |        |   |                                                                                                              |
| II       |   | 5           |   | Market  for Common Equity and Related Stockholder Matters                                                         |
|     |   | 6           |   | Management’s  Discussion and Analysis or Plan of Operation                                                   |
|     |   | 7           |   | Financial Statements                                                                                              |
|     |   | 8           |   | Changes  In and Disagreements With Accountants on Accounting and Financial Disclosure                             |
|     |   |        |   |                                                                                                              |
| III      |   | 9           |   | Directors, Executive Officers,  Promoters and Control Persons; Compliance with Section 16(a) of the Exchange  Act |
|     |   | 10          |   | Executive Compensation                                                                                            |
|     |   | 11          |   | Security  Ownership of Certain Beneficial Owners and Management                                                   |
|     |   | 12          |   | Certain  Relationships and Related Transactions                                                                   |
|     |   | 13          |   | Exhibits and  Reports on Form 8-K                                                                                 |
|     |   |        |   |                                                                                                              |
|     |   |        |   | Signatures                                                                                                        |
|     |   |        |   | Financial  Statements                                                                                             |
|     |   |        |   | Exhibits                                                                                                          |

 

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**PART I**

** **

**SPECIAL NOTE REGARDINGFORWARD-LOOKING STATEMENTS.**

 

Certain of the statements included below, including those regardingfuture financial performance or results that are not historical facts, contain“forward-looking” information as that term is defined in the SecuritiesExchange Act of 1934, as amended.  Thewords “expect”, “believe”, “anticipate”, “project”, “estimate” and similarexpressions are intended to identify forward-looking statements. The Companycautions readers that any such statements are not guarantees of futureperformance or events and that such statements involve risks, uncertainties andassumptions, including but not limited to industry conditions, general economicconditions, interest rates, competition, ability of the Company to successfullymanage its growth, and other factors discussed or included by reference in thisForm 10-KSB. Should one or more of these risks or uncertainties materialize orshould the underlying assumptions prove incorrect, those actual results andoutcomes may differ materially from those indicated in the forward-lookingstatements.  Although we believe thatthe assumptions and estimates reflected in such forward-looking statements arereasonable, we cannot guarantee that our plans, intentions or expectations willbe achieved.

 

**ITEM 1. DESCRIPTION OF BUSINESS**

** **

**OVERVIEW**

 

**CORPORATE PROFILE**

 

Genesis Bioventures, Inc. (AMEX: GBI) is a New York corporation, havingits administrative offices in Surrey, British Columbia, Canada and its Researchand Development production facility in Ann Arbor, Michigan.

 

The Company is a North American based biomedical company with itsprimary focus on the development and marketing of breast cancer risk assessmenttools. The Company is also actively involved with its investee companiesinvolved in cancer therapy and neurodegenerative diagnostics and serves as astrategic advisor in key aspects of science, product commercialization,business issues and financial development by providing management expertiseaimed at transforming promising medical technology into successful commercialproducts.  GBI has selected the areas ofoncology and neurology as its primary sectors of interest, based on thesubstantial market potential for new treatments and diagnostics. The investeecompanies typically have products in the earlier stages of development prior toinitiation of clinical trials.

 

The Company’s operating plan is to maximize shareholder value throughits commercialization strategies of its breast cancer assessment tools,establishing corporate critical mass through staff growth and new facilities,initiating appropriate regulatory approval processes, implementing solidtechnology rollout and marketing programs and supporting the continueddevelopment of clinical data and assay improvements.

 

The Company’s shareholders would also participate in increasedvaluation of the Company’s shares as the investee companies increase theirvalue.

 

**GENESIS BIOVENTURES’ MISSIONSTATEMENT**

 

The mission of GBI is to provide innovative, high-quality, easy-to-usecancer risk screening products and services worldwide. The Company plans toaccomplish this mission through the highest of ethical and professionalstandards and through unwavering attention to shareholders, customers,employees, and suppliers.

 

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**GENESIS BIOVENTURES’ OPERATINGSTRATEGY**

 

With the purchase of the remaining 50% interest in BiomedicalDiagnostics, LLC, the Company is focusing on the commercialization of itsbreast cancer risk assessment tool.

 

The Company is taking a multi-faceted approach to commercializationutilizing internal resources to continue development while also seekingstrategic alliances for marketing and distribution of its risk assessment tool.

 

Rollout of the Company’s technology began during the year with theannouncement of the commercial availability of the Mammastatin Serum Assay(“MSA”) technology through custom laboratory services. The Company plans tofocus its efforts in 2002 on engineering a smooth transition to new facilities,scaling up of manufacturing and services capacities to handle projected salesvolumes, ensuring that all marketing content meets regulatory standards, andachieving sales/profitability projections. The Company anticipates that itsactivities in 2002 will also position the Company to outsource large-scaleproduction and marketing/distribution as higher sales volumes begin in futureyears.

 

**GENESIS BIOVENTURES’ BIOTECHNOLOGYINVESTEE COMPANIES**

 

As at December 31, 2001 the Company has, through its purchase of theremaining 50% of the Biomedical Diagnostics, LLC, established itself as anoperating entity directly involved in the development and commercialization ofthe MSA.  The Company also hasinvestments in two investee companies: one in the field of oncology and one inneurology.  The following is a summarydescription of each company, including the current status of its productdevelopment program, the market potential for its products and the investmentholdings of the Company.

 

**BIOMEDICAL DIAGNOSTICS, LLC**

 

Biomedical Diagnostics, LLC (“Biomedical Diagnostics”) was initiallyformed for the purpose of developing proprietary cancer screening products. Itsinitial product development effort is commercializing the MSA as a riskscreening diagnostic for breast cancer. Biomedical Diagnostics also has the rights to develop, market anddistribute diagnostic screening assays based on other proteins discovered byanother of the Company’s investee companies, Biotherapies, Inc.(“Biotherapies”) that could be used to assess a person’s risk for prostate andovarian cancer. During the year, GBI acquired Biotherapies’ interest in thejoint venture and is now operating Biomedical Diagnostics as a division of GBI.

** **

**Product Development Program**- Mammastatinis a protein that has been found to be present in the breast tissue of healthywomen.  Research conducted atBiotherapies has shown that Mammastatin can be detected in the blood of over85% of healthy women and is absent in the blood of over 90% of breast cancerpatients.  That research also shows thatthe concentration of Mammastatin drops significantly both in women with breastcancer and in women at risk for breast cancer. Biomedical Diagnostics has developed the MSA test as a simple bloodserum diagnostic that could measure the quantity of Mammastatin in blood serum.The results from this test could be used to assess women’s risk of developingbreast cancer.

 

MSA is a blood test that measures Mammastatin levelsin serum samples using monoclonal antibody technology.  Data from a clinical study that used the MSAtest to measure Mammastatin levels in blood samples from over 200 women hasbeen analyzed and the results indicate that there is a statisticallysignificant difference in the Mammastatin levels between healthy women andbreast cancer patients.  To date, therehas not been a blood test that is capable of assessing risk for breast cancerprior to development of this disease, although there are some protein “markers”that are used to monitor treatment or to indicate that a tumor might already bepresent. The potential of the MSA test is to provide a simple blood test thatcould provide an earlier indication of the risk of breast cancer developing sothat appropriate monitoring or preventive therapy can be implemented.

 

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The current version of the MSA test is a Western DotBlot format that is being developed for use in reference labs and major medicaltesting clinics.  Product development iscurrently underway to develop monoclonal antibodies to the Mammastatin proteinfor use in a rapid immunoassay format of the test.  This second version of the test would be suitable for use inpoint-of-care clinics, medical clinics and potentially in physicians’ offices.

 

Biomedical Diagnostics is conducting four sample studies, two of whichhave been completed, to determine the usefulness of the MSA technology. Severalothers are being planned. The four studies already in place are:

 

•             Short-term Level 1study with 255 samples was completed in the third quarter of 2000. Statisticalanalysis and reporting by STATPROBE, Inc.

 

•             Short-term Level 2study with 309 samples was completed in the first quarter of 2001.  Sample collection was geographicallydispersed in the United States. Statistical analysis and reporting by STATPROBE,Inc.

 

•             Independent M DAnderson study with 200 samples began in September, 2001 with sample collectionand reporting planned for completion in early 2002.

 

•             Long-term studytargeting 10,000 to 20,000 women over three or more years is planned for the secondquarter of 2002 at the British Columbia Cancer Agency.

 

Statistical analysis by STATPROBE, Inc. indicated thatthe test demonstrated a favorable profile of sensitivity and positivepredictive value for the MSA test.  Forwomen aged less than 40 years, those with a positive family history of breastcancer appear to have lower mean levels of Mammastatin as compared to womenwithout a family history of this disease. On this basis, the MSA test could prove valuable in screening youngerwomen for increased risk of developing breast cancer.

 

In addition to the development of the MSA test,Biomedical Diagnostics has the rights to market this test worldwide and todevelop and market similar risk assessment tests for other related proteinsassociated with prostate and ovarian cancer. These tests could identifypatients with a significant risk of developing these diseases prior to anysymptoms appearing and, as a result, could substantially enhance theopportunities for detecting and treating these cancers earlier.

** **

**Market Potential** – It has been estimated that one in eight women in the UnitedStates will be diagnosed with breast cancer at some point in their lifetime,regardless of their family history or other known risk factors.  Only approximately 10% of breast cancer isknown to be hereditary, while the remaining 90% of cases develop without aknown underlying genetic defect.  Thismeans that early detection is a very important factor affecting long-termsurvival.

 

At present, breast cancer is detected primarilythrough mammography, breast self-examination or ultrasound.  However, these techniques are not alwayseffective against all types of breast cancer and can only detect the diseaseonce the tumor has started to develop. There are also a number of serum “biomarkers” that have been studied aspotential diagnostics and prognostic indicators.  To date, none of these markers have proved superior tomammography or breast self-examination nor indicate the risk of breast cancerprior to development of a tumor.

 

Based on testing all women over age 40, there are over50,000,000 women per year in the United States alone who could potentiallybenefit from having a MSA test done as part of their annual medicalcheck-up.  In addition, BiomedicalDiagnostics also has the rights to develop, market and distribute diagnosticscreening assays for prostate and ovarian cancer that are derived from thistechnology.

 

On June 22, 2001, Biomedical Diagnostics announcedthat it had signed a letter of agreement with Arup Laboratories of Salt LakeCity, Utah to market and service the MSA technology. Arup Laboratories iswholly owned by the University of Utah. The agreement gives Arup Laboratoriesrights

 

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to market and service the MSA test to clientsworldwide. To December 31, 2001, only a nominal amount has been sold.

 

In September 2001, Biomedical Diagnostics was granteda Certificate of Compliance under the Clinical Laboratory ImprovementAmendments (CLIA) Act, as administered by the U.S. Health Care FinancingAdministration. Biomedical Diagnostics’ Laboratory Services is now providingsample testing and analysis services under CLIA guidelines to physicians andreference laboratories in support of the MSA technology. CLIA compliance ensureslaboratories are providing testing services that follow standard industryguidelines.

 

Biomedical Diagnostics is, and will continue to be,subject to continuing regulation by the FDA and certain state agencies,including routine inspection by the FDA and a host of regulatory requirementsthat generally apply to medical services marketed in the United States. Suchrequirements include labeling regulations, quality system regulations, theMedical Device Reporting regulation and the FDA’s prohibitions againstpromoting products for unapproved or “off-label” uses. Failure to comply withregulatory requirements could result in enforcement action by the FDA whichalso could have a material affect on the business, financial condition andresults of operations of the Company.

 

**Acquisition of Remaining 50% InterestIn Biomedical Diagnostics, LLC**

 

Pursuant to a purchase agreement dated November 30, 2001 between GBIand Biotherapies, GBI acquired Biotherapies’ 50% interest in BiomedicalDiagnostics, LLC. The purchase makes GBI the sole owner of the LLC.

 

Total consideration for the remaining 50% membership interest acquiredis $8,840,408 which is comprised of:

 
| Cash paid or payable                              |   | $         | 3,755,100 |   |
|---------------------------------------------------|--------|-----------|-----------|--------|
| 2,524,030 GBI common shares @ $1.87/share         |   | 4,719,936 |      |
| Professional and investment banking fees          |   | 365,372   |      |
|                                              |   | $         | 8,840,408 |   |
|                                              |   |      |      |
| The purchase price has been allocated as follows: |   |      |      |
|                                              |   |      |      |
| Technology                                        |   | $         | 8,321,364 |   |
| In-process research and development               |   | 750,000   |      |
| Prepaid royalties                                 |   | 100,000   |      |
| Other net liabilities assumed                     |   | (330,956  | )         |
|                                              |   | $         | 8,840,408 |   |

 

Pursuant to the Purchase Agreement, GBI has committed to fund theoperating costs of Biomedical Diagnostics of at least $1,000,000 in support ofproduct development of the mammastatin, prostate and ovarian technologies on orbefore November 30, 2002. To December 31, 2001, GBI has paid $230,000 towardthis commitment.

 

Concurrently with the execution of the Purchase Agreement, GBI andBiotherapies entered into numerous other agreements, including a MammastatinSublicense Agreement (the “Mammastatin Sublicense Agreement) and a P&OTechnology License Agreement (the “P&O License Agreement”). Pursuant to theMammastatin Sublicense Agreement, Biotherapies granted to GBI a worldwide,perpetual and exclusive sublicense to make, use and sell certain proteins andantibodies and a non-exclusive sublicense to make, use and create improvementsthereto for the research, development or sale of additional antibodies and/ordiagnostic assays for the diagnosis of breast, prostate and/or ovarian cancers.Biotherapies also granted to GBI a worldwide, perpetual and exclusive licenseto make, have made, use and sell a certain dot blot diagnostic assay related tothe detection and measurement of certain proteins in the blood, andimprovements thereto, and a non-exclusive license to make, have made, use andcreate improvements to the dot blot assay in the research, development or saleof additional antibodies and/or diagnostic assays for the diagnosis of breast,prostate and/or ovarian cancers. GBI shall pay Biotherapies a royalty ofbetween 10% and 20% of net sales generated in connection with the MammastatinSublicense

 

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Agreement, depending on the level of net sales in a given year. As ofDecember 31, 2001, GBI had pre-paid royalty payments pursuant to theMammastatin Sublicense Agreement totaling $100,000.

 

Pursuant to the P&O License Agreement, Biotherapies granted to GBIa worldwide, perpetual and exclusive license to make, have made, use and createimprovements to a certain technology relating to prostate and ovarian cancerand to make, have made, use market and sell materials or services based upon orusing said technology. GBI shall pay Biotherapies a royalty of between 10% and20% of net sales generated in connection with the P&O License Agreement,depending on the level of net sales in a given year.

 

Biotherapies may terminate the Mammastatin Sublicense Agreement if theCompany fails to (i) meet its commitment to fund operating costs of the LLC ofat least $1,000,000; (ii) make any royalty payments due to Biotherapies; or(iii) achieve gross sales of the licensed technology of $7,500,000 within 24months of the signing of the Purchase Agreement and $20,000,000 within 36months of the signing of the Purchase Agreement.  The Company can cure the gross sales default by satisfying theroyalty obligations that would have accrued had the target gross sales beenmet.  Biotherapies may terminate theP&O Technology License Agreement if the Company fails to meet itscommitment to fund operating costs of the LLC of at least $1,000,000 or failsto make any required payments due to Biotherapies.

 

**PRION DEVELOPMENTAL LABORATORIES,INC.**

 

Prion Developmental Laboratories, Inc. (“PDL”) is a development stagecompany formed specifically to develop a rapid and inexpensive diagnostic testto detect “Mad Cow Disease” in cattle and to screen human blood and tissuesupplies for the presence of prion diseases. Founded in 1999, PDL is a privately held company incorporated inMaryland, with head offices and a manufacturing facility located in BuffaloGrove, Illinois. The parent company of PDL is Efoora, Inc., a publicly heldnon-trading company developing novel diagnostic tests and offering contractmanufacturing services for medical devices.

** **

**Background** - In 2000, GBI invested a totalof $2.0 million in PDL under an investment agreement, which provided GBI with a25% equity ownership in this company. On August 22, 2001, GBI exercised a rightof first refusal to invest additional funds in PDL, through a warrant topurchase an additional one million shares of PDL common stock for US $400,000,bringing GBI’s equity interest in PDL to 33%.

** **

**Prion Diseases** - Prion diseases are afamily of fatal neurodegenerative diseases that are caused by a prion, an“infectious proteinaceous particle”. Prion diseases have become a major health concern since the outbreak ofBovine Spongiform Encephalopathy (“BSE”) or “Mad Cow Disease”.  BSE was first discovered in the UnitedKingdom but has now spread to many other countries in Europe as well as Japan.BSE is believed to be transmitted among cattle through feed that containsprotein rendered from infected cattle and it is thought to be transmitted tohumans through eating beef or beef products from infected cattle. In humans,the prion infection results in a neurological disorder known as new variantCreutzfeldt-Jakob Disease (“nvCJD”). Both “Mad Cow Disease” and nvCJD are slow developing but invariably fataldiseases, with the brain becoming spongy and filled with tangled proteinplaques.

 

Prion diseases are difficult to diagnose and the onlydiagnostic tests currently available for “Mad Cow Disease” are based onanalysis of post-mortem brain samples from cattle, a procedure that isrelatively slow and expensive.  As aresult, tests can only be conducted on cattle suspected of being infected or ona random sample basis.

 

Currently there is no simple test available to checkhuman blood or tissues before they are used to treat another person. There isan urgent need for a more rapid and sensitive diagnostic that could detect thepresence of infectious prions at an earlier stage of the disease and provideaccurate results without requiring post-mortem brain samples.

 

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The scientists at PDL have developed an easy-to-use,patents pending rapid strip test for detecting BSE and the Company is currentlyin late-stage discussions with a European pharmaceutical company to providethem with this test.  It is similar to ahome pregnancy test and will be used on-site using brain tissue taking lessthan five minutes to complete with accurate, easily interpreted results.  Preliminary tests demonstrate comparablesensitivity of the PDL strip test with a more time consuming test currently inuse in Europe and other countries.

 

To date, there are no rapid tests that can beperformed at the slaughterhouse that will ensure that BSE infected cattle donot enter the human food chain.  Inaddition to BSE, the PDL test platform has also been used to successfullydetect prion diseases in human and other animal brain tissue.

 

In the United States each year over 37 million head ofcattle are slaughtered and 25 million units of human blood are collected. Thisprion test will be designed to detect BSE before the overt symptoms appear incattle, with the objective of ensuring that infected meat or cattle by-productsare removed from the market.

 

Using its proprietary reagents, PDL has now validatedthe recent discovery of prions in urine, a finding that was previously thoughtto be improbable. Studies to date have shown that the protein can be found inurine well before symptoms appear. Research is currently underway to adapt thePDL test for analysis of urine samples, which would provide the world’s firstpractical pre-mortem diagnostic test for BSE. Once the test has been proven incattle, development and completion of a similar test for humans and otheranimals would be accelerated, ensuring safe blood products, donor tissue and surgicalinstruments.

** **

**Scientific Collaboration**- Among the keyscientists involved in the product development program are Drs. PierluigiGambetti, MD and Man-Sun Sy, PhD of Case Western Reserve University; andDrs. Richard Kascsak, PhD, and Richard Rubenstein, PhD of the Institutefor Basic Research. Dr. Gambetti is a Director of the U.S. National PrionDisease Pathology Surveillance Center. As a key component in its product development strategy, PDL has establishedcollaborations with two major research institutions that are considered leadingcenters in both prion diseases and diagnostic test development. The members ofthis product development team are:

 

•             Case Western ReserveUniversity (“CWRU”) in Cleveland, Ohio, a leading center for neurological researchin human prion diseases; and

 

•             The Institute forBasic Research and Developmental Disabilities (IBR) in Staten Island, New York,a major research center for animal prion diseases.

 

PDL is utilizing the combined expertise of theresearch teams at both centers to develop a proprietary, rapid diagnostic forprion disease that can detect the presence of infectious prions before symptomsappear. In addition, researchers have identified an antibody that should yieldincreased detection of scrapie in sheep.

** **

**Market Potential** - The two majorinternational markets for the PDL prion diagnostic are the cattle industry andthe human blood products industry. As a result of the BSE outbreak in theUnited Kingdom, the rest of the European market banned export of British beef.The financial consequences of this in the UK were estimated to be in excess of$2.5 billion in 1998. Since then, BSE has been detected in a number of Europeancountries and most recently in Japan.

 

The strip test, utilizing PDL’s patents pending proprietaryreagents and assay technology has been proven to be simple yet accurate andinexpensive.  It is anticipated that thetest will be reviewed and evaluated in Europe in the first half of 2002 priorto being certified for commercial release in the massive global cattleindustry. The vitality of the beef industry worldwide depends on thedevelopment of such a test. The ultimate size of the world market for apost-mortem test is nearly 100 million head of cattle per year. The Company hasprojected that if this diagnostic were used to test

 

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cattle prior to slaughter (estimated at 40 millioncattle per year in the United States), the potential gross revenues from thisapplication could be in excess of $50 million in the United States alone.

 

In the human blood and tissue products market, thefear of prion infection from whole blood or purified blood products has led towithdrawal of purified blood components by major pharmaceutical companies.  In addition, tissue transplants such ascorneal grafts have been proven to transmit prion diseases. Based on estimatesof the market opportunity for a simple test to detect prions in human blood andtissue supplies, PDL projects that annual revenues in excess of $50 million canbe obtained from the U.S. market and that significantly higher revenues couldbe obtained if the test is marketed worldwide.

 

Through December 31, 2000, PDL funded research,beginning with payments to the University of Maryland of $1,000,000, a paymentto the Case Western Reserve University of $500,000, and a payment to theInstitute for Basic Research in Mental Retardation and DevelopmentalDisabilities of $150,000 to begin development of a test that can be used todetect prion diseases, such as “Mad Cow Disease”, primarily for use on animals,and to a lesser extent, on humans. PDL had raised $2,000,010 during 2000,through sales of shares of its stock to GBI. GBI exercised its stock option for$400,000 during the year ended December 31, 2001; however, PDL has expendedmost of these funds through its research and development funding and as aresult of other administrative expenses. There can be no assurance that suchtests will be developed and approved by the appropriate regulatory bodies or thatthey can be successfully and profitably marketed.

 

In order to fund its research and development, PDL isdependent on additional sales of stock to investors.  If it is unsuccessful in attracting new investors, there is noassurance that PDL can remain in business.

** **

**Current Investment** – In 2000, GBI invested a total of $2.0 million in PDL under aninvestment agreement, which provides GBI with a 25% ownership in this company.In August 2001, the GBI invested an additional $400,000 to increase itsownership interest to 33%.

** **

**Corporate Structure -**Founded in 1999, PDLis a privately held company incorporated in Maryland, with head offices and amanufacturing facility located in Buffalo Grove, Illinois.  The parent company of PDL is Efoora, Inc., aprivate company developing novel diagnostic tests and offering contractmanufacturing services for medical devices.

** **

**Corporate Developments –**PDL continues towork on the development of its test for the rapid detection of infection prionsand has also begun the initial patent protection process for its tests. PDL hasalso broadened its mission to include other neurodegenerative diseases.

 

**BIOTHERAPIES, INC.**

 

Biotherapies, Inc. (“Biotherapies”)****is a cancer research company with headoffices located in Ann Arbor, Michigan that is dedicated to the commercialdevelopment of proprietary proteins as potential cancer treatments and asdiagnostics.  As its primary objective,the Company is developing Mammastatin, a naturally occurring protein thatoccurs in the breast tissue of healthy women, as a potential new therapeuticagent for breast cancer.  Biotherapiesholds the exclusive rights, through licenses from the University of Michigan,to patents pending for the use of Mammastatin as both a therapeutic and adiagnostic. Biotherapies has sub-licensed mammastatin, prostate and ovariandiagnostic technology to GBI.

** **

**ProductDevelopmentProgram –**Mammastatin is a member of a family of naturally occurring human proteins thathave potential applications as new cancer therapies and diagnostics.  Based on research conducted at Biotherapies,it appears that Mammastatin has a critical role in the control of abnormal cellgrowth in breast tissue.  This protein occursin its active form in normal breast tissue, but is absent or present in lowlevels in most breast cancer patients. Mammastatin can be detected

 

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in the blood of healthy women, but is absent inapproximately 90% of breast cancer patients, regardless of whether these womenhave a prior family history of breast cancer.

 

Mammastatin Replacement Therapy has been used on alimited basis to treat late-stage breast cancer under a compassionate therapyexemption provided by the FDA, with promising results from some of thepatients.  Intravenous injection ofMammastatin into the blood stream of breast cancer patients raised the serumlevel of the protein and demonstrated the ability of Mammastatin to slow thegrowth of breast cancer in certain individuals.  The inhibitory effects of Mammastatin were observed in some ofthe women treated in the compassionate study, even in several cases ofadvanced, metastatic breast cancer.

 

Biotherapies is currently in the late pre-clinicalstage of product development of Mammastatin as a potential therapeutic forbreast cancer and is preparing the pre-clinical data that needs to be submittedto the FDA as part of an IND (Investigational New Drug) application to starthuman clinical trials of Mammastatin as a treatment for breast cancer.

 

In addition to Mammastatin, Dr. Ervin, the founder andchief scientist at Biotherapies, has discovered other related proteins thatappear to serve similar functions for prostate, colon, lung and ovariancancers.  These proteins could also bedeveloped as potential therapeutics and diagnostics for these life-threateningdiseases.

** **

**Market Potential –**Breast cancer is the second leading cause of cancer-related deaths among womenage 35-54.  In the United States, anestimated one in eight women is expected to develop breast cancer in theirlifetime.  With over 180,000 new casesof breast cancer being diagnosed in the United States each year, there is asubstantial market for a safe, non-toxic therapeutic agent that could be usedin the treatment of breast cancer. Breast cancer diagnostics and therapeutics are estimated to represent a$10 billion industry worldwide.  Relatedproducts from this platform technology are under development for prostate,ovarian and colon cancer.

 

Currently, standard treatments for breast cancerinclude surgery, chemotherapy and radiation. Most of these therapies have serious side effects and are generally noteffective in treating advanced or recurring cancer.  If the clinical trials are successful, Mammastatin would be anovel addition to the current treatment regimes for breast cancer, either as anadjunct to existing therapies or as a stand-alone therapy.

** **

**Current Investment –** Since 1998, GBI hasinvested approximately $5.4 million in Biotherapies, which includes $2.5million cash contributed under an investment agreement and through direct sharepurchases, plus an additional $2.5 million based on a share transferarrangement with a prior investor in Biotherapies and $0.4 million in debtconverted to shares. Based on the total investment, GBI currently hasapproximately a 26.3% equity ownership in this company.

** **

**Corporate Structure -**Founded in 1995,Biotherapies is a privately held company based in Ann Arbor, Michigan.  Biotherapies retains the rights to developMammastatin and related protein families as cancer therapeutics, whilelicensing the rights to develop selected diagnostic tests to GBI.

 

**HISTORY OF GENESIS BIOVENTURES, INC.**

 

The Company is a New York corporation that was incorporated onSeptember 19, 1994, under the name of Flexx Realm Inc., at which time it waslisted as an Over the Counter (“OTC”) shell company and did not carry on anytangible business for the most part.  OnNovember 3, 1998 the Company changed its name to BioLabs, Inc. at which time itentered into a joint venture with Biotherapies and commenced trading on the OTCunder the symbol BILB on February 17, 1999. On November 28, 2000, the Company started doing business as GenesisBioventures and began trading on AMEX on December 19, 2000 under the symbolGBI. On October 29, 2001, the Company amended its charter to formally changeits name to Genesis Bioventures, Inc.

 

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**COMPETITION**

 

Competition in the technology industry is intense and basedsignificantly on scientific and technological factors. These factors includethe availability of patent and other protection for technology and products,the ability to commercialize technological developments and the ability toobtain governmental approval for testing, manufacturing and marketing. TheCompany competes with other specialized biotechnology firms in the UnitedStates, Europe and elsewhere. Many biotechnology companies have focused theirdevelopment efforts in the human diagnostics and therapeutics area, includingcancer. Many major pharmaceutical companies have developed or acquired internalbiotechnology capabilities or made commercial arrangements with otherbiopharmaceutical companies. These companies, as well as academic institutions,governmental agencies and private research organizations, also compete with theCompany in recruiting and retaining highly qualified scientific personnel andconsultants.

 

The competition within the biotechnology sector itself is increasing,so our investee companies will encounter competition from existing biotechfirms that offer competitive solutions in the same disease area.  These competitive biotech companies coulddevelop products that are superior to, or have greater market acceptance, thanthe products being developed by our investee companies. Our investee companieswill have to compete against other biotech companies with greater marketrecognition and greater financial, marketing and other resources.

 

**PROPOSED TRANSACTIONS**

 

There are no proposed transactions as at December 31, 2001.

 

**INTELLECTUAL PROPERTY**

 

The Company has filed United States and Canadian trademark applicationsfor the use of the name Genesis Bioventures.

 

On November 3, 2000, the Company filed a trademark application for“GENESIS BIOVENTURES” with the U.S. Patent and Trademark Office. On December21, 2000, the Company filed a trademark application for “Genesis BioventuresLOGO” with the U.S. Patent and Trademark Office. Processing of the trademarkapplication by the trademark office has not yet been completed. The Company  expects to file additional trademarkapplications from time-to-time in the future as necessary.

 

**GOVERNMENT REGULATION – BIOTECHNOLOGYPRODUCT DEVELOPMENT**

 

GBI and its investee companies are developing biotechnology productsfor use in diagnosing or treating human or animals diseases.  As the investments to date are in biotechcompanies in the United States, these companies are affected by governmentalregulations from the United States Food and Drug Administration (FDA) forproducts intended to be used for humans and from the United States Departmentof Agriculture (USDA) for plant and animal products.  As these regulations affect the cost and time to developbiotechnology products, a brief overview of the FDA guidelines are presented tohighlight the stages in commercial development of biotech drugs anddiagnostics.

 

The FDA regulates the clinical development and marketing approval ofall biotechnology medical products intended for human use, as well as certainfood plants.  The laws and regulationsof the FDA place the burden of proof of safety and efficacy on the manufactureof the product.  This agency possessesextensive experience with its regulatory mechanisms and applies them to allbiotechnology products, with differing statutes for various categories ofproducts.  The USDA is responsible forregulating food safety related to meat, poultry and egg products, as well aspreventing the introduction or transmission of plant or animal pests, andapproval of animal biotechnology products. Other countries have comparable regulatory agencies to the FDA and USDA,although the specific regulations may differ substantially.

 

The FDA regulation for biotechnology drug and diagnostic products canbe summarized as follows:

 

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**New Biotechnology Diagnostic Devices**

 

Development of a new biotechnology diagnostic product has severalalternative regulatory paths, depending on the nature of the product.

 

•                  **510(k)Clearance: **A diagnosticdevice may be marketed until a 510(k) application is approved if the companycan demonstrate to the FDA that the product is “substantially equivalent” to a“predicate device” (i.e. a device that is legally marketed as a Class I orClass II device, or a Class III device on the market prior to the change inregulations in 1976).  This approvalprocess is relatively short, although the 510(k) application must include datashowing that the new product has the same intended use and at least the sameperformance as the predicate device.  Inaddition, the company must demonstrate that any differences in technology donot raise any questions regarding safety or effectiveness.

 

•                  **PMA:** A PMA (Premarket Application) is required fora “new device” and is the functional equivalent of a NDA/PLA for a biologicaldrug. The PMA process is typically shorter (2-5 years) than the NDA/PLA process(5-10 years), but is more time consuming, complex and expensive than the 510(k)process.  If clinical studies arerequired for a PMA device, then an IDA (Investigational New Device) exemptionmay be required prior to human studies. New diagnostic devices that do notpresent a potential for serious risk to the health, safety or welfare of apatient are governed by abbreviated regulations and considered “non-significantrisk” devices.

 

•                  **CLIA: **The use of diagnostic devices isregulated under the CLIA (Clinical Laboratory Improvement Amendments) of1988.  Under CLIA, diagnostic assaysmust be classified by complexity level and use of such diagnostics is limitedto those facilities that have been certified or accredited for the use ofcertain levels of complexity.  Thediagnostic manufacturer must ensure that it can obtain FDA clearance regardingquality control and assurance instructions that will enable its users to meetCLIA standards.

 

**New Biotechnology Drug Products**

 

Development of a new biological therapeutic product is a multi-stepprocess.

 

•                  **Pre-clinicalTesting -**Laboratory and animal pre-clinical testing is required toestablish the reasonable safety of the investigational product and to providesome indication of potential effectiveness with respect to a specificdisease.  Once the general plans andprotocols for specific human studies have been developed, the biotech companiesprepares and submits an Investigational New Drug (IND) application to theFDA.  The FDA may allow an IND toproceed or place it on clinical hold and request the company to provideadditional information prior to approving human testing. To minimize the possibilityof a clinical hold, a biotechnology company should schedule a pre-IND meetingwith the FDA to review all the pre-clinical data and the proposed clinicaltrial plan.

 

•                  **Clinical Trials** – The clinical trials of anew biotechnology product are generally conducted in three stages, althoughoccasionally two stages may be combined.

 

**Phase I:**The initial phase of human clinicaltesting (Phase I) is generally conducted on a relatively small number of humansubjects (20-50), either healthy or diseased, to evaluate the pharmacologicalactions and side effects of the experimental product.  The Phase I studies also evaluate various routes, dosages andschedules of product administration.  Ifacceptable safety is demonstrated, then the FDA may allow Phase II trials thatare designed to evaluate the effectiveness of the product in the treatment of aspecific disease.

 

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**Phase II:**Typically, Phase II trials arewell-controlled studies of a small number of patients (50-200) to determine theoptimal route, dosage and schedule of administration, along with validation ofthe endpoints to be used in the pivotal trials.

 

**Phase III:** Phase III is the pivotal stage ofclinical trials and are larger, controlled studies often involving severalhundred patients or more, depending on the disease being treated.  These trials are intended to collectstatistically and clinically significant data showing the product’s safety andeffectiveness.  Phase III data must begathered from studies using the product manufactured in the same facility andunder the same conditions as the product that the company intends to market.

 

**GMP** In addition to the regulationsassociated with clinical trials, the FDA has extensive regulations on GoodManufacturing Practices (GMP) for biological products. The company’s compliancewith GMP and its ability to ensure the safety, identify, strength, quality andpurity of the product being manufactured.

 

**NDA and PLA:**Following the successful completionof the clinical trials, the accumulated clinical data and GMP process data mustbe documented in a New Drug Application (NDA) and submitted to the FDA.  Upon review of all of the information in theNDA, the FDA may provide the company with a PLA (Product License Application)for the product and an ELA (Establishment License Application) for themanufacturing facility. Approval of the NDA and PLA/ELA is necessary before abiotech company can begin to market the product.  It is not possible to provide an average estimate of time forPhase I, II and III clinical trials and the NDA approval process, but it isgenerally between four and ten years, depending on the product, themanufacturing process and the disease being treated.

 

The growth in the biotechnology industry over the last several decadeshas been accompanied by growth in the extent and complexity of the FDA statutesand regulations, and of the intensity of the FDA’s regulations of thedevelopment, manufacturing, distribution, marketing, promotion, advertising anduse of regulated products. In the last decade, the FDA legal and regulatoryobstacles to product commercialization and the penalties of non-compliance havebeen pivotal factors in the success or failure of biotechnology companies. Thisis particularly true for small, emerging companies developingbiopharmaceuticals, other biotechnology products and medical diagnostics.

 

**GOVERNMENT REGULATION – INVESTMENTCOMPANIES**

 

As an operating company, GBI believes that it is not an investmentcompany as that term is defined under the Investment Company Act. Generally, acompany must register under the Investment Company Act of 1940 and comply withsignificant restrictions on operations and transactions with affiliates if itsinvestment securities exceed 40% of the company’s total assets, or if it holdsitself out as being primarily engaged in the business of investing, owning orholding securities. Under an alternative test, a company is not required toregister under the Investment Company Act if not more than 45% of its totalassets consist of, and not more than 45% of its net income is derived from,securities other than government securities and securities of majority-ownedsubsidiaries and companies primarily controlled by it. If GBI is unable to relyon these alternative tests, we could ask for exemptive relief from theSecurities and Exchange Commission. GBI is also able to rely once every threeyears on a one-year temporary exemption from the registration requirements ofthe Investment Company Act.

 

**HUMAN RESOURCES**

 

With the acquisition of a 100% interest in Biomedical Diagnostics, LLC,the Company has initiated its in-house research and development.

 

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The Company is staffed by experienced researchers and scientists whosebackgrounds include work in molecular biology, biochemistry, hybridomadevelopment, cancer biology research, tissue engineering technology, flowcytometry methodology, tumor testing systems, quality assurance and regulatoryaffairs.

 

Of the 15 employees, 9 are employed in administration and 6 areemployed in research.  The Company has 9full time employees.

 

**RISK FACTORS**

** **

**Lack ofPrior Operations and Experience.** The Company has no revenue from operations, is in a start-up phasewith its existing assets and has no significant assets, tangible or intangible,other than the medical technology licenses disclosed herein. There can be noassurance that the Company will generate revenues in the future. There is noassurance that the Company will be able to operate profitably in the future, ifat all. The Auditors’ Report on our December 31, 2001 financial statementsincludes an additional explanatory paragraph that states that there existssubstantive doubt about the Company’s ability to continue as a going concern.The financial statements do not include any adjustments as a result of thisuncertainty.

** **

**Need forAdditional Financing. **TheCompany continues to have significant obligations with respect to BiomedicalDiagnostics. In order to complete its obligations, the Company will requireminimum additional funding of $6,000,000 within approximately 6 months. TheCompany believes it has sufficient funds to carry its own expenses forapproximately 4 months. There can be no assurance that the Company will obtainadditional financing for Biomedical Diagnostics’ current and future operationsor capital needs on favorable terms, if at all.

** **

**Dependenceon Limited Numbers of Products/FDA Approval. **The size of the Company makes it unlikely that theCompany will be able to commit its funds to other business opportunities, untiland unless it has first succeeded in some way with the MSA test, to which thereis no assurance. There is no assurance that the clinical trials will be held asscheduled or that the MSA test will be approved or ever sold in commercialquantities.

** **

**IntellectualProperty Protection. **TheCompany may be unable to acquire or maintain trademarks in the United Statesand other countries in which it may conduct business. Third parties may asserttrademark, patent and other types of infringement or unfair competition claimsagainst the Company. If forced to defend against any such claims, the Companymay face costly litigation and diversion of technical and management personnel.

 

Further, if efforts to enforce intellectual property rights areunsuccessful or if claims by third parties are successful, the Company may berequired to pay financial damages or alter its business practices.

 

The Company relies on confidentiality, non-disclosure andnon-competition arrangements with its employees, representatives and otherentities engaged in joint product or business development and expects tocontinue to enter into such agreements with such persons. There can be noassurance that these agreements will provide meaningful protection. There canbe no assurance that other companies will not acquire and use information thatthe Company considers to be proprietary.

** **

**Historyof Losses. **TheCompany has incurred net losses of $15,368,941, $5,868,006 and $1,737,210 forthe fiscal years ended December 31, 2001, 2000 and 1999 respectively. There canbe no assurance that the Company will operate profitably in the near future orat all.

** **

**NegativeCash Flow. **TheCompany has no current income or no assurance of income in the immediatefuture. The Company continues to experience negative cash flows fromoperations.  The Company will berequired to place additional securities in new financings to make up for suchnegative cash flow. Such transactions may have a negative or depressing effecton the trading prices for the Company’s publicly-traded securities.

 

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**PreferredStock/Registration Requirements. **FromNovember of 1998 to August 30, 1999, the Company sold 2,000,000 shares ofConvertible Preferred Stock to 29 persons. The Convertible Preferred Stock isconvertible into Common Stock on a 1:1 basis. Under certain circumstances, theCompany may be obligated to register the Common Stock underlying theConvertible Preferred Stock for resale by the holders, or the holders mayotherwise become eligible to resell such shares without registration. Theexistence of the Common Stock underlying the Convertible Preferred, and/or anyregistration thereof, may have a negative or depressing effect on the tradingprices for the Company’s publicly-traded securities.

** **

**NoLikelihood of Dividends. **TheCompany has never paid any cash dividends on either its Common or PreferredStock. At present, the Company does not anticipate paying dividends in theforeseeable future and intends to devote any earnings to the development of theCompany’s businesses. Investors who anticipate the need for dividends fromtheir investment should refrain from purchasing the Company’s Stock.

** **

**PennyStock. **The Companymay be subject to the SEC’s “penny stock” rules if the common stock tradesbelow $5.00 per share. These rules require the delivery prior to any pennystock transaction of a disclosure schedule explaining the penny stock marketand all associated risks and impose various sales practice requirements onbroker-dealers who sell penny stocks to persons other than establishedcustomers and accredited investors, which are generally defined as institutionsor an investor with a net worth in excess of $1,000,000 or annual incomeexceeding $200,000 or $300,000 together with the spouse. For these types oftransactions the broker-dealer must make a special suitability determinationfor the purchaser and have received the purchaser’s written consent to thetransaction prior to sale. In addition, broker-dealer and the registeredrepresentative and current quotations for the securities they offer. Theadditional burdens imposed upon broker-dealers by such requirements maydiscourage broker-dealers from effecting transactions in the common stock whichcould severely limit its market price and liquidity.

** **

**Indemnificationand Exclusion of Liability of Directors and Officers. **So far as permitted by law, the Company’sCertificate of Incorporation and By-Laws provide that the Company willindemnify its directors and officers against expenses and liabilities theyincur to defend, settle or satisfy any civil or criminal action brought againstthem on account of their being or having been Company directors or officersunless, in any such action, they are adjudged to have acted with grossnegligence or to have engaged in wilful misconduct. As a result of suchprovisions, stockholders may be unable to recover damages against the directorsand officers of the Company for actions taken by them which constitutenegligence or a violation of their fiduciary duties, which may reduce thelikelihood of stockholders instituting derivative litigation against directorsand officers and may discourage or deter stockholders from suing directors,officers, employees and agents of the Company for breaches of their duty ofcare, even though such action, if successful, might otherwise benefit theCompany and its stockholders.

** **

**Dependenceon Future Market Conditions.** The ability to createshareholder value will be materially adversely affected if future marketconditions become unfavorable for prolonged periods.  The business strategy involves creating value for theshareholders through commercialization of tests and by helping the investeecompanies grow and then assisting them in completing initial public offeringsor corporate acquisitions. If the public markets in general, or the market forbiotechnology companies in particular, were to weaken for a prolonged period oftime, the ability of the investee companies to successfully complete IPOs wouldbe materially adversely affected.

** **

**Managementof Growth**. Rapid growth often places considerableoperational, managerial and financial strain on a company.  To successfully manage future growth, theCompany must do the following:

 

•                  Improve, upgradeand expand their business infrastructure

 

•                  Hire, train andretain key management and scientific personnel

 

•                  Advance thecommercialization development programs for their biotechnology products

 

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•                  Expand theintellectual property portfolio related to the underlying technology

 

•                  Maintainadequate financial resources

 

**Relianceon Key Personnel.** The success depends on the continuedemployment of and performance by senior management, particularly the Chairman andChief Executive Officer, and the key personnel at the investee companies. GBIwould be materially adversely affected if one or more of the senior managementteam do not continue to perform in their present positions or if the Companyand its investee companies are unable to hire and train a sufficient number ofqualified management, professional, technical and regulatory personnel.

 

**ITEM 2.          DESCRIPTION OF PROPERTIES**

 

The Company currently maintains its executive officesin approximately 2,000 square feet of space in Surrey, British Columbia andpays rent of approximately $1,850 per month ($3,000 Canadian) pursuant to alease signed by the Company that expires November 30, 2004.  The lease contains a termination clause ofsix months at the option of the Company. The Company also has a five year lease on 3,377 square feet of space inVancouver, British Columbia, Canada, pursuant to a lease which commenced onApril 7, 2001. Monthly lease payments on these offices are approximately$7,520.00 ($11,538.00 Cdn) per month. These offices are currently vacant and the Company is seeking a tenantto sublease. Biomedical Diagnostics, LLC leases approximately 2,000 square feetof office and laboratory space in Ann Arbor, Michigan pursuant to a lease whichexpires February 2003. Monthly lease payments are approximately $3,000 permonth.

 

**ITEM 3.          LEGAL PROCEEDINGS**

 

On November 1, 2001, aStatement of Claim was filed in the Supreme Court of British Columbia againstthe Company and a director of the Company seeking payment of 500,000 commonshares of the Company for consulting services performed by an outsideconsultant. The plaintiff is seeking specific performance of the agreement ordamages in lieu of specific performance. The Company’s position is that a letter of agreement dated April 24,2001, in which the plaintiff agreed to accept 250,000 options at $1.50 pershare represents compensation for the consulting services and no additionalshares are required to be issued.

 

On December 18, 2001, the former president of the Company filed aStatement of Claim in the Supreme Court of British Columbia against theCompany, two Directors of the Company and their related management companyseeking damages for breach of contract and wrongful dismissal.  The plaintiff is seeking general and specialdamages including the value of 500,000 Company shares and 90,000 Company stockoptions.  The Company has denied allclaims and has taken the position that the Company shares and stock optionclaimed were to be performance based according to a formula which was neveragreed upon. The Company also believes that the former president was terminatedas allowed for under the consulting agreement. The Company has filed a counter claim against the former president ofthe Company for damages for breach of contract and fraudulent or negligentmisrepresentation.

 

**ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

On October 24, 2001, the Company held its 2001 Annual Meeting ofStockholders, at which the Company’s shareholders approved the following, whichwere the only matters acted upon by the shareholders at this meeting:

 

1.                                       Electionof the following individuals as directors of the Company:

 

E. Greg McCartney, Lawrence J. Pasemko, T.J. LouisMcKinney, Dr. Ian B. Woods, Carol Patterson Neves and Robert Lutz. (For -12,091,134; Against - 1,918,749; Abstain - 5,466; Broker non-vote - 551,659)

 

 

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2.                                       Appointmentof KPMG, LLC as the Company’s independent auditors for the fiscal year endingDecember 31, 2001. (For - 13,984,370; Against - 24,902; Abstain - 6,077; Brokernon-vote - 551,659)

 

3.                                       Adoptionof the 2001 Stock Incentive Plan. (For - 10,999,705; Against - 60,744; Abstain- 329,964; Broker non-vote - 551,659)

 

4.                                       Amendmentof the Restated Certificate of Incorporation. (For - 10,999,705; Against -60,744; Abstain - 329,964; Broker non-vote - 551,659)

 

 

**PART II**

 

**ITEM 5.          MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

The Company’s Common Stock began trading under the symbol “BILB” in theOTC market on the NASDAQ Electronic Bulletin Board on February 16, 1999.  On December 19, 2000, the Company’s CommonStock was listed on The American Stock Exchange under the symbol “GBI.”

 

The table set forth below presents the range, on a quarterly basis, ofhigh and low sales prices per share of Common Stock.  High and low sales prices for 1999 and 2000 are as reported bythe OTC Bulletin Board. High and low sales prices for 2001 and 2002 to date asreported by The American Stock Exchange. The OTC quotations represent prices between dealers and do not includeretail mark-up, markdown or commissions and may not necessarily representactual transactions.

 
| **Quarter  Ended** |   | **High** |   | **Low** |   |
|--------------------|--------|----------|--------|---------|--------|
| **Fiscal  2001**   |   |     |   |    |   |
| December 31, 2001  |   | $        | 2.500  |    | $      | 1.500 |   |
| September 30, 2001 |   | $        | 4.050  |    | $      | 1.250 |   |
| June 30, 2001      |   | $        | 3.000  |    | $      | 1.050 |   |
| March 31, 2001     |   | $        | 3.880  |    | $      | 1.600 |   |
| **Fiscal  2000**   |   |     |   |    |   |
| December 31, 2000  |   | $        | 4.875  |    | $      | 1.750 |   |
| September 30, 2000 |   | $        | 5.218  |    | $      | 3.000 |   |
| June 30, 2000      |   | $        | 13.00  |    | $      | 2.437 |   |
| March 31, 2000     |   | $        | 18.50  |    | $      | 5.000 |   |
| **Fiscal  1999**   |   |     |   |    |   |
| December 31, 1999  |   | $        | 5.750  |    | $      | 3.250 |   |
| September 30, 1999 |   | $        | 3.750  |    | $      | 2.875 |   |
| June 30, 1999      |   | $        | 4.625  |    | $      | 2.000 |   |
| March 31, 1999     |   | $        | 7.000  |    | $      | 3.500 |   |

 

As of March 18, 2002, there were approximately 1,403 holders of recordof shares of such Common Stock.  Thereis no market for the Registrant’s Class A Convertible Preferred Stock.  During fiscal 2001,

 

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31 Class A Convertible Preferred Stockholders converted their preferredstock into common stock.  As of March18, 2002 there are approximately 28 holders of record of shares of the Class AConvertible Preferred Stock.

 

**DIVIDENDS**

 

The Company has not paid cash dividends on the Common Stock or theClass A Preferred Stock since inception and does not intend to pay anydividends to its stockholders in the foreseeable future. The declaration ofdividends in the future will be at the election of the Board of Directors andwill depend upon earnings, capital requirements, financial position of theCompany, general economic conditions, and other factors the Board of Directorsdeems relevant.

 

Each holder of the Series A Convertible Preferred Stock, par value$0.0001, (the “Class A Stock”) is entitled to receive, out of any funds legallyavailable, non-cumulative dividends at a rate of six percent (6%) per annumprior and in preference to any payment of any dividend on the Common Stock ineach calendar year, and to participate pro rata with the Common Stock in anyadditional dividends.  Dividends arepaid when, and if declared by the board. The dividend rights and preferences of the Class A Stock are senior tothose of the Common Stock.  The Companyhas never paid any dividends, and there is no likelihood that it will do so inthe foreseeable future.

 

**SALES OF UNREGISTERED SECURITIES**

 

In the three years ended December 31, 2001, the Company has made thefollowing sales of unregistered securities, all of which sales were exempt fromthe registration requirements of the Securities Act of 1933, as amended (the“Securities Act”), pursuant to Section 3(b) thereof or as otherwise indicatedherein.

 

During the year ended December 31, 2001, the Company sold 1,418,101common shares to 63 accredited investors under private placements as follows:

 

•    145,000 to 1 accredited investor at $1.20per share

 

•    295,000 to 1 accredited investor at $1.25per share

 

•    727,101 to 55 accredited investors at $1.50per share

 

•    251,000 to 6 accredited investors at $2.00per share

 

In connection with a private placement of 596,468 common shares at$1.50 per share, the Company issued warrants to purchase 29,832 shares to aplacement agent at $2.50 per share and paid cash commissions of $93,451.  These warrants expire December 31, 2004.

 

In connection with the other private placements, the Company paidcommissions totalling $86,515 to Okoboji Financial Services.

 

The private placements included warrants to purchase additional commonshares as follows:

 

•             145,000 warrants topurchase 145,000 common shares at $2.20 per share expiring April 2003

 

•             62,500 warrants topurchase 62,500 common shares at $2.50 per share expiring July 2003

 

•             64,000 warrants topurchase 64,000 common shares at $3.00 per share expiring July 2003

 

•             31,000 warrants topurchase 31,000 common shares at $2.50 per share expiring August 2003

 

•             65,416 warrants topurchase 65,416 common shares at $2.50 per share expiring November 2004

 

•             323,234 warrants topurchase 323,234 common shares at $2.50 per share expiring December 2004

 

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Pursuant to the Company’s acquisition of Biotherapies 50% interest inBiomedical Diagnostics LLC, the Company issued 2,524,030 shares of its commonstock with a fair value of $4,719,936.

 

The Company relied upon Regulation D in issuing these shares andwarrants without registration under the Securities Act.

 

During the year ended December 31, 2000, the Company issued 700,175common shares for total proceeds of $2,448,720 to 9 investors under privateplacements. The Company believes that each issuance and sale of such securitieswas exempt from registration pursuant to Section 3(b) of the Act and/or Rule504 promulgated thereunder.

 

Proceeds of the Company’s Private Placement Offerings, net ofcommissions and costs have been applied by the Company solely to capitalcontributions to the Joint Venture with Biotherapies, payments to Biotherapies(as per the JV Operating Agreement) and payment of general operating expenses,current and future.  The Companybelieves that such offerings are exempt from registration pursuant toRegulation D and Sections 3(b) or 4(2) of the Act as well as relevantexemptions in accordance with the Canadian Securities Laws and provincialauthorities, including Section 74(2)(4) of the Securities Act (BritishColumbia) and 107(1)(d) of the Securities Act (Alberta).

 

All proceeds of the Company’s private placement offerings, minus salescommissions not exceeding ten percent (10%) of the amount thereof, have beenapplied by the Company solely to investments in investee companies, includingcapital contributions to the Biomedical Diagnostics’ joint venture, and paymentof general operating expenses.  Exceptto the extent disclosed herein Item 10, “Executive Compensation”, none of theproceeds were paid, directly or indirectly, to directors, officers, generalpartners of the Company, 10% shareholders or any of their affiliates (otherthan payments made to Biotherapies, which is an affiliate of Dr. Paul Ervin, amember of the Scientific Advisory Board, and to PDL, which is an affiliate ofDr. Bob Petersen, a member of the Scientific Advisory Board).

 

All of the Class A Stock is restricted as to retransfer.  There is no liquid market for thesecurities. None is expected to develop. In certain events relating to liquidation, dissolution, consolidation orwinding up of the Company, holders of the Class A Stock are entitled to receivean amount equal to the original purchase price per share for the Class A Stockplus an amount equal to all declared but unpaid dividends thereon (the“Preference Amount”).  After the fullliquidation preference on all outstanding shares of the Class A Stock has beenpaid, any remaining funds and assets of the Company legally available for distributionto shareholders are distributed pro rata among the holders of the Class A Stockand the Common Stock on an “as-if-converted” basis.  If the Company has insufficient assets to permit payment of thePreference Amount in full to all the Class A Stock shareholders, then theholders of the Class A Stock will receive lesser payments in proportion to thePreference Amount each such holder would otherwise be entitled to receive,without any distribution to the holders of the Common Stock.

 

The Company has rights to redeem all of the outstanding Class A Stockat any time.  The redemption price is110% of the initial purchase price of the Class A Stock plus all declared butunpaid dividends. The Company has no plans to redeem any Class A Stock at thepresent time.

 

The holders of the Class A Stock have the right to convert its Class AStock into shares of Common Stock at any time commencing one year afterpurchase.  The Conversion Rate is oneshare of Class A Stock for one share of Common Stock. The holders and the ClassA Stock also have information rights, demand and piggy-back registrationrights, which ensure such holders that, under certain circumstances, theCompany will be forced to register the underlying Common Stock for resale bythe holders.  The existence of suchregistration rights is a risk factor with respect to the Common Stock. Allrights incident to a share of Class A Stock will terminate automatically uponany conversion of such share into Common Stock.

 

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**ITEM 6.            MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

 

YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OURFINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUALREPORT ON FORM 10-KSB.  ALL STATEMENTSIN THIS ANNUAL REPORT ON FORM 10-KSB RELATED TO GBI’s CHANGING FINANCIALOPERATIONS AND EXPECTED FUTURE GROWTH CONSTITUTE FORWARD-LOOKINGSTATEMENTS.  THE ACTUAL RESULTS MAYDIFFER MATERIALLY FROM THOSE ANTICIPATED OR EXPRESSED IN SUCH STATEMENTS.  SEE “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.”

 

**GENERAL**

 

In the last quarter of 2001, the Company purchased the remaining 50%interest in Biomedical Diagnostics, LLC from Biotherapies, Inc. making theCompany the sole owner of the LLC.

 

Under the Purchase Agreement, Biotherapies has sublicensed the MSAtechnology and will license pipeline technologies to the Company. In addition,the Company shall have a right to be notified of any new protein sequence andtechnology developed by Biotherapies applicable to product development ofdiagnostic tests for other cancers before such technology is disclosed to otherparties for possible licensing. Test formats and diagnostic products forprostate, ovarian, lung, colon and skin cancers are currently in thedevelopment pipeline.

 

Biomedical Diagnostics introduced its first breast cancer related bloodtest in June 2001.

 

The Company has committed to fund operating costs of BiomedicalDiagnostics of at least $1,000,000 in support of product development of themammastatin, prostate and ovarian technologies on or before November 30,2002.  As at December 31, 2001, $230,000has been contributed against this commitment.

 

As at December 31, 2001, the Company held a 33% equity investment inPrion Developmental Laboratories, Inc. (PDL), a privately held biotechnologycompany specializing in the development of rapid and inexpensive diagnostictests to detect “Mad Cow Disease”. PDL has developed the lateral flow striptest. It is similar to a home pregnancy test and is used on-site taking lessthan five minutes to complete. Currently there are no rapid tests that can beperformed at the slaughterhouse that will ensure that cattle with Mad CowDisease do not enter the human food chain. In addition to BSE, the PDL testplatform has also been used to successfully detect prion diseases in human andother animal brain tissue.

 

As of December 31, 2001, the Company held a 26.3% equity interest inBiotherapies, a privately held biotechnology company specializing in thedevelopment of innovative cancer diagnostic and therapeutic products.Biotherapies holds the exclusive rights, through the University of Michigan, topatents pending for the use of Mammastatin as a diagnostic and therapeutic forbreast cancer.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s discussion and analysis of its financial condition andresults of operations, including the discussion on liquidity and capitalresources, are based upon the Company’s financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires theCompany to make estimates and judgements that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.  Onan ongoing basis, management re-evaluates its estimates and judgements,particularly those related to the determination of the impairment of its equityinvestments and intangible assets. Actual results could differ from the estimates. The Company believes thefollowing critical accounting policies require its more significant judgementand estimates used in the preparation of the consolidated financial statements.

 

The consolidated financial statements have been prepared on the goingconcern basis, which assumes the realization of assets and liquidation ofliabilities in the normal course of operations.  If the Company

 

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were not to continue as a going concern, it would likely not be able torealize on its assets at values comparable to the carrying value or the fairvalue estimates reflected in the balances set out in the preparation of theconsolidated financial statements.  Asdescribed elsewhere in this report, at December 31, 2001, there are certainconditions that currently exist which raise substantial doubt about thevalidity of this assumption.  While theCompany anticipates raising additional private placement funds to remove thesubstantial doubt, these private placements are not assured.  Failure to raise additional funds may resultin the Company curtailing operations or writing assets and liabilities down toliquidation values, or both.

 

The Company’s investee companies are recorded using the equity method.These companies are development stage biotechnology companies that do not havelong-established products or proven technologies. Therefore, these investmentsmay be subject to write-down for impairment whenever events or changes incircumstances indicate that a loss in value is other than temporary.

 

When the Company acquires technology, the rights to manufacture andsell a product, it records the purchase price less the value of relatedliabilities assumed as intangible assets. The Company uses the assistance ofexperts to help allocate the purchase price to the fair value of the variousintangible assets acquired. Then, the Company estimates the economic usefullife of each of these intangible assets in order to amortize their cost as anexpense in the statement of operations over the estimated economic useful lifeof the related asset. The factors that drive the actual economic useful life ofa pharmaceutical product are inherently uncertain, and include patentprotection, competition by similar products, future introductions of competingproducts, the impact of promotional efforts and many other issues. The Companyuses all of these factors in initially estimating the economic useful lives ofits products, and also continuously monitors these factors to assess if changesin estimates are required.

 

In July 2001, the Financial Accounting Standards Board issued SFAS No.142 “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill andindefinite lived intangible assets are no longer amortized. Separate intangibleassets that are not deemed to have an indefinite life will continue to beamortized over their useful lives. SFAS No. 142 also establishes a new methodof testing goodwill and other intangible assets for impairment on an annualbasis or on an interim basis if an event occurs or circumstances change thatwould reduce the fair value of that goodwill or other intangible asset belowits carrying value. The amortization provisions of SFAS No. 142 apply togoodwill and other intangible assets acquired after June 30, 2001.

 

**RESULTS OF OPERATIONS**

 

Year ended December 31, 2001 compared to December 31, 2000:

 

For the year ended December 31, 2001, the Company incurred a net lossafter extraordinary items of $15,368,941 compared to $5,868,006 for the yearended December 31, 2000, an increase of $9,500,935.

 

Amortization is calculated on the Company’s property and equipment andmedical technology licenses. Amortization increased by $190,547 in the year ended December 31, 2001due to the amortization of acquired medical technology licenses acquiredpursuant to the LLC acquisition in November, 2001.

 

Investor relations are costs incurred by the company for generalfinancing services and investor relations. These costs increased by $194,231 for the year ended December 31, 2001due to the fair value of warrants and options issued to service providers of$394,206 and the fair value of common shares issued of $91,500.  Investor relations expenses have increasedas the Company has added additional consultants to increase the Company’spublic exposure.

 

Legal and Accounting expenses increased by $102,877****for the year ended December31, 2001 due to increased financial reporting requirements from the Company’sacquisitions and the defence of legal matters.

 

21

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Management and consulting fees increased by $2,667,159 for the yearended December 31, 2001.  The increaseis due primarily to an increase of $2,079,595 of non-cash compensationprimarily related to stock compensation costs for options and other equityinstruments issued to management and consultants of the company for services inthe year and additional consultants hired for general financing and otherservices.

 

Rent and occupancy costs increased by $198,499 due to the lease of asecond office in fiscal year 2001. Management is currently attempting to sublease this location, and hasaccrued the estimated net future cash outflows of $160,000 for this premises atDecember 31, 2001.

 

Salaries and benefits increased by $122,712 for the year ended December31, 2001 reflecting salary and severance costs of three full-time office staffhired for one-half of the year and subsequently terminated.

 

In-process research and development increased by $750,000 for the yearended December 31, 2001 relating to the estimated fair value of in-processresearch and development acquired in the acquisition of the remaining 50% ofLLC.

 

Research and development expenses of $102,396 were recorded in the yearended December 31, 2001 relating to the expenses incurred by the LLC for theone month ended December 31, 2001.

 

Interest and bank charges increased by $965,209 for the year endedDecember 31, 2001 due to the increase in the deemed discounts related to equityinstruments issued along with promissory notes.  The fair value of the equity instruments issued along withpromissory notes is amortized to interest expense over the term of thepromissory notes.

 

Equity in loss of investments increased by $3,301,346 for the yearended December 31, 2001.  Equity in lossin LLC increased by $1,306,346 due to the pickup 50% of the losses incurred byDiagnostics in the eleven month period ending November 30, 2001 and theamortization of excess investments in LLC. Equity in loss of PDL increased by $1,009,135 due to the pickup of 25%of the losses incurred by PDL up to August 31, 2001 and 33% of the lossesincurred for the remainder of the year ended December 31, 2001, theamortization of excess investments in PDL, and the write-down of the other thantemporary decline in the value of PDL of $441,668.  Equity in loss of Biotherapies increased by $985,865 due to thepickup of 26% of the losses incurred by Biotherapies for the year endedDecember 31, 2001 and the amortization of excess investments in Biotherapies.

 

The Company incurred extraordinary losses on debt settlements duringthe year ended December 31, 2001 of $870,354. No similar losses were incurred during fiscal year 2000.

 

Loss per share was ($1.02) in 2001 compared to ($0.65) in 2000. Theincrease in loss per share is due to the increase in the loss during thecurrent 2001 year. The weighted average number of shares outstanding for theyear ended December 31, 2001 was 15,107,237 compared to 9,209,570 for the yearended December 31, 2000.

 

The Company’s total assets as at December 31, 2001 totaled $15,179,029compared to total assets of $10,658,071 as at December 31, 2000. The increasein the Company’s total assets in 2001 is the result of the acquisition of theremaining 50% of Biomedical Diagnostics LLC.

 

During 2001 the Company’s investment in Biotherapies Incorporated wasreduced from a 26.6% equity interest to a 26.3% equity interest as BiotherapiesIncorporated issued shares under private placements.  The Company also increased its equity interest in PrionDevelopmental Laboratories to 33% for consideration of $400,000. In August2001, the Company issued 600,000 common shares of the Company with a fairmarket value of $1,680,000 to Biotherapies Incorporated as full satisfaction ofthe original Biomedical Diagnostics LLC Operating Agreement.

 

Stockholder equity as at December 31, 2001 was $9,660,743 compared to$7,300,225 as at December 31, 2000.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Cash flows used in operating activities totaled ($1,437,240) for theyear ended December 31, 2001 compared to ($1,655,216) for the year endedDecember 31, 2000. The decrease in cash flows used during 2001 relatesprimarily to the increases in accounts payable and accrued liabilities atDecember 31, 2001 compared to 2000 and additional non-cash stock basedcompensation used in 2001.

 

The Company expects to incur losses for at least the next few years,primarily due to the operation of Biomedical Diagnostics LLC. The Companyexpects the LLC to incur substantial research and development, sales, marketingand other expenses. The Company expects that losses will fluctuate from quarterto quarter and that such fluctuations may be substantial.

 

The Company’s short-term funding requirements are currently being metthrough private placements and short-term convertible promissory notes. Themajority of the promissory notes are placed with a significant shareholder ofthe Company. There can be no guarantee that the shareholder will continue tolend funds or that any other lender will provide short-term funds.

 

As discussed above, the Company is committed to funding BiomedicalDiagnostics’ operating activities of at least $1,000,000 on or before November30, 2002. The majority of the Company’s short-term convertible debt has alreadyor will mature within the next 6 months. Because of these capital requirements,the Company intends to raise funds through registered offerings or exempttransactions.

 

The Company has signed a Letter of Intent with First Montauk SecuritiesCorp. for a brokered private placement of up to $8,000,000.  There can be no assurances that any privateplacements will be completed.  TheCompany is also negotiating for other private placements should the Montauktransaction not complete.

 

A summary of the Company’s financial commitments are set out below:

 

PaymentsDue by Period

 
| **Contractual Obligations**        |   | **Total** |      | **Less than 1 year** |   | **1 – 3 years** |   | **4 – 5 years** |    | **After 5 years** | ** ** |
|------------------------------------|--------|-----------|-----------|----------------------|--------|----------------------|--------|----------------------|---------|-------------------|------------|
| Short-term debt                    |   | $         | 2,007,310 |                 | $      | 2,007,310            |   | $                    | —  |              | $          | — |   | $ | — |   |
| Operating leases                   |   | $         | 424,700   |                 | $      | 128,230              |   | $                    | 273,910 |              | $          | 22,560 |   | $ | — |   |
| Unconditional purchase obligations |   | $         | 1,500,000 |                 | $      | 1,500,000            |   | $                    | —  |              | $          | — |   | $ | — |   |
| Total contractual cash obligations |   | $         | 3,932,010 |                 | $      | 3,635,540            |   | $                    | 273,910 |              | $          | 22,560 |   | $ | — |   |

 

As of December 31, 2001, the Company had cash on hand of approximately$238,333 and a working capital deficiency of $4,527,725.  In the opinion of management, cash on handis sufficient for the next 4 months.

 

The Company, through the wholly-owned subsidiary Biomedical Diagnostics,LLC, is planning to increase its operating budget for 2002 to provide for anadditional 9 full-time employees and to purchase additional laboratoryequipment necessary for increased research and development activities. TheCompany has budgeted approximately $1,600,000 for these additionalexpenditures.

 

The Company’s future capital requirements will depend on many factors,including advancement of the Company’s LLC research and development programs;payments made to secure and develop additional cancer diagnostics technologies;the cost and availability of third-party financing for development andcommercialization activities; and administrative and legal expenses. Should theCompany not be able to secure additional financing when needed, it may be requiredto slow down or suspend its growth or reduce the scope of its currentoperations, any of which would have a material adverse effect on its business.

 

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**ITEM 7.          FINANCIAL STATEMENTS**

 

The financial statements required by this Item begin on Page F-1 ofthis Form 10-KSB.

 

•             *auditors’report*

•             *auditedconsolidated balance sheet as of December 31, 2001*

•             *auditedconsolidated statement of income, cash flows and changes in stockholders’equity for 2001 and 2000 and the period from September 19, 1994 (inception) toDecember 31, 2001*

•             *auditednotes to consolidated financial statements.*

 

**ITEM 8.****                              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**PART III**

 

**ITEM 9.****                              DIRECTORS****, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGEACT**

 

**DIRECTORS AND EXECUTIVE OFFICERS**

 

The following sets forth certain information, with respect to eachperson who is currently an executive officer or director of GBI.

 
| **Name**                  |   | **Age** |   | **Position**                                               |
|---------------------------|--------|---------|--------|------------------------------------------------------------|
| E. Greg McCartney         |   | 50      |   | Chairman of the Board,  President, Chief Executive Officer |
|                      |   |    |   |                                                       |
| T.J. Lou McKinney, C.A.   |   | 67      |   | Chief Financial Officer and  Director                      |
|                      |   |    |   |                                                       |
| Lawrence J. Pasemko       |   | 65      |   | Executive Vice President and  Director                     |
|                      |   |    |   |                                                       |
| Ian B. Woods, M.D., Ph.D. |   | 57      |   | Vice President and Director                                |
|                      |   |    |   |                                                       |
| Robert Lutz               |   | 65      |   | Director                                                   |
|                      |   |    |   |                                                       |
| Carol Patterson Neves     |   | 68      |   | Director                                                   |

 

**E. GREG MCCARTNEY -** Mr. McCartney has been the senior officer ofthe Company since 1995. He currently serves as Chairman of the Board, Presidentand Chief Executive Officer. In addition, he serves as President of AspenwoodHoldings Corporation, a family investment firm, as well as a Director andOfficer of Tynehead Capital Corp. a privately held management consulting andventure capital corporation. Mr. McCartney also presides as Chairman of theBoard of an American distilling and importing company. Mr. McCartney was afounding member of a number of private enterprises involved in the field ofelectronics, distribution and real estate development.

** **

**L.J. PASEMKO** - Currently the Executive VicePresident, Mr. Pasemko was formerly the Chief Financial Officer of the Companyfrom 1995 to April 2001. He now assumes the position of ExecutiveVice-President. Mr. Pasemko is President of Tynehead Capital Corp., a venturecapital company assisting smaller enterprises, and President of SupercartPacific Wholesale (Canada) Inc., a former 

 

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distribution company carrying on business throughoutthe Pacific Northwest. He was formerly the CASE co-coordinator of the FederalBusiness Development Bank of Canada, President, General Manager of twoautomobile dealerships and owner of an industrial supply company. His earlieryears were in management positions with Ford Motor Company and ChryslerCorporation.

** **

**T.J. LOU MCKINNEY, CA****- Mr. McKinney was firstappointed a Director of the Company in August 2000 and assumed the position ofChief Financial Officer in 2001. He has provided senior management andfinancial consulting services for over 30 years, most recently through SperrinEnterprises, a private company that he founded in 1992.  He was a co-founder of Ondine Biopharma,Inc., where he served as CFO and Director until 1999, and worked as a financialadvisor to Forbes Medi-Tech, a publicly listed biopharmaceutical company, from1997 to 1998.  Previously, Mr. McKinneywas President and CEO of two Canadian securities firms and served as Manager ofCorporate Services for C.M. Oliver & Company, a British Columbia brokeragefirm.  From 1961 to 1986 he held seniormanagement positions in real estate development companies, was President andCEO of a Canadian institutional food distributor, and held senior financialpositions with several large construction and real estate companies.  Mr. McKinney obtained his CA while workingwith Thorne, Mullholland, Howson & McPherson, the predecessor to KPMG.

** **

**DR. IAN B. WOODS, M.D., Ph.D**. - Dr. Woodsis the Company’s Vice President of Science and Technology. Dr. Woods was theCompany’s Vice President, Operations from 1998 to 2000 and also serves as aDirector.  Dr. Woods is the seniorfounding partner of the Burke Mountain Medical Centre in Port Coquitlam,British Columbia, where he has conducted a general medical practice since1977.  Over the last 10 years, he hasprovided medical and scientific consulting services to a number of public andprivate companies in the medical sector. He has also served for over 20 years at various times on the MedicalAdvisory, Pediatric Advisor, and Medical Manpower Committees on the RoyalColumbian Hospital in British Columbia, Canada.  He received his Ph.D. in Physics and his M.D. from the Universityof British Columbia.

** **

**ROBERT F. LUTZ –**Mr. Lutz is a Director ofthe Company and has been actively involved in five real estate developmentinvestments since his retirement in 1995. He was the founder of ContinentalCircuits Corp. and served as Chairman of the Board and President since itsinception in 1975 until the corporation’s public offering in 1995. He heldmanagement positions in three start-up companies in the computer industry from1969 through 1975 when he founded Continental Circuits Corp. Previously, Mr.Lutz was employed by The General Electric Company from 1960 through 1968 wherehe served in various positions of increasing responsibility.

** **

**CAROL PATTERSON NEVES** - Ms. Neves wasappointed a Director of the Company in March 1, 1999.  She was employed with Merrill Lynch, Pierce, Fenner & Smithfor approximately 40 years prior to her retirement in 1996.  From 1986 to 1996, Ms. Neves was the FirstVice President/Senior Research Analyst: Diversified Companies.  She was elected to the InstitutionalInvestor Magazine All-American Research Team for thirteen consecutive years,was ranked one of the world’s top eight financial analysts in a UK CorporateFinance magazine in 1989 and has appeared as a guest on “Wall StreetWeek”.  Ms. Neves received her B.A. inEconomics from Trinity College, her graduate certificate from Harvard BusinessSchool and her MBA from New York University. Ms. Neves was first elected to the Board of Directors on March 1, 1999.

 

Each director holds office until the Company’s annual meeting ofstockholders and until his/her successor is duly elected and qualified.  Officers are elected by the Board ofDirectors and hold office at the discretion of the Board of Directors.  There are no family relationships betweenany of the directors or executive officers of the Company.  Mr., McCartney, Mr. Pasemko, Mr. McKinney,Mr. Lutz, Dr. Woods and Ms. Neves were elected at a meeting of thestockholders held on October 24, 2001.

 

**SECTION 16A BENEFICIAL OWNERSHIPREPORTING COMPLIANCE**

 

Section 16(a) of the Securities and Exchange Act of 1934, as amended,generally requires the Company’s directors and executive officers and personswho own more than 10% of a registered class of

 

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the Company’s equity securities (10% owners) to file with theSecurities and Exchange Commission initial reports of ownership and reports ofchanges in ownership of Common Stock and other equity securities of theCompany.  Directors and executiveofficers and 10% owners are required by Securities and Exchange Commissionregulations to furnish the Company with copies of all Section 16(a) forms theyfile.  No other reports were required tobe filed during the fiscal year ended December 31, 2001.

 

**ITEM 10.        EXECUTIVE COMPENSATION**

 

The following table summarizes the aggregate compensation paid to GBI’sChief Executive Officer and the four most highly compensated executive officersother than the CEO (the “Named Executive Officers”) during the fiscal yearended December 31, 2001.

 

**SUMMARYCOMPENSATION TABLE**

 
| **Name and Principle  Position**                             |             | **Annual Compensation** |       | **Long-Term Compensation** |      |
|--------------------------------------------------------------|------------------|-------------------------|------------|----------------------------|-----------|
|                                                         | **Fiscal  Year** |                    | **Salary** |                       | **Bonus** |   | **Other** |   | **Securities Underlying  Options** |   |
| E. Greg McCartney,  President and Chief Executive Officer    |             | 2001   2000  1999       |       | —  —  —     |      | —  —  — |   | $94,998(1)  $91,332(2)  $91,332(2) |   | $501,000(5)  —  — |   |
|                                                         |             |                    |       |                       |      |   |   |   |   |   |   |
| Lawrence J. Pasemko, Executive Vice President                |             | 2001   2000   1999      |       | —   —  —    |      | —  —  — |   | $94,998(1)  $91,332(2)  $91,332(2) |   | $501,000 (5)  — — |   |
|                                                         |             |                    |       |                       |      |   |   |   |   |   |   |
| T.J. Lou McKinney,  Chief Financial   Officer                |             | 2001   2000   1999      |       | —  —   —    |      | —  —  — |   | $60,000(3)  —  — |   | $261,900(6)   —   — |   |
|                                                         |             |                    |       |                       |      |   |   |   |   |   |   |
| Dr. Ian Woods,   Vice President                              |             | 2001   2000   1999      |       | —   —   —   |      | —   —   — |   | $48,682(4)  $61,200(4)  $11,133(4) |   | $334,000(7)   —   — |   |
|                                                         |             |                    |       |                       |      |   |   |   |   |   |   |
| Linda Allison, Ph.D., President and Chief Executive  Officer |             | 2001   2000   1999      |       | —   —   —   |      | —   —   — |   | —  $120,000(8)   — |   | —   —   — |   |
|                                                              |                  |                         |            |                            |           |  |  |  |  |  |  |  |  |

 

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(1)               Represents1/2 of annual management fee paid to Tynehead Capital Corp.

(2)               Represents1/3 of annual management fee paid to Tynehead Capital Corp.

(3)               Representsmanagement fees paid to No. 134 Corporate Ventures.

(4)               Representsscientific consulting fees paid to Dr. Woods.

(5)               Representsstock options to purchase 300,000 common shares at an exercise price of $1.67per share.

(6)               Representsstock options to purchase 90,000 common shares at an exercise price of $1.24per share and stock options to purchase 90,000 common shares at an exerciseprice of $1.67 per share

(7)               Representsstock options to purchase 200,000 common shares at an exercise price of $1.67per share.

(8)               Representsmanagement and consulting fees paid to Snowdon & Associates ManagementConsulting Ltd. Dr. Allison served as President and Chief ExecutiveOfficer from November 1, 2000 to March 30, 2001.

 

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**STOCK OPTIONS**

 

The following table provides information with respect to the stockoption grants made to the Named Executive Officers during the 2001 fiscal yearunder GBI’s 2001 Stock Option Plan and options granted outside of theplan.  No stock appreciation rights weregranted during such fiscal year to the Executive Officers.

** **

**OPTION GRANTS IN LAST FISCAL YEAR**

 
| **Name**              |                                                    | **Individual Grants** |                                                          |   |                                   |
|-----------------------|---------------------------------------------------------|-----------------------|---------------------------------------------------------------|--------|----------------------------------------|
|                  | **Number of   Securities   Underlying Options Granted** |                  | **% of Total  Options Granted  to Employees in  Fiscal Year** |   | **Exercise or  Base Price  ($/share)** |   | **Expiration Date** | ** ** |
| E. Greg McCartney     |                                                    | 300,000               |                                                          | 17%    |                                   | $1.67 |   | December 13, 2006 |   |
|                  |                                                    |                  |                                                          |   |                                   |   |   |   |   |   |
| Lawrence Pasemko      |                                                    | 300,000               |                                                          | 17%    |                                   | $1.67 |   | December 13, 2006 |   |
|                  |                                                    |                  |                                                          |   |                                   |   |   |   |   |   |
| Carol Patterson Neves |                                                    | 40,000                |                                                          | 2.3%   |                                   | $1.67 |   | December 13, 2006 |   |
|                  |                                                    |                  |                                                          |   |                                   |   |   |   |   |   |
| Dr. Ian Woods         |                                                    | 200,000               |                                                          | 11.3%  |                                   | $1.67 |   | December 13, 2006 |   |
|                  |                                                    |                  |                                                          |   |                                   |   |   |   |   |   |
| T.J. Lou McKinney     |                                                    | 90,000                |                                                          | 5.1%   |                                   | $1.24 |   | December 13, 2006 |   |
|                  |                                                    |                  |                                                          |   |                                   |   |   |   |   |   |
| T.J. Lou McKinney     |                                                    | 90,000                |                                                          | 5.1%   |                                   | $1.67 |   | December 13, 2006 |   |
|                       |                                                         |                       |                                                               |        |                                        |  |  |  |  |  |  |

 

**AGGREGATEDOPTION EXERCISE IN LAST FISCAL YEAR**
|                  |   | **Shares  Acquired on** |   |                  |   | **Number of  Unexercised options at Dec. 31, 2001** |   | **Value of  unexercised in- the-money options at Dec 31, 2001** |   |
|-----------------------|--------|-------------------------|--------|-----------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------------------|--------|
|                  |   | **Exercise**            |   | **Value  Realized $** |   | **Exercisable(1)**                                  |   | **Exercisable(1)**                                              |   |
| E. Greg McCartney     |   | 22,500                  |   | $22,500               |   | 367,500                                             |   | $84,225                                                         |   |
|                  |   |                    |   |                  |   |                                                |   |                                                            |   |
| Lawrence Pasemko      |   | 22,500                  |   | $22,500               |   | 367,500                                             |   | $84,225                                                         |   |
|                  |   |                    |   |                  |   |                                                |   |                                                            |   |
| Carol Patterson Neves |   | —                  |   | —                |   | 90,000                                              |   | $48,700                                                         |   |
|                  |   |                    |   |                  |   |                                                |   |                                                            |   |
| Dr. Ian Woods         |   | —                  |   | —                |   | 290,000                                             |   | $86,300                                                         |   |
|                  |   |                    |   |                  |   |                                                |   |                                                            |   |
| T.J. Lou McKinney     |   | —                  |   | —                |   | 180,000                                             |   | $62,100                                                         |   |

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(1) There were no unexercisable options as of December 31, 2001.

 

**DIRECTOR COMPENSATION**

 

Directors not otherwise employed by the Company did not receive cashcompensation for serving on the Board of Directors during the fiscal year endedDecember 31, 2001; however, they did receive stock options.

 

**EMPLOYMENT CONTRACTS AND TERMINATIONOF EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS**

 

Dr. Linda Allison was retained starting July 2000 under a consultingagreement between Snowdon & Associates Management Consulting Ltd. and theCompany to serve as President and CEO. On November 24, 2000, the Companyprovided a letter that outlined the general terms of her full-time employmentwith the Company and confirmed that the Company would enter into an employmentagreement on or about December 31, 2000. Snowdon/Allison did not respond tothis letter and subsequent to December 31, 2000, Dr. Allison ceased employmentwith the Company.

 

Messrs. E. Greg McCartney, Chairman, and Larry Pasemko, ExecutiveVice-President, through their respective holding companies, were parties to an employmentagreement dated September 1, 1998, between Tynehead Capital Corp. and theCompany which expired on December 31, 2001. The employment agreement employedthe executives, as independent contractors, to provide described managementservices to the Company, including setting objectives, structures, time frames,identifying resources required and allocating and utilizing suchresources.  The Company paid a monthlymanagement fee, subject to annual review, at $15,833 to Tynehead.  That amount was subject to annual review forincreases only.  In addition, Tyneheadwas entitled to an annual incentive management fee on the basis of therecommendations of the Board taking into account the financial performance ofthe Company and other relevant factors. The Board of Directors of the Company is currently controlled by theexecutives.

 

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T.J. Louis McKinney is employed on a part-time basis as the Company’sChief Financial Officer and is paid a monthly fee of $5,000. Dr. Ian B. Woods,M.D., Ph.D. is employed on a part-time basis and is paid a monthly fee of$3,000. No employment contract is in effect for either Messrs. McKinney orWoods.

 

**ITEM 11.          SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth information known to the Company, as ofDecember 31, 2001, regarding the beneficial ownership of the Company’s votingsecurities by (i) each of the Company’s directors and executive officers, and(ii) all directors and executive officers of the Company as a group.  Except as indicated below, management is notaware of any individual or entity that owns 5% or more of the voting stock ofthe Company, unless otherwise indicated, each of the stockholders listed in thetable below has sole voting and power of disposition with respect to sharesbeneficially owned by such stockholder.

 
| **Title of Class** |   | **Name and Address  of Beneficial Owner**                 |   | **Number of  Shares  Beneficially Owned(2)** |   | **Percent of  Outstanding  Shares(3)** |   | **Percent of Voting   Ownership(4)** |   |
|--------------------|--------|-----------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
| Common shares      |   | E. Greg McCartney                                         | (1)    | 786,764(5)                                   |   | 3.52%                                  |   | 3.51%                                |   |
|               |   |                                                      |   |                                         |   |                                   |   |                                 |   |
| Common shares      |   | Lawrence J. Pasemko                                       | (1)    | 797,764(5)                                   |   | 3.60%                                  |   | 3.56%                                |   |
|               |   |                                                      |   |                                         |   |                                   |   |                                 |   |
| Common shares      |   | T. J. Lou McKinney                                        | (1)    | 180,000(5)                                   |   | .81%                                   |   | .80%                                 |   |
|               |   |                                                      |   |                                         |   |                                   |   |                                 |   |
| Common shares      |   | Ian B. Woods, M.D., Ph.D.                                 | (1)    | 590,000(5)                                   |   | 2.64%                                  |   | 2.63%                                |   |
|               |   |                                                      |   |                                         |   |                                   |   |                                 |   |
| Common shares      |   | Carol Patterson Neves                                     | (1)    | 90,000(5)                                    |   | .40%                                   |   | .40%                                 |   |
|               |   |                                                      |   |                                         |   |                                   |   |                                 |   |
| Common shares      |   | All directors and officers  as a group                    |   | 2,444,528                                    |   | 10.94%                                 |   | 10.91%                               |   |
|               |   |                                                      |   |                                         |   |                                   |   |                                 |   |
| Common shares      |   | Lutz Family Trust71 Biltmore Estates Phoenix,  AZ 85016   |   | 5,000,000(6)                                 |   | 22.37%                                 |   | 22.55%                               |   |
|               |   |                                                      |   |                                         |   |                                   |   |                                 |   |
| Common shares      |   | Biotherapies, Inc.5592 Plymouth Road  Ann Arbor, MI 48105 |   | 3,124,030                                    |   | 13.98%                                 |   | 13.95%                               |   |

** **

----

(1)               c/oGenesis Bioventures, Inc., 3153 King George Highway, Suite 1A, Surrey, BritishColumbia, Canada V4P 1B8

 

(2)               Number ofshares beneficially owned includes all shares that the beneficial owner has aright to acquire within 60 days pursuant to options, warrants, rights,conversion privileges or similar obligations.

 

(3)               Thepercent is calculated by dividing the number of shares beneficially owned bythe amount of outstanding securities plus the number of options and warrantsbeneficially owned by that owner.  Thedenominator does not include securities that any other person has the right toacquire within 60 days pursuant to options, warrants, rights, conversionprivileges or similar obligations.

 

(4)               Thepercentage shown reflects voting ownership after taking into account theexisting Class A preferred stock. None of the officers or directors owns any ofthe Class A Preferred Stock.

 

(5)               Includesvested options to purchase common shares held by such officers and directors.

 

(6)               The Trustalso owns 50,000 shares of the Company’s Convertible Class A Preferred Stock.

 

28

----

 

**ITEM 12.        CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

In 2000, the Company issued 160,528 common shares to companiescontrolled by officers and directors of the Company to settle debt of $40,132.No gain or loss resulted from these debt settlements. Also in 2000, Dr. LindaAllison earned a cash finders’ fee of $120,000 from Prion DevelopmentalLaboratories, Inc. upon the Company’s investment in Prion. Dr. Allison is theformer President of the Company who introduced the Prion project to theCompany. Dr. James Trotman, a former Director of the Company, earned a cashfinders’ fee of $40,000 from Prion for his efforts in introducing the projectto the Company. Dr. Trotman was not a Director at the time the Priontransaction was completed. The fees earned by Dr. Allison and Dr. Trotmanhave not been paid by Prion

 

During 2001 the Company issued 3,004,605 common shares and warrants topurchase 800,000 shares to settle an obligation of $3,500,000 incurred in 2000to the Lutz Family Trust, controlled by Robert Lutz, a major shareholder anddirector.  The warrants have an exerciseprice of $2.00 per share and expire in May 2003.  Also during 2001 the Lutz Family Trust, in two series of loans of$700,000 and $1,600,000, advanced an additional $2,300,000 to the Company.  Of the $1,600,000 loan, $600,000 was repaid,leaving a total outstanding balance of $1,700,000 for both loans.  In addition, as additional compensation forthe $700,000 loan the Company issued warrants to purchase 283,776 shares ofcommon stock at $3.00 per share that expire in 2003.  The remaining $1,000,000 loan plus outstanding interest isconvertible into common shares at $1.50 at the holder’s option.  On conversion the holder will receivewarrants to purchase the number of shares equal to one-half the number ofshares received on conversion with an exercise price of $3.00 and a three yearterm.

 

Also during 2001, the Company paid $210,163 under a management servicescontract to Tynehead Capital Corp., controlled by Greg McCartney and LarryPasemko, directors and officers of the Company and $60,000 to No 134 CorporateVentures Ltd. controlled by Louis McKinney, a director and officer.

 

**ITEM 13.        EXHIBITS AND REPORTS ON FORM 8-K**

 

The followingdocuments are filed as part of this Form 10-KSB:

 

(a) Exhibits:

 

Please see theExhibit Index on Page E-1 of this Annual Report.

 

(b) Reports on Form8-K:

 

1.          Amendment No. 1 to Current Report on Form 8-K, dated November 30, 2000,filed on February 15, 2002 in connection with the Company’s investment inBiotherapies, Inc. and Biomedical Diagnostics, LLC

 

2.          Current Report on Form 8-K, dated November 30, 2001, filed on December17, 2001 regarding acquisition of remaining 50% interest in Biomedical Diagnostics,LLC from Biotherapies, Inc.

 

29

----

SIGNATURES

 

In accordance withSection 13 or 15(d) of the Securities and Exchange Act of 1934, theregistrant has caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   | **Genesis Bioventures, Inc.**                    |
|--------|--------------------------------------------------|
|   |                                             |
|   | By:                                              | /s/ E.G. McCartney |
|   | Name:                                            | E.G. McCartney |
|   | Chairman, President and  Chief Executive Officer |

 

April 12, 2002

 

**POWER OF ATTORNEY**

 

We, the undersigneddirectors and officers of BioLabs, Inc., do hereby constitute and appoint E.G.McCartney, our true and lawful attorney-in-fact and agent, to sign for us orany of us in our names and in the capacities indicated below, any and allamendments to this Annual Report, and to file the same, with all exhibitsthereto and other documents required in connection therewith, and to do any andall acts and things in our names and in the capacities indicated below, whichsaid attorney and agent, may deem necessary or advisable to enable said corporationto comply with the Securities Act of 1933, as amended, and any rules,regulations, and requirements of the Securities and Exchange Commission, inconnection with this Registration Statement; and we do hereby ratify andconfirm all that the said attorney and agent shall do or cause to be done byvirtue hereof.

 

PURSUANT TO THEREQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEENSIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THECAPACITIES AND ON THE DATES INDICATED.

 
| **Signature**           |                                                                       | **Title** |           | **Date** |
|-------------------------|----------------------------------------------------------------------------|-----------|----------------|----------|
|                    |                                                                       |      |
| /s/ E. Greg McCartney   |                                                                       |      | April 12, 2002 |
| E. Greg McCartney       | Chairman of the Board  President and Chief Executive Officer  And Director |      |
|                    |                                                                       |      |
| /s/ Lawrence J. Pasemko |                                                                       |      | April 12, 2002 |
| Lawrence J. Pasemko     | Executive Vice President  and Director                                     |      |
|                    |                                                                       |      |
| /s/ Robert Lutz         |                                                                       |      | April 12, 2002 |
| Robert Lutz             | Director                                                                   |      |
|                         |                                                                            |           |                |          |  |

 

S-1

----

 
| /s/ Ian B. Woods, M.D., Ph.D. |                                                                                |   | April 12, 2002 |
|-------------------------------|-------------------------------------------------------------------------------------|--------|----------------|
| Ian B. Woods, M.D., Ph.D.     | Vice President of Science  and Technology  and Director                             |   |
|                          |                                                                                |   |
| /s/ Carol Patterson Neves     |                                                                                |   | April 12, 2002 |
| Carol Patterson Neves         | Director                                                                            |   |
|                          |                                                                                |   |
| /s/ T.J. Lou McKinney, C.A.   |                                                                                |   | April 12, 2002 |
| T.J. Lou McKinney, C.A.       | Chief Financial Officer  and Director (principal financial  and accounting officer) |   |

 

S-2

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directors and Stockholders

Genesis Bioventures, Inc.

 

We have audited the accompanying consolidated balance sheets of GenesisBioventures, Inc. (formerly Biolabs, Inc.) (a Development Stage Company) as ofDecember 31, 2001 and 2000, and the related consolidated statements ofoperations, stockholders’ equity and cash flows for the years endedDecember 31, 2001 and 2000, and cumulative for the period from September19, 1994 (inception) to December 31, 2001. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.  The cumulativestatements of operations, stockholders’ equity and cash flows for the periodfrom September 19, 1994 (inception) to December 31, 2001 include amounts forthe period from September 19, 1994 (inception) to December 31, 1999, which wereaudited by other auditors whose reports have been furnished to us, and ouropinion, insofar as it relates to the amounts included for the period September14, 1994 through December 31, 1999 is based solely on the reports of otherauditors.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, based on our audits and the report of other auditors,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Genesis Bioventures, Inc.(formerly Biolabs, Inc.) (a Development Stage Company) as of December 31, 2001and 2000 and the results of its operations and its cash flows for the yearsended December 31, 2001 and 2000 and cumulative for the period from September19, 1994 (inception) to December 31, 2001 and 2000, in conformity withaccounting principles generally accepted in the United States of America.

 

As discussed in note 2 to the consolidated financial statements,effective July 1, 2001, the Company adopted the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, andcertain provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, asrequired for goodwill and intangible assets resulting from businesscombinations consummated after June 30, 2001.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going 

concern.  As discussed in note 1to the consolidated financial statements, the Company has suffered recurringlosses from operations and negative cash flows from operations that raisesubstantial doubt about its ability to continue as a going concern.  Management’s plans in regard to thesematters are also described in note 1. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

/s/ KPMG LLP

 

Chartered Accountants

Vancouver, Canada

March 22, 2002

 

F-1

----

 

**GENESIS BIOVENTURES, INC.**

(Formerly Biolabs, Inc.)

(A Development Stage Company)

 

Consolidated Balance Sheets

(Expressed in United States dollars)

 

December 31, 2001 and 2000

 
|                                                         |   | **2001**    |       | **2000**   |   |
|--------------------------------------------------------------|--------|-------------|------------|------------|--------|
| **Assets**                                                   |   |        |       |       |   |
|                                                         |   |        |       |       |   |
| Current assets:                                              |   |        |       |       |   |
| Cash and cash  equivalents                                   |   | $           | 238,333    |       | $      | 284,306 |   |
| Short-term  investments                                      |   | —      |       | 367,000    |   |
| Accounts and  other receivables                              |   | 10,262      |       | 19,377     |   |
| Prepaid expenses                                             |   | 109,900     |       | 50,500     |   |
| Total current  assets                                        |   | 358,495     |       | 721,183    |   |
|                                                         |   |        |       |       |   |
| Property and  equipment (note 5)                             |   | 192,901     |       | 32,489     |   |
|                                                         |   |        |       |       |   |
| Long-term equity  investments (note 6)                       |   | 2,122,373   |       | 9,904,399  |   |
|                                                         |   |        |       |       |   |
| Medical  technology licenses (note 7)                        |   | 12,505,260  |       | —     |   |
|                                                         |   |        |       |       |   |
|                                                         |   | $           | 15,179,029 |       | $      | 10,658,071 |   |
|                                                         |   |        |       |       |   |
| **Liabilities  and Stockholders’ Equity**               |   |        |       |       |   |
|                                                         |   |        |       |       |   |
| Current  liabilities:                                        |   |        |       |       |   |
| Accounts payable  and accrued liabilities                    |   | $           | 3,457,909  |       | $      | 516,031 |   |
| Promissory notes  payable (note 8)                           |   | 1,428,311   |       | 2,841,815  |   |
| Total current  liabilities                                   |   | 4,886,220   |       | 3,357,846  |   |
|                                                         |   |        |       |       |   |
| Stock  appreciation rights plan (note 9(d))                  |   | 632,066     |       | —     |   |
|                                                         |   |        |       |       |   |
| Stockholders’  equity (note 9):                         |   |        |       |       |   |
| Common stock,  $.0001 par value:                             |   |        |       |       |   |
| Authorized:  100,000,000 shares                         |   |        |       |       |   |
| Issued:  2001 – 19,944,832; 2000 – 10,987,075 |   | 1,994       |       | 1,099      |   |
| Preferred stock,  $.0001 par value:                          |   |        |       |       |   |
| Authorized:  100,000,000 shares                         |   |        |       |       |   |
| Issued:  2001 – 176,562; 2000 – 1,241,536     |   | 18          |       | 124        |   |
| Additional  paid–in capital                             |   | 34,407,044  |       | 16,859,624 |   |
| Common share  subscriptions                                  |   | 181,250     |       | —     |   |
| Deficit  accumulated during the development stage            |   | (24,929,563 | )          | (9,560,622 | )      |
| Total  stockholders’ equity                             |   | 9,660,743   |       | 7,300,225  |   |
|                                                         |   |        |       |       |   |
|                                                         |   | $           | 15,179,029 |       | $      | 10,658,071 |   |

 

----

Going concern (note 1)

Commitments and contingencies (notes 3, 4 and 14)

 

 

See accompanying notes to consolidated financial statements.

 

Approved on behalf of the Board:

 
| /s/ E. Greg McCartney |   | Director |   | /s/ Lawrence J. Pasemko |   | Director |
|-----------------------|--------|----------|--------|-------------------------|--------|----------|

 

F-2

----

 

**GENESIS BIOVENTURES, INC.**

(Formerly Biolabs, Inc.)

(A Development Stage Company)

 

Consolidated Statements of Operations

(Expressed in United States dollars)

 
|                                                                                       |   | **Years  ended December 31,** | ** **  | **Period  from  September 19, 1994  (inception) to  December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|--------------------------------------------------------------------|------------|
|                                                                                       |   | **2001**                      |        | **2000**                                                           |       | **2001** |   |
| Expenses  (income):                                                                        |   |                          |        |                                                               |       |   |   |
| Amortization                                                                               |   | $                             | 197,269     |                                                               | $          | 6,722 |   | $ | 218,697 |   |
| Loss (gain) on  foreign exchange                                                           |   | 22,682                        |        | (5,360                                                             | )          | 17,322 |   |
| Investor  relations:                                                                       |   |                          |        |                                                               |       |   |   |
| Stock-based  compensation                                                                  |   | 485,706                       |        | —                                                             |       | 485,706 |   |
| Incurred                                                                                   |   | 248,600                       |        | 540,075                                                            |       | 912,004 |   |
| Legal and  accounting                                                                      |   | 455,316                       |        | 352,439                                                            |       | 1,093,148 |   |
| Listing and  share transfer fees                                                           |   | 46,905                        |        | 58,454                                                             |       | 190,954 |   |
| Management and  consulting fees:                                                           |   |                          |        |                                                               |       |   |   |
| Stock-based  compensation                                                                  |   | 2,766,043                     |        | 686,448                                                            |       | 4,737,831 |   |
| Incurred                                                                                   |   | 1,091,461                     |        | 503,897                                                            |       | 1,859,161 |   |
| Office and  miscellaneous                                                                  |   | 94,359                        |        | 100,153                                                            |       | 298,484 |   |
| Rent and  occupancy costs                                                                  |   | 279,650                       |        | 81,151                                                             |       | 391,341 |   |
| Salaries and  benefits                                                                     |   | 173,977                       |        | 51,265                                                             |       | 248,023 |   |
| Telephone                                                                                  |   | 21,045                        |        | 23,661                                                             |       | 80,341 |   |
| Travel and  promotion                                                                      |   | 216,318                       |        | 234,930                                                            |       | 941,365 |   |
| In-process  research and development (note 3(a))                                           |   | 750,000                       |        | —                                                             |       | 750,000 |   |
| Research and  development                                                                  |   | 102,396                       |        | —                                                             |       | 102,396 |   |
|                                                                                       |   | 6,951,727                     |        | 2,633,835                                                          |       | 12,326,773 |   |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Loss before  other income (expense)                                                        |   | (6,951,727                    | )           | (2,633,835                                                         | )          | (12,326,773 | ) |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Other income  (expense):                                                                   |   |                          |        |                                                               |       |   |   |
| Interest income                                                                            |   | 11,294                        |        | 57,429                                                             |       | 76,474 |   |
| Interest and  bank charges:                                                                |   |                          |        |                                                               |       |   |   |
| Incurred                                                                                   |   | (138,794                      | )           | (274,856                                                           | )          | (431,789 | ) |
| Amortization of  deemed discount (note 8)                                                  |   | (1,507,307                    | )           | (406,036                                                           | )          | (1,913,343 | ) |
| Equity in loss  of investments (note 6):                                                   |   |                          |        |                                                               |       |   |   |
| Prion Developmental  Laboratories, Inc.                                                    |   | (1,722,844                    | )           | (713,709                                                           | )          | (2,436,553 | ) |
| Biotherapies,  Inc.                                                                        |   | (2,061,622                    | )           | (1,075,758                                                         | )          | (3,315,237 | ) |
| Biomedical  Diagnostics, LLC                                                               |   | (2,127,587                    | )           | (821,241                                                           | )          | (3,357,253 | ) |
|                                                                                       |   | (7,546,860                    | )           | (3,234,171                                                         | )          | (11,377,701 | ) |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Loss for the  period before extraordinary items                                            |   | (14,498,587                   | )           | (5,868,006                                                         | )          | (23,704,474 | ) |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Extraordinary  loss on debt settlements (note 8(a))                                   |   | (870,354                      | )           | —                                                             |       | (870,354 | ) |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Loss for the  period                                                                       |   | $                             | (15,368,941 | )                                                                  | $          | (5,868,006 | ) | $ | (24,574,828 | ) |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Loss per common  share before extraordinary items, basic and diluted (notes 2(l) and 9(f)) |   | $                             | (0.96       | )                                                                  | $          | (0.65 | ) | $ | (4.26 | ) |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Loss per common  share, basic and diluted (notes 2(l) and 9(f))                            |   | $                             | (1.02       | )                                                                  | $          | (0.65 | ) | (4.41 | ) |
|                                                                                       |   |                          |        |                                                               |       |   |   |
|                                                                                       |   |                          |        |                                                               |       |   |   |
| Weighted average  common shares outstanding, basic and diluted                             |   | 15,107,237                    |        | 9,209,570                                                          |       | 5,648,952 |   |

 

See accompanying notes to consolidated financial statements.

 

F-3

----

 

**GENESIS BIOVENTURES, INC.**

(Formerly Biolabs, Inc.)

(A Development Stage Company)

 

Consolidated Statements of Stockholders’ Equity

(Expressed in United States dollars)

 
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   | **Deficit**     |   |                   |   |
|--------------------------------------------------------------------------------------------------------------------------------|---------------|--------------------|--------|-------------------|---------------|-----------------------|-----------|----------------|--------|------------------|--------|------------------|--------|-----------------|--------|------------------------|--------|
|                                                                                                                           |          |               |   |              |          |                  |      |           |   | **accumulated**  |   |             |   |
|                                                                                                                           |          | **Common  shares** |   | **Common  share** |          | **Preferred  shares** |      | **Additional** |   | ** during** |   | **Total**        |   |
|                                                                                                                           |          | **Number**         |   | **Amount**        |          | **subscriptions**     |      | **Number**     |   | **Amount**       |   | **paid–in** |   | **development** |   | **stockholders’** |   |
|                                                                                                                           | **of shares** | **Number**         |   | **Amount**        | **of shares** | **capital**           | **stage** | **equity**     |
|                                                                                                                           |          |               |   | **$**             |          |                  |      | **$**          |   |             |   | **$**            |   | **$**           |   | **$**                  |   | **$** |   |
| Issue of common stock for cash on organization of the Company                                                                  |          | 8,816,992          |   | 8,817             |          | —                |      | —         |   | —           |   | —           |   | —          |   | —                 |   | 8,817 |   |
| Loss for the period                                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | (147,192               | )      | (147,192 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Balance, December 31, 1995                                                                                                     |          | 8,816,992          |   | 8,817             |          | —                |      | —         |   | —           |   | —           |   | —          |   | (147,192               | )      | (138,375 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Consolidation of shares in November on a 50 for 1 basis                                                                        |          | (8,640,456         | )      | (8,799            | )             | —                |      | —         |   | —           |   | —           |   | 8,799           |   | —                 |   | — |   |
| Loss for the period                                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | (184,403               | )      | (184,403 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Balance, December 31, 1996                                                                                                     |          | 176,536            |   | 18                |          | —                |      | —         |   | —           |   | —           |   | 8,799           |   | (331,595               | )      | (322,778 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Issue of common stock for settlement of debt                                                                                   |          | 3,000,000          |   | 300               |          | —                |      | —         |   | —           |   | —           |   | 119,700         |   | —                 |   | 120,000 |   |
| Loss for the period                                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | (191,118               | )      | (191,118 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Balance, December 31, 1997                                                                                                     |          | 3,176,536          |   | 318               |          | —                |      | —         |   | —           |   | —           |   | 128,499         |   | (522,713               | )      | (393,896 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Issue of common stock for settlement of debt                                                                                   |          | 3,000,000          |   | 300               |          | —                |      | —         |   | —           |   | —           |   | 347,095         |   | —                 |   | 347,395 |   |
| Issue of common stock for cash                                                                                                 |          | 1,010,000          |   | 101               |          | —                |      | —         |   | —           |   | —           |   | 708,736         |   | —                 |   | 708,837 |   |
| Loss for the period                                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | (1,077,958             | )      | (1,077,958 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Balance, December 31, 1998                                                                                                     |          | 7,186,536          |   | 719               |          | —                |      | —         |   | —           |   | —           |   | 1,184,330       |   | (1,600,671             | )      | (415,622 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Issue of common stock for settlement of debt                                                                                   |          | 872,500            |   | 87                |          | —                |      | —         |   | —           |   | —           |   | 872,413         |   | —                 |   | 872,500 |   |
| Common stock returned                                                                                                          |          | (39                | )      | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | —                 |   | — |   |
| Issue of common stock for services                                                                                             |          | 60,000             |   | 6                 |          | —                |      | —         |   | —           |   | —           |   | 59,994          |   | —                 |   | 60,000 |   |
| Issue of common stock for shares of Biotherapies Incorporated                                                                  |          | 60,000             |   | 6                 |          | —                |      | —         |   | —           |   | —           |   | 239,994         |   | —                 |   | 240,000 |   |
| Issue of preferred stock for cash (net of beneficial feature)                                                                  |          | —             |   | —            |          | —                |      | —         |   | 2,000,000        |   | 200              |   | 5,210,976       |   | —                 |   | 5,211,176 |   |
| Fair value of options issued to consultants                                                                                    |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 81,252          |   | —                 |   | 81,252 |   |
| Beneficial feature of preferred stock issued                                                                                   |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 354,735         |   | —                 |   | 354,735 |   |
| Deemed dividends on preferred stock (note 9(a))                                                                                |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 232,065         |   | (232,065               | )      | — |   |
| Loss for the period                                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | (1,737,210             | )      | (1,737,210 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Balance, December 31, 1999                                                                                                     |          | 8,178,997          |   | 818               |          | —                |      | —         |   | 2,000,000        |   | 200              |   | 8,235,759       |   | (3,569,946             | )      | 4,666,831 |   |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Issue of common stock for settlement of debt                                                                                   |          | 240,528            |   | 24                |          | —                |      | —         |   | —           |   | —           |   | 309,498         |   | —                 |   | 309,522 |   |
| Exercise of share purchase warrants for cash                                                                                   |          | 9,000              |   | 1                 |          | —                |      | —         |   | —           |   | —           |   | 62,999          |   | —                 |   | 63,000 |   |
| Exercise of stock options for cash                                                                                             |          | 68,500             |   | 7                 |          | —                |      | —         |   | —           |   | —           |   | 129,593         |   | —                 |   | 129,600 |   |
| Issue of common stock for cash (net of cash share issue costs of  $214,139 and non–cash of $26,500)                       |          | 629,586            |   | 63                |          | —                |      | —         |   | —           |   | —           |   | 2,058,013       |   | —                 |   | 2,058,076 |   |
| Issue of common stock for financing services provided                                                                          |          | 2,000              |   | —            |          | —                |      | —         |   | —           |   | —           |   | 26,500          |   | —                 |   | 26,500 |   |
| Issue of common stock on acquisition (note 6(d))                                                                               |          | 1,100,000          |   | 110               |          | —                |      | —         |   | —           |   | —           |   | 4,330,590       |   | —                 |   | 4,330,700 |   |
| Issue of warrants to holders of promissory notes                                                                               |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 897,554         |   | —                 |   | 897,554 |   |
| Issue of common stock on conversion of convertible preferred shares                                                            |          | 758,464            |   | 76                |          | —                |      | —         |   | (758,464         | )      | (76              | )      | —          |   | —                 |   | — |   |
| Deemed dividends on preferred stock                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 122,670         |   | (122,670               | )      | — |   |
| Fair value of options issued to employees and consultants                                                                      |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 686,448         |   | —                 |   | 686,448 |   |
| Common shares subscribed, not issued                                                                                           |          | —             |   | —            |          | 150,001               |      | —         |   | —           |   | —           |   | —          |   | —                 |   | 150,001 |   |
| Note receivable share subscriptions                                                                                            |          | —             |   | —            |          | (150,001              | )         | —         |   | —           |   | —           |   | —          |   | —                 |   | (150,001 | ) |
| Loss for the period                                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | (5,868,006             | )      | (5,868,006 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Balance, December 31, 2000                                                                                                     |          | 10,987,075         |   | 1,099             |          | —                |      | —         |   | 1,241,536        |   | 124              |   | 16,859,624      |   | (9,560,622             | )      | 7,300,225 |   |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Issue of common stock for settlement of debt and accrued interest  (note 8(a))                                                 |          | 1,004,605          |   | 100               |          | —                |      | —         |   | —           |   | —           |   | 1,757,959       |   | —                 |   | 1,758,059 |   |
| Issue of common shares for cash (net of $15,001 non-cash issue costs)                                                          |          | 70,589             |   | 7                 |          | —                |      | —         |   | —           |   | —           |   | 134,994         |   | —                 |   | 135,001 |   |
| Issue of common stock for share financing services provided                                                                    |          | 21,559             |   | 2                 |          | —                |      | —         |   | —           |   | —           |   | 42,549          |   | —                 |   | 42,551 |   |
| Issuance of common stock for cash (net of cash share issue costs of  $86,515 and non-cash of $27,550)                          |          | 691,000            |   | 69                |          | —                |      | —         |   | —           |   | —           |   | 957,366         |   | —                 |   | 957,435 |   |
| Issue of common stock on conversion of convertible preferred shares                                                            |          | 1,064,974          |   | 106               |          | —                |      | —         |   | (1,064,974       | )      | (106             | )      | —          |   | —                 |   | — |   |
| Issue of common stock on settlement of debt and accrued interest  (note 8(a))                                                  |          | 2,000,000          |   | 200               |          | —                |      | —         |   | —           |   | —           |   | 2,499,800       |   | —                 |   | 2,500,000 |   |
| Issue of common stock for goods and services provided                                                                          |          | 111,510            |   | 11                |          | 50,000                |      | 91,250         |   | —           |   | —           |   | 237,849         |   | —                 |   | 329,110 |   |
| Stock options exercised                                                                                                        |          | 196,500            |   | 20                |          | —                |      | —         |   | —           |   | —           |   | 217,980         |   | —                 |   | 218,000 |   |
| Shares issued to Biotherapies, Inc. (note 5)                                                                                   |          | 600,000            |   | 60                |          | —                |      | —         |   | —           |   | —           |   | 1,679,940       |   | —                 |   | 1,680,000 |   |
| Fair value of options and warrants issued to consultants and major  shareholders for consulting and general financing services |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 2,922,628       |   | —                 |   | 2,922,628 |   |
| Shares issued to Biotherapies Inc. (note 3(a))                                                                                 |          | 2,524,030          |   | 252               |          | —                |      | —         |   | —           |   | —           |   | 4,719,684       |   | —                 |   | 4,719,936 |   |
| Issue of common stock for cash (net of $93,451 of cash and $32,556 of  non–cash share issue costs)                        |          | 667,101            |   | 67                |          | —                |      | —         |   | —           |   | —           |   | 874,577         |   | —                 |   | 874,644 |   |
| Subscription receivable for issued shares                                                                                      |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | (15,000         | )      | —                 |   | (15,000 | ) |
| Common shares subscribed, not issued                                                                                           |          | —             |   | —            |          | 60,000                |      | 90,000         |   | —           |   | —           |   | —          |   | —                 |   | 90,000 |   |
| Fair value of warrants issued for share financing costs                                                                        |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 32,556          |   | —                 |   | 32,556 |   |
| Issue of common stock for property and equipment                                                                               |          | 5,889              |   | 1                 |          | —                |      | —         |   | —           |   | —           |   | 11,188          |   | —                 |   | 11,189 |   |
| Dilution gain on shares issued by investee                                                                                     |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 53,635          |   | —                 |   | 53,635 |   |
| Fair value of options and warrants issued to promissory note holders                                                           |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 885,427         |   | —                 |   | 885,427 |   |
| Fair value of beneficial conversion feature of promissory note issued                                                          |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | 534,288         |   | —                 |   | 534,288 |   |
| Loss for the period                                                                                                            |          | —             |   | —            |          | —                |      | —         |   | —           |   | —           |   | —          |   | (15,368,941            | )      | (15,368,941 | ) |
|                                                                                                                           |          |               |   |              |          |                  |      |           |   |             |   |             |   |            |   |                   |   |   |   |
| Balance, December 31, 2001                                                                                                     |          | 19,944,832         |   | 1,994             |          | 110,000               |      | 181,250        |   | 176,562          |   | 18               |   | 34,407,044      |   | (24,929,563            | )      | 9,660,743 |   |

 

See accompanying notes to consolidated financial statements.

 

F-4

----

 

**GENESIS BIOVENTURES, INC.**

(Formerly Biolabs, Inc.)

(A Development Stage Company)

 

Consolidated Statements of Cash Flows

(Expressed in United States dollars)

 
|                                                                                                  |   |                         |        | **Period  from  September 19, 1994  (inception) to  December 31,** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------|--------------------------------------------------------------------|--------|
|                                                                                                  |   |                         |        |
|                                                                                                  |   |                         |        |
|                                                                                                  |   | **Years ended December 31,** |        |                                                               |
|                                                                                                  |   | **2001**                     |        | **2000**                                                           |   | **2001** |   |
| Cash flows from  operating activities:                                                                |   |                         |        |                                                               |   |   |   |
| Loss for the  period                                                                                  |   | $                            | (15,368,941 | )                                                                  | $      | (5,868,006 | ) | $ | (24,574,828 | ) |
| Items not  affecting cash:                                                                            |   |                         |        |                                                               |   |   |   |
| Amortization                                                                                          |   | 197,269                      |        | 6,722                                                              |   | 218,697 |   |
| Deemed discount  amortization on promissory notes                                                     |   | 1,507,307                    |        | 514,369                                                            |   | 2,021,676 |   |
| Equity in loss  on investment of Biomedical Diagnostics LLC                                           |   | 2,127,587                    |        | 821,241                                                            |   | 3,357,253 |   |
| Equity in loss  on investment of Biotherapies, Inc.                                                   |   | 2,061,622                    |        | 1,075,758                                                          |   | 3,315,237 |   |
| Equity in loss  on investment of Prion Developmental Laboratories, Inc.                               |   | 1,722,844                    |        | 713,709                                                            |   | 2,436,553 |   |
| In-process  research and development                                                                  |   | 750,000                      |        | —                                                             |   | 750,000 |   |
| Stock  compensation                                                                                   |   | 3,251,749                    |        | 686,448                                                            |   | 4,079,449 |   |
| Stock  appreciation rights plan                                                                       |   | 29,230                       |        | —                                                             |   | 29,230 |   |
| Extraordinary  loss of debt settlement                                                                |   | 870,354                      |        | —                                                             |   | 870,354 |   |
| Changes in  operating assets and liabilities:                                                         |   |                         |        |                                                               |   |   |   |
| Accounts and  other receivables                                                                       |   | 9,115                        |        | 163                                                                |   | (10,262 | ) |
| Prepaid expenses                                                                                      |   | 44,466                       |        | (19,571                                                            | )      | (6,034 | ) |
| Accounts payable  and accrued liabilities                                                             |   | 1,360,158                    |        | 413,951                                                            |   | 3,525,606 |   |
| Net cash used in  operating activities                                                                |   | (1,437,240                   | )           | (1,655,216                                                         | )      | (3,987,069 | ) |
|                                                                                                  |   |                         |        |                                                               |   |   |   |
| Cash flows from  investing activities:                                                                |   |                         |        |                                                               |   |   |   |
| Capital  expenditures on property and equipment                                                       |   | (66,428                      | )           | (21,397                                                            | )      | (111,528 | ) |
| Purchase of  shares and bonds of Biotherapies, Inc.                                                   |   | —                       |        | (1,548,976                                                         | )      | (2,643,976 | ) |
| Investment in  Prion Developmental Laboratories, Inc.                                                 |   | (400,000                     | )           | (2,036,553                                                         | )      | (2,436,553 | ) |
| Acquisition of  Biomedical Diagnostics, LLC, net of cash acquired                                     |   | (2,696,756                   | )           | —                                                             |   | (2,696,756 | ) |
| Cash acquired on  consolidation                                                                       |   | 8,617                        |        | —                                                             |   | 8,617 |   |
| Investment in  Biomedical Diagnostics, LLC                                                            |   | —                       |        | —                                                             |   | (3,000,000 | ) |
| Investment in  I.D. Certify, Inc.                                                                     |   | —                       |        | —                                                             |   | (800,160 | ) |
| Deposit on  future acquisitions                                                                       |   | —                       |        | —                                                             |   | (50,000 | ) |
| Purchase of  short-term investments                                                                   |   | —                       |        | (367,000                                                           | )      | (367,000 | ) |
| Redemption of  short-term investments                                                                 |   | 367,000                      |        |                                                               |   | 367,000 |   |
| Net cash used in  investing activities                                                                |   | (2,787,567                   | )           | (3,973,926                                                         | )      | (11,730,356 | ) |
|                                                                                                  |   |                         |        |                                                               |   |   |   |
| Cash flows from  financing activities:                                                                |   |                         |        |                                                               |   |   |   |
| Exercise of  share purchase warrants                                                                  |   | —                       |        | 63,000                                                             |   | 63,000 |   |
| Exercise of  stock options                                                                            |   | 218,000                      |        | 129,600                                                            |   | 347,600 |   |
| Issuance of  promissory notes                                                                         |   | 2,443,647                    |        | 3,225,000                                                          |   | 5,668,647 |   |
| Repayment of  promissory notes                                                                        |   | (600,000                     | )           | —                                                             |   | (600,000 | ) |
| Common stock  issued for cash                                                                         |   | 2,027,187                    |        | 2,084,576                                                          |   | 4,820,600 |   |
| Common stock  subscriptions                                                                           |   | 90,000                       |        | —                                                             |   | 90,000 |   |
| Preferred stock  issued for cash                                                                      |   | —                       |        | —                                                             |   | 5,565,911 |   |
| Net cash  provided by financing activities                                                            |   | 4,178,834                    |        | 5,502,176                                                          |   | 15,955,758 |   |
|                                                                                                  |   |                         |        |                                                               |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                 |   | (45,973                      | )           | (126,966                                                           | )      | 238,333 |   |
|                                                                                                  |   |                         |        |                                                               |   |   |   |
| Cash and cash  equivalents, beginning of period                                                       |   | 284,306                      |        | 411,272                                                            |   | — |   |
|                                                                                                  |   |                         |        |                                                               |   |   |   |
| Cash and cash  equivalents, end of period                                                             |   | $                            | 238,333     |                                                               | $      | 284,306 |   | $ | 238,333 |   |
|                                                                                                  |   |                         |        |                                                               |   |   |   |
| Supplemental  disclosure:                                                                             |   |                         |        |                                                               |   |   |   |
| Cash paid for:                                                                                        |   |                         |        |                                                               |   |   |   |
| Income taxes                                                                                          |   | $                            | —      |                                                               | $      | — |   | $ | — |   |
| Interest                                                                                              |   | 97,871                       |        | 166,523                                                            |   | 282,533 |   |
| Non-cash  activities:                                                                                 |   |                         |        |                                                               |   |   |   |
| Common stock  issued to settle promissory notes payable and accounts payable and accrued  liabilities |   | 4,258,059                    |        | 309,522                                                            |   | 5,907,477 |   |
| Common stock  issued for shares of Biotherapies Inc. and patents                                      |   | —                       |        | 4,330,700                                                          |   | 4,570,700 |   |
| Discounts and  beneficial conversion feature on promissory notes                                      |   | 1,419,715                    |        | 897,554                                                            |   | 2,317,269 |   |
| Deemed dividends  on preferred shares                                                                 |   | —                       |        | 122,670                                                            |   | 354,735 |   |
| Common stock  issued on conversion of preferred shares                                                |   | 106                          |        | 76                                                                 |   | 182 |   |
| Contribution to  BioMedical Diagnostics, LLC of rights acquired                                       |   | —                       |        | 2,680,860                                                          |   | 2,680,860 |   |
| Issuance of  common stock and warrants for share financing services                                   |   | 75,107                       |        | —                                                             |   | 75,107 |   |
| Issuance of  common stock on acquisition (note 6(a))                                                  |   | 1,680,000                    |        |                                                               |   | 1,680,000 |   |
| Shares issued as  consideration for acquisition of 50% interest in LLC (note 3(a))                    |   | 4,719,936                    |        |                                                               |   | 4,719,936 |   |
| Subscription  receivable for issued common shares                                                     |   | 15,000                       |        | —                                                             |   | 15,000 |   |
| Common stock  issued for fixed assets                                                                 |   | 11,189                       |        | —                                                             |   | 11,189 |   |
|                                                                                                       |        |                              |             |                                                                    |        |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

 

F-5

----

 

**GENESIS BIOVENTURES, INC.**

(Formerly Biolabs, Inc.)

(A Development Stage Company)

 

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

 

Years ended December 31, 2001 and 2000

Period from September 19, 1994 (inception) to December 31, 2001

 

**1.**              **Nature of development stage activities and goingconcern:**

 

The Company changed its name from Biolabs, Inc. toGenesis Bioventures, Inc. on October 29, 2001. Biolabs, Inc. was incorporated in the State of New York on September 19,1994.  The Company, through itssubsidiary and equity investment companies, is engaged in the business ofidentifying and funding promising biotechnology companies involved in researchand related product development in the fields of cancer therapy and cancer andprion disease diagnosing.

 

At December 31, 2001, the Company holds equityinterests in: Biotherapies, Incorporated (“Biotherapies”), a company developinga potential therapeutic for breast cancer; and Prion DevelopmentalLaboratories, Inc. (“PDL”), a private company that is developing a diagnostictest for prion diseases, a family of fatal neurodegenerative diseases thatincludes BSE or “Mad Cow Disease”. Furthermore, Biomedical Diagnostics, LLC (“Diagnostics”), a wholly ownedsubsidiary has developed a screening diagnostic for breast cancer and throughits license agreements with Biotherapies, will be developing potentialscreening diagnostics for the detection of ovarian and prostate cancers.

 

These financial statements have been prepared on agoing concern basis in accordance with United States generally accepted accountingprinciples.  The going concern basis ofpresentation assumes the Company will continue in operation throughout the nextfiscal year and into the foreseeable future and will be able to realize itsassets and discharge its liabilities and commitments in the normal course ofbusiness.  Certain conditions, discussedbelow, currently exist which raise substantial doubt upon the validity of thisassumption.  The financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

 

As of December 31, 2001, the Company is considered tobe in the development stage as substantially all efforts are being directedtowards the research and related development of medical diagnostics, and theCompany has not generated revenues from these principal businessactivities.  The Company’s futureoperations are dependent upon it’s ability to obtain third party financing inthe form of debt and equity and ultimately to generate future profitableoperations or income from its investments. The Company is required to make a further cash payment of $1,500,000prior to May 30, 2002 and fund certain research payments pursuant to anacquisition agreement (note 3(a)), and the Company’s equity investments willlikely require additional funding from the Company to continue research anddevelopment and other operations activities. The Company continues to experience negative cash flows from operationsand is currently in default on certain of its promissory note obligations.  The Company has a working capital deficiencyat December 31, 2001 of $4,527,725 (2000 - $2,636,663) and during the yearended December 31, 2001 used cash flow in operating activities of$1,437,240.  In addition, at December31, 2001 the Company is not in compliance with the repayment terms on certainnotes payable (note 8).  The Company iscurrently seeking additional funds through future debt or equity financings tooffset future cash flow deficiencies. Such financing may not be available or may not be available on reasonableterms.  The resolution of this goingconcern issue is dependent on the realization of management’s plans.  If management is unsuccessful in raisingfuture debt or equity financings, the Company will be required to liquidateassets and curtail or possibly cease operations.

 

F-6

----

 

**2.****              Significantaccounting policies:**

 

(a)   Principles of consolidation:

 

The consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiary, Biomedical Diagnostics, LLC (“Diagnostics”).  The statement of operations includes theaccounts of Diagnostics from November 30 (date of acquisition of control) toDecember 31, 2001.  All significantintercompany accounts and transactions have been eliminated.

 

The Company accounts forits investment in companies in which it has significant influence by the equitymethod.  The Company’s proportionateshare of earnings (loss) as reported, net of amortization of the excess purchaseprice over the net assets acquired, is included in earnings and is added(deducted from) the cost of the investment.

 

(b)   Use of estimates:

 

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported revenues and expenses for the reporting period.  Significant areas requiring the use ofmanagement estimates relate to the assessment of asset impairment provisionsand provisions for contingencies. Significant estimates of future operations and business outcomes wererequired to determine the allocation of consideration paid to acquiredbusinesses (note 3), particularly to the determination of the amounts allocatedto medical technology licenses and to in-process research and development.  Actual results may significantly differ fromthese estimates.

 

(c)   Foreign currency:

 

The functional currencyof the Company and its wholly-owned subsidiary is the United Statesdollar.  Transactions in foreigncurrencies are translated into United States dollars at the rates in effect onthe transaction date.  Exchange gains orlosses arising on translation or settlement of foreign currency denominatedmonetary items are included in the statement of operations.

 

(d)   Cash and cash equivalents:

 

The Company considers allshort-term investments, including investments in certificates of deposit, witha maturity date at purchase of three months or less to be cash equivalents.

 

(e)   Short-term investments:

 

Included in short-terminvestments are certificates of deposits with maturity dates in excess of threemonths but less than one year at the date of purchase.

 

(f)    Prepaid expenses:

 

Prepaid expenses includeprepaid insurance and deposits relating to future royalties.

 

F-7

----

 

(g)   Property and equipment:

 

Property and equipmentare recorded at cost and are depreciated using the straight-line method overtheir estimated useful lives as follows:

 
| **Asset**                 |   | **Rate**   |
|---------------------------|--------|------------|
| Computer software         |   | 3 years    |
| Furniture and fixtures    |   | 5 years    |
| Office equipment          |   | 4 years    |
| Leasehold improvements    |   | Lease term |
| Machinery and equipment   |   | 5 years    |
| Website development costs |   | 2 years    |

 

The cost of maintenanceand repairs are expensed as incurred. The Company reviews property and equipment for impairment wheneverevents or changes in circumstances indicate the carrying value may not berecoverable.

 

(h)   Medicaltechnology licenses:

 

The Company amortizes thecost of acquired medical technology licenses for one technology over the lesserof the license term or the estimated period of benefit.  The medical technology licenses acquiredthrough the Diagnostics acquisition are being amortized over 7 years.

 

(i)    Incometaxes:

 

The Company follows theasset and liability method of accounting for income taxes.  Under this method, current taxes arerecognized for the estimated income taxes payable for the current period.

 

Deferred income taxes areprovided based on the estimated future tax effects of temporary differencesbetween financial statement carrying amounts of assets and liabilities andtheir respective tax bases as well as the benefit of losses available to becarried forward to future years for tax purposes.

 

Deferred tax assets andliabilities are measured using enacted tax rates that are expected to apply totaxable income in the years in which those temporary differences are expectedto be recovered or settled.  The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin operations in the period that includes the enactment date.  A valuation allowance is recorded fordeferred tax assets when it is more likely than not that such deferred taxassets will not be realized.

 

F-8

----

 

(j)      Impairment of assets:

 

The Company evaluates therecoverability of property and equipment, medical technology licenses and itsequity accounted for investments whenever events or changes in circumstancesindicate that the carrying value may not be recoverable.  The Company recognizes an impairment lossrelated to property and equipment and medical technology licenses if theprojected undiscounted future cash flows is less than the carryingamounts.  The amount of the impairmentcharge, if any, is measured equal to the excess of the carrying value over theasset’s fair value, generally determined using the future operating cash flowsdiscounted at the Company’s average rate of cost of funds.  The assessment of the recoverability ofproperty and equipment and medical technology licenses will be impacted ifestimated future cash flows differ from those estimates.

 

A loss in the value ofthe Company’s equity investments is recognized when the loss in value isdetermined to be other than temporary based on the estimated future results ofoperations of the investee.

 

(k)     Research and development:

 

Research and developmentcosts are expensed as incurred.

 

(l)      Loss per share:

 

Basic loss per share iscomputed by dividing loss for the period available to common stockholders bythe weighted average number of common stock outstanding during theperiods.  Loss available to commonstockholders is increased by dividends on preferred stock.  Diluted loss per share is computed using theweighted average number of common and potentially dilutive common stockissuances, including options, warrants and convertible preferred stock,outstanding during the period.  As theCompany has a net loss in each of the periods presented, basic and diluted lossper share are the same.

 

(m)    Stock-based compensation:

 

The Company accounts forits employee stock-based compensation arrangements in accordance with provisionsof Accounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued toEmployees*”, and related interpretations.  As such, compensation expense under fixed plans is recorded onlyif the market value of the underlying stock at the date of grant exceeds theexercise price.  The Company recognizescompensation expense for stock options, common stock and other equityinstruments issued to non-employees for services received based upon the fairvalue of the equity instruments issued as the services are provided and thesecurities earned.

 

F-9

----

 

SFAS No. 123, “*Accountingfor Stock-Based Compensation*”, requires entities that continue toapply the provisions of APB Opinion No. 25 for transactions with employees toprovide pro forma net earnings (loss) and pro forma earnings (loss) per sharedisclosures for employee stock option grants as if the fair value based methoddefined in SFAS No. 123 had been applied to these transactions.  This information is presented innote 9(b).

 

(n)    Future pronouncements:

 

In August 2001, the FASBissued FAS No. 141, “*Business Combinations*” and FAS No. 142, “*Goodwill andOther Intangible Assets*”. FAS No. 141 requires that the purchase method of accounting be used forall business combinations initiated after June 30, 2001.  Use of the pooling-of-interests method isprohibited.  FAS No. 142 changes theaccounting for goodwill from an amortization method to an annual impairmenttest and is required to goodwill arising on business combinations made afterJune 30, 2001 and, otherwise, be applied prospectively effective January 1,2002.  Under this standard, the Companyis required to perform an initial benchmark test of impairment of goodwillwithin six months of adoption and subsequent annual tests of impairment ofgoodwill will be at the reporting unit level. If the carrying value of goodwill of a reporting unit exceeds the fairvalue of the reporting unit’s goodwill, the carrying value must be written downto fair value.  FAS No. 141 and FAS No.142 have been applied by the Company in the year ended December 31, 2001 to theacquisition described in note 3(a).

 

(o)    Comparative figures:

 

Certain comparativefigures have been reclassified to conform to the basis of presentation adoptedfor the current year.

 

**3.     Acquisitions:**

 

(a)          BiotherapiesIncorporated:

 

On November 30, 2001, theCompany entered into a Purchase Agreement (the “Purchase Agreement”) withBiotherapies Incorporated, a Michigan corporation (“Biotherapies”), pursuant towhich the Company acquired Biotherapies’ 50% interest in Biomedical DiagnosticsLLC (the “LLC” or “Diagnostics”), a Michigan limited liability company.  Diagnostics principal operations include adiagnostic technology platform for application in the detection of variousdiseases including breast, ovarian and prostate cancers.

 

F-10

----

 

Total consideration andadvances paid or payable by the Company on this acquisition totaled$8,840,408.  The Company paidBiotherapies $2,340,000 cash, including prepaid royalties and advances totaling$290,000, and issued 2,524,030 shares of its common stock with a fair value of$4,719,936.  The fair value of commonshares represents the average quoted market value of the Company’s commonshares on the acquisition consummation date of November 30, 2001 and the twodays preceding that date.  On May 30,2002, the six-month anniversary of the signing of the Purchase Agreement, the Companywill be required to make an additional cash payment to Biotherapies in theamount of $1,500,000.  This obligationhas been recorded at its estimated fair value, using a 12% discount rate, of$1,415,100.  The discount of $84,900 isbeing accreted through interest expense by the interest method over the periodto May 30, 2002.  At December 31, 2001,the discounted loan payable balance had accreted to $1,429,266.  Estimated costs of the acquisition,consisting primarily of third party professional fees, totaled $365,372.

 

Concurrently with theexecution of the Purchase Agreement, the Company and Biotherapies entered intonumerous other agreements, including a certain Mammastatin Sublicense Agreementand a certain P&O Technology License Agreement.  Pursuant to the Sublicense Agreement, Biotherapies granted to theCompany rights to make, use and sell certain proteins and antibodies, and teststo development or sell additional antibodies and/or diagnostic assays for thediagnosis of breast, prostate and/or ovarian cancers.  Under the agreement, the Company is required to pay Biotherapiesa royalty of between ten percent (10%) and twenty percent (20%) of net salesgenerated, depending on the level of net sales in a given year.  As of November 30, 2001 and December 31,2001, Genesis had pre-paid royalty payments pursuant to the MammastatinSublicense Agreement totalling $100,000.

 

Pursuant to the PurchaseAgreement, the Company committed to fund the operating costs of the LLC of atleast $1,000,000 in support of product development of the mammastatin, prostateand ovarian technologies on or before November 30, 2002.  As of December 31, 2001, $230,000 had beenpaid toward this commitment.

 

Biotherapies mayterminate the Mammastatin Sublicense Agreement if the Company fails to (*i*)meet its commitment to fund operating costs of the LLC of at least $1,000,000;(*ii*)make any royalty payments due to Biotherapies; or (*iii*) achieve gross sales ofthe licensed technology of $7,500,000 within 24 months of the signing of thePurchase Agreement and $20,000,000 within 36 months of the signing of thePurchase Agreement.  The Company cancure the gross sales default by satisfying the royalty obligations that wouldhave accrued had the target gross sales been met.  Biotherapies may terminate the P&O Technology License Agreementif the Company fails to meet its commitment to fund operating costs of the LLCof at lease $1,000,000 or fails to make any required royalty payments due toBiotherapies.

 

F-11

----

 

The acquisition was recordedby the purchase method with the results of Diagnostics consolidated with theCompany’s from the date of acquisition on November 30, 2001.  Prior to this acquisition, the Companyaccounted for its investment in Diagnostics using the equity method.  The total purchase price and advances of$8,840,408 has been allocated to the net assets acquired based upon theirrelative fair values as follows:

 
| Fair value of assets acquired:                      |   |     |      |
|-----------------------------------------------------|--------|----------|-----------|
| Medical  technology licenses                        |   | $        | 8,321,364 |   |
| In-process  research and development                |   | 750,000  |      |
| Other current  assets                               |   | 8,617    |      |
| Other assets                                        |   | 66,629   |      |
| Prepaid royalty  costs                              |   | 100,000  |      |
| Stock  appreciation rights plan liabilities assumed |   | (301,418 | )         |
| Other current  liabilities assumed                  |   | (104,784 | )         |
|                                                |   | $        | 8,840,408 |   |

 
| Consideration:                           |   |      |      |
|------------------------------------------|--------|-----------|-----------|
| Cash                                     |   | $         | 2,340,000 |   |
| Common shares                            |   | 4,719,936 |      |
| Loan payable  ($1,500,000 less discount) |   | 1,415,100 |      |
| Expenses of  acquisition                 |   | 365,372   |      |
|                                     |   | $         | 8,840,408 |   |

 

The allocation of thecost of the Company’s acquisition to medical technology licenses of $8,321,364reflects the estimated value of completed screening technology for thediagnosis of breast cancer and its potential application to ovarian andprostate cancer screening tests, which will be amortized over the estimatedperiod of benefit of seven years.  Thevalue assigned to in-process research and development of $750,000 is expensedat the date of acquisition and represents the estimated fair value of researchin-progress at the acquisition date related to a new detection process andresearch and development related to a serum and screening diagnostic forovarian and prostate cancers.  Theestimated fair value of these projects was determined by management using adiscounted cash flow model, using discount rates reflecting the stage ofcompletion and the risks affecting the successful development andcommercialization of the processes and diagnostic tests that were valued.

 

F-12

----

 

(b)    Dynamed Inc.:

 

In December 2000, theCompany completed an agreement with Dynamed Inc. and certain shareholders ofBiotherapies to receive 100,000 shares of Biotherapies (see note 6(b)) anda 50% interest in a joint venture company, BioMed Technologies LLC, in returnfor $50,000 cash, the Company’s investment in 800,000 shares of preferred stockof I.D. Certify Inc. and a warrant to purchase 160,000 common shares of I.D.Certify Inc., and 1,100,000 common shares of the Company.  Biotherapies also had a 50% interest inBioMed Technologies LLC.  The totalpurchase price of $5,180,860 has been allocated to the net assets acquiredbased upon their relative fair values as follows:

 
| Fair value of  assets acquired:                                          |   |      |      |
|--------------------------------------------------------------------------|--------|-----------|-----------|
| Investment in  Biotherapies, Inc. common shares                          |   | $         | 2,500,000 |   |
| Patents and  rights to prostate and ovarian diagnostics of joint venture |   | 2,680,860 |      |
|                                                                     |   | $         | 5,180,860 |   |

 
| Consideration:                             |   |      |      |
|--------------------------------------------|--------|-----------|-----------|
| Cash                                       |   | $         | 50,000    |   |
| I.D. Certify  preferred shares and warrant |   | 800,160   |      |
| Common shares of  the Company              |   | 4,330,700 |      |
|                                       |   | $         | 5,180,860 |   |

 

The Company accounted forthe transaction by valuing the cash and all common shares at fair value asevidenced by third party transactions. The residual amount in the transaction was applied to the Company’s 50%interest in patents and rights held by BioMed Technologies LLC for prostatediagnostics and prostate therapeutics.

 

Prior to December 31,2000, BioMed Technologies LLC was wound up and its only assets, includingpatents and technology rights, were transferred into Diagnostics (see note6(a)) to provide the Company with a 50% interest in the technology.

 

(c)     Pro forma information:

 

The following unauditedpro forma financial information give effect to the Company’s acquisitions ofthe remaining 50% interest in Biomedical Diagnostics, LLC and the Dynamedtransaction as if the acquisitions had taken place at the beginning of therespective years presented below. Appropriate adjustments have been made to reflect the accounting basisused in recording the acquisition.  Thepro forma financial information is presented for illustrative purposes only andis not necessarily indicative of the future results of operations of theCompany after its investment in Diagnostics or what the financial position orresults of operations of the Company would have been had the acquisitionsoccurred at the date indicated. Included in the pro forma loss for the period before extraordinary itemsand loss for the period is a non-recurring charge of $750,000 related toin-process research and development acquired in the acquisition of theremaining 50% interest in Diagnostics (note 3(a)).

 

F-13

----

 
|                                                          |   | **2001**    |        | **2000**   |   |
|---------------------------------------------------------------|--------|-------------|-------------|------------|--------|
| Loss for the  period, before extraordinary items              |   | $           | (15,404,926 | )          | $      | (8,973,513 | ) |
| Loss for the  period                                          |   | (16,275,280 | )           | (8,973,513 | )      |
| Basic and  diluted loss per share, before extraordinary items |   | (0.88       | )           | (0.71      | )      |
| Basic and  diluted loss per share                             |   | (0.93       | )           | (0.71      | )      |
|                                                               |        |             |             |            |        |  |  |

 

**4.     Legal proceedings:**

 

(a)          On November 1, 2001, aStatement of Claim was filed in the Supreme Court of British Columbia by aformer consultant against the Company and a director of the Company seekingpayment of 500,000 common shares of the Company for consulting servicesperformed.  The plaintiff is seekingspecific performance of the agreement or damages in lieu of specificperformance.

 

The Company’s position isthat in a letter of agreement dated April 24, 2001, the plaintiff agreed toaccept 250,000 options at $1.50 per share and to receive no additional sharesof the Company.  The Company hasrecorded the fair value of the 250,000 options in these consolidated financialstatements with an offsetting charge to consulting fees.

 

(b)         A former employee of thecompany has filed a claim for wrongful termination during the year.  The former employee is seeking general andspecial damages including the value of 500,000 common shares and 90,000 stockoptions of the Company.  The Company hasfiled a counterclaim against the employee for damages for breach of contractand fraudulent or negligent misrepresentation.

 

The Company hasdetermined that it is not possible at this time to predict the final outcome ofthese legal proceedings and that it is not possible to establish a reasonableestimate of possible damages, if any, or reasonably to estimate the range ofpossible damages that may be awarded to the plaintiffs.  Any adjustments to the amounts recognizedwill be recorded with determinable.

 

**5.     Property and equipment:**

 

        Property and equipment consists of the following:

 
|                       |   | **2001** |    | **2000** |   |
|----------------------------|--------|----------|---------|----------|--------|
| Computer  software         |   | $        | 3,388   |     | $      | 3,211 |   |
| Furniture and  fixtures    |   | 3,943    |    | 3,943    |   |
| Leasehold  improvements    |   | 46,363   |    | —   |   |
| Office equipment           |   | 77,707   |    | 37,946   |   |
| Machinery and  equipment   |   | 165,308  |    | —   |   |
| Website  development costs |   | 53,886   |    | —   |   |
|                       |   | 350,595  |    | 45,100   |   |
| Accumulated  amortization  |   | (157,694 | )       | (12,611  | )      |
|                       |   | $        | 192,901 |     | $      | 32,489 |   |

 

F-14

----

 

**6.     Long-term equity investments:**

 

        Long-terminvestments:

 
|                                        |   | **Ownership  percentage**                                                                   |   | **2001**  |      | **2000**  |   |
|---------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Equity method:                              |   |                                                                                        |   |      |      |      |   |
| Biomedical  Diagnostics, LLC (a)            |   | (2001 – 50% to  November 20, 2001 and consolidated thereafter (note 3(a)); 2000 - 50%) |   | $         | —    |      | $      | 4,451,194 |   |
|                                        |   |                                                                                        |   |      |      |      |   |
| Biotherapies,  Inc. (b)                     |   | (2001 - 26.3%; 2000 - 26.6%)                                                                |   | 2,122,373 |      | 4,130,361 |   |
|                                        |   |                                                                                        |   |      |      |      |   |
| Prion  Developmental Laboratories, Ltd. (c) |   | (2001 - 33%; 2000 - 25%)                                                                    |   | —    |      | 1,322,844 |   |
|                                        |   |                                                                                        |   | $         | 2,122,373 |      | $      | 9,904,399 |   |

 

(a)     Investment in Biomedical Diagnostics, LLC:

 
|                                                |   | **2001** |   | **2000**   |   |
|-----------------------------------------------------|--------|----------|--------|------------|--------|
| Investment in  Biomedical Diagnostics, LLC, at cost |   | $        | — |       | $      | 5,680,860 |   |
| Equity in losses                                    |   | —   |   | (1,229,666 | )      |
|                                                |   | $        | — |       | $      | 4,451,194 |   |

 

The Company entered intoa joint venture agreement dated November 8, 1998 with Biotherapies for thedevelopment of a mammastatin diagnostic assay through the formation ofDiagnostics.  The diagnostic assay beingdeveloped will be used as a cancer screening method.  Under the terms of the amended agreement dated November 8, 1998,both parties to the agreement had a 50% equity interest in Diagnostics, butvoting control of Diagnostics was held by Biotherapies.  The Company accounted for its investment inDiagnostics using the equity method.

 

In December 2000, theCompany contributed its 50% interest in certain technology and technologyrights to ovarian and prostate diagnostics, received as part of the Dynamedtransaction, to Diagnostics (see note 3(b)).

 

Pursuant to a Letter ofIntent dated August 20, 2001 between the Company and Biotherapies, the Companyissued 600,000 common shares with a fair value of $1,680,000 to Biotherapies,Inc. which was deemed to be full payment for amounts owing under the Amendedand Restated Operating Agreement.  Thefair value of the common shares represents the quoted market value at the dateof their issuance.  The Companyaccounted for this transaction as an additional investment in Diagnostics.

 

F-15

----

 

On November 30, 2001, theCompany acquired the remaining 50% interest in Diagnostics from Biotherapiesand commenced the consolidation of the operations of Diagnostics with those ofthe Company (see note 3).  The carryingvalue of the Company’s original 50% equity investment in Diagnostics at November30, 2001 of $4,003,607, was allocated to remaining net assets as follows:

 
| Medical  technology licenses                        |   | $        | 4,334,563 |   |
|-----------------------------------------------------|--------|----------|-----------|--------|
| Other current  assets                               |   | 8,617    |      |
| Other assets                                        |   | 66,629   |      |
| Stock  appreciation rights plan liabilities assumed |   | (301,418 | )         |
| Other current liabilities  assumed                  |   | (104,784 | )         |
|                                                |   | $        | 4,003,607 |   |

 

Details of Diagnostic’sreported results of operations (which excludes the amortization of the excessof the Company’s investment over the net book value of Diagnostics at the dateof acquisition) are set out below:

 
|                        |   | **January 1, 2001  to November 30,  2001** |       | **2000** |   |
|-----------------------------|--------|--------------------------------------------|------------|----------|--------|
| Research and  development   |   | $                                          | 473,340    |     | $      | 239,788 |   |
| Selling and  administration |   | 915,452                                    |       | 389,240  |   |
|                        |   |                                       |       |     |   |
| Operating loss              |   | (1,388,792                                 | )          | (629,028 | )      |
| Other income                |   | 12,190                                     |       | 34,092   |   |
| Loss for the period         |   | $                                          | (1,376,602 | )        | $      | (594,936 | ) |

 

(b)    Investment in Biotherapies, Incorporated:

 
|                        |   | **2001**   |      | **2000**   |   |
|-----------------------------|--------|------------|-----------|------------|--------|
| Investment in  Biotherapies |   | $          | 5,437,611 |       | $      | 5,383,976 |   |
| Equity in losses            |   | (3,315,238 | )         | (1,253,615 | )      |
|                        |   | $          | 2,122,373 |       | $      | 4,130,361 |   |

 

F-16

----

 

The Company has made thefollowing investments in Biotherapies, a biotechnology company developing apotential therapeutic for breast cancer (number of common shares retroactivelyrestated for a 8.3:1 stock split by Biotherapies in 2001):

 
| **Transaction**                                 |   | **Date**        |   | **Common shares** |   | **Common  share   investment** |      | **Bond** |   |
|-------------------------------------------------|--------|-----------------|--------|------------------------|--------|--------------------------------|-----------|----------|--------|
| Cash investment  in common shares               |   | March, 1998     |   | 498,000                |   | $                              | 420,000   |     | — |   |
| Cash and equity  investment in common shares    |   | September, 1999 |   | 340,300                |   | 915,000                        |      | —   |   |
| Cash investment  in bonds                       |   | March, 2000     |   | —                 |   | —                         |      | 400,000  |   |
| Conversion of  bond receivable to common shares |   | March, 2000     |   | 132,800                |   | 400,000                        |      | (400,000 | )      |
| Cash investment  in common shares               |   | June, 2000      |   | 365,200                |   | 1,100,000                      |      | —   |   |
| Cash investment  in common shares (3(b))        |   | December, 2000  |   | 830,000                |   | 2,500,000                      |      | —   |   |
| Direct  acquisition costs                       |   |            |   | —                 |   | 48,976                         |      |     |   |
| Dilution gain                                   |   | March, 2001     |   | —                 |   | 53,635                         |      | —   |   |
|                                            |   |            |   | 2,166,300              |   | $                              | 5,437,611 |     | — |   |

 

The Company uses theequity method of accounting for its investment in Biotherapies.  The excess of each investment inBiotherapies over the Company’s then proportionate interests in the net assetsof Biotherapies at each purchase step is being amortized over three years.  The Company’s ownership percentage decreasedfrom 26.6% to 26.3% during the year ended December 31, 2001 upon the issuanceof shares of Biotherapies to third parties resulting in a dilution gain of$53,635 which has been recorded as an equity transaction to additional paid-incapital.

 

Details of Biotherapies’reported results of operations are set out below (which excludes amortizationof the excess of the Company’s investment over the net book value ofBiotherapies at the dates of acquisition and intercompany transactions with theCompany):

 
|                      |   | **2001**   |       | **2000**   |   |
|---------------------------|--------|------------|------------|------------|--------|
| Revenue                   |   | $          | 59,209     |       | $      | — |   |
|                      |   |       |       |       |   |
| Research and  development |   | 920,813    |       | 1,416,320  |   |
| Administration            |   | 638,290    |       | 1,233,719  |   |
|                      |   |       |       |       |   |
| Operating loss            |   | (1,499,894 | )          | (2,650,039 | )      |
| Other expenses            |   | (12,345    | )          | (43,073    | )      |
| Loss for the  period      |   | $          | (1,512,239 | )          | $      | (2,693,112 | ) |

 

F-17

----

 

(c)     Investment in Prion DevelopmentLaboratories, Inc.:

 
|                                                  |   | **2001**   |      | **2000** |   |
|-------------------------------------------------------|--------|------------|-----------|----------|--------|
| Investment in  Prion Developmental Laboratories, Inc. |   | $          | 2,436,553 |     | $      | 2,036,553 |   |
| Equity in losses  and write-down                      |   | (2,436,553 | )         | (713,709 | )      |
|                                                  |   | $          | —    |     | $      | 1,322,844 |   |

 

Pursuant to an investmentagreement dated on September 8, 2000, the Company acquired 1,000,000 commonshares of Prion Developmental Laboratories, Inc. (“PDL”) and a warrant topurchase an additional 1,000,000 common shares of PDL at an exercise price of$0.40 per common share for total cash consideration of $1,000,010.  On November 21, 2000, the Company purchaseda further 1,000,000 common shares pursuant to the investment agreement for cashconsideration of $1,000,000.  On August22, 2001, the Company exercised its warrant to purchase an additional 1,000,000common shares of PDL for $400,000, giving the Company a 33% equity interest inPDL.  PDL is a development stagebiotechnology company developing diagnostic tests for prion diseases.

 

The Company accounts forits investment in PDL by the equity method from September 8, 2000, the date ofinitial investment acquisition.  Theexcess of each investment in PDL over the Company’s then proportionate interestsin the net assets of PDL at each purchase step is being amortized over theestimated life of PDL’s existing research contracts of three years.

 

At December 31, 2001, PDLhad limited its research and development activities due to inadequate cashresources and PDL had a working capital deficiency of $1,524,918.  Consequently, at December 31, 2001, theCompany determined that there was an other than temporary loss in value andwrote down the investment balance to nil. The write down of $441,668 is included in equity in loss of investments.

 

Details of PDL’s reportedresults of operations for the year ended December 31, 2001 and the period fromSeptember 8, 2000 to December 31, 2000 are set out below:

 
|                                      |   | **2001**  |      | **2000**  |   |
|-------------------------------------------|--------|-----------|-----------|-----------|--------|
| Revenue                                   |   | $         | —    |      | $      | — |   |
| Research,  development and administration |   | 1,834,339 |      | 2,002,247 |   |
|                                      |   |      |      |      |   |
| Operating loss                            |   | 1,834,339 |      | 2,002,247 |   |
| Interest income                           |   | 1,393     |      | 5,559     |   |
| Loss for the  period                      |   | $         | 1,832,946 |      | $      | 1,996,688 |   |

 

F-18

----

 

**7.     Medical technology licenses:**

 
|                         |   | **2001** |       | **2000** |   |
|------------------------------|--------|----------|------------|----------|--------|
| Medical  technology licenses |   | $        | 12,655,926 |     | $      | — |   |
| Accumulated  amortization    |   | (150,666 | )          | —   |   |
|                         |   | $        | 12,505,260 |     | $      | — |   |

 

Pursuant to theacquisition of LLC, the Company acquired a license to utilize certaindiagnostic technology for use in detecting various diseases including breast,ovarian and prostate cancers (note 3).

 

**8.     Promissory notes:**

 

Promissory notes payable:

 
|                                  |   | **2001**  |      | **2000**  |   |
|---------------------------------------|--------|-----------|-----------|-----------|--------|
| Payable to private investors:         |   |      |      |      |   |
| Issued:                               |   |      |      |      |   |
| April 27, 2000 (a)                    |   | $         | —    |      | $      | 1,500,000 |   |
| September 11, 2000 (a)                |   | —    |      | 2,000,000 |   |
| August through October, 2001 (d)      |   | 143,647   |      | —    |   |
| Other – Biotherapies             |   | 43,062    |      | —    |   |
|                                  |   |      |      |      |   |
| Shareholders and directors:           |   |      |      |      |   |
| July 3 and October 3, 2001 (b)        |   | 600,000   |      | —    |   |
| October 30, 2001 (b)                  |   | 100,000   |      | —    |   |
| November 26, 2001 (b)                 |   | 1,000,000 |      | —    |   |
|                                  |   | 1,886,709 |      | 3,500,000 |   |
|                                  |   |      |      |      |   |
| Cash financing costs, unamortized     |   | —    |      | (166,667  | )      |
| Non-cash financing costs, unamortized |   | (458,398  | )         | (491,518  | )      |
|                                  |   | (458,398  | )         | (658,185  | )      |
|                                  |   | $         | 1,428,311 |      | $      | 2,841,815 |   |

 

F-19

----

 

                        (a)   On April 27, 2000 and September 11, 2000, theCompany issued $1,500,000 and $2,000,000 promissory notes to a privateinvestor.  Both promissory notes bearinterest at an annual rate of 10% compounded semi-annually and are payablemonthly.  The notes are repayable withinthe earlier of twelve months of issuance and ten days after completion of afinancing with aggregate net proceeds of $10,000,000 or more.

 

Under the terms of thefinancing agreements, the Company granted 300,000 warrants for the $1,500,000financing and 500,000 warrants for the $2,000,000 financing.  The warrants entitle the holder to acquireone common share at an exercise price of $6.50 per share until October 27, 2001and one common share at an exercise price of $4.00 per share until September11, 2002, respectively.  The estimatedfair value of the warrants of $897,554 was recorded as a discount to thepromissory notes and is being amortized to interest expense over the one yearterm of the promissory notes.  Thisresulted in additional interest expense during the year ended December 31, 2001of $491,518 (2000 - $406,036).  Theunamortized discount at December 31, 2001 is nil (2000 - $491,518).

 

In May 2001, the Companycommitted to issue 2,000,000 common shares of the Company in settlement of anoutstanding $2,000,000 promissory note to the private investor and shareholderresulting in an extraordinary loss on settlement of $500,000 based on themarket value of the common shares at the date of agreement to settle.  In addition, 800,000 warrants previouslyprovided to this lender as part of the original promissory note financing and181,818 warrants previously provided to this lender as part of a privateplacement, were repriced to reduce the exercise price to $2.00 per common shareand the term to expiry of the options was extended to 24 months after themodification date.  The incrementalvalue of the repriced 800,000 warrants in excess of the original amount of$388,787 has been recorded as an additional discount on the promissory notefinanced and has been recorded in interest expense in the statement ofoperations.

 

During 2001, the Companyissued 1,004,605 common shares to settle the $1,500,000 in promissory notes andrelated interest owing to the private investor, which had a carrying value of$1,387,805.  The Company recognized anextraordinary loss on debt settlement of $370,354 based upon the market valueof the shares at the date of agreement to settle.

 

F-20

----

 

                        (b)   On July 3 and October 3, 2001, the Companyborrowed $500,000 and $100,000, respectively, from the private investor andmajor shareholder.  Interest accrues onthe loan at a rate of 10% per annum, compounded semi-annually and is secured bya promissory note.  On October 30, 2001a further $100,000 was advanced to the Company.  The promissory note bears interest at 1% per month.  As consideration for the loans, the Companyissued 33,776 common share purchase warrants with an exercise price of $3.00expiring October 1, 2003 and a warrant to acquire up to 250,000 common sharesof the Company at $3.00 per share expiring May 30, 2003.  The notes are due and payable on the earlierof 90 days from the date funds are advanced or 10 days after the completion ofa financing of not less than $5,000,000. The fair value of the warrants of $467,158 has been recorded as adiscount to the promissory notes and was being amortized over the estimatedperiod to maturity of the loans.  ByDecember 31, 2001, the loans had matured, but have not been repaid.  The Company’s intent is to repay the loanswhen additional financing is secured. The lender has not demanded repayment.

 

(c)          On October 24, 2001, themajor shareholder became a director of the Company and on November 26, 2001,advanced a further $1,600,000 to the Company, $600,000 of which was repaid onDecember 27, 2001.  The outstandingbalance bears interest at 10% per annum, compounded semi-annually, is securedby the promissory note, and matures May 23, 2002.  The outstanding principal and interest balance is convertibleinto common shares at a price of $1.50 per share at the holder’s option.  If the holder elects to convert, the holderreceives common share purchase warrants to acquire one-half of the number ofcommon shares received on conversion. The warrants would have an exercise price of $2.50 and expire threeyears after issuance.  A beneficialconversion feature totaling $534,288 has been recorded and is recognized overthe term to maturity of the loan as additional interest expense.  The fair value of the warrants at thecommitment date of $261,955 will be recognized on conversion.

 

(d)         During August throughOctober 2001, the Company raised a further $143,647 through the issuance ofpromissory notes to third parties.  Thenotes bear interest from 5% per month to 10% per annum, are unsecured andmature 90 to 150 days after funds are advanced.  Warrants to acquire 35,000 common shares were issued asconsideration for the loans.  The fairvalue of the warrants of $31,580 has been recorded as a discount to thepromissory notes and is being amortized over the term of the notes to interestexpense.  The loans have matured, butthey have not been repaid by the Company. The lenders have not demanded repayment of the loans.

 

F-21

----

 

**9.     Stockholders’ equity:**

 

(a)          Common and preferredstock offerings:

 

During 1999 the Companycompleted the sale of 2,000,000 Class A Convertible Preferred Shares at variousdates pursuant to an offering memorandum dated December 1, 1998.  Net cash proceeds to the company from thisoffering were $5,565,911.  The Series APreferred shares carry a 6% non-cumulative dividend rate in preference to anydividend on common stock, have a liquidation preference ahead of common stockand are convertible into common stock on a one-for-one basis within one year ofthe date of the subscription agreement. The Company has a right to redeem all the outstanding Class AConvertible Preferred Shares at any time at a redemption price equal to 110% ofthe initial purchase price plus all declared and unpaid dividends thereon atthe date of redemption.

 

Certain of the PreferredShares were issued for cash consideration at a price that was less than themarket price of the Company’s common shares on the date of agreement forissuance.  This difference represents abeneficial conversion feature attached to the Preferred Shares.  The discount resulting from the allocationof the proceeds to the beneficial conversion feature of $354,735 was recordedas a dividend or return to the preferred shareholders over the minimum periodto conversion using the effective yield method and dividends were fullyrecognized during the year ended December 31, 2000.

 

During the year endedDecember 31, 2001, 1,064,974 (2000 – 758,464) preferred shares were convertedto common stock.

 

(b)         Stock options andstock-based compensation:

 

Stock options:

 

During fiscal year 2000,the Company adopted a new stock option plan, “Year 2000 Stock OptionPlan”.  The Company adopted a new stockoption plan in fiscal year 2001, “Year 2001 Stock Option Plan”, that authorizesfor the issuance of 2,000,000 stock options to officers, directors, employees,and consultants to acquire shares of the Company’s common stock.

 

The Board of Directors determines the terms of theoptions granted, including the number of options granted, the exercise priceand the vesting schedule.  The exerciseprice for the stock options shall not be less than the fair market value of theunderlying stock at the date of grant, and have terms no longer than ten yearsfrom the date of grant.

 

F-22

----

 

Stock option activitysince the inception of the Company’s plans is presented below:

 
|                                      |   | **Number   of shares** |   | **Weighted  average   exercise price** |   |
|-------------------------------------------|--------|------------------------|--------|----------------------------------------|--------|
| Options  outstanding at December 31, 1999 |   | 895,000                |   | $                                      | 2.58   |   |
| Granted                                   |   | 120,000                |   | 3.89                                   |   |
| Cancelled                                 |   | (386,500               | )      | 4.30                                   |   |
| Exercised                                 |   | (68,500                | )      | 1.89                                   |   |
|                                      |   |                   |   |                                   |   |
| Options  outstanding at December 31, 2000 |   | 560,000                |   | 1.62                                   |   |
| Granted                                   |   | 1,566,500              |   | 1.83                                   |   |
| Cancelled                                 |   | (145,000               | )      | 2.84                                   |   |
| Exercised                                 |   | (196,500               | )      | 1.31                                   |   |
|                                      |   |                   |   |                                   |   |
| Options  outstanding at December 31, 2001 |   | 1,785,000              |   | $                                      | 1.74   |   |

 

The following table summarizes the stock optionsoutstanding at December 31, 2001:

 
|                          |   | **Options  outstanding** |   | **Options  exercisable**                           |   |
|-------------------------------|--------|--------------------------|--------|----------------------------------------------------|--------|
| **Range of   exercise price** |   | **Number of   shares**   |   | **Weighted  average  remaining  contractual life** |   | **Weighted  average   exercise price** |   | **Number   exercisable** |   | **Weighted  average  exercise   price** |   |
| $1.00 – 1.24             |   | 415,000                  |   | 1.84                                               |   | $ | 1.09 |   | 415,000 |   | $ | 1.09 |   |
| $1.67 – 2.50             |   | 1,295,000                |   | 4.10                                               |   | 1.75 |   | 1,150,000 |   | 1.70 |   |
| $3.81 – 5.75             |   | 75,000                   |   | 2.58                                               |   | 5.22 |   | 75,000 |   | 5.22 |   |
|                          |   | 1,785,000                |   | 3.51                                               |   | $ | 1.74 |   | 1,640,000 |   | 1.71 |   |
|                               |        |                          |        |                                                    |        |  |  |  |  |  |  |  |  |

 

The Company has committed to issue 250,000 options assettlement of a legal action (see note 4(a)). The Company has committed to issue 15,000 options to a director asconsideration for director services provided.

 

In addition to the above option plan activity, theCompany granted the following options outside of its option plan to certain officersduring December 2001:

 

Stock options issued outside of plans:

 

| **Expiry**    |     | **Exercise  price   per share** |     | **Outstanding  options** |    |
|---------------|----------|---------------------------------|----------|--------------------------|---------|
|          | **2001** |                            | **2000** |                     |
| December 2006 |     | $                               | 1.67     |                     | 200,000 |   | — |   |
|               |          |                                 |          |                          |         |  |  |  |

 

F-23

----

 

These options are fullyvested and all are outstanding as of December 31, 2001.

 

As explained in note 2(m), the Company has adoptedonly the disclosure provisions of FAS No. 123 for options granted to employeesunder the existing employee stock option plan. FAS No. 123 uses a fair value method of calculating the cost of stockoption grants.  Had compensation costfor the employee stock option plan been determined by this method, loss andbasic loss per share at December 31, 2001 would have been as follows:

 

|                               |   |                          |       |      |   | **Period  from  September 19,  1994 (inception)  to December 31,  2001** |   |
|------------------------------------|--------|-------------------------------|------------|-----------|--------|--------------------------------------------------------------------------|--------|
|                               |   |                          |       |      |   |                                                                     |
|                               |   |                          |       |      |   |                                                                     |
|                               |   | **Years  ended December 31,** |       |      |
|                               |   | **2001**                      |       | **2000**  |   |                                                                     |
| Loss:                              |   |                          |       |      |   |                                                                     |   |
| As reported                        |   | $                             | 15,368,941 |      | $      | 5,868,006                                                                |   | $ | 24,574,828 |   |
| Pro forma                          |   | 15,755,925                    |       | 6,121,561 |   | 25,488,715                                                               |   |
|                               |   |                          |       |      |   |                                                                     |   |
| Basic and  diluted loss per share: |   |                          |       |      |   |                                                                     |   |
| As reported                        |   | $                             | 1.02       |      | $      | 0.65                                                                     |   | $ | 4.41 |   |
| Pro forma                          |   | 1.04                          |       | 0.68      |   | 4.57                                                                     |   |

 

The weighted average fair value of options grantedwith an exercise price greater than the market price during the years ended December31, 2001 and 2000 was $0.93 and nil per option, respectively.  The weighted average fair value of optionsgranted with an exercise price equal to market price during the years endedDecember 31, 2001 and 2000 was $1.44 and nil per option, respectively.  The weighted average fair value of optionsgranted with an exercise price less than the market price during the yearsended December 31, 2001 and 2000 was $2.11 and $4.28 per option, respectively.

 

The Company has estimated the fair value of each optionon the date of the grant using the Black-Scholes option-pricing model with thefollowing weighted average assumptions:

 

|                             |   | **2001**  |   | **2000**  |   |
|----------------------------------|--------|-----------|--------|-----------|--------|
| Expected  dividend yield         |   | 0         | %      | 0         | %      |
| Expected stock  price volatility |   | 128.3     | %      | 118.0     | %      |
| Risk-free  interest rate         |   | 4.3       | %      | 5.5       | %      |
| Expected life of  options        |   | 3.8 years |   | 4.0 years |   |

 

F-24

----

 

(c)     Share purchase warrants:

 

Share purchase warrantsoutstanding at December 31, 2001 and 2000 to purchase one common share of theCompany are as follows:

 

| **Expiry dates**                         |   | **Exercise  price   per share** |   | **Outstanding  warrants** |   |
|------------------------------------------|--------|---------------------------------|--------|---------------------------|--------|
| **2001**                                 |   | **2000**                        |
|                                     |   |                            |   |                      |   |   |   |
| January 2001 *(i)*                       |   | $                               | 7.00   |                      | — |   | 28,500 |   |
| February 2001 *(i)*                      |   | 11.125                          |   | —                    |   | 4,950 |   |
| March 2001 *(i)*                         |   | 7.00                            |   | —                    |   | 22,725 |   |
| March 2001 *(i)*                         |   | 11.125                          |   | —                    |   | 4,950 |   |
| May 2001 *(i)*                           |   | 4.75                            |   | —                    |   | 62,500 |   |
| June 2001 *(ii)*                         |   | 4.00                            |   | —                    |   | 181,818 |   |
| October 2001 *(ii)*                      |   | 6.50                            |   | —                    |   | 300,000 |   |
| December 2001 *(i)*                      |   | 3.00                            |   | —                    |   | 35,095 |   |
| March 2002 *(ii)*                        |   | 4.00                            |   | —                    |   | 500,000 |   |
| April 2003 *(ii)*                        |   | 2.00                            |   | 981,818                   |   | — |   |
| May 2003 *(iii)*                         |   | 3.00                            |   | 250,000                   |   | — |   |
| April 2003 *(iv)*                        |   | 2.20                            |   | 145,000                   |   | — |   |
| July 2003 *(iv)*                         |   | 3.00                            |   | 64,000                    |   | — |   |
| July 2003 *(v)*                          |   | 2.50                            |   | 5,000                     |   | — |   |
| July 2003 *(iv)*                         |   | 2.50                            |   | 62,500                    |   | — |   |
| August 2003 *(iii)*                      |   | 2.50                            |   | 25,000                    |   | — |   |
| August 2003 *(iv)*                       |   | 2.50                            |   | 31,000                    |   | — |   |
| September 2003 *(iii)*                   |   | 2.50                            |   | 5,000                     |   | — |   |
| October 2003 *(iii)*                     |   | 3.00                            |   | 33,776                    |   | — |   |
| October 2004 *(iii)*                     |   | 2.50                            |   | 5,000                     |   | — |   |
| November 2004 *(iv)*                     |   | 2.50                            |   | 65,416                    |   | — |   |
| November 2004 *(v)*                      |   | 3.87                            |   | 140,000                   |   | — |   |
| December 2004 *(iv)*                     |   | 2.50                            |   | 298,234                   |   | — |   |
| December 2004 *(iv)*                     |   | 2.50                            |   | 25,000                    |   | — |   |
| December 2004 *(v)*                      |   | 2.50                            |   | 29,823                    |   | — |   |
| November 2006 *(v)*                      |   | 2.50                            |   | 100,000                   |   | — |   |
| December 2006 *(v)*                      |   | 1.93                            |   | 150,000                   |   | — |   |
|                                     |   |                            |   |                      |   |   |   |
| Total warrants  outstanding, end of year |   |                            |   | 2,416,567                 |   | 1,140,538 |   |
|                                          |        |                                 |        |                           |        |  |  |  |

* *

----

*(i)*          During 2000, the Company completed privateplacements issuing 700,175 units to investors for cash proceeds of $2,448,720net of $214,129 of cash and $26,500 of common stock financing costs.  Each unit consists of one common share ofthe Company and one-half of one warrant, with two one-half warrants exercisableto purchase an additional one common share at an exercise price of between$3.00 and $11.125 per share.  Optionsexpired during 2001.

 

*(ii)*      During 2000, 800,000 warrants were issued to theholders of note payables from the Company. In 2001 upon conversion of these loans to common shares, the warrantsalong with 181,818 warrants issued on private placements were repriced anexercise price of $2.00 per share and extended until April 2003 (see note8(a)).

 

F-25

----

 

*(iii)*  During 2001, 318,776 warrants were issued to holdersof note payables from the Company (see note 8(b) and (d)).

* *

*(iv)**   *During2001, the Company completed private placements issuing 1,092,300 units toinvestors for cash.  Each unit consistsof one common share of the Company and one-half of one warrant, with twoone-half warrants exercisable to purchase an additional one common share at anexercise price of between $2.00 and $3.00 per share.  The Company also completed a private placement for 145,000 unitsconsisting of one common share of the Company and one warrant to purchase oneadditional common share at an exercise price of $2.20 per share.

* *

*(v)**       *During2001, the Company issued 424,823 warrants to consultants for servicesprovided.  The fair value of thesewarrants has been recorded as an expense and additional paid-in capital.

 

(d)         Stock appreciation rightsplan:

 

The stock appreciationrights plan obligation was recorded by the Company upon the acquisition of the Company’ssubsidiary, Diagnostics.  At thediscretion of Diagnostics’ management, membership appreciation units weregranted to certain employees of Diagnostics. At the date of acquisition of Diagnostics and as at December 31, 2001,6,800 units were granted of which 2,125 units had vested.  The liability pursuant to this plan isrecognized over the vesting period based upon the difference between theestimated current market value of Diagnostics’ units over the deemed initialvalue at the date of grant.  The planvalue is intended to be the fair market value of a membership interest inDiagnostics taking into consideration all objective and credible evidence suchas third party transactions relating to Diagnostics.  Employees may redeem their vested units five years from the dateof grant for cash at the appreciated value of the units.

 

The Company plans tosettle the outstanding obligations through the issuance of the fixed options ofthe Company.  Any settlement will berecorded in the period an irrevocable agreement is reached.

 

(e)          Retirement plan:

 

The Company’s subsidiarysponsors a 401(k) plan for its employees. No contributions have been made to the plan to December 31, 2001.

 

F-26

----

 

(f)            Earnings per share:

 

Loss attributed to commonstockholders for basic and diluted loss per share is as follows:

 
|                                            |   | **Year ended  December 31,** |        | **Period  from  September 19, 1994 (inception) to** |   |
|-------------------------------------------------|--------|------------------------------|-------------|----------------------------------------------------------|--------|
|                                            |   | **2001**                     |        | **2000**                                                 |   | **December 31, 2001** |   |
| Loss for the  period before extraordinary items |   | $                            | (14,498,587 | )                                                        | $      | (5,868,006 | ) | $ | (23,704,474 | ) |
| Extraordinary  loss on debt settlements         |   | (870,354                     | )           | —                                                   |   | (870,354 | ) |
|                                            |   |                         |        |                                                     |   |   |   |
| Loss for the  period                            |   | (15,368,941                  | )           | (5,868,006                                               | )      | (24,574,828 | ) |
|                                            |   |                         |        |                                                     |   |   |   |
| Preferred share  dividends                      |   | —                       |        | (122,670                                                 | )      | (354,735 | ) |
|                                            |   |                         |        |                                                     |   |   |   |
| Loss  attributable to common stockholders       |   | $                            | (15,368,941 | )                                                        | $      | (5,990,676 | ) | $ | (24,929,563 | ) |

 

**10.  Related party transactions:**

 
|                                                                                                                                                                                 |   | **2001** |    | **2000** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| (a)  Management and consulting fees paid to  officers and directors of the Company to companies controlled by the officers  and directors of the Company                        |   | $        | 370,163 |     | $      | 455,252 |   |
|                                                                                                                                                                                 |   |     |    |     |   |
| (b)  Included in the consolidated balance sheet  are the following amounts due to directors and officers and/or companies  controlled by officers and directors of the Company: |   |     |    |     |   |
| Accounts payable and  accrued liabilities                                                                                                                                            |   | 168,660  |    | —   |   |
|                                                                                                                                                                                      |        |          |         |          |        |  |  |

 

----

*(i)*          In 2000, the Company issued 160,528 commonshares to companies controlled by officers and directors of the Company tosettle debt of $40,132.  No gain or lossresulted from these debt settlements.

* *

*(ii)*      The Company’s subsidiary, Diagnostics, leases itspremises under an operating lease agreement with Biotherapies, an equityinvestee.  This lease expires in May2002.

 

F-27

----

 

**11.  Deferred tax assets and liabilities:**

 
|                                                  |   | **2001**   |    | **2000**   |   |
|-------------------------------------------------------|--------|------------|---------|------------|--------|
| Deferred tax  assets:                                 |   |       |    |       |   |
| Research and  development credits and costs           |   | $          | 290,770 |       | $      | 19,732 |   |
| Current  liabilities                                  |   | 299,627    |    | –     |   |
| Equity  investments                                   |   | 1,924,945  |    | 269,248    |   |
| Operating loss  carry forwards                        |   | 3,005,286  |    | 1,896,790  |   |
|                                                  |   |       |    |       |   |
| Total deferred  tax assets before valuation allowance |   | 5,520,628  |    | 2,185,770  |   |
| Valuation  allowance                                  |   | (4,047,175 | )       | (2,185,770 | )      |
|                                                  |   |       |    |       |   |
| Net deferred tax  asset after valuation allowance     |   | 1,473,453  |    | —     |   |
|                                                  |   |       |    |       |   |
| Deferred tax  liabilities:                            |   |       |    |       |   |
| Property and  equipment                               |   | (35,210    | )       | —     |   |
| Medical  technology licenses                          |   | (1,438,243 | )       | —     |   |
|                                                  |   |       |    |       |   |
| Net deferred tax  liability                           |   | $          | —  |       | $      | — |   |

 

Management believes thatit is not more likely than not that it will create sufficient taxable income sufficientto realize its deferred tax assets.  Itis reasonably possible these estimates could change due to future income andthe timing and manner of the reversal of deferred tax liabilities.  Due to its losses, the Company has no incometax expense.

 

The Company has operatingloss carry forwards for income tax purposes at December 31, 2001 ofapproximately $8,839,076.  Operatinglosses begin to expire in fiscal year 2019.

 

**12.  Financial instruments:**

 

Fair values:

 

The fair value of cashand cash equivalents, short-term investments, accounts and other receivables,and accounts payable and accrued liabilities approximates their financialstatement carrying amounts due to the short-term maturities of theseinstruments.  The carrying amount ofpromissory notes payable approximates fair value since they have a short termto maturity.

 

Stock appreciation rightsare carried at estimated fair value representing the estimated market value ofthe underlying shares of the Company’s subsidiary.

 

F-28

----

 

**13.  Geographic information:**

 

The Company hasinvestments in property and equipment in the following countries:

 
|          |   | **2001** |    | **2000** |   |
|---------------|--------|----------|---------|----------|--------|
| United States |   | $        | 126,756 |     | $      | — |   |
| Canada        |   | 66,145   |    | 32,489   |   |
|               |        |          |         |          |        |  |  |

 

The Company has notentered into any derivative agreements to manage its foreign exchange exposure.

 

**14.  Commitments:**

 

(a)     Operating leases:

 

The Company leases office facilities in BritishColumbia under operating lease agreements that expire in 2001 and 2006.  Minimum lease payments under these operatingleases are approximately as follows:

 
| Year ending December 31: |   |   |    |
|--------------------------|--------|--------|---------|
|                     |   |   |    |
| 2002                     |   | $      | 128,000 |   |
| 2003                     |   | 93,000 |    |
| 2004                     |   | 90,000 |    |
| 2005                     |   | 90,000 |    |
| 2006 and  thereafter     |   | 23,000 |    |
|                          |        |        |         |  |

 

(b)    Funding commitments:

 

Under the terms of the Diagnostics operating agreementthe Company has agreed to fund Biotherapies and Diagnostics as set out innote 3(a).

 

F-29

----

 

**15.  Recent accounting pronouncements:**

 

In October 2001, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*”(“FAS No. 144”),that replaces FAS No. 121.  FAS No. 144applies to the assessment of the impairment in the carrying value of long-livedassets, excluding goodwill and certain other specified items, including thoseto be disposed of by sale, including discontinued operations.  FAS No. 144 requires that those long-livedassets be measured at the lower of carrying amount and fair value less costs tosell.  In addition, FAS No. 144 providesthat discontinued operations will no longer be measured at net realized valueor include amounts for operating losses that have not yet occurred.  The Company will be required to implementFAS No. 144 in fiscal 2002.

 

In August 2001, the FASB issued FAS No. 143, “*Accountingfor Asset Retirement Obligations*” (“FAS No. 143”), which requiresentities to record the fair value of a liability for an asset for an assetretirement obligation in the period in which it is incurred and a correspondingincrease in the carrying amount of the related long-lived asset.  FAS No. 143 is effective for fiscal yearsbeginning after June 15, 2002.

 

The impact on adoption of these standards is notexpected to be material to the Company’s financial position or historicallyreported results of operations.

 

**16.  Subsequent events:**

 

(a)          Subsequent to December31, 2001, the Company reduced the exercise price of 100,000 options held by aconsultant from $2 to $1 per share.

 

(b)         Subsequent to December31, 2001, the Company issued 70,200 common shares for net cash proceeds of$105,300.

 

F-30

----

 

**INDEX TO EXHIBITS**

** **
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                      |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Restated Certificate of  Incorporation (incorporated by reference to the like-numbered exhibit to the  Company’s Registration Statement on Form 10SB12B, filed on August 13, 1999).                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 3.1.1           |   | Certificate of Amendment to  Certificate of Incorporation.                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 3.2             |   | Class A Convertible  Preferred Stock definition (incorporated by reference to the like-numbered  exhibit to the Company’s Registration Statement on Form 10SB12G, filed on  October 14, 1999).                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 3.3             |   | Bylaws (incorporated by  reference to the like-numbered exhibit to the Company’s Registration Statement  on Form 8-A12B, filed on December 18, 2000).                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 4.1             |   | Specimen Form of Stock  Certificate (incorporated by reference to the like-numbered exhibit to the  Company’s Registration Statement on Form 8-A12B, filed on December 18, 2000).                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.1            |   | Abstract of Limited  Liability Company Operating Agreement of BioMedical Diagnostics, LLC (Joint  Venture Agreement) (incorporated by reference to the like-numbered exhibit to  the Company’s Registration Statement on Form 10SB12B, filed on August 13,  1999).                              |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.2            |   | Amended and Restated Limited  Liability Company Agreement with Biomedical Diagnostics, LLC (incorporated by  reference to the like-numbered exhibit to the Company’s Registration  Statement on Form 10SB12G, filed on October 14, 1999).                                                       |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.3            |   | Management Services  Agreement BioLabs, Inc. with Tynehead Capital Corp. (incorporated by  reference to the like-numbered exhibit to the Company’s Registration  Statement on Form 10SB12G, filed on October 14, 1999).                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.4            |   | Letter Agreement with  DynaMed, Inc. dated September 2, 1999 (incorporated by reference to the  like-numbered exhibit to the Company’s Registration Statement on Form  10SB12G/A, filed on December 8, 1999).                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.5            |   | Form of Stock Option  Agreement for Shares Issued under the BioLabs Amended and Restated Stock  Option Plan (incorporated by reference to the like-numbered exhibit to the  Company’s Registration Statement on Form S-8, filed on April 27, 2000).                                             |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.6            |   | Amended and Restated Stock  Option Plan (incorporated by reference to the like-numbered exhibit to the  Company’s Registration Statement on Form S-8, filed on April 27, 2000).                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.7            |   | Warrant to Purchase Shares  of the Company’s Common Stock (incorporated by reference to the like-numbered  exhibit to the Company’s Registration Statement on Form S-8, filed on April  27, 2000).                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.8            |   | Investment Agreement, dated  September 8, 2000, by and among Prion Developmental Laboratories, Inc.,  Efoora, Inc. and BioLabs, Inc. (incorporated by reference to Exhibit 99.1 to  the Company’s Current Report on Form 8-K, filed on September 25, 2000).                                     |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.9            |   | Warrant, dated September 8,  2000, issued by Prion Developmental Laboratories, Inc., in favor of BioLabs,  Inc. (incorporated by reference to Exhibit 99.2 to the Company’s Current  Report on Form 8-K, filed on September 25, 2000).                                                          |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.10           |   | Purchase and Sale Agreement,  dated December 5, 2000, by and among BioLabs, Inc., DynaMed, Inc., Antony  Dyakowski, Elio Gugliemi, Kevin O’Farrell and Roberta Soon (incorporated by  reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed  on December 20, 2000). |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.11           |   | Year 2000 Stock Option Plan,  2001 Stock Incentive Plan and Stock Option Grants Outside of a Plan  (incorporated by reference to the like-numbered exhibit 4.1 to the Company’s  Registration Statement on Form S-8, filed on December 4, 2001).                                                |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.12           |   | 2001 Stock Incentive Plan.  (incorporated by reference to the like-numbered exhibit 4.2 to the Company’s  Registration Statement on Form S-8, filed on December 4, 2001).                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.13           |   | Purchase Agreement, dated  November 30, 2001 by and between Genesis Bioventures, Inc. and Biotherapies,  Inc. (incorporated by reference to Exhibit 99.1 to the Company’s  Current Report on Form 8-K, filed on  December 17, 2001).                                                       |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.14           |   | Mammastatin Sublicense  Agreement, dated November 30, 2001, by and between Genesis Bioventures, Inc.  and Biotherapies, Inc. (incorporated by reference to Exhibit 99.2 to the  Company’s Current Report on Form 8-K, filed on December 17, 2001).                                              |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 10.15           |   | P & O Technology License  Agreement, dated November 30, 2001, by and between Genesis Bioventures, Inc.  and Biotherapies, Inc. (incorporated by reference to Exhibit 99.3 to the  Company’s Current Report on Form 8-K, filed on December 17, 2001).                                        |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 21.1            |   | Subsidiaries.                                                                                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 23.1            |   | Consent of KPMG.                                                                                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                 |
| 24.1            |   | Power of Attorney  (incorporated by reference to the signature page on page S-1 of this Annual  Report on Form 10-KSB).                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                 |

 

E-1

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