Interim Report January-June 2009

Interim Report January-June 2009

Financial information

Net sales amounted to SEK thousand 270  (SEK thousand 143)

Operating earnings amounted to SEK thousand -6 215 (SEK thousand -9 703)

Net profit/loss for the period amounted to SEK thousand -6 340 (SEK thousand -7
080)

Cash flow from current operations amounted to SEK thousand -7 482 (SEK thousand
-9 770)

Cash flow for the period amounted to  SEK thousand -7 695 KSEK (SEK thousand -10
437 KSEK)



First quarter highlights

•Genovis signs Letter of Intent for the acquisition of CRO company. Eijdo is a
contract research company specialized in imaging using magnetic camera; MRT
(magnetic resonance tomography).

•Genovis nano products show promising results in magnetic resonance studies. The
nanoparticles possess unique properties that are very useful in the development
of new medical products, such as diagnostics and therapeutics in the areas of
cancer and neuro.

Significant events after the end of the quarter 

•Genovis has signed an agreement for the acquisition of all shares in Eijdo
research AB. The acquisition is an important step in Genovis' strategy, and
strengthens the company's opportunities to create a market for its nanoparticles
in medical research and development. The nanoparticles combined with methods to
analyse their contrasting effect using MRT, will give Genovis a distinct
competitive advantage during the market introduction of products and services
for medical imaging and for so called molecular imaging.

•Genovis' board and management have decided to abandon the intended divestment
of the so called protein portfolio, and instead collaborate with partners for
production and global sales of products derived from the antibody modifying
enzymes. Despite a genuine interest from several companies, the planned
divestment could not be completed at a level that met with expected revenues. It
therefore appears to be more financially advantageous alternative for the
company to maintain and further develop all its IP.   

•Genovis has requested negotiations regarding staff reductions in accordance
with the Swedish MBL law, following the decision not to continue production and
marketing of antibody modifying enzymes on its own. Through staff reductions the
overall costs are expected to be reduced with approx. 37%. 

•The board has decided to call an extraordinary General Meeting on 8th September
2009, and proposes that the meeting decides on a new share issue with
preferential rights to existing shareholders. 


Comments from the CEO

A year ago we decided to divest our protein products portfolio as a means to
finance the further focusing on our nanoparticle business area. As things turned
out we learned that the timing was not right for this divestment, but Genovis is
therefore lacking capital. The conclusion is that we must make substantial cost
reductions and at the same time turn to our shareholders for new capital. 
  
There are long-term trends indicating that it was a wise decision not to go
through with our divestment strategy and to sell off the protein portfolio at
too a low price. The customers who have tested the products are satisfied and
come back; there is now discussions about these products at conferences and in
scientific publications, and we notice a marked increase in sales. Even though
the volumes still are low, we doubled sales during the six months this year, and
during the second quarter of sales increased further compared to the same period
last year. This trend remains the same throughout July this year. To further
increase volumes we need a stronger market presence, which we will improve by
collaborating with one or a few well established partners who efficiently can
handle global marketing and sales to our qualified cuistomers. 
        
Our development projects, in which nanoparticles are tested as contrast agents
for different medical imaging techniques, have progressed successfully during
the spring. Through the acquisition of Eijdo research AB we have a fantastic
opportunity to generate business based on both our know-how and our
nanoparticles, and thus be able to offer customer fitted products. Genovis and
Eijdo research is a truly unique combination that gives us a strong competitive
advantage, and it adds strength as we develop the company business. 
   
It is extremely difficult and very painful to give notice about termination of
employment to competent colleagues but it can not be allowed to paralyse the
organization. Instead we will capture the unique knowledge base of Genovis , and
with a dedicated focus on sales activities we will make the company grow again.
It is my sincere hope that our shareholders will support this plan by
participating in the forthcoming new share issue.

Sarah Fredriksson, CEO of Genovis


Operations

Genovis develops and markets nanostructures that can be divided into two groups:
Proteins (Antibody Tools) for antibody fragmentation/ -modification and
nanoparticles (NIMT®) for medical imaging (early trials) and
transfection/delivery.

Business development and sales
During the spring we conducted discussions with selected partners for the
out-licensing of the intellectual property rights behind the products based on
the antibody modifying enzymes, which make up the lion part of Genovis' protein
based product portfolio. It appears to be a genuine interest for the protein
products from several parties while we at the same time realize that Genovis
will not receive the cash compensation we aimed for to go through with the
divestment. We have therefore decided to reach agreement on production and
non-exclusive distribution of this product group with one or a few partners who
in return can offer a global sales organization. Genovis will thus maintain,
strengthen and control all intellectual property, and it means a better business
deal long-term despite the fact that revenues are generated over a longer time
period.

Research and development
The development projects in Genovis have over the last year primarily been
directed towards the use of nanoparticles for so called medical imaging for
preclinical purposes. We have developed a new category of nanoparticles that
generate a contrast effect in more than one type of medical imaging technique.
We run our projects partly in-house, and partly in collaboration with research
groups at Lund University. To be able to transfer the very promising results and
knowledge into a new product offering, we have decided to acquire Eijdo research
AB. The intention is that Genovis will be in a position to offer customer made
nanoparticles which besides the particles per se also include method development
and services in the form of pre-studies that are specifically adapted to the
individual needs of the customer. Through the acquisition it will be possible to
strengthen our offer to the customer and to launch new products and services. 

Product portfolio
Imaging 
Imaging, a market segment undergoing strong growth, is used by researchers for
in vivo and ex vivo studies. In order to see what happens in a cell and to be
able to follow the cell inside an animal model, the cell must be marked in some
way. One method is to introduce magnetic nanoparticles into the cell, NIMT®
FeOlabel, and then follow the cell using magnetic resonance imaging (MRI). 
Today Genovis is working on two in vivo imaging projects in cooperation with
Lund University. One project involves development of nanostructures for use in
diagnostics (medical imaging) of extremely small tumors that can rapidly occur
in lymph glands among patients with breast cancer. The project recently received
funds from the Swedish Research Council to finance an industrial doctoral
student for four years. The other project involves nanoparticles as carriers of
small molecules to cells in the brain. Genovis also supports several customer
projects in which the customer either uses Genovis' products for medical imaging
or to track stem cells. 

Transfection/Delivery 
There is a large market for technologies that deliver molecules (e.g., DNA or
genes) into cells. One such technology is NIMT®FeOfection, which offers high
efficiency and low toxicity compared with rival products. RNAi is another field
undergoing dramatic growth, where researchers are interested in technologies to
silence gene activity in order to treat conditions such as viral infections,
cardiovascular diseases, cancer, and metabolic diseases. With its high
efficiency and low toxicity, Genovis' NIMT®FeOfection is also extremely suitable
for these studies. 

Antibody Tools 
FabRICATOR® is a genetically modified enzyme that cleaves antibodies into two
parts, a Fab fragment and an Fc fragment. Unlike other technologies on the
market, FabRICATOR® cleaves all antibodies in a very short time in exactly the
same place, and each antibody is only cleaved once. FabRICATOR is also sold as a
kit that allows customers to cleave and isolate pure Fab fragments in less than
one hour, unlike other methods which may take up to twenty-four hours to achieve
the same results. IgGZERO™ is a unique protein that can specifically cleave
sugar molecules that are found naturally on antibodies. Removing the sugar
molecules can improve the performance of the antibody in various applications.
IgGZERO™ can also help wash away antibody molecules 

from primary cells. FcDOCKER™ binds specifically to the antibody. This protein
is very useful in the antibody production process. Using FcDOCKER™ entails a
gentler production process than competing methods and offers great technical and
economic advantage. 


Geographic markets and market strategy 

Genovis sells to dealers and distributors, who in turn conduct marketing
campaigns in different regional markets. The distributors have a good
understanding of the business opportunities for Genovis' nanostructures in each
region. The company currently has distributors who cover thirteen countries and
are geographically scattered from North America across Europe and beyond to the
Far East. Sales also take place to some extent directly to end customers in
countries where Genovis does not have distributors. Revenues are currently
mainly generated from sales of nanoparticles and proteins as consumables, though
they are also generated by consulting services combined with the sale of
nanoparticles for applications that do not fall within Genovis' standard line of
products. 

One of the objectives for 2009 is to begin generating revenues through OEM sales
or the sale of licenses, where either Genovis is responsible for production of
the product, which is then sold under a partner's brand, or the partner assumes
responsibility even for this portion. In the latter case, revenues can involve
both advance payment and royalties per unit sold. In both cases, the
counterparty would be responsible for all marketing and sales and the Company
has decided to work according to this model for the next two to three years. 
With respect to sales of custom-made particles mainly for in-vivo studies and
imaging, the Company will continue to handle production and delivery to
customers or resellers in the future. 

Sales 
Q2
Orders received during the second quarter were SEK thousand 144 (SEK thousand
37). The revenues are predominantly derived from sales of proteins, KSEK 111.
The revenues from sales of nanoparticles amount to KSEK 33. The company can
notice a clear increase in sales of, above all, the antibody modifying enzymes
for which several customers are big pharmas.  

January - June
Net sales during the period were SEK thousand 270 (SEK thousand 143).

Net Result 
Q2
The operating loss during the first quarter of the year was SEK thousand 2,842
(loss: SEK thousand 4,864). Genovis is carrying out a cost-cutting program that
will achieve full impact during the third quarter. In addition to the current
cost savings programme, the company will go through with further savings that
are expected to have effect during the first quarter of 2010.

Depreciation and amortization during the quarter were SEK thousand -260 (-258)
including SEK thousand -182 (SEK thousand -155) for tangible assets and SEK -78
(SEK thousand -103) for intangible assets. 
The loss after financial items was SEK thousand 3,466 (loss: SEK thousand 4,882.
Deferred tax during the quarter was SEK 0 (SEK thousand 1,335).

January - June
The operating loss during the period of the year was SEK thousand 6,215 (LOSS:
SEK thousand 9,703). 
Depreciation and amortization during the quarter were SEK thousand -516 (-450)
including SEK thousand -273 (SEK thousand -297) for tangible assets and SEK -243
(SEK thousand -153) for intangible assets. 
The loss after financial items was SEK thousand 6,340 (loss: SEK thousand 9,793.
Deferred tax during the quarter was SEK 0 (SEK thousand 2,713).


Cash Flow and Financial Position 
Q2
Cash flow from operating activities was SEK thousand -2,984 (SEK thousand
-5,533). Cash flow from change in working capital totaled SEK thousand -370 (SEK
thousand -909). At the end of the period cash and cash equivalents amounted to
SEK thousand 70. Genovis plans to carry out a new share issue in September, and
will be bridge financed until the share issue is completed.
The Group's net investments during the period totaled SEK 47 (6).

January - June
Cash flow from operating activities was SEK thousand -7,482 (SEK thousand
-9,770). Cash flow from change in working capital totaled SEK thousand -1,658
(SEK thousand -427). 
The Group's net investments during the period totaled SEK 47 (SEK 6). Net
investments included SEK 47 (SEK 6) for tangible assets.


Organization and Personnel 

Genovis' Lund division is responsible for centrally coordinated business and
financial functions, as well as production, research and development, marketing,
customer support and sales support. The CEO and COO have overall responsibility
for the group's business. Genovis Inc. mainly focuses on strategic business
development. 

June 30, 2009, the Group had nine employees, including nine at the Parent
Company and no employees in the United States, compared with eleven people at
the Parent Company and one in the United States during 
the same period last year. The Chairman of the Board of Genovis Inc. is paid a
consulting fee when working on projects. 


Additional information 

Debt to closely related
Genovis AB is financed through bridge financing arranged with a credit from the
major owner, Farstorp Invest. As per 20th August the debt amounts to SEK 229
309. No collateral is n place for this credit. 

Acquisition of Eijdo research AB
The purchase price amounts to SEK 4,7 million and will be paid in the form of
non-cash issued shares in Genovis AB corresponding to SEK 4,5 million, and a
cash consideration of KSEK 200. The non-cash issued shares can not be traded for
2 years. The financial impact of the acquisition is marginal.    

Non-cash share issue
As authorized by the General Annual Meeting on 2nd June 2009, the board has
decided to issue 1 690 140 shares to the owners of Eijdo research AB, thereby
bypassing the rights of the shareholders. The subscription shall be at issue
price SEK 2,66, which has been established to be the average trading price
during the 20 trading days immediately proceeding the day of signing the
agreement, the 20th of August 2009. The trading price for each day has been
calculated as the average of the highest and lowest price paid. In case no price
paid was recorded, the latest price paid was included in the calculation. Day
without recorded trading price has not been included in the calculation. Through
this decision the share capital will increase with SEK 676 056. The shares are
issued in connection with taking possession, however no later than 30th
September 2009. The share issue results in a dilution of 11%. 

Proposed new share issue with preferential rights
The board proposes that the extraordinary General Meeting decides on a new share
issue with preferential rights for existing shareholders, at which two existing
shares give right to the subscription of one new share at issue price of SEK 1
per share. The decision means that the share capital can be increased with
altogether SEK 2 813 293,2 through the issuing of 7 033 233 new shares.
Following the completed share issue the share capital will amount to, at the
maximum, SEK 8 439 879,6, and the number of shares to 21 099 699. The company
receives approx. SEK 7 million before costs for the share issue. Shareholders
who do not participate in the new share issue will see their share holding
diluted with 33%.   

Risks and uncertainties 
Genovis' general view of the financial risks that could affect operations has
not changed since the description published in the most recent annual report.
For a detailed overview of the company's financial risks please refer to page 28
of Genovis' 2008 annual report. 

Stock option program 
The company has 187,000 warrants issued. The warrants may be exercised for
subscription of shares between February 28, 2012 and May 31, 2012. When all
warrants are fully exercised the company's share capital will increase by a
total of SEK 74,800 through the issue of 187,000 shares, each with a par value
of SEK 0.40. If the warrants are fully exercised the new shares will constitute
1.7% of capital and votes. 
The Genovis share is traded on First North, part of the OMX Nordic Exchange.
Mangold Fondkommission is the Company's Certified Adviser and liquidity
guarantor.