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Tuesday, October 25, 2005

Genex Pharm. (GENX) 10-K

Genex Pharmaceutical, Inc. website pink sheets yahoo SEC Annual report for year ending Dec 31, 2004 Q1 report for March 31, 2005 Q2 report for June 30, 2005

Delaware (inc 2002)
offices in Tianjin City, PRC
As of April 29, 2005, the registrant had 3,212,232 common shares outstanding
Reverse merger with Tianjin Zhongjin Biology Development Co., Ltd. Previously KS E-Media, Inc.
Producing and distributing Reconstituted Bone Xenograft ("RBX")
published paper on dog RBX
published paper on mouse RBX using cow bone 2002, mostly same authors
published paper on rat RBX 2003, US and Korean authors

Here's a good, detailed description of the process. It works in animal tests. Antibiotics can't be delivered directly to infected bone without toxic effects. There is a way around this using beads which apparently bleed antibiotics but these must be surgically removed. If you can create bone paste with antibiotics, that would work great, but has some problems. Freezing, freeze-drying, decalcifying, boiling, radiating, and de-proteinizing all fail to work because they either don't elminate the stuff the body reacts against or else they destroy the antibiotics needed. The solution is to chemically treat the bone paste so the body won't reject it. Then add "BMP [bone morphogenic proteins which stimulate bone growth], a highly osteoconductive material, from calf cortical bone". In addition to being a good solution for bone grafting, it also works well compared to existing solutions for repairing bone defects.

An unrelated informational article about bone grafts. It talks about autografts (bone from the same animal) and xenografts (bone from a different species of animal). It also goes into some detail about BMP, freezing, immune reactions, etc.

There has also been some progress in the use of cuttlefish backbone for xenografts.

GENX believes RBX requires fewer medical procedures and has less immune problems than autograft or allograft methods. Based on what I've read, I'd say that's correct. However, autograft is pretty compelling (but requires two surgeries).
Bovine bone --> decalcify --> remove protein --> add BMP = RBX

Tests at Beijing General Military Hospital showed an 88.4% success rate. It's only more cost effective in "certain cases". This is sounding less and less compelling.

RBX is being distributed to 400 hospitals in 22 provinces. 50 direct sales employees. 20 independent 3rd party resellers in 13 other provinces. Sales is via professional medical seminars, technical conferences, internal hospital meetings, clinical studies, professional journals (such as this).

No trademarks or patents. Relies on trade secrets as disclosure is deemed worse. Key employees have signed NDAs. No non-executive knows the whole process, with records and files maintained separately.

Two resellers account for 15% and 10% of 2004 revenues. Both signed 3-year nonbinding letters of intent for RBX deliveries for $1.4 million in sales.

Resellers: 56%
Direct sales: 44%

R&D is outsourced.

Business License issued by The Tianjin Administration for Industry and Commerce
Manufacturing License for Medical Devices issued by The Tianjin Drug Administration
Certificate for Medical Devices Product Standard: Q12 XJ 3867-2001, which is a certified product statement of manufacturing and production for medical devices.

86 employees (11 mgmt, 23 production and some R&D, 41 sales, 6 finance acctng, 5 admin). 37 added in 2004 (10 prod, 27 sales, 5 finance). Sales has 7 managers. Sales teams are in Guangdong, Tianjin, Beijing, Shandong, Hunan, Hubei, Sichuan, and Fujian.

The dominant competition for RBX is traditional bone graft surgery products, the market is fragmented with only small businesses in regional markets. There are no other known companies pursuing the national xenograft market. There is a national allograft competitor, Shanxi Osteorad. The 10-K lists other companies in the business.

Related party stuff
GENX advanced cash to parties related through common shareholders during 2003 and 2004. $1 million bears 6% interest. $169K is interest free. Both are unsecured. $197K is a 6 month term loan due May 2005. $244K is a 6 month term loan due April 2005, but was extended for 1 more year. $560K is due on demand. No frickin explanation!
GENX borrowed small amounts of money from a shareholder interest free, due on demand, unsecured.
GENX rented office and factory from related parties. The total was about $50K.
GENX purchased $1 million of PP&E and inventory from related party through major shareholder. The AR and other receivables did not relate to GENX.

No legal proceedings.
No significant new accounting changes (except stock options).

GENX terminated Manning Elliott, Chartered Accountants (handled 38 public companies in 2005) in June 2004. From June to Oct 2004, Kabani & Company were the auditors. From Oct 2005 to March 2005 it was Weinberg & Company, Inc. (handled 42 accounts in 2005) auditors (no adverse opinions). They re-appointed Kabani & Company (handled 28 accounts in 2005) in March 2005. What the hell is it with Chinese reverse merger companies and revolving doors for auditors???
Audit fees for 2004: $70K

Fuzhi Song, 53, Chairman, CEO, President
Song only has 10 years of experience in the pharm business. CEO of Tainjin Zhongjin Pharm Jan 98 to present. Chairman since 1999. Also Chairman and GM of Jinshi Group.
Shuli Zhang, 43, CFO, Treasurer
Joined in 2004. Previously CFO at Tainjin Pharm. During 2002 was audit manager of Tainjin Jiurong Accounting Company. 2000 to 2003 Chief Accountant of Tianjin Hualinhang Investment Co, CFO at XinJiang Zhonghe Ltd. Is a CPG in China (and CPV and CTA).
Sufen Ail, 30, Secretary
MBA from St. Joseph's University in Philidelphia, PA in 2001.
No family relationships.

No audit committee. Same with other Chinese reverse mergers.

Officers, directors, and 10%ers did NOT comply with SEC requirements on filing. Company will tell them to file. None of them have filed as of Oct 23, 2005! The company plans to have a Code of Ethics by the end of 2005 (yeah, right).

None of the executive officers were paid more than $100,000. No stock options, retirement, pensions, etc. except for the usual Chinese legal stuff.

CEO owns 82% of the company. That's bad. I'm thinking that's a showstopper, at least in combination with the other red flags.

Update Nov 26, 2005: Q3 results: earned another 2 cents with good cash flow. Revenues down slightly. Dismissed auditor. Stock price is down somewhat, but not nearly enough to consider it.

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