**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|----------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                     |
| **For the Quarter Ended June 30, 2004** |
|                                         |
| **or**                                       |
|                                         |
| **o**                                        | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                         |
| **Commission file number 333-12570**         |

 

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**STRESSGEN BIOTECHNOLOGIES CORPORATION**

(Exactname of registrant as specified in its charter) 

 
| **Yukon Territory, Canada**                                                                                                                              |   | **N/A**                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|
| (State of incorporation)                                                                                                                                 |   | (IRS Employer Identification No.) |
|                                                                                                                                                     |   |                              |
| **350-4243  Glanford Avenue  Victoria, British Columbia V8Z 4B9****Parent  of Stressgen Biotechnologies, Inc.  6055 Lusk Boulevard  San Diego, CA** |   | **92121**                         |
| (Address of principal executive offices)                                                                                                                 |   | (zip code)                        |
|                                                                                                                                                     |   |                              |
| **(250)  744-2811(858) 202-4900**                                                                                                                        |
| (Registrant’s telephone number, including area code)                                                                                                |

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  Yes ý  No o

 

As ofJuly 30, 2004 the registrant had approximately 72,506,000 shares of CommonStock, no par value, outstanding. 

 

 

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**Stressgen Biotechnologies Corporation and Subsidiaries**

**INDEX**
| **Part I — Financial Information** |         |
|-----------------------------------------|--------------|
|                                    |         |
|                                    | Item 1. | Financial Statements (Unaudited) |   |
|                                    |         | Consolidated Balance Sheet  June 30, 2004 and December 31, 2003 |   |
|                                    |         | Consolidated  Statement of Operations and Accumulated Deficit  Three and Six Months Ended June 30, 2004 and 2003 |   |
|                                    |         | Consolidated  Statement of Cash Flows  Three and Six Months Ended June 30, 2004 and 2003 |   |
|                                    |         | Notes to  Consolidated Financial Statements |   |
|                                    | Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                    |         | Factors That  Could Affect Future Performance |   |
|                                    | Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                    | Item 4.      | Controls and  Procedures |   |
|                                    |         |
| **Part II — Other Information**    |         |
|                                    |         |
| Items  1 through 6                      |         |
|                                    |         |
| SIGNATURES  AND CERTIFICATIONS          |         |

 

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**CONSOLIDATED BALANCE SHEET**

(Unaudited)

 

*Stressgen Biotechnologies Corporation and Subsidiaries*

*(Canadian dollars in thousands, except share information)*

 
|                                                                                                                                                                                                       |   | **June 30,  2004** |   | **December 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| **Assets**                                                                                                                                                                                                 |   |                    |   |                        |   |
| Current assets:                                                                                                                                                                                            |   |                    |   |                        |   |
| Cash and cash equivalents                                                                                                                                                                                  |   | $                       | 7,888  |                        | $      | 19,996 |   |
| Short-term investments                                                                                                                                                                                     |   | 32,003                  |   | 32,094                      |   |
| Accounts receivable, net                                                                                                                                                                                   |   | 575                     |   | 733                         |   |
| Inventories                                                                                                                                                                                                |   | 659                     |   | 639                         |   |
| Other current assets                                                                                                                                                                                       |   | 492                     |   | 512                         |   |
| Total current assets                                                                                                                                                                                       |   | 41,617                  |   | 53,974                      |   |
|                                                                                                                                                                                                       |   |                    |   |                        |   |
| Plant and equipment                                                                                                                                                                                        |   | 1,983                   |   | 2,196                       |   |
| Deferred expenses, net of current portion                                                                                                                                                                  |   | 225                     |   | 260                         |   |
|                                                                                                                                                                                                       |   | $                       | 43,825 |                        | $      | 56,430 |   |
|                                                                                                                                                                                                       |   |                    |   |                        |   |
| **Liabilities and  Stockholders’ Equity**                                                                                                                                                             |   |                    |   |                        |   |
| Current liabilities:                                                                                                                                                                                       |   |                    |   |                        |   |
| Accounts payable and accrued liabilities                                                                                                                                                                   |   | $                       | 3,586  |                        | $      | 3,975 |   |
| Current portion of deferred revenue                                                                                                                                                                        |   | 714                     |   | 688                         |   |
| Current portion of notes payable and leases                                                                                                                                                                |   | 522                     |   | 518                         |   |
| Total current liabilities                                                                                                                                                                                  |   | 4,822                   |   | 5,181                       |   |
|                                                                                                                                                                                                       |   |                    |   |                        |   |
| Long-term liabilities:                                                                                                                                                                                     |   |                    |   |                        |   |
| Deferred revenue, net of current portion                                                                                                                                                                   |   | 1,785                   |   | 2,065                       |   |
| Notes payable and leases, net of current  portion                                                                                                                                                          |   | 372                     |   | 607                         |   |
| Total long-term liabilities                                                                                                                                                                                |   | 2,157                   |   | 2,672                       |   |
|                                                                                                                                                                                                       |   |                    |   |                        |   |
| Total liabilities                                                                                                                                                                                          |   | 6,979                   |   | 7,853                       |   |
|                                                                                                                                                                                                       |   |                    |   |                        |   |
| Stockholders’ equity:                                                                                                                                                                                 |   |                    |   |                        |   |
| Common shares and other equity – no par  value;  unlimited shares authorized, 72,506,403 and 72,491,403 shares issued and  outstanding at June 30, 2004 and December 31, 2003, respectively |   | 216,412                 |   | 196,849                     |   |
| Contributed surplus                                                                                                                                                                                        |   | 16,328                  |   | 2,207                       |   |
| Deferred stock compensation (Note 2)                                                                                                                                                                       |   | —                  |   | (185                        | )      |
| Accumulated deficit (Note 2)                                                                                                                                                                               |   | (195,894                | )      | (150,294                    | )      |
| Total stockholders’ equity                                                                                                                                                                            |   | 36,846                  |   | 48,577                      |   |
|                                                                                                                                                                                                       |   | $                       | 43,825 |                        | $      | 56,430 |   |

 

*See accompanyingnotes to consolidated financial statements*.

 

1

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**CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT**

**(Unaudited)**

 

*Stressgen Biotechnologies Corporation and Subsidiaries*

*(Canadian dollars in thousands, except per share amounts)*

 
|                                                                                                   |   | **Three  months ended  June 30,** |     | **Six months  ended  June 30,** |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------------|----------|--------------------------------------|--------|
|                                                                                                   |   | **2004**                               |     | **2003**                             |   | **2004** |   | **2003** |   |
| Revenue:                                                                                               |   |                                   |     |                                 |   |   |   |   |   |
| Bioreagent sales                                                                                       |   | $                                      | 1,446    |                                 | $      | 1,373 |   | $ | 2,898 |   | $ | 2,792 |   |
| Collaborative R&D revenue                                                                          |   | 190                                    |     | 1,508                                |   | 363 |   | 6,729 |   |
| Total revenue                                                                                          |   | 1,636                                  |     | 2,881                                |   | 3,261 |   | 9,521 |   |
|                                                                                                   |   |                                   |     |                                 |   |   |   |   |   |
| Operating expenses:                                                                                    |   |                                   |     |                                 |   |   |   |   |   |
| Research and development                                                                               |   | 5,973                                  |     | 4,791                                |   | 11,542 |   | 11,284 |   |
| Selling, general and administrative                                                                    |   | 1,892                                  |     | 1,866                                |   | 4,245 |   | 4,156 |   |
| Cost of bioreagent sales                                                                               |   | 306                                    |     | 388                                  |   | 662 |   | 753 |   |
|                                                                                                   |   | 8,171                                  |     | 7,045                                |   | 16,449 |   | 16,193 |   |
|                                                                                                   |   |                                   |     |                                 |   |   |   |   |   |
| Operating loss                                                                                         |   | (6,535                                 | )        | (4,164                               | )      | (13,188 | ) | (6,672 | ) |
|                                                                                                   |   |                                   |     |                                 |   |   |   |   |   |
| Other income (expenses):                                                                               |   |                                   |     |                                 |   |   |   |   |   |
| Interest and other income, net                                                                         |   | (48                                    | )        | 255                                  |   | 302 |   | 458 |   |
| Net foreign exchange gain (loss)                                                                       |   | 244                                    |     | (485                                 | )      | 291 |   | (626 | ) |
| Interest expense                                                                                       |   | (27                                    | )        | (9                                   | )      | (55 | ) | (20 | ) |
|                                                                                                   |   | 169                                    |     | (239                                 | )      | 538 |   | (188 | ) |
|                                                                                                   |   |                                   |     |                                 |   |   |   |   |   |
| Net loss                                                                                               |   | (6,366                                 | )        | (4,403                               | )      | (12,650 | ) | (6,860 | ) |
|                                                                                                   |   |                                   |     |                                 |   |   |   |   |   |
| Accumulated deficit, beginning of period                                                               |   | (189,528                               | )        | (136,506                             | )      | (150,294 | ) | (134,049 | ) |
| Cumulative effect of change in accounting  policy (Note 2)                                             |   | —                                 |     | —                               |   | (32,950 | ) | — |   |
| Accumulated deficit, end of period                                                                     |   | $                                      | (195,894 | )                                    | $      | (140,909 | ) | $ | (195,894 | ) | $ | (140,909 | ) |
|                                                                                                   |   |                                   |     |                                 |   |   |   |   |   |
| Basic and diluted net loss per common share                                                            |   | $                                      | (0.09    | )                                    | $      | (0.07 | ) | $ | (0.17 | ) | $ | (0.11 | ) |
|                                                                                                   |   |                                   |     |                                 |   |   |   |   |   |
| Weighted average shares used to compute  basic and diluted loss per common share   (in thousands) |   | 72,506                                 |     | 61,198                               |   | 72,502 |   | 60,721 |   |

 

*See accompanyingnotes to consolidated financial statements.*

 

2

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**CONSOLIDATED STATEMENT OF CASH FLOWS**

**(Unaudited)**

 

*Stressgen Biotechnologies Corporation and Subsidiaries*

*(Canadian dollars in thousands)*

 
|                                                                         |   | **Three months  ended  June 30,** |   | **Six months  ended  June 30,** |   |
|------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                         |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Cash flows from operating activities:                                        |   |                                   |   |                                 |   |   |   |   |   |
| Net loss                                                                     |   | $                                      | (6,366 | )                                    | $      | (4,403 | ) | $ | (12,650 | ) | $ | (6,860 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                   |   |                                 |   |   |   |   |   |
| Depreciation and amortization of plant and  equipment                        |   | 204                                    |   | 171                                  |   | 342 |   | 344 |   |
| Loss on disposal of plant and equipment                                      |   | 44                                     |   | —                               |   | 59 |   | — |   |
| Amortization of stock compensation expense                                   |   | 301                                    |   | 52                                   |   | 964 |   | 107 |   |
| Unrealized foreign exchange (gain) loss                                      |   | (232                                   | )      | 178                                  |   | (222 | ) | 508 |   |
| Loss on market value of investments                                          |   | 304                                    |   | 15                                   |   | 310 |   | 52 |   |
| Changes in operating assets and liabilities                                  |   | (15                                    | )      | 2,140                                |   | (450 | ) | (2,217 | ) |
| Net cash used in operating activities                                        |   | (5,760                                 | )      | (1,847                               | )      | (11,647 | ) | (8,066 | ) |
|                                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Cash flows from investing activities:                                        |   |                                   |   |                                 |   |   |   |   |   |
| Purchase of short-term investments                                           |   | (2,000                                 | )      | (8,767                               | )      | (22,919 | ) | (31,191 | ) |
| Sales and maturities of short-term  investments                              |   | 12,008                                 |   | 4,264                                |   | 22,943 |   | 4,862 |   |
| Purchase of plant and equipment                                              |   | (58                                    | )      | (42                                  | )      | (188 | ) | (54 | ) |
| Net cash provided by (used in) investing  activities                         |   | 9,950                                  |   | (4,545                               | )      | (164 | ) | (26,383 | ) |
|                                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Cash flows from financing activities:                                        |   |                                   |   |                                 |   |   |   |   |   |
| Proceeds on issuance of common shares                                        |   | —                                 |   | 4,639                                |   | 36 |   | 4,698 |   |
| Share issue costs                                                            |   | —                                 |   | —                               |   | (81 | ) | — |   |
| Repayment of borrowings                                                      |   | (114                                   | )      | (82                                  | )      | (231 | ) | (162 | ) |
| Net cash (used in) provided by financing  activities                         |   | (114                                   | )      | 4,557                                |   | (276 | ) | 4,536 |   |
|                                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                |   | (6                                     | )      | (12                                  | )      | (21 | ) | (170 | ) |
|                                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                            |   | 4,070                                  |   | (1,847                               | )      | (12,108 | ) | (30,083 | ) |
| Cash and cash equivalents, beginning of  period                              |   | 3,818                                  |   | 2,966                                |   | 19,996 |   | 31,202 |   |
| Cash and cash equivalents, end of period                                     |   | $                                      | 7,888  |                                 | $      | 1,119 |   | $ | 7,888 |   | $ | 1,119 |   |

 

*See accompanyingnotes to consolidated financial statements.*

 

3

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***StressgenBiotechnologies Corporation***

**Notes to Consolidated Financial Statements**

***(Canadian dollars)***

(Unaudited)

 

### ***1.***             THECOMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

### *** ***

*The Company*

 

Stressgen BiotechnologiesCorporation (with its subsidiaries, “Stressgen” or the “Company”) is abiopharmaceutical company focused on the development and commercialization ofinnovative stress protein-based immunotherapeutics. The Company is developing abroad range of products for the treatment of viral infections and relatedcancers. Its lead product HspE7 targets a broad spectrum of humanpapillomavirus (HPV) related diseases. The Company has also initiated research studies to evaluate stressprotein (also known as heat shock protein) fusions, made through itsproprietary CoValTM technology, for the treatment of hepatitis B andherpes simplex and is targeting hepatitis C. Further, Stressgen has an internationally recognized bioreagentsbusiness with sales to scientists worldwide for the study of cellular stress,apoptosis, oxidative stress and neurobiology.

 

*Basis ofpresentation*

 

The consolidated financialstatements include the assets, liabilities and operating results of the Companyand its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated inconsolidation.

 

*Financialstatements and estimates*

 

Theinformation at June 30, 2004 and for the three and six month periods endedJune 30, 2004 and 2003 has been prepared by the Company and has not beenaudited.  The financial statements, inthe opinion of management, include all adjustments necessary for their fair presentationin conformity with Canadian generally accepted accounting principles (“CanadianGAAP”), and conform in material respects with accounting principles generallyaccepted in the United States of America (“U.S. GAAP”), except as discussed inNote 7.  All such adjustments are of anormal and recurring nature.  Thesefinancial statements should be read in conjunction with the financialstatements and notes thereto in the Company’s December 31, 2003 AnnualReport on Form 10-K and March 31, 2004 Quarterly Report on Form 10-Q.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with Canadianand U.S. GAAP have been condensed or omitted pursuant to the applicableCanadian regulatory and U.S. Securities and Exchange Commission rules andregulations.  Interim results are notnecessarily indicative of results for the full year.

 

Thepreparation of financial statements in conformity with Canadian GAAP and U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenue and expenses and relateddisclosures as of the date of the financial statements.  Significant estimates are used for, but notlimited to, revenue recognition, accrual of clinical trial costs, measurementof stock-based compensation, and the allocation of indirect costs betweenresearch and development (R&D), selling, general and administrative(SG&A) and cost of bioreagent sales. Actual results could differ from such estimates.  

 

*Foreigncurrency translation*

 

TheCompany uses the Canadian dollar as its consolidated functional currency.  Monetary assets and liabilities that aredenominated in U.S. dollars or British pounds are translated into Canadiandollars at the rates of exchange prevailing at the balance sheet date.  Non-monetary assets and liabilities aretranslated at historical exchange rates. Revenue and expenses are translated at the average rate of exchange forthe period of such transactions.  

 

4

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*Revenue recognition*

 

Revenue from product sales of the Company’sbioreagent business is recognized upon delivery to customers when persuasiveevidence of an arrangement exists, the price is fixed or determinable andcollection is reasonably assured. Revenue also includes amounts charged for shipping and handlingcosts.  

 

Revenue from collaborative research anddevelopment arrangements may include multiple elements within a singlecontract.  The Company’s accountingpolicy complies with the revenue determination requirements set forth in EITF00-21, *Accounting for Revenue Arrangementswith Multiple Deliverables*, and EIC 142, *Revenue Arrangements with Multiple Deliverables,* relating tothe separation of multiple deliverables into individual accounting units withdeterminable fair values.  Paymentsreceived under collaborative arrangements may include the following:  non-refundable fees at inception of contractfor technology rights; funding for services performed; milestone payments forspecific achievements; and payments based upon resulting sales ofproducts.  

 

TheCompany recognizes collaborative research and development revenues as servicesare rendered consistent with the performance requirements of the contract.  Revenue from non-refundable contract feeswhere the Company has continuing involvement through research and developmentcollaborations or other contractual obligations, less the fair market value ofany related warrants, is recognized ratably over the development period or theperiod for which Stressgen continues to have a performance obligation.  The period of development is evaluated on aregular basis.  In December 2003,the Company increased the development period by one year to reflectmanagement’s research and development plan. Revenue from performance milestones is recognized upon the achievementof the milestones as specified in the agreement, provided payment isproportionate to the effort expended. Payments are recorded as deferred revenue if they are received inadvance of performance or delivery.

 

*Clinical trial accruals*

 

The Company recognizes expenses related toits ongoing clinical trials using a methodology designed to accrue estimatedcosts in the appropriate accounting periods when the expenses areincurred.    The Company recognizesclinical trial costs in three distinct phases that correspond with the periodduring which the services are performed: the start-up phase, the patient accrual phase, and the close-out phase.The start up portion of the trial contract is accrued during the trial planningand protocol writing period.  The perpatient accrual cost is recognized as each patient enters the trial.  The close-out portion of the trial isrecognized as the final analyses of patient data are prepared.  Based on the design of the trial includingnumber of patients, number of clinical sites, method of treatment, andfollow-up, the proportion of the cost of each phase could vary from trial totrial.   As each trial continues, theCompany evaluates the total contract costs and makes adjustments accordingly.Changes to the cost estimates are charged to expense in the appropriate periodbased on the facts and timing of the adjustment.

 

*Stock-based compensation plan*

 

In September 2003,the CICA Accounting Standards Board released revised transitional provisionsfor *Stock-Based Compensation and OtherStock-Based Payments*, Section 3870 (CICA 3870), to provide thesame alternative methods of transition as is provided in the U.S. for voluntaryadoption of the fair value based method of accounting.   In January 2004, the Company adoptedthe recommendations of the CICA 3870. This standard requires that all stock-based awards made to non-employeesbe measured and recognized using a fair value based method.  The standard encourages the use of a fairvalue based method for all awards granted to employees, but only requires theuse of a fair value based method for direct awards of stock, stock appreciationrights, and awards that call for settlement in cash or other assets.  

 

5

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Awards that a company hasthe ability to settle in stock are recorded as equity, whereas awards that theentity is required to or has a practice of settling in cash are recorded asliabilities.  

 

The Company has two stock-based compensationplans, which are described in Note 5. The Company typically grants options with an exercise price equal to thefair market value of the underlying common stock.  Under the principles of CICA 3870, compensation expense isrecognized over the vesting period of the grant based on the estimated fairvalue at the time of grant using the Black-Scholes method.  Any consideration paid by directors,employees and others on exercise of stock options is credited to common shares.  See further discussion of the change inaccounting policy in Note 2.  

 

*Accounting pronouncements*

 

The Emerging Issues Task Force (EITF) recentlydeliberated regarding Issue 03-01, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.”  The Issue is intended to address the meaningof other-than-temporary impairment and its application to certain investmentsheld at cost.  The EITF reached aconsensus regarding disclosure requirements concerning unrealised losses onavailable-for-sale debt and equity securities accounted for under SFAS No. 115“Accounting for Certain Investments in Debt and Equity Securities” and SFAS No.124, “Accounting for Certain Investments Held for Not-for-ProfitOrganizations.”  The guidance forevaluating whether an investment is other-than-temporarily impaired is to beapplied in reporting periods beginning after June 15, 2004.  The disclosure requirements apply to annualfinancial statements for fiscal years ending after December 15, 2003 forinvestments accounted for under SFAS Nos. 115 and 124.  For all other investments within the scopeof this Issue, the disclosure requirements apply to fiscal years ending afterJune 15, 2004.  Additional disclosurerequirements for cost method investments apply to fiscal years ending after June 15,2004.  The Issue does not affect thecurrent period.  The Company iscurrently evaluating the effect of this pronouncement on its financialstatements.  

 

**2.****            ****CHANGE IN ACCOUNTING POLICY**

 

In January 2004 the Company changed itsaccounting policy relating to stock based compensation awards, retroactive toJanuary 1, 1995, in accordance with the recommendation of CICA 3870*.* As permitted by the September 30, 2003 transitional provisionsissued by the CICA Accounting Standards Board related to CICA 3870, the Companyhas applied this change using the retroactive method without restatement.  Expense related to stock-based compensationawards is calculated using the Black-Scholes option pricing model andrecognized over the vesting period of the grant.  Previously, the Company used the intrinsic value method forvaluing stock-based compensation awards granted to employees and directorswhere compensation expense was recognized for the excess, if any, of the quotedmarket price of Company’s common shares over the compensation award exerciseprice on the day that options were granted. 

 

6

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The following pro forma information presentsthe net loss and the basic loss per common share had CICA 3870 beenretroactively applied:

 
| **(in thousands, except per share  amounts)**                          |   | **Three  months ended  June 30, 2003** |   | **Six months  ended  June 30, 2003** |   |
|------------------------------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
|                                                                   |   |                                        |   |                                      |   |
| Net loss under Canadian GAAP                                           |   | $                                           | (4,403 | )                                         | $      | (6,860 | ) |
|                                                                   |   |                                        |   |                                      |   |
| Stock-based compensation expense under  intrinsic value method         |   | 52                                          |   | 107                                       |   |
| Stock-based employee compensation expense  under the fair value method |   | (841                                        | )      | (1,559                                    | )      |
| Pro forma net loss under Canadian GAAP                                 |   | $                                           | (5,192 | )                                         | $      | (8,312 | ) |
| Pro forma basic loss per common share under  Canadian GAAP             |   | $                                           | (0.08  | )                                         | $      | (0.14 | ) |

 

Toimplement the fair value method for stock-based compensation beginningJanuary 1, 2004, the Company recorded an adjustment to beginningaccumulated deficit of $32,950,000, comprised of $17,105,000 related to thefair value expense calculated on options granted on or after January 1,1995, $16,434,000 related to compensation expense on the release ofcontingently issuable shares completed in 1999, offset by a $589,000 reversalof previously recorded expense under the principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  Under the principles of CICA 3870, theCompany reclassified $3,174,000 from contributed surplus to common stockrelated to the historical exercise of employee stock options.  The Company recorded expense of $301,000 and$964,000 for the three and six month periods ended June 30, 2004,representing the amortization of the fair value of compensation based on thevesting period of stock options granted to employees and directors.  The weighted-average per-share fair valuesof the individual options granted during the three month periods endedJune 30, 2004 and 2003 were $0.50 and $1.60, respectively.   The weighted-average per-share fair valuesof the individual options granted during the six month periods endedJune 30, 2004 and 2003 were $0.68 and $1.05.   The fair value of the options was determined using aBlack-Scholes option-pricing model with the following assumptions:

 
|                    |   | **For the  three months  ended June 30,** |   | **For the  six months  ended June 30,** |   |
|-------------------------|--------|------------------------------------------------|--------|----------------------------------------------|--------|
|                    |   | **2004**                                       |   | **2003**                                     |   | **2004** |   | **2003** |   |
| Dividend yield          |   | 0                                              | %      | 0                                            | %      | 0 | % | 0 | % |
| Volatility              |   | 61                                             | %      | 88                                           | %      | 65 | % | 74 | % |
| Risk-free interest rate |   | 3.8                                            | %      | 2.2                                          | %      | 3.5 | % | 2.5 | % |
| Expected life           |   | 4 years                                        |   | 4 years                                      |   | 4 years |   | 4 years |   |

 

TheFASB issued SFAS No. 148, *Accounting forStock-Based Compensation, Transition and Disclosure*(SFAS 148)**in December 2002.  SFAS 148 provides alternative transitionmethods for entities that voluntarily elect to adopt the fairvalue recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*(SFAS123)*,*to stock-based employeecompensation.  Under the provisions ofSFAS 123, fair value accounting is required for all grants made on or afterJanuary 1, 1995.  The Company hasnot elected to adopt the provisions of SFAS 123.  See Note 7 for the reconciliation between Canadian and U.S.GAAP.  

 

7

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**3.****           ****COLLABORATIVE AGREEMENT**

 

OnDecember 2, 2003, the Company announced it had restructured itsJune 24, 2002 collaboration agreement with F. Hoffmann-La Roche Ltd andHoffmann-La Roche Inc. (together, “Roche”), providing for the development andcommercialization of the pharmaceutical fusion product candidate, HspE7.  Under the restructured terms Roche wasgranted an option to develop the first generation HspE7, a license to develop asecond generation HspE7 product, and an option to negotiate rights to theCompany’s CoValTM fusion product candidates for the treatment ofcancer and hepatitis C.

 

Inconnection with the first generation of HspE7, the restructured agreement givesthe Company the right to develop and commercialize the product for indicationsother than genital warts, including control of regulatory matters such as U.S.Investigational New Drug applications. The Company can conduct dose-ranging studies in patients with genitalwarts.  In the original agreement theCompany was responsible for clinical development expenses related to the recurrentrespiratory papillomatosis (RRP)indication.  In the new agreement theCompany is responsible for the manufacturing and other costs of all indicationsit develops.

 

The Companyrecorded collaborative R&D revenue of $190,000 and $1,508,000 during thethree month periods ended June 30, 2004 and 2003, respectively.Collaborative R&D revenue for the six month periods ended June 30, 2004and 2003 was $363,000 and $6,729,000, respectively.  Collaborative R&D revenue during the three and six monthperiods in 2004 relates principally to the amortization of upfront license feesin accordance with Staff Accounting Bulletin (SAB) No. 101 “Revenue Recognitionin Financial Statements.”  CollaborativeR&D revenue for the six month period ended June 30, 2003 includes$4,003,000 for development activities, a time-based development payment of$2,214,000 and $512,000 from the amortization of upfront license fees.  

 

**4.****            ****SIGNIFICANT CONTRACTUALACTIVITY**

 

OnJanuary 28, 2004, the Company entered into a biological services agreementwith Avecia Limited for manufacturing and process development of HspE7.  Under the terms of the contract, paymentsare due in British pounds.  The contractis a multi-year agreement for process development and manufacturing of clinicalsupplies, and may also include the manufacturing of commercial drug substance.  The Company purchased British pounds inanticipation of making payments in that currency.  The services agreement contains cancellation fees based on asliding percentage of certain future program milestones.  The cancellation fee as of June 30,2004 would have been $4,290,000.

 

**5.****            ****BALANCE SHEET DETAILS**

 

At June 30, 2004 theCompany had outstanding principal balances of $894,000 and $1,125,000,respectively, in the form of fixed rate capital leases and term loans includingthe September 2003 term loan with Oxford Finance Corporation (Oxford).  At June 30, 2004 the outstandingprincipal balance was $761,000 on the Oxford loan.  Under the terms of the Oxford loan, the Company must issue aletter of credit for the outstanding loan balance if our combined cash, cashequivalents, and short-term investments fall below $6,000,000**.**

 

8

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The followingtables provide details of selected balance sheet items:

 
| **(In thousands)**                                        |   | **June 30,  2004** |   | **December 31,  2003** |   |
|-----------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| Accounts receivable:                                      |   |                    |   |                        |   |
| Trade accounts receivable                                 |   | $                       | 610    |                        | $      | 492 |   |
| Collaborative receivable                                  |   | —                  |   | 277                         |   |
| Less:   allowance for doubtful accounts              |   | (35                     | )      | (36                         | )      |
|                                                      |   | $                       | 575    |                        | $      | 733 |   |
|                                                      |   |                    |   |                        |   |
| Inventories:                                              |   |                    |   |                        |   |
| Raw materials, net of $26 provision for  obsolescence     |   | $                       | 204    |                        | $      | 202 |   |
| Work in progress, net of $156 provision for  obsolescence |   | 178                     |   | 146                         |   |
| Finished goods, net of $142 provision for  obsolescence   |   | 277                     |   | 291                         |   |
|                                                      |   | $                       | 659    |                        | $      | 639 |   |
|                                                      |   |                    |   |                        |   |
| Accounts payable and accrued liabilities:                 |   |                    |   |                        |   |
| Trade accounts payable                                    |   | $                       | 1,856  |                        | $      | 1,461 |   |
| Accrued compensation and benefits                         |   | 1,161                   |   | 1,009                       |   |
| Clinical trial accruals                                   |   | 528                     |   | 1,409                       |   |
| Other accrued liabilities                                 |   | 41                      |   | 96                          |   |
|                                                      |   | $                       | 3,586  |                        | $      | 3,975 |   |

 
|                   |   | **June 30,  2004 (unaudited)** |   | **December 31,  2003**   |   |
|------------------------|--------|-------------------------------------|--------|-------------------------------|--------|
| **(In thousands)**     |   | **Cost**                            |   | **Accumulated  Depreciation** |   | **Net Book  Value** |   | **Net Book  Value** |   |
| Plant and equipment:   |   |                                |   |                          |   |   |   |   |   |
| Laboratory equipment   |   | $                                   | 4,154  |                          | $      | 2,683 |   | $ | 1,471 |   | $ | 1,626 |   |
| Computer equipment     |   | 1,054                               |   | 818                           |   | 236 |   | 292 |   |
| Furniture and fixtures |   | 437                                 |   | 294                           |   | 143 |   | 172 |   |
| Leasehold improvements |   | 795                                 |   | 662                           |   | 133 |   | 106 |   |
|                   |   | $                                   | 6,440  |                          | $      | 4,457 |   | $ | 1,983 |   | $ | 2,196 |   |

 

*Stockholders’equity*

 

In June 2002 the Company issued2,036,436 common shares for $7,657,000 pursuant to the collaboration agreementwith Roche (see Note 3).  The equity wasissued at a per share price determined by the weighted average price of commonshares of the Company during the ten business days prior to the Rochetransaction.   

 

Atthe time of the original collaboration agreement, Roche received two warrantsto purchase the common stock of Stressgen. The Company allocated $1,264,000 as the fair value of the warrants,determined by independent valuation.  InApril 2003, Roche exercised the first warrant to acquire 1,413,600common shares at $3.25, resulting in netproceeds of $4,594,000 to the Company. Under the original collaboration agreement, the Company had the right tocall the second warrant resulting in an issuance of a range of shares andexercise price depending upon the price of the Company’s common stock. Inconnection with the restructured collaboration agreement, Roche has a continuedright to exercise the second warrant for

 

9

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814,574shares at a purchase price of $3.76 per share at any time until June 28,2007.  The Company no longer hasthe right to call the second warrant.  

 

*Employee share option plan*

 

The following table summarizes informationrelated to all stock options outstanding and exercisable under the Company’s1996 and 2001 stock-based compensation plans as of June 30, 2004.

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                                       |   |
|-------------------------------|--------|--------------------------|--------|----------------------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Contractual Life  (in years)** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                     |   |                                                           |   |   |   |   |   |   |   |
| $0.98 -  $1.99                |   | 1,377,395                |   | 7.6                                                            |   | $ | 1.70 |   | 885,197 |   | $ | 1.74 |   |
| $2.00 -  $3.99                |   | 618,500                  |   | 8.1                                                            |   | $ | 3.24 |   | 378,963 |   | $ | 3.39 |   |
| $4.00 -  $5.99                |   | 1,215,095                |   | 7.0                                                            |   | $ | 4.91 |   | 1,056,395 |   | $ | 4.90 |   |
| $6.00 -  $8.00                |   | 1,527,100                |   | 5.7                                                            |   | $ | 6.19 |   | 1,526,411 |   | $ | 6.19 |   |
|                          |   | 4,738,090                |   |                                                           |   |   |   | 3,846,966 |   |   |   |

 

At June 30, 2004, there were 581,514options available for future grant under the 2001 Plan.  At July 30, 2004 there wereapproximately 4,729,000 options outstanding.

 

10

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**6.****            ****SEGMENT INFORMATION**

 

The Company manages its operations in tworeportable segments, Biotechnology and Bioreagents.  Revenues are allocated to countries based on customerlocations.  

 
|                                |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
| **(In thousands)**                  |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| **Bioreagents**                     |   |                                   |   |                                 |   |   |   |   |   |
| Revenue:                            |   |                                   |   |                                 |   |   |   |   |   |
| U.S.                                |   | $                                      | 998    |                                 | $      | 947 |   | $ | 1,956 |   | $ | 1,855 |   |
| Canada                              |   | 58                                     |   | 69                                   |   | 131 |   | 126 |   |
| Other                               |   | 390                                    |   | 357                                  |   | 811 |   | 811 |   |
|                                |   | 1,446                                  |   | 1,373                                |   | 2,898 |   | 2,792 |   |
| Operating expenses:                 |   |                                   |   |                                 |   |   |   |   |   |
| Research and development            |   | 492                                    |   | 435                                  |   | 933 |   | 754 |   |
| Selling, general and administrative |   | 222                                    |   | 425                                  |   | 577 |   | 913 |   |
| Cost of bioreagent sales            |   | 306                                    |   | 388                                  |   | 662 |   | 753 |   |
|                                |   | 1,020                                  |   | 1,248                                |   | 2,172 |   | 2,420 |   |
| Operating income                    |   | $                                      | 426    |                                 | $      | 125 |   | $ | 726 |   | $ | 372 |   |
|                                |   |                                   |   |                                 |   |   |   |   |   |
| **Biotechnology**                   |   |                                   |   |                                 |   |   |   |   |   |
| Collaborative R&D revenue       |   | $                                      | 190    |                                 | $      | 1,508 |   | $ | 363 |   | $ | 6,729 |   |
|                                |   |                                   |   |                                 |   |   |   |   |   |
| Operating expenses:                 |   |                                   |   |                                 |   |   |   |   |   |
| Research and development            |   | 5,481                                  |   | 4,356                                |   | 10,609 |   | 10,530 |   |
| Selling, general and administrative |   | 1,670                                  |   | 1,441                                |   | 3,668 |   | 3,243 |   |
|                                |   | 7,151                                  |   | 5,797                                |   | 14,277 |   | 13,773 |   |
| Operating loss                      |   | $                                      | (6,961 | )                                    | $      | (4,289 | ) | $ | (13,914 | ) | $ | (7,044 | ) |
|                                |   |                                   |   |                                 |   |   |   |   |   |
| **Totals**                          |   |                                   |   |                                 |   |   |   |   |   |
| Revenue:                            |   |                                   |   |                                 |   |   |   |   |   |
| Bioreagent sales                    |   | $                                      | 1,446  |                                 | $      | 1,373 |   | $ | 2,898 |   | $ | 2,792 |   |
| Collaborative R&D revenue       |   | 190                                    |   | 1,508                                |   | 363 |   | 6,729 |   |
| Total revenue                       |   | 1,636                                  |   | 2,881                                |   | 3,261 |   | 9,521 |   |
|                                |   |                                   |   |                                 |   |   |   |   |   |
| Expenses:                           |   |                                   |   |                                 |   |   |   |   |   |
| Research and development            |   | 5,973                                  |   | 4,791                                |   | 11,542 |   | 11,284 |   |
| Selling, general and administrative |   | 1,892                                  |   | 1,866                                |   | 4,245 |   | 4,156 |   |
| Cost of bioreagent sales            |   | 306                                    |   | 388                                  |   | 662 |   | 753 |   |
|                                |   | 8,171                                  |   | 7,045                                |   | 16,449 |   | 16,193 |   |
|                                |   |                                   |   |                                 |   |   |   |   |   |
| Operating loss                      |   | $                                      | (6,535 | )                                    | $      | (4,164 | ) | $ | (13,188 | ) | $ | (6,672 | ) |

 

The Company does not allocate interest andother income, or interest on capital lease obligations to each segment.

 

At June 30, 2004 and December 31,2003, respectively, $1,814,000 and $2,006,000 of plant and equipment supportedthe Biotechnology operating segment while the remaining $169,000 and $190,000supported the Bioreagent operating segment.

 

11

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**7.****            ****THE EFFECT OF APPLYING ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THEU.S.**

 

These financial statementshave been prepared in accordance with Canadian GAAP which, except as set outbelow, conform in all material respects to U.S. GAAP.  Effect on the consolidated financial statements:

 

*BalanceSheet*

 
| **(In thousands)**                             |   | **June 30,  2004** |   | **December 31,  2003** |   |
|------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| Current assets under Canadian GAAP             |   | $                       | 41,617 |                        | $      | 53,974 |   |
| Adjustments to Canadian GAAP                   |   | —                  |   | —                      |   |
| Current assets under U.S. GAAP                 |   | $                       | 41,617 |                        | $      | 53,974 |   |
|                                           |   |                    |   |                        |   |
| Stockholders’ equity under Canadian GAAP  |   | $                       | 36,846 |                        | $      | 48,577 |   |
|                                           |   |                    |   |                        |   |
| Adjustment to common stock (a)                 |   | (17,295                 | )      | —                      |   |
| Adjustment to deferred stock compensation  (a) |   | (133                    | )      | —                      |   |
| Adjustment to accumulated deficit (a)          |   | 17,428                  |   | —                      |   |
|                                           |   | —                  |   | —                      |   |
| Stockholders’ equity under U.S. GAAP      |   | $                       | 36,846 |                        | $      | 48,577 |   |

 

*Statement of Operations*

 
|                                                                                         |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| **(In thousands except per share  amounts)**                                                 |   | **2004**                              |   | **2003**                            |   | **2004** |   | **2003** |   |
| Net loss under Canadian GAAP                                                                 |   | $                                     | (6,366 | )                                   | $      | (4,403 | ) | $ | (12,650 | ) | $ | (6,860 | ) |
| Reversal of unrealized foreign exchange  (gain) loss on investments (b)                      |   | (238                                  | )      | 166                                 |   | (243 | ) | 338 |   |
| Loss on market value of investments (b)                                                      |   | 304                                   |   | 15                                  |   | 310 |   | 52 |   |
| Reversal of stock compensation expense (a)                                                   |   | 301                                   |   | —                              |   | 964 |   | — |   |
| Stock compensation expense under APB No. 25  (a)                                             |   | (15                                   | )      | —                              |   | (52 | ) | — |   |
|                                                                                         |   | 352                                   |   | 181                                 |   | 979 |   | 390 |   |
|                                                                                         |   |                                  |   |                                |   |   |   |   |   |
| Net loss under U.S. GAAP                                                                     |   | $                                     | (6,014 | )                                   | $      | (4,222 | ) | $ | (11,671 | ) | $ | (6,470 | ) |
|                                                                                         |   |                                  |   |                                |   |   |   |   |   |
| Basic and diluted loss per common share  under Canadian GAAP                                 |   | $                                     | (0.09  | )                                   | $      | (0.07 | ) | $ | (0.17 | ) | $ | (0.11 | ) |
|                                                                                         |   |                                  |   |                                |   |   |   |   |   |
| Basic and diluted loss per common share  under U.S. GAAP                                     |   | $                                     | (0.08  | )                                   | $      | (0.07 | ) | $ | (0.16 | ) | $ | (0.11 | ) |
|                                                                                         |   |                                  |   |                                |   |   |   |   |   |
| Common shares used to compute basic and  diluted loss per share under Canadian and U.S. GAAP |   | 72,506                                |   | 61,198                              |   | 72,502 |   | 60,721 |   |

 

12

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*Statement of Cash Flows*

 

For all periods presentedthere are no significant differences under Canadian and U.S. GAAP in net cash(used in) provided by operating, investing and financing activities.

 

*Differences*

 

As disclosed in Note 11 to thefinancial statements in the Company’s December 31, 2003 Annual Report onForm 10-K, differences exist for the Company between Canadian and U.S.GAAP.  

 

The following notes outlinethe differences that affect the Company for the three and six month periodsended June 30, 2004 and 2003.

 

----

(a)           As discussed inNote 2, on January 1, 2004, the Company adopted fair value accounting forall stock options as required by CICA 3870. The Company is required to record the expense of the fair value of allstock options over their respective vesting term.  The Company used the “Retrospective method withoutRestatement.”  This method requires theCompany to record the cumulative expense as an adjustment to accumulateddeficit for the period beginning January 1, 1995 through December 31,2003 and begin recording the expense to retained earnings in 2004.  The Company has not adopted SFAS 123 forU.S. reporting purposes, which would require fair value based accounting forgrants made on or after January 1, 1995. 

 

Under the principles of SFAS123, the Company would have recorded $19,277,000 of deferred compensationrelated to the total fair value for stock options granted between January 1,1995 and June 30, 2004.  Thefollowing table illustrates the effect on net loss and loss per share underU.S. GAAP if the Company had applied the fair value accounting provisions ofSFAS 123 to employee stock based compensation:

 
|                                                      |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|-----------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| **(In thousands except per share  amounts)**              |   | **2004**                              |   | **2003**                            |   | **2004** |   | **2003** |   |
| Net loss under U.S. GAAP                                  |   | $                                     | (6,014 | )                                   | $      | (4,222 | ) | $ | (11,671 | ) | $ | (6,470 | ) |
|                                                      |   |                                  |   |                                |   |   |   |   |   |
| Stock-based compensation under APB No. 25                 |   | 15                                    |   | 52                                  |   | 52 |   | 107 |   |
| Stock-based compensation expense recorded  under SFAS 123 |   | (301                                  | )      | (841                                | )      | (964 | ) | (1,559 | ) |
| Pro forma net loss under U.S. GAAP                        |   | $                                     | (6,300 | )                                   | $      | (5,011 | ) | $ | (12,583 | ) | $ | (7,922 | ) |
|                                                      |   |                                  |   |                                |   |   |   |   |   |
| Pro forma loss per common share                           |   | $                                     | (0.09  | )                                   | $      | (0.08 | ) | $ | (0.17 | ) | $ | (0.13 | ) |

 

(b)           Under U.S. GAAPStatement of Financial Accounting Standards (SFAS) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*, the Company would have classified certain of itsshort-term securities as available-for-sale and, accordingly, would haveincluded the changes in net unrealized holding gains or losses on thesesecurities as a component of stockholders’ equity rather than inoperations.  

 

13

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SFAS No. 130, *Reporting Comprehensive Income,*establishes standards for the reporting and display of comprehensive loss andits components in a full set of general-purpose financial statements.  Comprehensive loss is as follows:

 
|                                                                  |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|-----------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**                                                    |   | **2004**                              |   | **2003**                            |   | **2004** |   | **2003** |   |
|                                                                  |   |                                  |   |                                |   |   |   |   |   |
| Net loss under U.S. GAAP                                              |   | $                                     | (6,014 | )                                   | $      | (4,222 | ) | $ | (11,671 | ) | $ | (6,470 | ) |
| Other comprehensive income                                            |   |                                  |   |                                |   |   |   |   |   |
| Adjustment to unrealized foreign exchange  gain (loss) on investments |   | 238                                   |   | (166                                | )      | 243 |   | (338 | ) |
| Adjustment of market losses on investments                            |   | (304                                  | )      | (15                                 | )      | (310 | ) | (52 | ) |
| Comprehensive net loss under U.S. GAAP                                |   | $                                     | (6,080 | )                                   | $      | (4,403 | ) | $ | (11,738 | ) | $ | (6,860 | ) |

 

**8.****            ****SUPPLEMENTALCASH FLOW INFORMATION**

 

The changes inoperating assets and liabilities are as follows:

 
|                                               |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|----------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**                                 |   | **2004**                              |   | **2003**                            |   | **2004** |   | **2003** |   |
| Collaborative receivable                           |   | $                                     | — |                                | $      | 3,867 |   | $ | 277 |   | $ | 2,710 |   |
| Trade receivables                                  |   | 26                                    |   | (38                                 | )      | (119 | ) | (158 | ) |
| Inventories                                        |   | (59                                   | )      | 145                                 |   | (20 | ) | 141 |   |
| Other current assets                               |   | 165                                   |   | 241                                 |   | 20 |   | 184 |   |
| Deferred expenses, net of current portion          |   | 17                                    |   | 58                                  |   | 35 |   | 120 |   |
| Accounts payable and accrued liabilities           |   | (45                                   | )      | (1,592                              | )      | (389 | ) | (4,101 | ) |
| Deferred revenue                                   |   | (119                                  | )      | (541                                | )      | (254 | ) | (1,113 | ) |
|                                               |   | $                                     | (15    | )                                   | $      | 2,140 |   | $ | (450 | ) | $ | (2,217 | ) |
| Supplemental disclosures of cash flows:            |   |                                  |   |                                |   |   |   |   |   |
| Interest paid                                      |   | $                                     | 28     |                                | $      | 9 |   | $ | 56 |   | $ | 20 |   |
|                                               |   |                                  |   |                                |   |   |   |   |   |
| Supplemental disclosures of non-cash  transactions |   |                                  |   |                                |   |   |   |   |   |
| Reversal of deferred compensation                  |   | $                                     | — |                                | $      | — |   | $ | 185 |   | $ | — |   |

 

14

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” is dated as of July 30, 2004.  Itshouldbe read in conjunction with our June 30, 2004 consolidated financialstatements and related notes therein, which are prepared in accordance withCanadian GAAP and with our December 31, 2003 Annual Report on Form 10-K.  The differences from U.S. GAAP,as they affect our consolidated financial statements, are described in Note 7to our consolidated quarterly financial statements and in Note 11 to our Form10-K.  All amounts following are expressedin Canadian dollars unless otherwise indicated.  

 

The discussion contains forward-looking statementsthat involve risk and uncertainties. The predictions described in these statements may not materialize ifmanagement’s current expectations regarding our future performance proveincorrect. Our results could also be affected by factors including, but notlimited to, our reliance on collaborative partners and other risks describedbelow under “Factors That May Affect Future Performance.”  The forward-looking statements are based oncurrently available information; we disclaim any obligation to updatethem.  

 

## **Overview**

## ** **

From our inception in 1990to 1993, our core business involved the sale of bioreagent products.  Although we have retained and expanded ourbioreagent business worldwide, our primary focus since 1993 has been theresearch and development of innovative stress protein-based fusion productsthat will stimulate the body’s immune system to combat viral infections andrelated cancers.  Our core, exclusivelylicensed technology involves the fusion of heat shock proteins with viral orcancer-associated antigens.  The leadproduct candidate developed with this technology, HspE7, targets a variety ofhuman papillomavirus-related diseases, including genital warts, recurrentrespiratory papillomatosis, anal intraepithelial neoplasia, cervicalintraepithelial neoplasia and cervical cancer, among others.   We are also performing research studies onpotential treatments for hepatitis B and herpes simplex and are evaluatingfusion proteins to treat infections caused by hepatitis C.  

 

We have incurred significantlosses since our inception and expect to incur substantial losses for theforeseeable future as we invest in our research and product developmentprograms, including manufacturing, pre-clinical studies and clinical trials,and regulatory activities.  AtJune 30, 2004 our accumulated deficit was $195,894,000.  Historically, we have depended principallyon equity financings, cash flows from our bioreagent business and funding fromresearch collaborations to fund our business activities.  We intend to pursue additional equityfinancings, markets permitting, and to seek additional research collaborationsto fund our business activities. 

 

Our success will depend uponthe safety and efficacy of our immunotherapeutic products in pre-clinicalstudies and clinical trials, and upon obtaining the necessary regulatoryapprovals to market our products.  Themarketability of our products will be influenced by competition fromalternative therapies and the degree of protection our intellectual propertyprovides. We believe there will be significant markets for our therapeuticproducts should these products prove to be effective in human clinical trials.

 

*Restructured Roche Agreement*

 

OnDecember 2, 2003, we announced a restructuring of our June 24, 2002collaboration agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La RocheInc. (together, “Roche”), providing for the development and commercializationof our pharmaceutical fusion product candidate, HspE7.  Under the restructured terms we grantedRoche an option to develop the first generation HspE7, a license to develop asecond generation HspE7 product, and an option to negotiate rights to our CoValTMfusion product candidates for the treatment of cancer and hepatitis C.

 

Inconnection with the first generation of HspE7, the restructured agreement givesus the right to develop and commercialize the product for indications otherthan genital warts, including control of regulatory

 

15

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matterssuch as U.S. Investigational New Drug applications.  We can conduct dose-ranging studies in patients with genitalwarts.  In the original agreement wewere responsible for clinical development expenses related to the recurrentrespiratory papillomatosis (RRP)indication.  In the new agreement we areresponsible for the manufacturing and other costs of all indications wedevelop.  If Roche exercises its rightsto the first generation product it will fund all prospective developmentcosts.  Roche can exercise its rights tothe first generation of HspE7 by paying a fee, in which case it would alsobecome responsible for event-driven milestones that could result in aggregatepayments to Stressgen of up to $207,000,000 (US $138,000,000). Under thatscenario Stressgen would record first generation HspE7 product sales in theU.S. and Canada for three years following approval of a Biologics LicenseApplication (BLA) with the U.S. Food and Drug Administration, would receivesales-based payments of approximately 35% in the U.S. and Canada thereafter,and would receive sales-based payments (similar to royalties) of 20% of salesin countries outside the US and Canada. 

 

Bypaying additional fees, Roche can exclusively develop the second generationHspE7 product.  In such case Roche would be required to pay the costsof development, manufacturing and commercialization of the product and to payus defined milestones. We would also receive tiered, progressive sales-basedpayments that we believe are competitive with other agreements of this stageand type.  Commercial success payments of up to $127,500,000 (US$85,000,000) become payable depending upon the aggregate net sales of either orboth generations of the HspE7 product.

 

Therestructured collaboration agreement gives Stressgen the right to discuss,negotiate and execute an alternative agreement with a third-party for thedevelopment and commercialization of HspE7 through a license, partnership,joint venture or similar transaction.  Rochecan terminate this right by paying us a fee, which in 2005 would be $15,000,000or $22,500,000 (US$10,000,000 or US$15,000,000). 

 

Rochehas separate non-exclusive rights to negotiate licenses to our CoValTMfusion product candidates for the treatment of cancer and hepatitis C.  Roche can pay additional fees to make theserights exclusive until January 1, 2007.

 

Aspart of our financial responsibility for manufacturing we pay Avecia Limited(Avecia) for process development, scale-up and manufacturing of clinicalsupplies under a contract discussed below.  

 

## **Liquidity and CapitalResources**

## ** **

Since inception we have relied principally on equityfinancings, research collaborations and cash flows generated from ourbioreagents business to fund our research and development programs, operationsand capital expenditures.  ThroughJune 30, 2004 we have raised net proceeds of $198,238,000 through equitytransactions.  

 

We will need to obtain significant additional fundsthrough financings or strategic transactions to continue product development,manufacturing and commercialization.  Ifadequate funds are not available from those sources, we will be required todelay, reduce the scope of, or eliminate the development of HspE7 or otherresearch or development programs.  Basedon our current spending to support our research and development programs, aswell as the existing regulatory environment and general economic conditions,our current capital resources are sufficient to fund operations for over twelvemonths.  

 

We employ a financial performance measurement systemdesigned to ensure our revenues and expenses are consistent with management’soperational objectives and budgetary constraints.  Our cash utilization in2004 is dependent upon several factors, including the timing and progress ofclinical development of HspE7 and the cost of manufacturing clinicalsupplies.  

 

At June 30, 2004, we had$39,891,000 of cash, cash equivalents and short-term investments. The$12,199,000 decrease since December 31, 2003 is due principally tospending related to the development of HspE7. At June 30, 2004 and December 31, 2003, approximately 30% and24%, respectively, of cash, cash equivalents and short-term investments were heldin U.S. dollars.  During the first halfof 2004, we purchased British pounds to fund payments made to Avecia.  At June 30, 2004 approximately 6% ofour

 

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cash, cash equivalents andshort-term investments were held in British pounds.  Periodically we may purchase additional British pounds based onfuture anticipated payments in that currency. 

 

Our capital expenditurestotaled $58,000 and $42,000 during the three month periods ended June 30,2004 and 2003, respectively.  For thesix month periods ended June 30, 2004 and 2003 capital expenditures were$188,000 and $54,000, respectively. Spending in the first half of 2004 consisted of tenant improvements onour facilities, laboratory equipment, and computer related hardware.  Capital expenditures are expected todecrease during the remainder of 2004, although additional purchases areplanned to support our research, development and regulatory requirements.

 

At June 30, 2004 andDecember 31, 2003 we had outstanding principal balances of $894,000 and$1,125,000, respectively, in the form of fixed rate capital leases and termloans including our September 2003 term loan with Oxford FinanceCorporation (Oxford).  At June 30,2004 and December 31, 2003 the outstanding principal balances were$761,000 and $906,000 on the Oxford loan. Under the terms of the Oxford loan, we must issue a letter of credit forthe outstanding loan balance if our combined cash, cash equivalents, andshort-term investments fall below $6,000,000**.**

 

*ContractualObligations*

 

Our contractual obligationsconsist of operating leases for facilities, capital leases to finance equipmentand a term loan to increase working capital cash flows.  Details of these commitments are describedin our 2003 Annual Report on Form 10-K under the section “Liquidity andCapital Resources.”  InJanuary 2004 we entered into a biological services agreement with Aveciathat is cancellable subject to specified termination conditions. The servicesagreement, which is further discussed below, specifies cancellation fees basedon a sliding percentage of certain future program milestones.  The cancellation fee as of June 30,2004 would have been $4,290,000.  Duringthe three and six month periods ended June 30, 2004 there were no materialchanges to our contractual obligations. 

 

We have entered into variouscontracts for research, process development and limited product manufacturingto further the development of HspE7. Due to our goal to retain a flexible development program, we typicallynegotiate termination provisions so that our financial obligations are limitedto paying for work performed up to the termination date and if applicable,pre-established cancellation fees. Except as disclosed above we currently do not have other significantresearch and development contracts subject to cancellation fees.  We have not entered into any minimum supplyagreements with any service vendors or contract manufacturers.  

 

We expect to seek additionalfunds from various sources, including corporate partners that enter into researchand development collaborations with us, and public and private equityfinancings.  If we raise additionalfunds by issuing equity securities, substantial dilution to our existingshareholders may result.  We may need toobtain funds through collaborative arrangements with others that are onunfavorable terms.  We may also have torelinquish rights to certain of our technologies, product candidates orproducts that we would otherwise seek to develop ourselves.

 

## **Results ofOperations **

## ** **

For the three month periodsended June 30, 2004 and 2003, our net loss was $6,366,000 and $4,403,000,respectively, or $0.09 and $0.07 per common share, respectively.  Our net losses for the six month periodsended June 30, 2004 and 2003 were $12,650,000 and $6,860,000, respectively,or $0.17 and $0.11 per common share, respectively.  Our increased net loss during the current quarter and the firsthalf of 2004 compared to the same periods in 2003 is due principally tospending on research and development (R&D) activities related tomanufacturing development that was previously funded by Roche.

 

***Collaborative R&D revenue***

 

We recorded collaborativeR&D revenue of $190,000 and $1,508,000 during the three month periods ended

 

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June 30, 2004 and 2003,respectively. Collaborative R&D revenue for the six month periods endedJune 30, 2004 and 2003 was $363,000 and $6,729,000, respectively.  Collaborative R&D revenue during bothperiods in 2004 relates principally to the amortization of upfront license feesin accordance with Staff Accounting Bulletin (SAB) No. 101 “Revenue Recognitionin Financial Statements.”  CollaborativeR&D revenue for the six month period ended June 30, 2003 includes$4,003,000 for development activities, a time-based development payment of$2,214,000 and $512,000 from the amortization of upfront license fees.  Under the terms of the restructured HspE7collaboration agreement, we expect future collaborative R&D revenue toinclude amortization of the initial up-front license fee, which reflects theanticipated development period of HspE7 and recognition of future milestonerevenues. 

 

***Bioreagent sales ***

 

The production and sale ofbioreagents supports our business strategy by building our market presence instress proteins and strengthening our strategic relationships with companies,academic institutions and stress response researchers. Our products are solddirectly to end-users and through third party distributors.  For the three month periods endedJune 30, 2004 and 2003, we reported a 5% increase in bioreagent sales to$1,446,000 from $1,373,000.  Bioreagentsales increased by 4% to $2,898,000 during the six month period endedJune 30, 2004 from $2,792,000 during the same period in 2003. U.S. andCanadian dollar denominated sales in the first half of 2004 compared to thesame period in 2003 increased by 11% and 10%, respectively, aided by theintroduction of new products and several higher priced kit-based researchproducts.  The foreign exchange rateapplied to U.S. denominated sales was lower in the first half of 2004 comparedto the first half of 2003, thereby diluting the reported improvement in U.S.dollar sales.

 

***Research and development***

 

Research and developmentincludes costs associated with therapeutic product development, clinicalstudies, ongoing exploratory research and bioreagent product development.  In order to optimize our financialflexibility, we employ clinical research organizations to conduct our clinicaltrials and engage contract manufacturers to assist us with product developmentand manufacturing. 

 

OurR&D spending during the first half of 2004 was devoted principally toactivities in support of developing HspE7, including in-house researchactivities, spending to support the final stages of our clinical trials, andactivities to support the process development and manufacturing of HspE7.  During the first half of 2004 approximately80% of our R&D spending related to efforts developing HspE7, compared toapproximately 60% for the same period in 2003. The remaining spending relates to research supporting our bioreagentbusiness and exploratory research involving our follow-on CoValTMfusion proteins.   

 

OnJune 30, 2004 we held an End of Phase II/Pre-Phase III meeting with theU.S. Food and Drug Administration (FDA) for HspE7 to discuss a path forward forthe clinical development of HspE7 for recurrent respiratory papillomatosis(RRP).  Following the FDA’srecommendation, we will be submitting a final pivotal clinical trial protocolfor a Special Protocol Assessment (SPA). Under a SPA, the sponsor and the FDA formally agree to the details ofthe study protocol.  After our meetingwith the FDA, we continue to believe that in mid-2007 we may be able to submita Biologics License Application to the FDA for RRP as the first indication forHspE7.  

 

InJanuary 2004, we entered into a biological services agreement withAvecia.  The contract is a multi-yearagreement for process development, scale-up and manufacturing of clinicalsupplies.  Although the timelines maychange for specific manufacturing events covered by the contract, such as GMPbulk release, cell paste production and fill/finish, we believe clinical-gradesupplies will be available in the second quarter of 2005. We may also have Aveciamanufacture commercial drug substance.  

 

R&D spending increased byapproximately 25% to $5,973,000 during the three months ended June 30,2004, compared with $4,791,000 for the same period in 2003.  For the six months ended June 30, 2004,R&D spending increased by approximately 2% to $11,542,000 from $11,284,000for the same period in 2003.  Thisincrease is due principally to increased spending at Avecia, which began earlyin 2004; in

 

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contrast, in 2003 ourthird-party spending focused on Roche-requested manufacturing initiatives,which are complete.  Our spending atAvecia is expected to increase during the second half of 2004 as we transitionfrom process development activities to initial production runs of bulk drugsubstance for our upcoming pivotal trial. 

 

During the second half of2004, we expect to continue to devote the majority of planned R&D spendingto support HspE7 development.  Weanticipate that R&D spending will continue to increase during the secondhalf of 2004 due to our planned HspE7 manufacturing and development activitiesand the start-up of additional clinical trials.  

 

***Selling, general and administrative expenses ***

 

Selling, general andadministrative expense, or SG&A, includes executive management, businessdevelopment, investor relations, legal support and general administrativeactivities.    

 

SG&A spending increased byapproximately 1% to $1,892,000 for the three month periods ended June 30,2004 from $1,866,000 for the same period in 2003.  For the six month periods ended June 30, 2004 and 2003,SG&A spending was $4,245,000 and $4,156,000, respectively.

 

***Cost of bioreagent sales***

 

The aggregate cost ofbioreagent sales as a percentage of bioreagent sales was approximately 21% and28% for the three month periods ended June 30, 2004 and 2003,respectively, resulting in gross margins of 79% and 72%, respectively.   For the six month periods endedJune 30, 2004 and 2003 the aggregate cost of sales was approximately 23%and 27%, respectively, resulting in gross margins of 77% and 73%,respectively.  Our improved gross marginduring the three and six month periods ended June 30, 2004 as compared to2003 is due principally to fewer adjustments to inventory reserves in the firsthalf of 2004 and initiatives to bring kit manufacturing in-house.  

 

***Interest and other income***

 

Interest and other incomedecreased during the three month periods ended June 30, 2004 by 119% to aloss of $48,000 compared with income of $255,000 during the same period in2003.  During the six month periodsended June 30, 2004 and 2003 interest and other income decreased by 34% to$302,000 from $458,000, respectively. The decrease is due principally to a $293,000 temporary write-down ofour fixed income investment portfolio recorded in the second quarter 2004.  

 

***Net foreign exchange gain/loss***

 

For the three month periodended June 30, 2004 we recorded a net foreign exchange gain of $244,000compared with a loss of $485,000 for the same period in 2003.  During the first half of 2004, we recordedforeign exchange a gain of $291,000 compared to a loss of $626,000 for the sameperiod in 2003.  The volatility of theU.S. dollar compared to the Canadian dollar in 2003 caused the 2003 foreignexchange loss. 

 

# ***Basic and diluted lossper share***

# *** ***

The 45% increase in net lossto $6,366,000 for the three month periods ended June 30, 2004 comparedwith $4,403,000 for the same period in 2003, was diluted by a 18% increase inthe weighted average number of common shares outstanding, resulting in basicand diluted loss per share of $0.09 in 2004 and $0.07 in 2003.  The 84% increase in net lossto $12,650,000 for the six month periods ended June 30, 2004 compared with$6,860,000 for the same period in 2003, was diluted by a 19% increase in theweighted average number of common shares outstanding, resulting in basic anddiluted loss per share of $0.17 in 2004 and $0.11 in 2003.

 

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### ***Differences between Canadian and U.S. generallyaccepted accounting principles***

### *** ***

Our consolidated financialstatements include adjustments necessary for their fair presentation inaccordance with Canadian GAAP.  Certainadjustments would be required if these statements were to be prepared in allmaterial respects in accordance with U.S. GAAP. 

 

Toconform to U.S. GAAP, our net loss would decrease by $352,000 and $979,000 forthe three and six month periods ended June 30, 2004.  The principal differences under U.S. GAAP asopposed to Canadian GAAP for the three and six month periods endedJune 30, 2004 were the reversal of an unrealized foreign exchange gain oninvestments of $238,000 and $243,000, a reversal of a loss on market value ofinvestments of $304,000 and $310,000 and the reversal of stock compensation expensetotaling $301,000 and $964,000 related to fair value stock option accountingadopted beginning January 1, 2004, offset by stock compensation expense of$15,000 and $52,000 that would be recorded under APB Opinion No. 25.  U.S. GAAP does not currently require fairvalue accounting on stock based compensation. Therefore, under the provisions of APB Opinion No. 25, no expense isrecorded for options granted with an exercise price equal to the fair value ofthe stock on the day of grant.  UnderAPB Opinion No. 25 expense is incurred when stock options are granted atexercise prices less than the fair value of the underlying stock.  Further, under U.S. GAAP, adjustments to themarket value of our investment portfolio would be recorded as a component of stockholders’equity.  Under Canadian GAAP unfavorablemarket value adjustments are recorded as a component of retained earnings.   

 

To conform to U.S. GAAP our net loss would decrease by $181,000 and$390,000 for the three and six month periods ended June 30, 2003.  The principal differences under U.S. GAAP asopposed to Canadian GAAP for the current quarter and first half of 2003,respectively, were the reversal of unrealized foreign exchange loss oninvestments of $166,000 and $338,000, coupled with a $15,000 and $52,000reversal of a loss on market value of investments. 

 

Basic net loss per common share underU.S. GAAP would have been $0.08 and $0.16 in the three and six month periodsended June 30, 2004, respectively. Basic net loss per common share under U.S. GAAP would have been $0.07and $0.11 in the three and six month periods ended June 30, 2003,respectively.   Our current assets andstockholders’ equity at June 30, 2004 are the same under U.S. GAAP andCanadian GAAP.   

 

**Summary of Quarterly Results**

 

The following is a summary of the unaudited quarterlyresults of operations for the previous eight quarters beginning with thequarter ended June 30, 2004. 

 

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|                                         |   | **Quarter  ended**      |   |
|----------------------------------------------|--------|-------------------------|--------|
| **(In thousands except per share  amounts)** |   | **June 30,  2004** |   | **March 31,  2004** |   | **December 31,  2003** |   | **September 30,  2003** |   |
| Net revenues                                 |   |                    |   |   |   |   |   |   |   |
| Canadian and U.S. GAAP                       |   | $                       | 1,636  |   | $ | 1,625 |   | $ | 1,727 |   | $ | 2,171 |   |
|                                         |   |                    |   |   |   |   |   |   |   |
| Research and development expenses            |   |                    |   |   |   |   |   |   |   |
| Canadian and U.S. GAAP                       |   | 5,973                   |   | 5,569 |   | 3,572 |   | 6,009 |   |
|                                         |   |                    |   |   |   |   |   |   |   |
| Net loss (1)                                 |   |                    |   |   |   |   |   |   |   |
| Canadian GAAP                                |   | (6,366                  | )      | (6,284 | ) | (3,762 | ) | (5,623 | ) |
| U.S. GAAP                                    |   | (6,014                  | )      | (5,657 | ) | (3,365 | ) | (5,463 | ) |
|                                         |   |                    |   |   |   |   |   |   |   |
| Basic loss per common share                  |   |                    |   |   |   |   |   |   |   |
| Canadian GAAP                                |   | $                       | (0.09  | ) | $ | (0.09 | ) | $ | (0.06 | ) | $ | (0.09 | ) |
| U.S. GAAP                                    |   | $                       | (0.08  | ) | $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.09 | ) |

 
|                              |   | **Quarter  ended**      |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | **June 30,  2003** |   | **March 31,  2003** |   | **December 31,  2002** |   | **September 30,  2002** |   |
| Net revenues                      |   |                    |   |   |   |   |   |   |   |
| Canadian and U.S. GAAP            |   | $                       | 2,881  |   | $ | 6,640 |   | $ | 5,320 |   | $ | 5,826 |   |
|                              |   |                    |   |   |   |   |   |   |   |
| Research and development expenses |   |                    |   |   |   |   |   |   |   |
| Canadian and U.S. GAAP            |   | 4,791                   |   | 6,493 |   | 7,167 |   | 7,447 |   |
|                              |   |                    |   |   |   |   |   |   |   |
| Net loss (1)                      |   |                    |   |   |   |   |   |   |   |
| Canadian GAAP                     |   | (4,403                  | )      | (2,457 | ) | (4,059 | ) | (2,280 | ) |
| U.S. GAAP                         |   | (4,222                  | )      | (2,248 | ) | (3,981 | ) | (3,668 | ) |
|                              |   |                    |   |   |   |   |   |   |   |
| Basic loss per common share       |   |                    |   |   |   |   |   |   |   |
| Canadian GAAP                     |   | $                       | (0.07  | ) | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.04 | ) |
| U.S. GAAP                         |   | $                       | (0.07  | ) | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.06 | ) |

 

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(1)           To conform these results to U.S. GAAP,certain adjustments would be made.  Theprincipal differences between U.S. GAAP and Canadian GAAP are described indetail in the notes to our 2003 and 2002 financial statements and ourMarch 31, 2004 and June 30, 2004 interim financial statements.

 

Our quarterly financialresults over the past eight quarters were principally affected by variations inrevenues from our Roche collaboration and variations in R&D spending.  Our collaborative R&D revenues havedecreased over time due principally to our December 2003 restructuredRoche agreement under which we are not reimbursed for R&D spending relatedto HspE7.   Another variation in ourrevenues occurred in the first quarter of 2003 when we received a time baseddevelopment milestone.  There have notbeen any milestone payments since that time. The fluctuation of R&D expense over the most recent eight quartersrelates to timing of spending associated with our clinical trials, processdevelopment and manufacturing of HspE7.  See the discussion under the captions “Results of Operations—CollaborativeR&D Revenue” and “Results of Operations—Research and Development” foradditional information.  

 

## **Critical AccountingPolicies**

 

Our significant accountingpolicies are disclosed in Note 1 to our consolidated financial statements herein.  Certain of our policies require theapplication of management judgment in making estimates and assumptions thataffect the amounts reported in the consolidated financial statements anddisclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience andvarious other factors deemed applicable and reasonable under thecircumstances.  The use of judgment in

 

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determining such estimates andassumptions is, by nature, subject to a degree of uncertainty.  Accordingly, actual results could differfrom the estimates made.  Our criticalaccounting policies include:

 

***Revenue recognition***

 

Revenue from collaborativeR&D arrangements may include multiple elements within a singlecontract.  Our accounting policycomplies with the revenue determination requirements set forth in EITF 00-21“Accounting for Revenue Arrangements with Multiple Deliverables,” and EIC 142“Revenue Arrangements with Multiple Deliverable,” relating to the separation ofmultiple deliverables into individual accounting units with determinable fairvalues.  We estimate the fair value ofdeliverables in collaboration agreements using standard industry techniques.  Changes in the determination of fair valuesor performance periods relating to certain deliverables, and associatedmilestones, could impact the timing of future revenue streams.   

 

***Clinical trial accruals***

 

Clinical trial costsconstitute a significant portion of R&D expense.  We recognize expenses related to our ongoing clinical trials using amethodology designed to accrue estimated costs in the appropriate accountingperiods in which the expenses are incurred.   We recognize clinical trial costs in three distinct phases thatcorrespond with the period during which the services are performed:  the start-up phase, the patient accrualphase, and the close-out phase. Based on the design of the trial, including thenumber of patients, number of clinical sites, method of treatment, and follow-up,the allocation of trial costs to each phase could vary from trial totrial.   Using our current trialaccrual methodology, our liability for clinical trials as of June 30, 2004is $528,000, which includes the estimated effect of any work-in-process terminatedat the end of the reporting period. Alternatively, if we utilized a percentage of completion approach andused an operational estimate of the actual work completed as of June 30,2004 compared to the total contract value, our clinical trial liability woulddecrease by approximately $72,000.  

 

***Stock-based compensation***

 

In September 2003 theCICA Accounting Standards Board released revised transitional provisions for *Stock-Based Compensation and Other Stock-BasedPayments*, Section 3870, to provide the same alternative methodsof transition as is provided in the U.S. for voluntary adoption of the fairvalue based method of accounting.  TheAcSB has also amended Section 3870 to require that all transactions wherebygoods and services are received in exchange for stock-based compensation andother payments result in expenses that should be recognized in financialstatements, and that this requirement would be applicable for financial periodsbeginning on or after January 1, 2004. Section 3870 requires that share-based transactions should bemeasured on a fair value basis. We retroactively adopted the provisions of CICASection 3870 beginning January 1, 1995.  See the detail at Note 2 in the financial statements includedherein.  

 

**NewAccounting Pronouncement**

 

The Emerging Issues Task Force (EITF) recentlydeliberated regarding Issue 03-01, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.”  The Issue is intended to address the meaningof other-than-temporary impairment and its application to certain investmentsheld at cost.  The EITF reached aconsensus regarding disclosure requirements concerning unrealised losses onavailable-for-sale debt and equity securities accounted for under SFAS No. 115“Accounting for Certain Investments in Debt and Equity Securities” and SFAS No.124, “Accounting for Certain Investments Held for Not-for-ProfitOrganizations.”  The guidance forevaluating whether an investment is other-than-temporarily impaired is to beapplied in reporting periods beginning after June 15, 2004.  The disclosure requirements apply to annualfinancial statements for fiscal years ending after December 15, 2003 forinvestments accounted for under SFAS Nos. 115 and 124.  For all other investments within the scopeof this Issue, the disclosure requirements apply to fiscal years ending afterJune 15, 2004.  Additionaldisclosure requirements for cost method investments apply to fiscal yearsending after June 15, 2004.  The

 

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Issue does not affect the current period.  We are currently evaluating the effect ofthis pronouncement on our financial statements.  

 

**FACTORSTHAT MAY AFFECT FUTURE PERFORMANCE**

 

**Before investing in our common stock you should carefullyconsider the following risk factors, the other information included herein andthe information included in our other reports and filings.  Our business, financial condition, and thetrading price of our common stock could be adversely affected by these and otherrisks.**

 

#### **We are an Early Stage Development Company**

#### ** **

Our biotechnology business isstill at an early stage of development. Significant additional research and development and clinical trials mustbe completed before our technology can be commercialized.  We have not completed the development of anytherapeutic products and, therefore, have not begun to market or generaterevenues from the commercialization of any therapeutic products.  We have undertaken only limited humanclinical trials for HspE7 and cannot assure you that subsequent trials willgenerate comparable results, that the results obtained from laboratory orresearch studies for our other products will be replicated in human studies,that our human studies will demonstrate efficacy or that our studies and trialswill not identify undesirable side effects of our products.  There are no assurances that any of ourtherapeutic products will:

 

•      meet applicablehealth regulatory standards

 

•      obtain requiredregulatory approvals or clearances

 

•      be produced incommercial quantities at reasonable costs

 

•      be successfullymarketed or 

 

•      be profitableenough that we will recoup the investment made in such product candidates.

 

None of our therapeuticproduct candidates are expected to be commercially available for severalyears.  It is possible that we will notsuccessfully develop any therapeutic products.

 

**We Have a History of Operating Losses and May Never BecomeProfitable**

 

We have not recorded anyrevenues from the sale of therapeutic products and have accumulated substantialnet losses.  We expect we will incurcontinued losses for at least the next several years while our primaryactivities are research, development, and clinical trials.  To become profitable we, either alone orwith one or more partners, must develop, manufacture and successfully markettherapeutic product candidates.

 

**We Must Obtain Additional Financing to Execute Our BusinessPlan**

 

The revenues from theproduction and sale of bioreagents and the projected revenues fromcollaborators are not adequate to support either the development of HspE7 underthe restructured Roche Collaboration Agreement or our other therapeutic productdevelopment programs.  We will needsubstantial additional funds to pursue further research and development; conductclinical trials; obtain regulatory approvals; file, prosecute, defend andenforce our intellectual property rights and market our products.  We will seek additional funds through publicor private equity or debt financing, strategic transactions and/or from othersources.  We could enter intocollaborative arrangements for the development of particular products thatwould lead to our relinquishing some or all rights to the related technology orproducts.

 

There are no assurances thatfuture funding will be available on favorable terms or at all.  If additional funding is not obtained, wewill need to reduce, defer or cancel development programs, planned initiatives

 

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or overhead expenditures, tothe extent necessary.  The failure tofund our capital requirements would have a material adverse effect on ourbusiness, financial condition and results of operations. 

 

**Our Success Depends On Collaborative Partners, Licensees andOther Third Parties Over Whom We Have Limited Control**

 

Dueto the complexity of the process of developing therapeutics, our core businessdepends on arrangements with pharmaceutical companies, corporate and academiccollaborators, licensors, licensees and others for the research, development,clinical testing, technology rights, manufacturing, marketing andcommercialization of our products. We have various research collaborations andoutsource many other business functions, including clinical trials andmanufacturing.  Our license agreementscould obligate us to diligently bring potential products to market, makemilestone payments and royalties that, in some instances, could be substantial,and incur the costs of filing and prosecuting patent applications.  There are no assurances that we will be ableto establish or maintain collaborations that are important to our business onfavorable terms, or at all.  

 

A number of risks arise fromour dependence on collaborative agreements with third parties.  Product development and commercializationefforts could be adversely affected if any collaborative partner:

 

•      terminates orsuspends its agreement with us

 

•      causes delays

 

•      fails to timelydevelop or manufacture in adequate quantities a substance needed in order toconduct clinical trials

 

•      fails toadequately perform clinical trials

 

•      determines not todevelop, manufacture or commercialize a product to which it has rights or

 

•      otherwise failsto meet its contractual obligations.  

 

Our collaborative partnerscould pursue other technologies or develop alternative products that couldcompete with the products we are developing.

 

**The Profitability of Our Products Will Depend in Part on OurAbility to Protect Proprietary Rights and Operate Without Infringing theProprietary Rights of Others**

 

The profitability of ourproducts will depend in part on our ability to obtain and maintain patents andlicenses and preserve trade secrets, and the period our intellectual propertyremains exclusive.  We must also operatewithout infringing the proprietary rights of third parties and without thirdparties circumventing our rights. The patent positions of pharmaceutical andbiotechnology enterprises, including ours, are uncertain and involve complexlegal and factual questions for which important legal principles are largelyunresolved.  For example, no consistentpolicy has emerged regarding the breadth of biotechnology patent claims thatare granted by the U.S. Patent and Trademark Office or enforced by the U.S.federal courts.  In addition, the scope ofthe originally claimed subject matter in a patent application can besignificantly reduced before a patent is issued.  The biotechnology patent situation outside the U.S. is even moreuncertain, is currently undergoing review and revision in many countries, andmay not protect our intellectual property rights to the same extent as the lawsof the U.S.  Because patent applicationsare maintained in secrecy in some cases, we cannot be certain that we or ourlicensors are the first creators of inventions described in our pending patentapplications or patents or the first to file patent applications for suchinventions.  

 

Other companies mayindependently develop similar products and design around any patented productswe develop.  We cannot assure you that:

 

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•      any of our patentapplications will result in the issuance of patents

 

•      we will developadditional patentable products

 

•      the patents wehave been issued will provide us with any competitive advantages

 

•      the patents ofothers will not impede our ability to do business or 

 

•      third partieswill not be able to circumvent our patents. 

 

On October 22, 2002Antigenics Inc. announced that it had filed an opposition in the EuropeanPatent Office to a European patent and requests for re-examination in the U.S.Patent and Trademark Office of two U.S. patents we licensed in connection withour platform technology.  InOctober 2003 Antigenics filed an opposition in the European Patent Officeto an additional, product specific, European patent.  It could take several years to obtain results from theseproceedings.  Until we receive finalresults from the opposition and re-examination processes, we will not be ableto assure investors of the success of our planned vigorous defense of thepatents.

 

A number of pharmaceutical,biotechnology, research and academic companies and institutions have developedtechnologies, filed patent applications or received patents on technologiesthat may relate to our business.  Ifthese technologies, applications or patents conflict with ours, the scope ofour current or future patents could be limited or our patent applications couldbe denied.  Our business may beadversely affected if competitors independently develop competing technologies,especially if we do not obtain, or obtain only narrow, patent protection.  If patents that cover our activities areissued to other companies, we may not be able to obtain licenses at areasonable cost, or at all; develop our technology; or introduce, manufactureor sell the products we have planned.  

 

Patentlitigation is becoming widespread in the biotechnology industry.  Such litigation may affect our efforts toform collaborations, to conduct research or development, to conduct clinical testingor to manufacture or market any products under development.  There are no assurances that our patentswould be held valid or enforceable by a court or that a competitor’s technologyor product would be found to infringe our patents in the event of patentlitigation.  Our business could bematerially affected by an adverse outcome to such litigation.  Similarly, we may need to participate ininterference proceedings declared by the U.S. Patent and Trademark Office orequivalent international authorities to determine priority of invention.  We could incur substantial costs and devotesignificant management resources to defend our patent position or to seek adeclaration that another company’s patents are invalid.  

 

Much of our know-how andtechnology may not be patentable, though it may constitute trade secrets. Thereare no assurances that we will be able to meaningfully protect our tradesecrets.  We cannot assure you that anyof our existing confidentiality agreements with employees, consultants, advisorsor collaborators will provide meaningful protection for our trade secrets,know-how or other proprietary information in the event of any unauthorized useor disclosure.  Collaborators, advisorsor consultants may dispute the ownership of proprietary rights to ourtechnology, for example by asserting that they developed the technologyindependently.

 

**We May Encounter Difficulties in Manufacturing our Products**

 

Our manufacturing experiencein bioreagents is not directly applicable to the manufacture of therapeuticproducts.  We have not yet introducedany therapeutic products and have no experience manufacturingimmunotherapeutics ourselves.  Beforeour products can be profitable, they must be produced in commercial quantitiesin a cost-effective manufacturing process that complies with regulatoryrequirements, including GMP, production and quality control regulations.  Because we do not have facilities for theproduction of therapeutic products such as HspE7, we contract with thirdparties for process development, the scale-up of manufacturing our productsfrom the laboratory bench to commercial quantities, manufacturing of bulkmaterials, product characterization, filling the product into vials,

 

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packaging and relatedprocesses.  If there are delays ordifficulties in developing a commercial manufacturing process, performingmanufacturing or transferring HspE7 between contractors performing differentaspects of the manufacturing process, we may not be able to conduct clinicaltrials, obtain regulatory approval or meet demand for our products.

 

Production of our productscould require raw materials which are scarce or which can be obtained only froma limited number of sources.  If ourmanufacturers were unable to obtain adequate supplies of such raw materials,the development, regulatory approval and marketing of our products could bedelayed.

 

**We Could Need More Clinical Trials or Take More Time toComplete Our Clinical Trials Than We Have Planned**

 

Clinical trials vary in designby factors including dosage, end points, length, controls, and numbers andtypes of patients enrolled.  We may needto conduct a series of trials to demonstrate the safety and efficacy of ourproducts.  The results of these trialsmay not demonstrate safety or efficacy sufficiently for regulatory authoritiesto approve our products.  

 

Regulatory authorities mayrequire us to determine whether our products delay or prevent diseaserecurrence.  Clinical trials to showthat a disease does not recur take longer to complete than clinical trials thatend when patients stop having specific symptoms.  The actual schedules for our clinical trials could varydramatically from the forecasted schedules due to factors including changes intrial design, conflicts with the schedules of participating clinicians andclinical institutions, delayed patient accrual and changes affecting productsupplies for clinical trials.  

 

We rely on collaborators,including academic institutions, governmental agencies and clinical researchorganizations, to conduct, supervise, monitor and design some or all aspects ofclinical trials involving our products. The National Cancer Institute is sponsoring some HspE7 clinical trials.  Since these trials depend on governmentalparticipation and funding, we have less control over their timing and designthan trials we sponsor.  Delays in orfailure to commence or complete any planned clinical trials could delay theultimate timelines for product release. Such delays could reduce investors’ confidence in our ability to developproducts, likely causing our share price to decrease.

 

**We May Not Be Able to Obtain the Regulatory Approvals orClearances That Are Necessary to Commercialize Our Products**

 

TheU.S., Canada and other countries impose significant statutory and regulatoryobligations upon the manufacture and sale of human therapeutic products.  Each regulatory authority typically has alengthy approval process in which it examines pre-clinical and clinical dataand the facilities in which the product is manufactured.  Regulatory submissions must meet complexcriteria to demonstrate the safety and efficacy of the ultimate products.  Addressing these criteria requiresconsiderable data collection, verification and analysis.  We may spend time and money preparingregulatory submissions or applications without assurances as to whether theywill be approved on a timely basis or at all. 

 

Our product candidates, someof which are currently in the early stages of development, will requiresignificant additional development and pre-clinical and clinical testing priorto their commercialization. These steps and the process of obtaining requiredapprovals and clearances can be costly and time-consuming.  If our potential products are notsuccessfully developed, cannot be proven to be safe and effective throughclinical trials, or do not receive applicable regulatory approvals andclearances, or if there are delays in the process:

 

•      the commercialization of our products couldbe adversely affected;

 

•      any competitive advantages of the productscould be diminished; and

 

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•      revenues or collaborative milestones from theproducts could be reduced or delayed.

 

Governmentaland regulatory authorities may approve a product candidate for fewerindications or narrower circumstances than requested or may condition approvalon the performance of post-marketing studies for a product candidate.  Even if a product receives regulatoryapproval and clearance, it may later exhibit adverse side effects that limit orprevent its widespread use or that force us to withdraw the product from themarket.  

 

Anymarketed product and its manufacturer will continue to be subject to strictregulation after approval.  Results ofpost-marketing programs may limit or expand the further marketing ofproducts.  Unforeseen problems with anapproved product or any violation of regulations could result in restrictionson the product, including its withdrawal from the market and possible civilactions. 

 

Themanufacturers of our products will be required to comply with applicable goodmanufacturing practices regulations, which include requirements relating toquality control and quality assurance, as well as the maintenance of recordsand documentation.  If the manufacturerscannot comply with regulatory requirements, including applicable goodmanufacturing practice requirements, we may not be allowed to develop or marketthe product candidates.  If we or ourmanufacturers fail to comply with applicable regulatory requirements at anystage during the regulatory process, we may be subject to sanctions, includingfines, product recalls or seizures, injunctions, refusal of regulatory agenciesto review pending market approval applications or supplements to approveapplications, total or partial suspension of production, civil penalties,withdrawals of previously approved marketing applications and criminalprosecution.

 

**Competitors May Develop and Market Drugs That Are Less Expensive,More Effective or Safer, Making Our Products Obsolete or Uncompetitive**

 

Many competitors and potential competitors havesubstantially greater product development capabilities and financial,scientific, marketing and human resources than we do.  Technological competition from pharmaceutical companies andbiotechnology companies is intense and is expected to increase.  Other companies have developed technologiesthat could be the basis for competitive products.  Some of these products have an entirely different approach ormeans of accomplishing the desired therapeutic effect than products we aredeveloping.  Alternative products may bedeveloped that are more effective, work faster and are less costly than ourproducts.  Competitors may succeed in developingproducts earlier than us, obtaining approvals and clearances for such productsmore rapidly than us, or developing products that are more effective thanours.  In addition, other forms ofmedical treatment, such as surgery, may be competitive with our products. Overtime, our technology or products may become obsolete or uncompetitive.   

 

**Our Products May Not Gain Market Acceptance**

 

Products such as HspE7 may notgain market acceptance among physicians, patients, healthcare payors and themedical community.  The degree of marketacceptance of any product depends on a number of factors, includingestablishment and demonstration of clinical efficacy and safety,cost-effectiveness, clinical advantages over alternative products, andmarketing and distribution support for the products.  Limited information regarding these factors is available inconnection with our products or products that may compete with ours.

 

Our sales experience is limited to the sale of bioreagents.  To directly market and distribute anypharmaceutical products, we or our collaborators will need a marketing andsales force with appropriate technical expertise and supporting distributioncapabilities.  We may not be able toestablish sales, marketing and distribution capabilities or enter intoarrangements with third parties on acceptable terms.  If we or our partners cannot successfully market and sell ourproducts, our ability to generate revenue will be limited.   

 

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**Our Operations and the Use of Our Products Could Subject Usto Damages Relating to Injuries or Accidental Contamination**

 

The human clinical trials weconduct, including trials in children, may have unforeseen long-term healthimplications.  We have only limitedamounts of product liability insurance for our clinical trials.  We may not correctly anticipate or be ableto maintain on acceptable terms the level of insurance coverage that wouldadequately cover potential liabilities from proposed clinical trials and eventualcommercial sales.  Product liabilityinsurance is expensive, difficult to obtain and may not be available in thefuture.  If we cannot obtain sufficientinsurance coverage or other protection against potential product liabilityclaims, the commercialization of our products may become financiallyinfeasible.  If any liabilities from aclaim exceed the limit of insurance coverage, we may not have the resources topay them.

 

Our research and developmentprocesses involve the controlled use of hazardous and radioactivematerials.  We are subject to federal,provincial and local laws and regulations governing the use, manufacture,storage, handling and disposal of such materials and waste products.  The risk of accidental contamination orinjury from handling and disposing of such materials cannot be completelyeliminated. In the event of an accident involving hazardous or radioactivematerials, we could be held liable for resulting damages.  We are not insured with respect to thisliability. Such liability could exceed our resources.  In the future we could incur significant costs to comply withenvironmental laws and regulations.

 

**Our Success Depends On Attracting and Retaining QualifiedPersonnel**

 

We depend on a core managementand scientific team.  The loss of any ofthese individuals could prevent us from achieving our business objective ofcommercializing our product candidates. Our future success will depend in large part on our continued ability toattract and retain other highly qualified scientific, technical and managementpersonnel, as well as personnel with expertise in clinical testing andgovernment regulation.  We facecompetition for personnel from other companies, universities, public andprivate research institutions, government entities and otherorganizations.  If our recruitment andretention efforts are unsuccessful, our business operations could suffer.

 

**Our Revenues Will Depend Upon the Availability ofReimbursement from Third-Party Payors That Are Increasingly Challenging thePrice and Examining the Cost Effectiveness of Medical Products and Services**

 

Sales of therapeutic productsdepends in part upon the availability of reimbursement from third-party payors,including government health administration authorities, managed care providers,private health insurers and other organizations.  These third-party payors increasingly attempt to contain costs bychallenging the price of products and services and limiting the coverage andlevel of reimbursement for pharmaceutical products.  Third party reimbursement for our products may be inadequate toenable us to maintain prices that provide a return on our product developmentinvestment.  Governments continue topropose and pass legislation designed to reduce healthcare costs.  This legislation could further limitreimbursement.  If government andthird-party payors do not adequately reimburse patients for the costs of ourproducts, the market for our products may be limited.

 

**Our Share Price Has Been and Is Likely to Continue to BeHighly Volatile**

 

As is typical forbiotechnology companies without an approved product on the market, our shareprice has been highly volatile in the past and is likely to continue to bevolatile. The price of our shares could be materially affected by factorsincluding:

 

•      the announcementof clinical trials results by us or our competitors

 

•      regulatoryactions

 

•      safety issues

 

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•      changes affectingpatents or exclusive licenses

 

•      future issuancesof shares

 

•      the announcementof technological innovations

 

•      the release ofpublications

 

•      the developmentof new commercial products

 

•      changes inregulations

 

•      the release offinancial results

 

•      public concernsover risks relating to biotechnology

 

•      sales of sharesby existing shareholders and 

 

•      changes inanalyst recommendations. 

 

The market for our shares,which are traded on the Toronto Stock Exchange, may be more limited than itwould be if they were traded on NASDAQ or a U.S. exchange.

 

**Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We use the Canadian dollaras our measurement and functional currency. As a result, we are exposed to foreign currency fluctuations through ouroperations because a substantial amount of our contract research anddevelopment spending has been transacted in other currencies, principally inU.S. dollars and British pounds.  Wehold investment balances in the currencies in which we have expendituresplanned during the foreseeable future. During the first half of 2004, we purchased British pounds to mitigateour currency exposure based on spending plans with Avecia.  Our U.S. dollar denominated expenses andrevenues are partially matched by our bioreagent product sales, 95% of whichare in U.S. dollars.  We translate monetaryassets and liabilities into Canadian dollars using the rates of exchangeprevailing at our balance sheet date. We record the resulting exchange gainsand losses in our statement of operations. Although we do not currently engage in hedging or other activities toreduce foreign currency risk, beyond matching investments proportionately withanticipated spending, we may do so in the future if conditions change. 

 

A hypotheticalchange in U.S dollar exchange rates by applying a 10% change to our June 30,2004 foreign exchange rate, then applying that rate to our average level ofU.S. investments during 2004, would result in a $890,000 impact.  If the value of the Canadian dollar relativeto the U.S. dollar were to increase by 10%, our net loss would decrease by$890,000.  Further, if the value of theCanadian dollar relative to the U.S. dollar were to decrease by 10%, our netloss would increase by $890,000.

 

A hypotheticalchange in British pound exchange rates by applying a 10% change to ourJune 30, 2004 foreign exchange rate, then applying that rate to ouraverage level of British pound investments during the year, would result in a$106,000 impact.  If the value of theCanadian dollar relative to the British pound were to increase by 10%, our netloss would decrease by $106,000. Further, if the value of the Canadian dollar relative to the Britishpound were to decrease by 10%, our net loss would increase by $106,000.

 

We are also exposed tointerest rate risk, because we maintain cash equivalent and short-terminvestment portfolio holdings of various issuers, types, and maturity dateswith large banks and investment banking institutions.  The market value of these short-term investments on any dayduring the investment term may vary as a result of market interest ratefluctuations.  Changing market interest rates during thequarter affected our fixed income security valuations, resulting in a temporarywrite-down of our investment portfolio during the second quarter of $293,000.

 

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To differentiate between the affect of a change in the market valuationof securities caused by market interest rate changes versus a change in theannual rate of interest we could earn on a security, we calculated that ahypothetical change in interestrates comparable to a 10% change to our average rate of return would result ina $86,000 impact.  If interest rateswere to increase by 10%, our net loss would decrease by $86,000.  Further, if interest rates were to decreaseby 10%, our net loss would increase by $86,000.

 

We have not used derivativefinancial instruments in our investment portfolio.  We classify our investments as available-for-sale at the time ofpurchase and re-evaluate this designation as of each balance sheet date. We had$39,891,000 in cash, cash equivalents and short-term investments as ofJune 30, 2004.

 

**Item4.  CONTROLS AND PROCEDURES**

** **

Ourchief financial officer and chief executive officer concluded as ofJune 30, 2004 that our disclosure controls and procedures (as defined inRule 15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended) are effective and designed to alert them to material informationrelating to Stressgen and its consolidated subsidiaries, based on the evaluationof these controls and procedures as required by paragraph (b) of Rule 15d-15.

 

#### **PART II—OTHERINFORMATION**

#### ** **

###### **Item 4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITIES HOLDERS**

###### ** **

OnMay 12, 2004 we held our annual general meeting.  The shareholders elected the six directors listed below.  In each case, over 99% of the shareholdersthat voted cast their votes in favor of the candidate.  The specific number of votes for andwithheld from each candidate are specified below:

 

JoannData – 28,747,616 for (27,413 withheld)

ElizabethGreetham – 28,746,616 for (28,413 withheld)

DanielKorpolinski – 28,661,466 for (113,563 withheld)

IanLennox – 28,749,676 for (25,353 withheld)

MargotNorthey – 28,747,326 for (27,703 withheld)

JayShort – 28,731,216 for (43,813 withheld)

 

Inaddition, Deloitte & Touche LLP was reappointed as our independent auditorby a vote of 28,745,954 shares (29,075 withheld).

 

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###### **Item 6.  EXHIBITS AND REPORTS ON FORM 8-K**

###### ** **

On May 7, 2004 we filed a report on Form 8-K containing our financial results for the first quarter of 2004.

 

 

## **SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized. 

 
|                       | Stressgen  Biotechnologies Corporation                                                                                                                                              |
|----------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |                                                                                                                                                                                |
| Date:  August 5, 2004 | /s/  Gregory M. McKee                                                                                                                                                               |   |
|                       | Gregory  M. McKee                                                                                                                                                                   |
|                       | Vice  President, Corporate Development  and Chief Financial Officer  (Principal Financial and Accounting  Officer duly authorized to sign  this report on behalf of the registrant) |

 

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INDEX OF EXHBITS

 
| **Exhibit No.** |   | **Description**                                                    |
|-----------------|--------|--------------------------------------------------------------------|
| 3.9*            |   | Articles  of Continuance of the Company                            |
| 3.10*           |   | By-Laws  of the Company                                            |
| 4.4*            |   | Form  of Stock Certificate                                         |
| 31.1            |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
| 31.2            |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
| 32              |   | Section 1350  Certification                                   |

 

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*Incorporated by reference to the Company’s Form 10-Q for the quarter endedJune 30, 2001, as filed with the Commission on August 2, 2001

 

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