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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _______________
Commission file number 000-25169
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GENEREX BIOTECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 98-0178636
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 Harbour Square, Suite 202, Toronto, Canada M5J 2G2
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 416/364-2551
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at October 15, 2001, based on the closing price as of that date, was
approximately $20,283,528.
At October 15, 2001, the registrant had 20,682,634 shares of Common Stock
outstanding.
Documents incorporated by reference: None
Forward-Looking Statements
Certain statements in the "Business" (Item 1) section, "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" (Item 7), the
notes to our audited financial statements (Item 8) and elsewhere in this Annual
Report on Form 10-K constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements can be
identified by introductory words such as "expects", "plans", "intends",
"believes", "will", "estimates", "forecasts", "projects" or words of similar
meaning, and by the fact that they do not relate strictly to historical or
current facts. Forward-looking statements address, among other things, our
expectations concerning the efficacy of our platform buccal delivery technology,
our expectations concerning product candidates for our technology, our
expectations concerning our development and license agreement with Lilly, our
expectations of when different phases of clinical activity may commence and our
expectations of when regulatory submissions may be filed or when regulatory
approvals may be received.
Any or all of our forward-looking statements may turn out to be wrong. They can
be affected by inaccurate assumptions that we might make or by known or unknown
risks and uncertainties. Actual outcomes and results may differ materially from
what is expressed or implied in our forward-looking statements. Among the
factors that could affect future results are:
o the inherent uncertainties of product development based on a new and as
yet not fully proven drug delivery technology,
o the risks and uncertainties regarding the actual effect on humans of
seemingly safe and efficacious formulations when tested clinically,
o the inherent uncertainties associated with clinical trials of product
candidates,
o the inherent uncertainties associated with the process of obtaining
regulatory approval to market product candidates, and
o adverse developments in our collaboration with Lilly regarding oral
insulin, which is currently our only product candidate that has moved
beyond preliminary research and development.
Additional factors that could affect future results are set forth throughout the
"Business" (Item 1) section, including the subsection entitled "Certain
Additional Risk Factors", and elsewhere in this Annual Report on Form 10-K.
PART I
Item 1. Business.
Overview
Generex Biotechnology Corporation is engaged in the research and development of
drug delivery technologies. Our primary focus at the present time is our
proprietary technology for the administration of formulations of large molecule
drugs to the oral (buccal) cavity using a hand-held aerosol applicator.
A substantial number of large molecule drugs (i.e., drugs composed of molecules
with a higher than specified molecular weight) have been approved for sale in
the United States or are presently undergoing clinical trials as part of the
process to obtain such approval, including various proteins, peptides,
monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which
generally can be administered by various methods, large molecule drugs
historically have been administered predominately by injection. The principal
reasons for this have been the vulnerability of large molecule drugs to
digestion and the relatively large size of the molecule itself, which makes
absorption into the blood stream through the skin or mucosa inefficient or
ineffective.
All injection therapies involve varying degrees of discomfort and inconvenience.
With chronic and sub-chronic diseases, the discomfort and inconvenience
associated with injection therapies frequently results in less than optimal
patient acceptance of and compliance with the prescribed treatment plan. Poor
acceptance and compliance can lead to medical complications and higher disease
management costs. Also, elderly, infirm and pediatric patients with chronic or
sub-chronic conditions may not be able to self-inject their medications. In such
cases assistance is required which increases both the cost and inconvenience of
the therapy.
Our goal is to develop proprietary formulations of large molecule drugs that can
be administered through the buccal mucosa, primarily the inner cheek walls,
thereby eliminating or reducing the need for injections. We believe that our
buccal delivery technology is a platform technology that has application to many
large molecule drugs, and provides a convenient, non-invasive, accurate and cost
effective way to administer such drugs. We have identified several large
molecule drugs as possible candidates for development, but to date have focused
our development efforts on a buccal insulin product.
Between January 1999 and September 2000, we conducted clinical trials of our
buccal insulin product in the United States, Canada and Europe. In September
2000, we entered into a Development and License Agreement with Eli Lilly and
Company to develop this product. Prior to entering into the agreement with
Lilly, we had not reached a point in our clinical program at which we were
prepared to apply for regulatory approvals to market the product in any country,
and we did not anticipate receiving any such approvals for a number of years.
Under the terms of our agreement with Lilly, Lilly will be responsible generally
for clinical trials and regulatory approvals on a worldwide basis for all
products developed under the agreement. Lilly also will have the exclusive right
to market the products worldwide. Our principal responsibilities under the Lilly
agreement will be to continue development, as required, of our proprietary
formulation and on our RapidMist(TM) device, which is described below.
In January 2001, we established a joint venture with a wholly owned subsidiary
of Elan Corporation, plc. The joint venture will pursue the application of
certain of our and Elan's drug delivery technologies, including our platform
technology for the buccal delivery of pharmaceutical products, for the treatment
of prostate cancer, endometriosis and/or the suppression of testosterone and
estrogen. The parties intend to select at least one pharmaceutical product for
research and development under the joint venture within one year's time. The
parties will conduct the joint venture through Generex (Bermuda), Ltd., a
Bermuda limited liability company. Generex (Bermuda), Ltd. was granted
non-exclusive licenses to utilize our buccal delivery technology and certain
Elan drug delivery technologies.
We are a development stage company, and prior to the first quarter of the
current fiscal year had not received any revenues from operations. We have no
products approved for commercial sale by drug regulatory authorities and only
one product, our oral insulin formulation, for which we have begun the
regulatory approval process. As noted above, however, we believe that our buccal
delivery technology is a platform technology that has application to a large
number of large molecule drugs in addition to insulin. Fentanyl, morphine,
estrogen, heparin, monoclonal antibodies, human growth hormone, fertility
hormone, as well as a number of vaccines are among the compounds that we have
identified as possible candidates for product development.
Buccal Delivery Technology
Our buccal delivery technology involves the preparation of a proprietary
formulation in which an active pharmaceutical agent is placed in solution with a
combination of absorption enhancers and other excipients classified generally
recognized as safe ("GRAS") by the Food and Drug Administration when used in
accordance with specified quantity and other limitations. The resulting
formulation, which is stable at room temperature, is aerosolized with a
pharmaceutical grade chemical propellant and is administered to the patient
using our proprietary RapidMist(TM) device. The device is a small, lightweight,
hand-held, easy-to- use aerosol applicator comprised of a container for the
formulation, a metered dose valve, an actuator and dust cap. Using the device,
the patient self-administers the formulation by spraying it into the mouth. The
device contains multiple applications, the number being dependent, among other
things, on the concentration of the formulation. Absorption of the
pharmaceutical agent occurs in the buccal cavity, principally through the inner
cheek walls. In clinical studies of our insulin product, insulin absorption in
the buccal cavity has been shown to be very rapid.
Buccal Insulin Product
Insulin is a hormone that is naturally secreted by the pancreas to regulate the
level of glucose, a type of sugar, in the bloodstream. The term diabetes refers
to a group of disorders that are characterized by the inability of the body to
properly regulate blood glucose levels. When glucose is abundant, it is
converted into fat and stored for use when food is not available. When glucose
is not available from food, these fats are broken down into free fatty acids
that stimulate glucose production. Insulin acts by stimulating the use of
glucose as fuel and by inhibiting the production of glucose. In a healthy
individual, a balance is maintained between insulin secretion and glucose
metabolism.
There are two major types of diabetes. Type 1 diabetes (juvenile onset diabetes
or insulin dependent diabetes) refers to the condition where the pancreas
produces little or no insulin. Type 1 diabetes accounts for 5-10 percent of
diabetes cases. It often occurs in children and young adults. Type 1 diabetics
must take daily insulin injections, typically three to five times per day, to
regulate blood glucose levels.
In Type 2 diabetes (adult onset or non-insulin dependent diabetes mellitus), the
body does not produce enough insulin, or cannot properly use the insulin
produced. Type 2 diabetes is the most common form of the disease and accounts
for 90-95 percent of diabetes cases. In addition to insulin therapy, Type 2
diabetics may take oral drugs that stimulate the production of insulin by the
pancreas or that help the body to more effectively use insulin.
If not treated, diabetes can lead to blindness, kidney disease, nerve disease,
amputation, heart disease and stroke. Each year, from 12,000 to 24,000 people
lose their sight because of diabetes. Diabetes is also the leading cause of
end-stage renal disease (kidney failure), accounting for about 40% of new cases.
In addition, about 60-70 percent of people with diabetes have mild to severe
forms of diabetic nerve damage, which, in severe forms, can lead to lower limb
amputations. Diabetics are also 2 to 4 times more likely to have heart disease,
which is present in 75 percent of diabetes-related deaths, and are 2 to 4 times
more likely to suffer a stroke.
There is no known cure for diabetes. The World Health Organization estimates
that there are currently over 1.5 billion diabetics worldwide. It is further
estimated that this number will almost double by the year 2025. There are
estimated to be 17 million people suffering from diabetes in North America
alone, approximately 5 million of whom are undiagnosed, and diabetes is the
second largest cause of death by disease in North America.
We conducted the first clinical trials of our buccal insulin formulation with
human subjects in Ecuador in January 1998. We ultimately conducted a number of
studies in Ecuador in 1998, each of which involved a selection of between 8 and
10 patients. The principal purpose of these studies was to evaluate the
effectiveness of our oral insulin formulation in humans compared with injected
insulin and placebos.
On the basis of the test results in Ecuador and other pre-clinical data, we made
an Investigatory New Drug submission to the Health Protection Branch in Canada
(Canada's equivalent to the United States' Food and Drug Administration) in July
1998, and received permission from the Canadian regulators to proceed with
clinical trials in September 1998. We filed an Investigational New Drug
Application with the Food and Drug Administration in October 1998, and received
FDA approval to proceed with human trials in November 1998.
We began our clinical trial programs in Canada and the United States in January
1999. Between January 1999 and September 2000 we conducted clinical trials of
our insulin formulation involving approximately 200 Type 1 and Type 2 diabetic
patients and healthy volunteers. The study protocol in most trials involved
administration of two different doses of our insulin formulation following
either a liquid sustacal meal or a standard meal challenge. The objective of
these studies was to evaluate our insulin formulation's efficacy in controlling
post-prandial (meal related) glucose levels. These trials demonstrated that our
insulin formulation controlled post-prandial hyperglycemia in a manner
comparable to injected insulin.
As noted above, in September 2000 we entered into a Development and License
Agreement with Eli Lilly and Company covering an insulin product based upon our
buccal delivery technology. Under this agreement, Lilly will be responsible
generally for clinical trials and regulatory approvals for this product on a
worldwide basis. Lilly has not yet authorized the commencement of clinical
trials under the agreement. However, in furtherance of our product development
responsibilities under the agreement with Lilly, we are conducting limited
clinical studies in the United States, Canada, Europe and Ecuador.
Other Large Molecule Drug Projects
We have identified numerous compounds, other than insulin, as candidates for
product development. We have had discussions of possible research collaborations
with various pharmaceutical companies concerning use of our large molecule drug
delivery technology with these compounds, which include monoclonal antibodies,
human growth hormone, fertility hormone, fentanyl, morphine, estrogen and
heparin, and a number of vaccines.
Prior to entering into our agreement with Lilly covering the insulin product, we
had not aggressively pursued development opportunities apart from insulin
because we believed it was more advantageous to concentrate our resources,
particularly our financial resources, on developing the insulin product. While
the insulin product remains our first priority, we believe that Lilly's
involvement will relieve us of a substantial portion of the costs associated
with conducting the clinical program for the insulin product. We also raised
approximately $37 million from private placements of our common stock during the
last fiscal year. Based on the financial structure of the Lilly agreement and
the amounts raised through private placements, we believe we now have sufficient
financial resources to pursue development of additional products.
Corporate History
We were incorporated in Delaware in September 1997 for the purpose of acquiring
Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to
engage in pharmaceutical and biotechnological research and other activities. Our
acquisition of Generex Pharmaceuticals was completed in October 1997 in a
transaction in which the holders of all outstanding shares of Generex
Pharmaceuticals exchanged their shares for shares of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green Mt. P.
S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of
this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
Government Regulation
Our research and development activities, and the eventual manufacturing and
marketing of our products, are subject to extensive regulation by the Food and
Drug Administration in the United States (FDA) and comparable regulatory
authorities in other countries. Among other things, extensive regulation puts a
burden on our ability to bring products to market. While these regulations apply
to all competitors in our industry, many of our competitors have extensive
experience in dealing with FDA and other regulators, while we do not. Also,
other companies in our industry do not depend completely on products which still
need to be approved by government regulators, as we now do.
If requisite regulatory approvals are not obtained and maintained, our business
will be substantially harmed. In many if not all cases, we expect that our
development partners will control or participate extensively in the regulatory
approval process once a development agreement is in place. The following
discussion summarizes the principal features of food and drug regulation in the
United States and other countries as they affect our business.
United States. All aspects of our research, development and foreseeable
commercial activities are subject to extensive regulation by FDA and other
regulatory authorities in the United States. United States federal and state
statutes and regulations govern, among other things, the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of pharmaceutical products. The regulatory approval process, including
clinical trials, usually takes several years and requires the expenditure of
substantial resources. If regulatory approval of a product is granted, the
approval may include significant limitations on the uses for which the product
may be marketed.
The steps required before a pharmaceutical product may be marketed in the United
States include:
o preclinical tests;
o the submission to FDA of an Investigational New Drug application, which
must become effective before human clinical trials commence;
o human clinical trials to establish the safety and efficacy of the drug;
o the submission of a New Drug Application to FDA; and
o FDA approval of the New Drug Application, including approval of all
product labeling and advertising.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. The results of the preclinical tests are
submitted to FDA as part of the Investigational New Drug application and are
reviewed by FDA before the commencement of human clinical trials. Unless FDA
objects to the Investigational New Drug application, the Investigational New
Drug application becomes effective 30 days following its receipt by FDA. The
Investigational New Drug application for our oral insulin formulation became
effective in November 1998.
Clinical trials involve the administration of the new drug to humans under the
supervision of a qualified investigator. The protocols for the trials must be
submitted to FDA as part of the Investigational New Drug application. Also, each
clinical trial must be approved and conducted under the auspices of an
Institutional Review Board, which considers, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
Clinical trials are typically conducted in three sequential phases (Phase I,
Phase II, and Phase III), but the phases may overlap. Phase I clinical trials
test the drug on healthy human subjects for safety and other aspects, but not
effectiveness. Phase II clinical trials are conducted in a limited patient
population to gather evidence about the efficacy of the drug for specific
purposes, to determine dosage tolerance and optimal dosages, and to identify
possible adverse effects and safety risks.
When a compound has shown evidence of efficacy and acceptable safety in Phase II
evaluations, Phase III clinical trials are undertaken to evaluate clinical
efficacy and to test for safety in an expanded patient population at clinical
trial sites in different geographical locations. FDA and other regulatory
authorities require that the safety and efficacy of therapeutic product
candidates be supported through at least two adequate and well-controlled Phase
III clinical trials.
In the United States, the results of preclinical studies and clinical trials, if
successful, are submitted to FDA in a New Drug Application to seek approval to
market and commercialize the drug product for a specified use. FDA may deny a
New Drug Application if it believes that applicable regulatory criteria are not
satisfied. FDA also may require additional testing for safety and efficacy of
the drug. We cannot be sure that any of our proposed products will receive FDA
approval. Even if approved by FDA, our products and the facilities used to
manufacture our products will remain subject to review and periodic inspection
by FDA.
To supply drug products for use in the United States, foreign and domestic
manufacturing facilities must be registered with, and approved by, FDA.
Manufacturing facilities must also comply with FDA's Good Manufacturing
Practices, and domestic facilities are subject to periodic inspection by FDA.
Products manufactured outside the United States are inspected by regulatory
authorities in those countries under agreements with FDA. To comply with Good
Manufacturing Practices, manufacturers must expend substantial funds, time and
effort in the area of production and quality control. FDA stringently applies
its regulatory standards for manufacturing. Discovery of previously unknown
problems with respect to a product, manufacturer or facility may result in
consequences with commercial significance. These include restrictions on the
product, manufacturer or facility, suspensions of regulatory approvals,
operating restrictions, delays in obtaining new product approvals, withdrawals
of the product from the market, product recalls, fines, injunctions and criminal
prosecution.
Foreign Countries. Before we are permitted to market any of our products outside
of the United States, those products will be subject to regulatory approval by
foreign government agencies similar to FDA. These requirements vary widely from
country to country. Generally, however, no action can be taken to market any
drug product in a country until an appropriate application has been approved by
the regulatory authorities in that country. FDA approval does not assure
approval by other regulatory authorities. The current approval process varies
from country to country, and the time spent in gaining approval varies from that
required for FDA approval. The Canadian regulatory process is substantially
similar to that of the United States. We obtained regulatory approval to begin
clinical trials in Canada in November 1998. In Ecuador, regulatory authorities
approved the limited non-commercial distribution of our oral insulin formulation
in September 1998.
Marketing
We intend to rely on collaborative arrangements with one or more other companies
that possess strong pharmaceutical marketing and distribution resources to
perform these functions for us. Accordingly, we will not have the same control
over marketing and distribution that we would have if we conducted these
functions ourselves.
With respect to our insulin product, Lilly has exclusive, worldwide marketing
rights to the product under our development and license agreement. Except for
our agreement with Lilly with respect to our oral insulin product, we do not
have any agreements with any other companies for marketing or distributing our
products.
Manufacturing
To date, we have produced our oral insulin formulation only under laboratory
conditions on a small scale. In December 2000, we completed our pilot
manufacturing facility in Toronto in the same commercial complex in which our
original laboratory is located, and we are in the process of obtaining
regulatory approval for the facility. We believe that this facility will be
capable of producing our insulin product at levels necessary to supply our needs
for late stage human clinical trials of the product and for initial commercial
sales outside the United States. However, we have not yet actually produced
product at those levels.
Under our agreement with Lilly, Lilly may select us, but is not required to
select us, to manufacture products developed under that agreement. In order to
qualify for consideration in this role, we will have to satisfy Lilly that we
can supply such products at the requisite levels of quality, cost and
reliability in compliance with all applicable regulatory requirements. We have
no experience in resolving the staffing, manufacturing, regulatory and quality
control problems that are likely to come up in developing and running a large
scale manufacturing operation. Our failure to solve problems of this nature
would lead to loss of any opportunity to manufacture products developed under
our agreement with Lilly, and could delay or prevent our ability to bring other
products to market and inhibit sales after a product comes to market. In any
event, we will need to significantly increase our manufacturing capability in
order to manufacture any product in commercial quantities.
We own facilities in Brampton, Ontario, and Mississauga, Ontario, both within 25
miles from downtown Toronto, that were purchased with the intention of improving
and equipping them for manufacturing. These facilities are currently leased to
unrelated third parties, however, we believe we can place these facilities into
production of our insulin product or other products within 12 to 18 months lead
time if additional production capabilities are necessary.
Raw Material Supplies
The excipients used in our formulation are available from numerous sources in
sufficient quantities for clinical purposes, and we believe that they will be
available in sufficient quantities for commercial purposes when required,
although we have not yet attempted to secure a commercial supply of any such
products.
Components suitable for our RapidMist device are available from a limited number
of potential suppliers, as is the chemical propellant used in the device. We
believe that the components which now comprise the device will be utilized with
the commercial version of our insulin product irrespective of what manufacturing
arrangements are ultimately chosen by Lilly, i.e., whether or not we perform the
formulating and filling function. We have secured supply arrangements with the
manufacturers of all components and the propellant that we presently use in our
RapidMist device for commercial quantities of such components and the
propellant. All such suppliers are prominent, reputable and reliable suppliers
to the pharmaceutical industry. Because we now have a single supplier for each
of these components and propellant, however, we are more vulnerable to supply
interruptions than would be the case if we had multiple suppliers for each
component. We do not believe that the risk of a single source of supply for
proprietary raw materials or device components is unusual in the pharmaceutical
industry.
Lilly will supply the pharmaceutical compounds that are used in products
developed under our agreement with Lilly. We expect that similar arrangements
will be made with future development and marketing partners under licensing and
development agreements covering other products.
Intellectual Property
We currently have been issued five U.S. patents pertaining to aspects of buccal
delivery technology, and we have eleven U.S. patent applications and one
Canadian patent application pending, including applications that cover our oral
insulin formulation and technology. In addition, we hold one U.S. patent and one
Canadian patent and have two Canadian applications pending that pertain to
delivery technologies other than our buccal delivery technology. We also have an
indirect interest in three drug delivery patents held by another company,
Centrum Biotechnologies, Inc., which is fifty (50%) percent owned by us.
Our long-term success will substantially depend upon our ability to obtain
patent protection for our technology and our ability to protect our technology
from infringement, misappropriation, discovery and duplication. We cannot be
sure that any of our pending patent applications will be granted, or that any
patents which we own or obtain in the future will fully protect our position.
Our patent rights, and the patent rights of biotechnology and pharmaceutical
companies in general, are highly uncertain and include complex legal and factual
issues. We believe that our existing technology and the patents which we hold or
have applied for do not infringe any one else's patent rights. We believe our
patent rights will provide meaningful protection against others duplicating our
proprietary technologies. We cannot be sure of this, however, because of the
complexity of the legal and scientific issues that could arise in litigation
over these issues. (See "Legal Proceedings" (Item 3) for discussion of certain
legal proceedings involving intellectual property issues.)
We also rely on trade secrets and other unpatented proprietary information. We
seek to protect this information, in part, by confidentiality agreements with
our employees, consultants, advisors and collaborators.
Competition
We expect that products based upon our buccal delivery technology and any other
products that we may develop will compete directly with products developed by
pharmaceutical companies, universities, government agencies and public and
private research organizations.
Products developed by our competitors may use a different active pharmaceutical
agent to treat the same medical condition or indication as our product or may
provide for the delivery of substantially the same active pharmaceutical
ingredient as our products using different methods of administration. For
example, a number of pharmaceutical and biotechnology companies are engaged in
various stages of research, development and testing of alternatives to insulin
therapy for the treatment of diabetes, as well as new methods of delivering
insulin. These methods, including nasal, transdermal and pulmonary, may
ultimately successfully deliver insulin to diabetic patients. Many of our
competitors and potential competitors have substantially greater scientific
research and product development capabilities, as well as financial, marketing
and human resources, than we do.
Where the same or substantially the same active ingredient is available using
alternative delivery means, we expect that competition among products will be
based, among other things, on product safety, efficacy, ease of use,
availability, price, marketing and distribution. When different active
pharmaceutical ingredients are involved, these same competitive factors will
apply to both the active agent and the delivery method.
We consider other drug delivery companies to be direct competitors for the
cooperation and support of major drug and biotechnology companies that own or
market proprietary pharmaceutical compounds, as well as for the ultimate patient
market. Among drug delivery companies, those that are known to be developing
delivery systems for insulin and other pharmaceutical agents that we have
identified as product candidates using our technology are of primary concern.
Within this category, we consider Inhale Therapeutics, Inc. to be our principal
competitor for our insulin product.
Inhale Therapeutics, Inc. is developing a customized insulin formulation that is
processed into a fine, dry powder and administered to the deep lung using a
proprietary inhalation device developed for this purpose. Inhale has announced
successful results using its inhaled product in Phase II clinical trials, and is
now engaged in Phase III trials. Inhale is developing its insulin product in
collaboration with Pfizer, Inc., which in turn has announced agreements to
co-develop and co-promote the use of inhaled insulin with Aventis, a leading
pharmaceutical company which presently manufactures insulin for sale primarily
in Europe. Inhale is also developing pulmonary products with large molecule
drugs other than insulin, and has stated that it is investigating the use of its
inhalation technology with small molecule drugs.
Aradigm Corporation, which has announced a joint development agreement with Novo
Nordisk A/S to jointly develop a pulmonary delivery system for insulin by
inhalation, also may be considered a direct competitor of ours in the insulin
area. Novo Nordisk is one of the two leading manufacturers of insulin in the
world, the other being Eli Lilly and Company. Aradigm began Phase II testing of
its inhalation product in the second half of 1998.
Other companies have announced development efforts relating to alternative (to
injection) methods of delivering insulin or other large molecule drugs,
including Dura Pharmaceuticals, which announced a collaboration with Eli Lilly
and Company in 1998 to develop a pulmonary method of administering insulin, and
Alkermes, which announced a collaboration with Eli Lilly and Company in April
2000 to develop a pulmonary method of administering insulin. Other companies
developing alternative means of delivering insulin and other large molecule
drugs include: Emisphere (pills taken orally), Nobex (pills taken orally), and
Nastech (nasal), among others. These companies are at various stages of clinical
development.
In addition to other delivery systems for insulin, there are numerous products
which have been approved for use in the treatment of Type 2 diabetics in place
of or in addition to insulin therapy. These products may also be considered
competitive with insulin products.
Environmental Compliance
Our manufacturing, research and development activities involve the controlled
use of hazardous materials and chemicals. We believe that our procedures for
handling and disposing of these materials comply with all applicable government
regulations. However, we cannot eliminate the risk of accidental contamination
or injury from these materials. If an accident occurred, we could be held liable
for damages, and these damages could severely impact our financial condition. We
are also subject to many environmental, health and workplace safety laws and
regulations, particularly those governing laboratory procedures, exposure to
blood-borne pathogens, and the handling of hazardous biological materials.
Violations and the cost of compliance with these laws and regulations could
adversely affect us. However, we do not believe that compliance with the United
States, Canadian or other environmental laws will have a material effect on us
in the foreseeable future.
Research and Development Expenditures
A substantial portion of our activities to date have been in research and
development. In the period from inception to July 31, 2001, our expenditures on
research and development were $26,316,114. These included $19,149,860 in the
year ended July 31, 2001, which includes a one-time charge for the licensing fee
in connection with the Elan transaction, $3,476,436 in the year ended July 31,
2000 and $1,853,108 in the year ended July 31, 1999. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" (Item
7) for discussion of the licensing fee in connection with the Elan transaction.)
Employees
At September 30, 2001, we had 22 full-time employees, including our executive
officers and other individuals who work for us full time but are employed by
management companies that provide their services. Thirteen of our employees are
executive and administrative, five are scientific and technical personnel who
engage primarily in development activities and in preparing formulations for
testing and clinical trials, and four are engaged in corporate and product
promotion, public relations and investor relations. We believe our employee
relations are good. None of our employees is covered by a collective bargaining
agreement.
We will continue to need qualified scientific personnel and personnel with
experience in clinical testing, government regulation and manufacturing. We may
have difficulty in obtaining qualified scientific and technical personnel as
there is strong competition for these people from other pharmaceutical and
biotechnology companies as well as universities and research institutions. Our
business could be materially harmed if we are unable to recruit and retain
qualified scientific, administrative and executive personnel to support our
expanding activities, or if one or more members of our limited scientific and
management staff were unable or unwilling to continue their association with us.
We do not have fixed term agreements with any of our key management or
scientific staff, other than Dr. Pankaj Modi. The fact that we have a fixed term
contract with Dr. Modi, however, does not guarantee his continued availability.
We also use non-employee consultants to assist us in formulating research and
development strategy, in preparing regulatory submissions, in developing
protocols for clinical trials, and in designing, equipping and staffing our
manufacturing facilities. These consultants and advisors usually have the right
to terminate their relationship with us on short notice. Loss of some of these
key advisors could interrupt or delay development of one or more of our products
or otherwise adversely affect our business plans.
Certain Additional Risk Factors
In addition to historical facts or statements of current condition, this Annual
Report on Form 10-K contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events.
The following discussion outlines certain factors that we think could cause our
actual outcomes and results to differ materially from our forward-looking
statements. These factors are in addition to those set forth elsewhere in this
Annual Report on Form 10-K.
Our technologies and products are at an early stage of development.
We are a development stage company. We have a very limited history of
operations, and we do not expect ongoing revenues from operations in the
immediately foreseeable future. We have no products approved for commercial sale
at the present time. We may not be successful in obtaining regulatory clearance
for the sale of existing or any future products, or any of these products may
not be commercially viable.
In September 2000, as noted above, we entered into a development and license
agreement to work with Eli Lilly and Company on the development of our oral
insulin product. Under the terms of the agreement with Lilly, we will receive
milestone payments only if the project reaches specified development milestones
and we will be entitled to license royalties based on product sales only if the
product is successfully brought to market.
Prior to entering into the agreement with Lilly, we had conducted some
preliminary clinical trials of our oral insulin product in the United States,
Canada and Europe. Our clinical program, however, had not reached a point where
we were prepared to apply for regulatory approvals to market the product in any
country. Going forward under the agreement, Lilly will be responsible generally
for clinical trials and regulatory approvals on a worldwide basis. Lilly also
will have the exclusive right to market the product worldwide. Our principal
responsibilities will be to continue development, as required, on our oral
insulin formulation and on the RapidMist(TM) device.
Clinical trials under the agreement have not yet commenced. At this time, we
cannot predict when or if we will reach any of the development milestones under
the agreement and when or if any clinical trials might commence under the
agreement.
We believe that we can use our buccal delivery successfully with other large
molecule drugs in addition to insulin. We have engaged in preliminary research
and development work on other applications, but we have not devoted significant
time or resources to this effort to date. In January 2001, as noted above, we
entered into a joint venture with a subsidiary of Elan Corporation, plc. The
purpose of the joint venture is to pursue the application of certain of our and
Elan's drug delivery technologies -- including our large molecule drug delivery
technology -- to pharmaceutical products for the treatment of prostate cancer
and endometriosis and/or the suppression of testosterone and estrogen. However,
we and Elan have not yet selected a specific product for research and
development under the joint venture, and we cannot predict whether our
technology can be applied successfully to any such product, when or if selected.
We have not, and may not, receive regulatory approval to sell our products.
We have engaged primarily in research and development activities since our
inception. We have no products approved for commercial sale by drug regulatory
authorities. We have begun the regulatory approval process for only one product,
our oral insulin formulation.
Notwithstanding our development and license agreement with Lilly and the
participation of Lilly in the research and development process, we may not be
able to develop our insulin product successfully. In order to obtain regulatory
approvals for our insulin product, it will be necessary to demonstrate, among
other things, that:
o the product is physically and chemically stable under a range of
storage, shipping and usage conditions;
o the results of administering the product to patients are reproducible
in terms of the amounts of insulin delivered to the oral cavity and
absorbed in the bloodstream; and
o there are no serious adverse safety issues associated with use of the
product.
Under our agreement, Lilly also has the option of developing a number of
additional products using our platform buccal delivery technology. There is even
greater uncertainty and risk related to the regulatory approval process for
other products besides our insulin product that may be developed, whether with
Lilly or independently of Lilly. This is because we have not developed any other
product candidate to the extent that we have developed the insulin product.
We may not become, or stay, profitable even if our products are approved for
sale.
Even if regulatory approval to market our oral insulin product is obtained, many
factors may prevent the product from ever being sold in commercial quantities.
Some of these factors are beyond our control, such as:
o acceptance of the formulation by health care professionals and diabetic
patients;
o the availability, effectiveness and relative cost of alternative
diabetes treatments that may be developed by competitors; and
o the availability of third-party (i.e., insurer and governmental agency)
reimbursements.
We may not be able to compete with diabetes treatments now being marketed and
developed by other companies.
Our oral insulin product will compete with existing and new therapies for
treating diabetes, including administration of insulin by injection. We are
aware of a number of companies currently seeking to develop alternative means of
delivering insulin, as well as new drugs intended to replace insulin therapy at
least in part. In the longer term, we also face competition from companies that
seek to develop cures for diabetes through techniques for correcting the genetic
deficiencies that underlie diseases such as diabetes.
We will have to depend upon others for marketing and distribution of our
products, and we may be forced to enter into contracts limiting the benefits we
may receive and the control we have over our products.
We intend to rely on collaborative arrangements with one or more other companies
that possess strong marketing and distribution resources to perform these
functions for us. Except for the agreement with Lilly relating to our oral
insulin product, we do not have any agreements with other companies for
marketing or distributing our products. We may be forced to enter into contracts
for the marketing and distribution of our products that substantially limit the
potential benefits to us from commercializing these products. In addition, we
will not have the same control over marketing and distribution that we would
have if we conducted these functions ourselves.
We will need additional capital, which may not be available to us when we need
it.
We have incurred substantial losses from operations since our inception, and we
expect to continue to incur substantial losses for the immediately foreseeable
future. Under our agreement with Lilly, we expect Lilly to fund a substantial
portion of the costs relating to the clinical program and regulatory approvals
for our insulin product, and for any other products that may be developed under
the agreement should we reach that stage of activity. We may, however, incur
significant costs to fulfill our responsibilities under the agreement with
Lilly. We also may require funds in excess of our existing cash resources:
o to proceed under our joint venture with Elan, which requires us to fund
80% of initial product development costs;
o to develop new products based on our oral delivery technology,
including clinical testing relating to new products;
o to develop or acquire other delivery technologies or other lines of
business;
o to establish and expand our manufacturing capabilities; and
o to finance general and administrative and research activities that are
not related to specific products under development.
Our agreement with Lilly provides for us to receive milestone payments if the
project reaches specified development milestones and for us to receive license
royalties based on product sales if the product is successfully brought to
market. Given that these payments are contingent on events that we cannot be
sure will occur, we cannot be certain of when or if we will receive any further
payments from Lilly. In any event, we do not expect to receive revenues under
the agreement with Lilly or under any future development agreements that are
sufficient to satisfy all of our cash requirements.
In the past, we have funded most of our development and other costs through
equity financing. Unforeseen problems, including materially negative
developments in our relationship with Lilly, in our clinical trials or in
general economic conditions could interfere with our ability to raise additional
equity capital or materially adversely affect the terms upon which such funding
is available.
It is also possible that we will be unable to obtain additional funding as and
when we need it. If we were unable to obtain additional funding as and when
needed, we could be forced to delay the progress of certain development efforts.
Such a scenario poses risks. For example, our ability to bring a product to
market and obtain revenues could be delayed, our competitors could develop
products ahead of us, and/or we could be forced to relinquish rights to
technologies, products or potential products.
If we are not able to obtain sufficient patent protection for our buccal
delivery technology, we may face competition from potential competitors who may
use the unprotected aspects of our technology to our disadvantage.
Our long-term success will substantially depend upon protecting our technology
from infringement, misappropriation, discovery and duplication. We currently
have been issued five U.S. patents pertaining to aspects of buccal delivery
technology, and we have eleven U.S. patent applications and one Canadian patent
application pending, including applications that, if granted, would cover our
oral insulin formulation and technology. In addition, we hold one U.S. patent
and one Canadian patent and have two Canadian applications pending that pertain
to delivery technologies other than our buccal delivery technology. We also have
an indirect interest in three drug delivery patents held by another company,
Centrum Biotechnologies, Inc., which is 50% owned by us.
We cannot be sure that any of our pending patent applications will be granted,
or that any patents that we own or will obtain in the future will fully protect
our position. Our patent rights, and the patent rights of biotechnology and
pharmaceutical companies in general, are highly uncertain and include complex
legal and factual issues. We believe that our existing technology and the
patents we hold or have applied for do not infringe any one else's patent
rights. We believe our patent rights will provide meaningful protection against
others duplicating our proprietary technologies. We cannot be sure of this,
however, because of the complexity of the legal and scientific issues that could
arise in litigation over these issues. (See "Legal Proceedings" (Item 3) for
discussion of certain legal proceedings invoving intellectual property issues.)
Furthermore, patent applications are maintained in secrecy in the United States
until the patents are approved, and in most foreign countries for a period of
time following the date from which priority is claimed. A third party's pending
patent applications may cover any technology that we currently are developing.
We also hold some of our technology as trade secrets. We seek to protect this
information, in part, by confidentiality agreements with our employees,
consultants, advisors and collaborators.
Enforcement of an arbitration award may result in adverse effects upon Generex.
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment
banking and brokerage firm, initiated an arbitration against us under New York
Stock Exchange rules. Sands alleged that it had the right to receive, for
nominal consideration, approximately 1.5 million shares of our common stock.
Sands based its claim upon an October 1997 letter agreement that was purported
by Sands to confirm an agreement appointing Sands as the exclusive financial
advisor to Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late
1997. In exchange therefor, the letter agreement purported to grant Sands the
right to acquire 17% of Generex Pharmaceuticals common stock for nominal
consideration. Sands claimed that its right to receive shares of Generex
Pharmaceuticals common stock applies to our common stock since outstanding
shares of Generex Pharmaceuticals common stock were converted into shares of our
common stock in the acquisition. Sands' claims also included additional shares
allegedly due as a fee related to that acquisition, and $144,000 in monthly fees
allegedly due under the terms of the purported agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel
that heard this case awarded Sands $14,070 and issued a declaratory judgment
requiring us to issue to Sands a warrant to purchase 1,530,020 shares of our
common stock pursuant to and in accordance with the terms of the purported
October 1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of the State of
New York, County of New York (the "New York Supreme Court"). On November 10,
1999, we moved to vacate the arbitration award. On March 20, 2000, the New York
Supreme Court granted Sands' petition to confirm the award and denied our motion
to vacate the award. We appealed and on January 23, 2001, the New York State
Appellate Division, First Department (the "Appellate Division"), modified the
judgment of the New York Supreme Court that had confirmed the arbitration award
against us. The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of $14,070 to
Sands but modified the judgment to vacate the portion of the arbitration award
directing the issuance to Sands of a warrant to purchase 1,530,020 shares of the
our common stock. The Appellate Division held that the portion of the award
directing us to issue warrants to Sands is too indefinite to be enforceable and
remanded the matter to the arbitration panel for a final and definite award with
respect to such relief or its equivalent (including possibly an award of
monetary damages). The arbitration panel commenced hearings on the matters
remanded by the Appellate Division in June 2001 and is expected to conclude its
consideration of such matters and render its decision during the fourth calendar
quarter of 2001. We are not able to estimate an amount or range of potential
loss from this legal proceeding at the present time.
Our consolidated financial condition would be materially adversely affected to
the extent that Sands receives shares of our common stock for little or no
consideration or substantial monetary damages as a result of this legal
proceeding.
We face significant product liability risks, which may have a negative effect on
our financial performance.
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims whether or not the drugs
are actually at fault for causing an injury. Furthermore, our products may
cause, or may appear to have caused, serious adverse side effects (including
death) or potentially dangerous drug interactions that we may not learn about or
understand fully until the drug has been administered to patients for some time.
Product liability claims can be expensive to defend and may result in large
judgments or settlements against us, which could have a negative effect on our
financial performance. We maintain product liability insurance in amounts we
believe to be commercially reasonable for our current level of activity and
exposure, but claims could exceed our coverage limits. Furthermore, we cannot be
certain that we will always be able to purchase sufficient insurance at an
affordable price. Even if a product liability claim is not successful, the
adverse publicity and time and expense of defending such a claim may interfere
with our business.
The results and timing of our research and development activities, including
future clinical trials, are difficult to predict, subject to future setbacks
and, ultimately, may not result in any additional pharmaceutical products, which
may adversely affect our business.
We are focused on the development of our oral insulin product in the immediate
future, and ultimately upon additional products using our platform buccal
delivery technology. In pursuing these objectives, we may undertake a range of
activities, which include engaging in discovery research and process
development, conducting preclinical and clinical studies, and seeking regulatory
approval in the United States and abroad. In all of these areas, we have
relatively limited resources and compete against larger multinational
pharmaceutical companies. Moreover, even if we undertake these activities in an
effective and efficient manner, regulatory approval for the sale of new
pharmaceutical products remains highly uncertain since, in our industry, the
majority of compounds discovered do not enter clinical studies and the majority
of therapeutic candidates fail to show the human safety and efficacy necessary
for regulatory approval and successful commercialization.
Preclinical testing and clinical trials must demonstrate that a product
candidate is safe and efficacious. The results from preclinical testing and
early clinical trials may not be predictive of results obtained in subsequent
clinical trials, and we cannot be sure that these clinical trials would
demonstrate the safety and efficacy necessary to obtain regulatory approval for
any product candidates. A number of companies in the biotechnology and
pharmaceutical industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. In
addition, certain clinical trials are conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients may
die or suffer other adverse medical effects for reasons that may not be related
to the pharmaceutical agent being tested. Such events can have a negative impact
on the statistical analysis of clinical trial results.
The completion of clinical trials of product candidates may be delayed by many
factors. One such factor is the rate of enrollment of patients. We cannot
control the rate at which patients would present themselves for enrollment, and
we cannot be sure that the rate of patient enrollment would be consistent with
our expectations or be sufficient to enable clinical trials of product
candidates to be completed in a timely manner or at all. Any significant delays
in, or termination of, clinical trials of product candidates can have a material
adverse effect on our business.
We cannot be sure that we will be permitted by regulatory authorities to
undertake additional clinical trials for any product candidates, or that if such
trials are conducted, any product candidates will prove to be safe and
efficacious or will receive regulatory approvals. Any delays in or termination
of these clinical trial efforts can have a material adverse effect on product
development.
Our research and development and marketing efforts are highly dependent at
present on corporate collaborators and other third parties who may not devote
sufficient time, resources and attention to our programs, which may limit our
efforts to successfully develop and market potential products.
Because we have limited resources, we have sought to enter into collaboration
agreements with other pharmaceutical companies. Our primary collaboration
agreement at present is our development and license agreement with Eli Lilly and
Company. As is often the case in such collaboration agreements, Lilly has
substantial control over the supply of bulk drugs for commercial use or for use
in clinical trials; the design and execution of clinical studies; the process of
obtaining regulatory approval to market the product; and/or the eventual
marketing and selling of any approved product. In each of these areas, Lilly, or
any other collaborator with whom we may enter into such collaboration
agreements, may not support fully our research and commercial interests since
our program may compete for time, attention and resources with such
collaborator's internal programs. As such, we cannot be sure that either Lilly
or any other corporate collaborators will share our perspectives on the relative
importance of our program, that they will commit sufficient resources to our
program to move it forward effectively, or that the program will advance as
rapidly as it might if we had retained complete control of all research,
development, regulatory and commercialization decisions. Additionally, we may
find it necessary from time to time to seek new or additional partners to assist
us in commercializing our products. It is uncertain whether we would be
successful in establishing any such new or additional relationships.
We may incur additional losses.
To date, we have not been profitable and our accumulated net loss was
approximately $49 million at July 31, 2001. Our losses have resulted principally
from costs incurred in research and development, including clinical trials, and
from general and administrative costs associated with our operations. While we
seek to attain profitability, we cannot be sure that we will ever achieve
product and other revenue sufficient for us to attain this objective. We cannot
be sure that we will obtain required regulatory approvals, or successfully
develop, commercialize, manufacture and market any other product candidates.
The price of our shares may be volatile.
There may be wide fluctuation in the price of our shares. These fluctuations may
be caused by several factors including:
o announcements of research activities and technology innovations or new
products by us or our competitors;
o changes in market valuation of companies in our industry generally;
o variations in operating results;
o changes in governmental regulations;
o results of clinical trials of our products or our competitors'
products; and
o regulatory action or inaction on our products or our competitors'
products.
Our outstanding Special Voting Rights Preferred Stock and provisions of our
Certificate of Incorporation could delay or prevent the acquisition or sale of
Generex.
Holders of our Special Voting Rights Preferred Stock have the ability to prevent
any change of control of Generex. Our Vice President of Research and
Development, Dr. Pankaj Modi, owns all of our Special Voting Rights Preferred
Stock. In addition, our Certificate of Incorporation permits our Board of
Directors to designate new series of preferred stock and issue those shares
without any vote or action by the shareholders. Such newly authorized and issued
shares of preferred stock could contain terms that grant special voting rights
to the holders of such shares that make it more difficult to obtain shareholder
approval for an acquisition of Generex or increase the cost of any such
acquisition.
Item 2. Properties.
Our executive and principal administrative offices occupy approximately 5,000
square feet of office space in the Business Centre at 33 Harbour Square in
downtown Toronto, Ontario, Canada. We own the Business Centre, which comprises
approximately 9,100 square feet of usable space. The space in the Centre that is
not used by us is leased to third parties. Rental income is accounted for as a
reduction of our occupancy costs.
We also own a laboratory facility in Toronto that we have used for limited
production of our oral insulin formulation for clinical purposes, and have
completed a pilot manufacturing facility for our insulin product in the same
commercial complex. Our laboratory facility is approximately 2,650 square feet.
Our pilot manufacturing facility, which also includes laboratory facilities, is
approximately 4,800 square feet, a portion of which has been leased to third
parties. We have obtained regulatory approval for the laboratory facility, and
we are currently in the process of obtaining regulatory approval for the pilot
manufacturing facility.
We have first mortgages on our Toronto properties totaling $692,660 at July 31,
2001. Our mortgages require the payment of interest, with minimal principal
reduction, prior to their due date (November 1, 2002 with respect to $174,565
and May 25, 2005 with respect to $518,095).
At this time, we do not expect to need manufacturing capabilities beyond our
pilot facility before the end of the current fiscal year. We have acquired,
however, an 11,625 square foot building in Brampton, Ontario, which is
approximately 25 miles outside Toronto, and a 13,500 square foot building in
Mississauga, Ontario, which is about 20 miles from downtown Toronto, for
ultimate use in manufacturing. We have done preliminary work on these
facilities, but we do not expect to make a substantial investment in improving
and equipping them for manufacturing operations until our requirements in this
area are better defined. Both properties are currently leased to third parties.
Item 3. Legal Proceedings.
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On October 2,
1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against us under New York Stock
Exchange rules. Sands alleged that it had the right to receive, for nominal
consideration, approximately 1.5 million shares of our common stock. Sands based
its claim upon an October 1997 letter agreement that was purported by Sands to
confirm an agreement appointing Sands as the exclusive financial advisor to
Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late 1997. In
exchange therefor, the letter agreement purported to grant Sands the right to
acquire 17% of Generex Pharmaceuticals common stock for nominal consideration.
Sands claimed that its right to receive shares of Generex Pharmaceuticals common
stock applies to our common stock since outstanding shares of Generex
Pharmaceuticals common stock were converted into shares of our common stock in
the acquisition. Sands' claims also included additional shares allegedly due as
a fee related to that acquisition, and $144,000 in monthly fees allegedly due
under the terms of the purported agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel
that heard this case awarded Sands $14,070 and issued a declaratory judgment
requiring us to issue to Sands a warrant to purchase 1,530,020 shares of our
common stock pursuant to and in accordance with the terms of the purported
October 1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of the State of
New York, County of New York (the "New York Supreme Court"). On November 10,
1999, we moved to vacate the arbitration award. On March 20, 2000, the New York
Supreme Court granted Sands' petition to confirm the award and denied our motion
to vacate the award. We appealed and on January 23, 2001, the New York State
Appellate Division, First Department (the "Appellate Division"), modified the
judgment of the New York Supreme Court that had confirmed the arbitration award
against us. The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of $14,070 to
Sands but modified the judgment to vacate the portion of the arbitration award
directing the issuance to Sands of a warrant to purchase 1,530,020 shares of the
our common stock. The Appellate Division held that the portion of the award
directing us to issue warrants to Sands is too indefinite to be enforceable and
remanded the matter to the arbitration panel for a final and definite award with
respect to such relief or its equivalent (including possibly an award of
monetary damages). The arbitration panel commenced hearings on the matters
remanded by the Appellate Division in June 2001 and is expected to conclude its
consideration of such matters and render its decision during the fourth calendar
quarter of 2001. We are not able to estimate an amount or range of potential
loss from this legal proceeding at the present time.
MQS, Inc. v. Generex Biotechnology Corporation. In February 1999, MQS, Inc., a
former consultant, commenced a civil action against us in the United States
District Court for the District of New Jersey claiming that 242,168 shares of
our common stock and $243,066 are due to it for services that it rendered
through December 22, 1998. MQS claimed that we used proprietary technology of
MQS in developing our aerosol applicator and in formulating our oral insulin
formulation for aerosol application. We filed our answer to MQS's claims in May
1999, in which we denied that MQS is entitled to the relief that it was seeking
and denied that any of our products or technology incorporates any proprietary
technology belonging to MQS. We also filed a counterclaim against MQS for breach
of contract, as well as claims based upon unauthorized use and misappropriation
of our trade secrets and technology. In January 2001, we entered into a
settlement agreement with MQS whereby we paid the plaintiff certain amounts in
cash and common stock that were not material to the consolidated financial
position of the Company and whereby the claims of the parties were dismissed
with prejudice. The settlement agreement prohibits MQS from developing,
manufacturing, licensing or marketing any insulin or non-insulin product that
uses our platform technology.
Subash Chandarana et al. v Generex Biotechnology Corporation et al. In February
2001, Subash Chandarana, a former business associate of Dr. Pankaj Modi, our
Vice President of Research and Development, and an entity called Centrum
Technologies Inc. commenced an action in the Ontario Superior Court of Justice
against us and Dr. Modi seeking, among other things, damages for alleged
breaches of contract and tortious acts related to a business relationship
between Chandarana and Modi that ceased in July 1996. The plaintiffs' statement
of claim also seeks to enjoin the use, if any, by us of three patents allegedly
owned by the company called Centrum Technologies Inc. On July 20, 2001, we filed
a preliminary motion to dismiss the action of Centrum Technologies Inc. as a
nonexistent entity or, alternatively, to stay such action on the grounds of want
of authority of such entity to commence the action and, in the further
alternative, to dismiss such action for failure to produce documents referred to
in the statement of claim. We intend to defend this action vigorously. We are
not able to predict the ultimate outcome of this legal proceeding at the present
time or to estimate an amount or range of potential loss, if any, from this
legal proceeding.
We maintain product liability coverage for claims arising from the use of our
products in clinical trials, but do not have any insurance that covers our
potential liability in any of the legal proceedings described above.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to a vote of stockholders in the fourth quarter of
the fiscal year ended July 31, 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the executive
officers of the Company:
Name Age Position Held
---- --- -------------
Anna E. Gluskin 50 President, Chief Executive Officer and Director
Pankaj Modi, Ph.D. 47 Vice President, Research & Development and Director
E. Mark Perri 40 Chairman, Chief Financial Officer and Director
Rose C. Perri 34 Chief Operating Officer, Treasurer, Secretary and Director
Anna E. Gluskin - Director since September 1997. Ms. Gluskin has served as the
President and Chief Executive Officer of Generex since October 1997. She held
comparable positions with Generex Pharmaceuticals, Inc. from its formation in
1995 until its acquisition by Generex in October 1997.
Pankaj Modi, Ph.D. - Director since September 1997. Dr. Modi has served as Vice
President, Research and Development, since October 1997. Prior to that time, Dr.
Modi was Director of Insulin Research for Generex Pharmaceuticals, Inc., a
position he assumed in October 1996. Prior to joining Generex Pharmaceuticals
Inc., Dr. Modi was engaged in independent research and was employed as a senior
researcher at McMaster University in Hamilton, Ontario from February 1994
through October 1996.
E. Mark Perri - Director since September 1997. Mr. Perri has served as the
Chairman and Chief Financial Officer of Generex since October 1997. He held
comparable positions with Generex Pharmaceuticals, Inc. from its formation in
1995 until its acquisition by Generex in October 1997.
Rose C. Perri - Director since September 1997. Ms. Perri has served as Treasurer
and Secretary of Generex since October 1997, and as Chief Operating Officer
since August 1998. She was an officer of Generex Pharmaceuticals, Inc. from its
formation in 1995 until its acquisition by Generex in October 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
"Bid" and "asked" prices for our common stock were quoted on the Nasdaq OTC
Electronic Bulletin Board from February 1998 to May 2000. On May 5, 2000, our
common stock began trading on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market"). Prior to February 1998, there was no public market
for our common stock.
The table below sets forth the high and low inter-dealer bid quotations for our
common stock for certain periods prior to May 5, 2000, as furnished by the
Nasdaq OTC Bulletin Board. These are "inter-dealer" quotations, without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
The table also sets forth the high and low sales prices of our common stock
reported by The Nasdaq Stock Market for these periods beginning May 5, 2000.
Interdealer Bid Quotations Sales Prices
(not actual transactions) (actual transactions)
High Low High Low
2000
----
First quarter $9.88 $4.62 -- --
Second quarter $13.88 $1.06 $ .38 $4.78
Third quarter $24.75 $4.00 $24.88 $7.56
Fourth quarter $14.69 $.03 $14.75 $10.00
2001
----
First quarter $11.50 $4.25
Second quarter $11.60 $4.58
Third quarter $10.00 $2.91
Fourth quarter (through $ 4.35 $3.55
October 15, 2001)
The closing sales price for our common stock reported on October 15, 2001, was
$4.25.
At October 15, 2001, there were 674 holders of record of our common stock.
Dividends
We have not paid dividends on our common stock in the past and have no present
intention of paying dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In the period from August 1, 2000 until July 31, 2001, we have offered and sold
common stock and other securities in a number of transactions, including the
transactions described below, in reliance upon exemptions from the registration
requirements of the Securities Act of 1933. In the transactions described below,
unless otherwise indicated, we relied upon the exemptions from registration
provided in Section 4(2) of the Securities Act, and Rule 506 of Regulation D
thereunder. No "public solicitation", as that term is defined in Rule 502(c) of
Regulation D, was employed by or in connection with the sale of these
securities. All purchasers were, to our reasonable belief, accredited investors
who purchased for investment. All disclosures required under Rule 502(d) of
Regulation D were made by us, and all other conditions to the availability of
the Rule 506 exemption were, to our knowledge and belief, complied with by us.
In order to assure that resale restrictions applicable to restricted securities
are complied with, we placed a legend evidencing the restrictions on all
certificates representing the shares, and issued "stop transfer" instructions to
our transfer agent to prevent unapproved transfers.
Transactions in the year ended July 31, 2001, and not previously reported on a
Quarterly Report on Form 10-Q were as follows:
(a) On or about July 6, 2001, we completed a private placement of 1,189,189
units of securities ("Units") for cash at a price of $9.25 per Unit. Each Unit
consisted of a share of common stock and a warrant to purchase .25 shares of
common stock at an initial exercise price of $10.175 per share. The Units were
sold without registration under the Securities Act of 1933 (the "1933 Act") in
reliance upon the exemption from registration provided in Section 4(2) thereof
and Rule 506 of Regulation D promulgated thereunder. Under the terms of sale, we
have agreed to register the shares of common stock issued to the investors and
the shares of common stock issuable upon exercise of the warrants for sale under
the 1933 Act.
(b) On or about July 6, 2001, we also completed a second private placement of
64,864 units of securities ("Units") for cash at a price of $9.25 per Unit. Each
Unit consisted of a share of common stock and a warrant to purchase .25 shares
of common stock at an initial exercise price of $10.175 per share. The Units
were sold without registration under the 1933 Act in reliance upon the exemption
from registration provided in Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder. Under the terms of sale, we have agreed to register the
shares of common stock issued to the investors and the shares of common stock
issuable upon exercise of the warrants for sale under the 1933 Act.
Item 6. Selected Financial Data.
The following selected financial data is derived from and should be read in
conjunction with our financial statements and related notes, which appear
elsewhere in this annual report. Our financial statements as of July 31, 2001
and for the year ended July 31, 2001 have been audited by Deloitte & Touche LLP.
Our financial statements for the years ended July 31, 2000 and 1999 were audited
by WithumSmith+Brown.
Years Ended July 31
-------------------
(In thousands, except per share data) 2001 2000 1999 1998 1997 2001*
Operating Results
Revenue $ 1,000 -- -- -- -- $1,000
Net Loss $(27,097) $(8,841) $(6,240) $(4,664) (1,379) $(48,914)
Cash dividends per share -- -- -- -- -- --
Loss per common share:
Basic and diluted net loss
per common share (1.44) (.58) (.47) (.46) (.25) --
Financial Positions:
Total Assets 42,666 10,341 8,890 5,456 3,673 --
Long-term Debt 693 722 996 1,324 -- --
Stockholder's Investment 39,322 8,415 7,310 2,642 3,449 --
*Cumulative from November 2, 1995 (Date of Inception) to July 31, 2001
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
General
Corporate History. We were incorporated in Delaware in September 1997 for the
purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian corporation
formed in November 1995 to engage in pharmaceutical and biotechnological
research and other activities. Our acquisition of Generex Pharmaceuticals was
completed in October 1997 in a transaction in which the holders of all
outstanding shares of Generex Pharmaceuticals exchanged their shares for shares
of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green Mt. P.
S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of
this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
Business History. We are engaged in the development of proprietary drug delivery
technology. Our principal business focus has been to develop a technology for
buccal delivery (absorption through the inner cheek walls) of large molecule
drugs, i.e., drugs composed of molecules with molecular weights above a
specified level. Large molecule drugs historically have been administered only
by injection because their size inhibits or precludes absorption if administered
by oral, transdermal, transnasal or other means.
Our first product is an insulin formulation that is administered as a fine spray
into the oral cavity using a hand-held aerosol spray applicator. Between January
1999 and September 2000, we conducted clinical trials on this product in the
United States, Canada and Europe. In September 2000, we entered into an
agreement to develop this product with Eli Lilly and Company. Under this
agreement, Lilly is responsible for conducting clinical trials of the product,
securing regulatory approvals and marketing on a worldwide basis. Lilly also has
the option to develop certain additional products using our buccal delivery
technology depending on the success of the initial product. We received
$1,000,000 in connection with our entry into the agreement and will receive
certain other initial fees and milestone payments subject to the attainment of
certain product development milestones, as well as royalty payments based on
product sales should any products be approved for commercial sale. Lilly also
has the option to develop certain additional products using our buccal delivery
technology depending on the success of the initial product.
In January 2001, we established a joint venture with Elan International
Services, Ltd. ("EIS"), a wholly owed subsidiary of Elan Corporation, plc (EIS
and Elan Corporation, plc being collectively referred to as "Elan"). The joint
venture will pursue the application of certain of our and Elan's drug delivery
technologies, including our platform technology for the buccal delivery of
pharmaceutical products, for the treatment of prostate cancer, endometriosis
and/or the suppression of testosterone and estrogen. The parties intend to
select at least one pharmaceutical product for research and development under
the joint venture within one year's time. The parties will conduct the joint
venture through Generex (Bermuda), Ltd., a Bermuda limited liability company.
In connection with the joint venture, EIS purchased 1,000 shares of a new series
of our preferred stock, designated as Series A Preferred Stock, for $12,015,000.
We applied the proceeds from the sale of the Series A Preferred Stock to
subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS
paid in capital of $2,985,000 to subscribe for a 19.9% equity interest in
Generex (Bermuda), Ltd. While we initially own 80.1% of the joint venture
entity, EIS has the right, subject to certain conditions, to increase its
ownership up to 50% by exchanging the Series A Preferred Stock for 30.1% of our
interest in the joint venture entity.
Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal
delivery technology and certain Elan drug delivery technologies. Using the funds
from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable
license fee of $15,000,000 to Elan in consideration for being granted the rights
to utilize the Elan drug delivery technologies.
EIS also purchased 344,116 shares of our common stock for $5,000,000. We may use
the proceeds of this sale for any corporate purpose. If the joint venture
achieves certain milestones, we may require EIS to purchase an additional
$1,000,000 of our common stock at a 30% premium to the then prevailing fair
market value of our common stock.
Our buccal delivery technology is a platform technology that we believe has
application to a significant number of large molecule drugs in addition to
insulin. In the future, we expect to undertake development of additional
products based on this technology that are not covered by our agreement with
Lilly.
We do not expect to receive any revenues from product sales in the current
fiscal year. We received a $1,000,000 signing fee, which is included in revenues
as all necessary requirements have been satisfied, under the terms of the
agreement with Lilly in the first fiscal quarter of FY 2001. We expect, however,
to satisfy a substantial majority of our cash needs during the current year from
capital raised through prior equity financing.
Results of Operations - - 2001 Compared with 2000
We had a net loss of $27,097,210 in the year ended July 31, 2001 (FY 2001)
compared to a loss of $8,841,047 in the year ended July 31, 2000 (FY 2000). The
increase in our FY 2001 net loss resulted from increases in research and
development expenses (to $19,149,860 from $3,476,436) and in general and
administrative expenses (to $13,287,679 from $5,567,520). Our interest and
miscellaneous income in FY 2001 increased to $1,355,329 from $202,909 in FY
2000. The accounting treatment of the minority shareholder's share of the loss
generated by Generex (Bermuda), Ltd., resulted in a $2,985,000 minority interest
share of loss. In addition, we received $1,000,000 in revenues in connection
with the agreement with Lilly.
The principal reasons for the increase in our research and development expense
in FY 2001 were:
o the accounting treatment for our joint venture with Elan, which
resulted in a $15,000,000 research and development expense for the
license fee paid by Generex (Bermuda) Ltd. to Elan for technology
rights (The Company's consolidated net loss, which includes this
expense, however, was partially offset by approximately $2.9 million of
minority interest, reflecting Elan's 19.9% ownership interest in the
joint venture.); and
o increased expenditures relating to clinical studies of our oral insulin
formulation.
The principal reasons for the increase in our general and administrative
expenses in FY 2001 were:
o expenses incurred in connection with the termination in August 2001 of
the equity line facility, pursuant to which the Company paid $245,000
to Tradersbloom Limited, $750,000 to Ladenburg Thalman & Co., and
expensed the deferred financing costs (the fair value of the warrants,
approximately $3,406,196), all of which were included in FY 2001;
o increased travel and other costs of $1,524,997 (to $2,663,059 from
$538,062) associated with attendance at and sponsorship of industry
seminars and exhibitions and other promotional activities;
o an increase of $959,124 in legal and accounting fees and expenses (to
$2,479,850 from $1,520,726) related primarily to legal and accounting
services in connection with reporting requirements under the Securities
and Exchange Act of 1934, litigation defense costs and increased legal
activity necessitated by increased equity financing and business
activity;
o increased personnel costs of $207,658 (to $576,665 from $369,007)
related primarily to additions in our technical and administrative
staff during FY 2001; and
o expenses associated with the 2001 annual meeting of stockholders.
Results of Operations - - 2000 Compared With 1999
We had a net loss of $8,841,047 in the year ended July 31, 2000 (FY 2000)
compared to a loss of $6,239,602 in the year ended July 31, 1999 (FY 1999). The
increase in our FY 2000 net loss resulted from increases in research and
development expenses (to $3,476,436 from $1,853,108) and in general and
administrative expenses (to $5,567,520 from $4,374,523). Our net interest and
miscellaneous income in FY 2000 increased to $202,909 from a net expense of
$11,971 in FY 1999, primarily as a result of increased interest income in FY
2000.
The principal reasons for the increase in our research and development expense
in FY 2000 were:
o increased expenditures relating to clinical trials of our oral insulin
formulation primarily attributable to the expanded scope of these
trials in FY 2000 to include additional sites in the United States and
Europe, and the fact that trials did not commence in FY 1999 until the
second quarter; and
o costs associated with operations of our pilot manufacturing facility in
Toronto which supports our clinical program.
The principal reasons for the increase in our general and administrative
expenses in FY 2000 were:
o an increase of $684,344 in legal and accounting fees and expenses (to
$1,520,726 from $836,382) related primarily to legal and accounting
services in connection with reporting requirements under the Securities
and Exchange Act of 1934, litigation defense costs and increased legal
activity necessitated by increased business activity;
o increased personnel costs of $198,122 (to $369,007 from $170,885)
related primarily to additions to our technical and administrative
staff during FY 2000; and
o increased travel and other costs of $93,298 (to $538,062 from $444,764)
associated with attendance at and sponsorship of industry seminars and
exhibitions and other promotional activities.
In both of the last two fiscal years, we incurred substantial expenses for
financial advisory and other financing services that were not related to a
specific financing and, therefore, were accounted for as general and
administrative expenses. These expenses ($1,845,408 in FY 2001 and $1,573,604 in
FY 2000) were paid primarily through the issuance of shares of common stock
and/or warrants and options to purchase common stock. We believe that any
similar expenses incurred in the current fiscal year will not exceed the level
of such expenses in FY 2001.
Liquidity and Capital Resources
To date we have financed our development stage activities primarily through
private placements of common stock. In FY 2001, we issued approximately 3.82
million shares of common stock for cash proceeds of approximately $37.4 million
(net of financing costs of approximately $2.9 million). Additionally, we granted
stock options, warrants and shares of common stock to consultants, advisors and
employees with a value of $5,742,592 for services rendered, of which $292,592
was included in financing costs. As a result of our sales of common stock for
cash and our use of stock options, warrants and shares of common stock to pay
for certain services during FY 2001, our stockholders' equity increased to
approximately $39.3 million at July 31, 2001, versus approximately $8.42 million
at July 31, 2000, notwithstanding our net loss during the year.
At July 31, 2001, we had on hand cash and short term investments (primarily
notes of U.S. corporations) of approximately $37 million versus $7.17 million at
July 31, 2000. In the final quarter of FY 2001, we received additional equity
capital of approximately $531,000 from the sale of 103,500 shares of common
stock upon exercise of outstanding warrants. In the final quarter of FY 2001, we
received additional equity capital of approximately $10.8 million (net of
financing costs of approximately $.75 million) from two private placements of
units of securities consisting of 1.0 shares of common stock and warrants to
purchase an additional .25 shares of common stock at a price of $9.25 per unit.
We believe that our current cash position is sufficient to meet all of our
working capital needs for at least the next 12 months. Beyond that, we may
require additional funds to support our working capital requirements or for
other purposes and may seek to raise funds through private or public equity
financing or from other sources. If we were unable to raise additional capital
as needed, we could be required to "scale back" or otherwise revise our business
plan. Any significant scale back of operations or modification of our business
plan due to a lack of funding could be expected to materially and adversely
affect our prospects.
In the past we have funded most of our development and other costs with equity
financing. While we have been able to raise equity capital as required,
unforeseen problems with our clinical program or materially negative
developments in general economic conditions could interfere with our ability to
raise additional equity capital as needed, or materially adversely affect the
terms upon which such capital is available.
Transactions with Affiliates
On May 3, 2001, the Company's three senior officers, who are also shareholders
of the Company, were advanced $334,300 each, in exchange for promissory notes.
These notes bear interest at 8.5 percent per annum and are payable in full on
May 1, 2002. These notes are guaranteed by a related company owned by these
officers and secured by a pledge of 2,500,000 shares of the Company's common
stock currently owned by this related company. As of July 31, 2001, the balance
outstanding on these notes, including accrued interest, was $1,023,743.
Prior to January 1, 1999, a portion of our general and administrative expenses
resulted from transactions with affiliated persons, and a number of capital
transactions also involved affiliated persons. Although these transactions were
not the result of "arms-length" negotiations, we do not believe that this fact
had a material impact on our results of operations or financial position. Prior
to December 31, 1998, we classified certain payments to executive officers for
compensation and expense reimbursements as "Research and development - related
party" because the executive officers received such payments through personal
services corporations rather than directly. After December 31, 1998, these
payments have been and will continue to be accounted for as though the payments
were made directly to the officers, and not as a related party transaction. We
do not foresee a need for, and therefore do not anticipate, any related party
transactions in the current fiscal year.
New Accounting Pronouncements
In June 1998, 1999, and 2000, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, respectively. These statements
require companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The adoption on
August 1, 2000 of these statements did not have a significant impact on the
Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition in Financial Statements. SAB 101 provides guidance on the
recognition, presentation, and disclosure of revenues in financial statements of
all public registrants. In October 2000, the SEC issued a Frequently Asked
Questions document related to SAB 101 which provides interpretive guidance. The
Company adopted SAB 101 in fiscal year 2001, and the adoption of SAB 101 did not
have a significant impact on the Company's financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 is applicable
to business combinations beginning July 1, 2001. The adoption of this statement
did not have a significant impact on the Company's financial position or results
of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 also
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination whether acquired individually or with a group
of other assets. Goodwill and intangible assets previously recorded, in the
Company's financial statements, will be affected by the provisions of SFAS No.
142. This statement provides that intangible assets with finite useful lives be
amortized and that intangible assets with indefinite lives and goodwill will not
be amortized, but will rather be tested at least annually for impairment. SFAS
No. 142 will be effective for the Company's fiscal year 2002, however management
is assessing the impact that SFAS No. 142 will have on the Company's financial
position and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Price
We are not presently subject to any material market risk exposures. We are
exposed to market risk associated with interest rate changes in the exchange
rates between U.S. and Canadian currencies.
We have neither issued nor own any long term debt instruments, or any other
financial instruments as to which we would be subject to material risks,
including market risks, related to interest rate movements. At the present time,
we maintain our cash in short term government or government guaranteed
instruments, short term commercial paper, interest bearing bank deposits or
demand bank deposits which do not earn interest. A substantial majority of these
instruments and deposits are denominated in U.S. dollars, with the exception of
funds denominated in Canadian dollars on deposit in Canadian banks to meet short
term operating needs in Canada. At the present time, with the exception of
professional fees and costs associated with the conduct of clinical trials in
the United States and Europe, substantially all of our operating expense
obligations are denominated in Canadian dollars. We do not presently employ any
hedging or similar strategy intended to mitigate against losses that could be
incurred as a result of fluctuations in the exchange rates between U.S. and
Canadian currencies
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports F-1-2
Consolidated Balance Sheets
July 31, 2001 and 2000 F-3
Consolidated Statements of Operations
For the Years Ended July 31, 2001, 2000 and 1999
and Cumulative From Inception to July 31, 2001 F-4
Consolidated Statements of Changes in Stockholders' Equity
For the Period November 2, 1995 (Date of Inception)
to July 31, 2001 F-5-10
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2001, 2000 and 1999
and Cumulative From Inception to July 31, 2001 F-11
Notes to Consolidated Financial Statements F-12-31
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
To the Board of Directors and Stockholders of
Generex Biotechnology Corporation
We have audited the accompanying consolidated balance sheet of Generex
Biotechnology Corporation and Subsidiaries (a development stage company) as at
July 31, 2001 and the consolidated statement of operations, shareholders' equity
and of cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 2001 and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
-----------------------------------
DELOITTE & TOUCHE LLP
Chartered Accountants
Toronto, Ontario
October 2, 2001
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
Generex Biotechnology Corporation:
We have audited the accompanying consolidated balance sheet of Generex
Biotechnology Corporation and Subsidiaries (a development stage company) as of
July 31, 2000 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended July 31, 2000, and the cumulative amounts of operations and cash flows for
the period November 2, 1995 (date of inception) to July 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Generex
Biotechnology Corporation and Subsidiaries as of July 31, 2000 and the
consolidated results of their operations, and their cash flows for each of the
years in the two-year period ended July 31, 2000, and the cumulative amounts of
operations and cash flows for the period November 2, 1995 (date of inception) to
July 31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
WithumSmith+Brown
New Brunswick, New Jersey
September 14, 2000
F-2
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
July 31,
-----------------------------------
2001 2000
---------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,109,559 $ 3,204,905
Short-term investments 26,892,729 3,966,263
Officers' loans receivable 1,023,743 --
Miscellaneous receivables 12,865 16,138
Other current assets 112,620 99,041
------------ ------------
Total Current Assets 38,151,516 7,286,347
Property and Equipment, Net 3,727,761 2,395,867
Patents, Net 434,307 267,369
Deposits 20,000 47,914
Due From Related Parties 332,289 343,773
------------ ------------
TOTAL ASSETS $ 42,665,873 $ 10,341,270
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,650,773 $ 1,204,282
Current maturities of long-term debt 9,634 9,404
------------ ------------
Total Current Liabilities 2,660,407 1,213,686
Long-Term Debt, Less Current Maturities 683,026 712,559
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Series A, preferred stock, $.001 par value; (liquidation preference
$12,015,000); authorized 1,000,000 shares, issued and
outstanding 1,000 and -0- at July 31, 2001 and 2000, respectively 1 --
Special Voting Rights Preferred stock, $.001 par value; authorized,
issued and outstanding 1,000 shares at July 31, 2001 and 2000 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 20,681,526 and 16,326,333 shares
at July 31, 2001 and 2000, respectively 20,681 16,327
Additional paid-in capital 88,776,859 30,435,066
Notes receivable - common stock (314,300) (54,118)
Deficit accumulated during the development stage (48,913,935) (21,816,725)
Accumulated other comprehensive loss (246,867) (165,526)
------------ ------------
Total Stockholders' Equity 39,322,440 8,415,025
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,665,873 $ 10,341,270
============ ============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-3
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
For the Years Ended November 2,
July 31, 1995 (Date of
-------------------------------------------- Inception) to
2001 2000 1999 July 31, 2001
------------- ------------ ------------- ---------------
Revenues 1,000,000 $ -- $ -- $ 1,000,000
Operating Expenses:
Research and development 19,149,860 3,476,436 1,853,108 26,095,896
Research and development - related party -- -- -- 220,218
General and administrative 13,287,679 5,567,520 4,374,523 27,751,469
General and administrative- related party -- -- -- 314,328
------------ ----------- ----------- ------------
Total Operating Expenses 32,437,539 9,043,956 6,227,631 54,381,911
------------ ----------- ----------- ------------
Operating Loss (31,437,539) (9,043,956) (6,227,631) (53,381,911)
Other Income (Expense):
Miscellaneous income 10,664 7,906 -- 18,570
Interest income 1,417,847 272,808 55,190 1,745,845
Interest expense (73,182) (77,805) (67,161) (281,439)
------------ ----------- ----------- ------------
Net Loss Before the Undernoted (30,082,210) (8,841,047) (6,239,602) (51,898,935)
Minority Interest Share of Loss 2,985,000 -- -- 2,985,000
------------ ----------- ------------ ------------
Net Loss $(27,097,210) $(8,841,047) $(6,239,602) $(48,913,935)
============ =========== =========== ============
Basic and Diluted Net Loss Per Common
Share $ (1.44) $ (.58) $ (.47)
============ =========== ===========
Weighted Average Number of Shares of
Common Stock Outstanding 18,769,077 15,189,781 13,260,260
============ =========== ===========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
GENEREX BIOTECHOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001
Series A SVR
Common Preferred Preferred
Stock Stock Stock
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ---------- --------- ----------
Balance November 2, 1995
(Inception) -- $ -- -- $ -- -- $ --
Issuance of common stock for cash,
February 1996, $.0254 321,429 321 -- -- -- --
Issuance of common stock for cash,
February 1996, $.0510 35,142 35 -- -- -- --
Issuance of common stock for cash,
February 1996, $.5099 216,428 216 -- -- -- --
Issuance of common stock for cash,
March 1996, $10.2428 2,500 3 -- -- -- --
Issuance of common stock for cash,
April 1996, $.0516 489,850 490 -- -- -- --
Issuance of common stock for cash,
May 1996, $.0512 115,571 116 -- -- -- --
Issuance of common stock for cash,
May 1996, $.5115 428,072 428 -- -- -- --
Issuance of common stock for cash,
May 1996, $10.2302 129,818 130 -- -- -- --
Issuance of common stock for cash,
July 1996, $.0051 2,606,528 2,606 -- -- -- --
Issuance of common stock for cash,
July 1996, $.0255 142,857 143 -- -- -- --
Issuance of common stock for cash,
July 1996, $.0513 35,714 36 -- -- -- --
Issuance of common stock for cash,
July 1996, $10.1847 63,855 64 -- -- -- --
Costs related to issuance of common
Stock -- -- -- -- -- --
Founders Shares transferred for services
Rendered -- -- -- -- -- --
Comprehensive Income (Loss):
Net loss -- -- -- -- -- --
Other comprehensive income (loss)
Currency translation adjustment -- -- -- -- -- --
Total Comprehensive Income (Loss)
--------- ----------- --------- ---------- --------- ----------
Balance, July 31, 1996 4,587,764 $ 4,588 -- $ -- -- $ --
========= =========== ========= ========== ========= ==========
[RESTUBBED]
Deficit
Notes Accumulated
Additional Receivable Other During the Total
Paid-In - Common Comprehensive Development Stockholders'
Capital Stock Income (Loss) Stage Equity
---------- ---------- ------------- ----------- -------------
Balance November 2, 1995
(Inception) $ -- $ -- $ -- $ -- $ --
Issuance of common stock for cash,
February 1996, $.0254 7,838 -- -- -- 8,159
Issuance of common stock for cash,
February 1996, $.0510 1,757 -- -- -- 1,792
Issuance of common stock for cash,
February 1996, $.5099 110,142 -- -- -- 110,358
Issuance of common stock for cash,
March 1996, $10.2428 25,604 -- -- -- 25,607
Issuance of common stock for cash,
April 1996, $.0516 24,773 -- -- -- 25,263
Issuance of common stock for cash,
May 1996, $.0512 5,796 -- -- -- 5,912
Issuance of common stock for cash,
May 1996, $.5115 218,534 -- -- -- 218,962
Issuance of common stock for cash,
May 1996, $10.2302 1,327,934 -- -- -- 1,328,064
Issuance of common stock for cash,
July 1996, $.0051 10,777 -- -- -- 13,383
Issuance of common stock for cash,
July 1996, $.0255 3,494 -- -- -- 3,637
Issuance of common stock for cash,
July 1996, $.0513 1,797 -- -- -- 1,833
Issuance of common stock for cash,
July 1996, $10.1847 650,282 -- -- -- 650,346
Costs related to issuance of common
Stock (10,252) -- -- -- (10,252)
Founders Shares transferred for services
Rendered 330,025 -- -- -- 330,025
Comprehensive Income (Loss):
Net loss -- -- -- (693,448) (693,448)
Other comprehensive income (loss)
Currency translation adjustment -- -- (4,017) -- (4,017)
----------- ----------- ------------
Total Comprehensive Income (Loss) (4,017) (693,448) (697,465)
---------- --------- ----------- ----------- ------------
Balance, July 31, 1996 $2,708,501 $ -- $ (4,017) $ (693,448) $ 2,015,624
========== ========= =========== =========== ============
F-5
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001
Series A SVR
Common Preferred Preferred
Stock Stock Stock
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ---------- --------- ----------
Balance, August 1, 1996 4,587,764 $ 4,588 -- $ -- $ -- $ --
Issuance of common stock for cash,
September 1996, $.0509 2,143 2 -- -- -- --
Issuance of common stock for cash,
December 1996, $10.2421 1,429 1 -- -- -- --
Issuance of common stock for cash,
January 1997, $.0518 1,466 1 -- -- -- --
Issuance of common stock for cash,
March 1997, $10.0833 12 -- -- -- -- --
Issuance of common stock for cash,
May 1997, $.0512 4,233 4 -- -- -- --
Issuance of common stock for cash,
May 1997, $.5060 4,285,714 4,286 -- -- -- --
Costs related to issuance of common
stock, May 1997 -- -- -- -- -- --
Issuance of common stock for cash,
May 1997, $10.1194 18,214 18 -- -- -- --
Issuance of common stock for cash,
June 1997, $.0504 10,714 11 -- -- -- --
Issuance of common stock for cash,
June 1997, $.5047 32,143 32 -- -- -- --
Issuance of common stock for cash,
June 1997, $8.9810 29,579 30 -- -- -- --
Issuance of common stock for cash,
June 1997, $10.0978 714 1 -- -- -- --
Issuance of common stock for cash,
July 1997, $10.1214 25,993 26 -- -- -- --
Costs related to issuance of common
stock -- -- -- -- -- --
Founders Shares transferred for services
rendered -- -- -- -- -- --
Comprehensive Income (Loss):
Net loss -- -- -- -- -- --
Other comprehensive income (loss)
Currency translation adjustment -- -- -- -- -- --
Total Comprehensive Income (Loss)
--------- ----------- --------- ---------- --------- ----------
Balance, July 31, 1997 9,000,118 $ 9,000 -- $ -- -- $ --
========= =========== ========= ========== ========= ==========
[RESTUBBED TABLE]
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001--
(Continued)
Deficit
Notes Accumulated
Additional Receivable Other During the Total
Paid-In - Common Comprehensive Development Stockholders'
Capital Stock Income (Loss) Stage Equity
---------- ---------- ------------- ----------- -------------
Balance, August 1, 1996 $2,708,501 $ -- $ (4,017) $ (693,448) $ 2,015,624
Issuance of common stock for cash,
September 1996, $.0509 107 -- -- -- 109
Issuance of common stock for cash,
December 1996, $10.2421 14,635 -- -- -- 14,636
Issuance of common stock for cash,
January 1997, $.0518 75 -- -- -- 76
Issuance of common stock for cash,
March 1997, $10.0833 121 -- -- -- 121
Issuance of common stock for cash,
May 1997, $.0512 213 -- -- -- 217
Issuance of common stock for cash,
May 1997, $.5060 2,164,127 -- -- -- 2,168,413
Costs related to issuance of common
stock, May 1997 (108,421) -- -- -- (108,421)
Issuance of common stock for cash,
May 1997, $10.1194 184,297 -- -- -- 184,315
Issuance of common stock for cash,
June 1997, $.0504 529 -- -- -- 540
Issuance of common stock for cash,
June 1997, $.5047 16,190 -- -- -- 16,222
Issuance of common stock for cash,
June 1997, $8.9810 265,618 -- -- -- 265,648
Issuance of common stock for cash,
June 1997, $10.0978 7,209 -- -- -- 7,210
Issuance of common stock for cash,
July 1997, $10.1214 263,060 -- -- -- 263,086
Costs related to issuance of common
stock (26,960) -- -- -- (26,960)
Founders Shares transferred for services
rendered 23,481 -- -- -- 23,481
Comprehensive Income (Loss):
Net loss -- -- -- (1,379,024) (1,379,024)
Other comprehensive income (loss)
Currency translation adjustment -- -- 3,543 -- 3,543
------------- ----------- ------------
Total Comprehensive Income (Loss) 3,543 (1,379,024) (1,375,481)
---------- ---------- ------------- ----------- ------------
Balance, July 31, 1997 $5,512,782 -- $ (474) $(2,072,472) $ 3,448,836
========== ========== ============= =========== ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-6
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001
Series A SVR
Common Preferred Preferred
Stock Stock Stock Additional
----- ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
--------- ------- --------- ------ ---------- ------ ----------
Balance, August 1, 1997 9,000,118 $ 9,000 -- $-- -- $-- $5,512,782
Issuance of warrants issued in exchange
for services rendered, October 1997, $.50 -- -- -- -- -- -- 234,000
Issuance of common stock in exchange
for services rendered, December 1997,
$0.0467 234,000 234 -- -- -- -- 10,698
Issuance of SRV Preferred Sock in exchange
for services rendered, January 1998, $.001 -- -- -- -- 1,000 1 99
Shares issued pursuant to the January 9, 1998
reverse merger between GBC-Delaware, Inc.
and Generex Biotechnology Corporation 1,105,000 1,105 -- -- -- -- (1,105)
Issuance of common stock for cash, March
1998, $2.50 70,753 71 -- -- -- -- 176,812
Issuance of common stock for cash,
April 1998, $2.50 60,000 60 -- -- -- -- 149,940
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 38,172 38 -- -- -- -- 95,392
Issuance of common stock for cash, May
1998, $2.50 756,500 757 -- -- -- -- 1,890,493
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 162,000 162 -- -- -- -- 404,838
Issuance of warrants issued in exchange
for services rendered, May 1998, $.60 -- -- -- -- -- -- 300,000
Issuance of common stock for cash, June
1998, $2.50 286,000 286 -- -- -- -- 714,714
Exercise of warrants for cash, June
1998, $0.0667 234,000 234 -- -- -- -- 15,374
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 24,729 24 -- -- -- -- 61,799
Net loss
Other comprehensive income (loss)
Currency translation adjustment -- -- -- -- -- -- --
Total Comprehensive Income (Loss)
---------- ------- ---- ---- ----- ---- ----------
Balance, July 31, 1998 11,971,272 $11,971 -- $-- 1,000 $ 1 $9,565,836
========== ======= ==== ==== ===== ==== ==========
(RESTUBBED TABLE)
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001--
(Continued)
Deficit
Notes Accumulated
Receivable Other During the Total
- Common Comprehensive Development Stockholders'
Stock Income (Loss) Stage Equity
---------- -------------- ------------ ------------
Balance, August 1, 1997 $-- $ (474) $(2,072,472) $3,448,836
Issuance of warrants issued in exchange
for services rendered, October 1997, $.50 -- -- -- 234,000
Issuance of common stock in exchange
for services rendered, December 1997,
$0.0467 -- -- -- 10,932
Issuance of SRV Preferred Sock in exchange
for services rendered, January 1998, $.001 -- -- -- 100
Shares issued pursuant to the January 9, 1998
reverse merger between GBC-Delaware, Inc.
and Generex Biotechnology Corporation -- -- -- --
Issuance of common stock for cash, March
1998, $2.50 -- -- -- 176,883
Issuance of common stock for cash,
April 1998, $2.50 -- -- -- 150,000
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 -- -- -- 95,430
Issuance of common stock for cash, May
1998, $2.50 -- -- -- 1,891,250
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 -- -- -- 405,000
Issuance of warrants issued in exchange
for services rendered, May 1998, $.60 -- -- -- 300,000
Issuance of common stock for cash, June
1998, $2.50 -- -- -- 715,000
Exercise of warrants for cash, June
1998, $0.0667 -- -- -- 15,608
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 -- -- -- 61,823
Net loss (4,663,604) (4,663,604)
Other comprehensive income (loss)
Currency translation adjustment -- (198,959) -- (198,959)
--------- ----------- ----------
Total Comprehensive Income (Loss) (198,959) (4,663,604) (4,862,563)
---- --------- ----------- ----------
Balance, July 31, 1998 $-- $(199,433) $(6,736,076) $2,642,299
==== ========= =========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-7
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001
Series A SVR
Common Preferred Preferred
Stock Stock Stock Additional
------ ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- -------- ------- ------ ------ ----------- -----------
Balance, August 1, 1998 11,971,272 $ 11,971 -- $ -- 1,000 $ 1 $ 9,565,836
Issuance of common stock for cash, August
1998, $3.00 100,000 100 -- -- -- -- 299,900
Issuance of common stock for cash, August
1998, $3.50 19,482 19 -- -- -- -- 68,168
Redemption of Common Stock for cash,
September 1998, $7.75 (15,357) (15) -- -- -- -- (119,051)
Issuance of common stock for cash,
September - October 1998, $3.00 220,297 220 -- -- -- -- 660,671
Issuance of common stock for cash, August -
October 1998, $4.10 210,818 211 -- -- -- -- 864,142
Issuance of common stock in exchange for
services rendered, August -
October 1998, $2.50 21,439 21 -- -- -- -- 53,577
Issuance of common stock in exchange for
services rendered, August -
October 1998, $4.10 18,065 18 -- -- -- -- 74,048
Issuance of Common Stock in exchange
for services rendered, September
1998, $4.10 180,000 180 -- -- -- -- 737,820
Issuance of warrants in exchange for
services rendered, October 1998, $.26 -- -- -- -- -- -- 2,064
Issuance of stock options in exchange for
services rendered, November 1998, $1.85 -- -- -- -- -- -- 92,500
Issuance of warrants in exchange for
services rendered, November 1998, $1.64 -- -- -- -- -- -- 246,000
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 180,000 180 -- -- -- -- 629,820
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 275,000 275 -- -- -- -- 1,099,725
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 96,852 97 -- -- -- -- 397,003
Issuance of common stock in exchange
for services rendered, November 1998 -
January 1999, $4.10 28,718 29 -- -- -- -- 117,715
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 20,000 20 -- -- -- -- 99,980
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 15,000 15 -- -- -- -- 82,485
Issuance of common stock in exchange for
services rendered, January 1999, $5.00 392 -- -- -- -- -- 1,960
Issuance of common stock for cash,
February 1999, $5.00 6,000 6 -- -- -- -- 29,994
Issuance of common stock in exchange for
services rendered, February 1999, $6.00 5,000 5 -- -- -- -- 29,995
Issuance of common stock for cash,
March 1999, $6.00 11,000 11 -- -- -- -- 65,989
Issuance of common stock for cash,
April 1999, $5.50 363,637 364 -- -- -- -- 1,999,640
Issuance of warrants in exchange for
services rendered, April 1999, $3.21 -- -- -- -- -- -- 160,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.17 -- -- -- -- -- -- 317,000
Issuance of warrants in exchange for
services rendered, April 1999, $2.89 -- -- -- -- -- -- 144,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.27 -- -- -- -- -- -- 184,310
Stock adjustment 714 1 -- -- -- -- (1)
Issuance of common stock for cash,
May 1999, $5.50 272,728 273 -- -- -- -- 1,499,731
Issuance of common stock in exchange for
services rendered, May - June 1999, $5.50 60,874 61 -- -- -- -- 334,746
Exercise of warrants for cash,
June 1999, $5.00 388,375 389 -- -- -- -- 1,941,484
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 94,776 95 -- -- -- -- 473,787
Exercise of warrants in exchange for
services rendered, June 1999, $5.00 13,396 13 -- -- -- -- 66,967
Reduction of note receivable in exchange for
services rendered -- -- -- -- -- -- --
Shares tendered in conjunction with warrant
exercise, June 1999, $7.8125 (323,920) (324) -- -- -- -- (2,530,301)
Exercise of warrants for shares tendered,
June 1999, $5.00 506,125 506 -- -- -- -- 2,530,119
Cost of warrants redeemed for cash -- -- -- -- -- -- (3,769)
Cost related to warrant redemption,
June 1999 -- -- -- -- -- -- (135,431)
Costs related to issuance of common stock -- -- -- -- -- -- (1,179,895)
Comprehensive Income (Loss):
Net Loss -- -- -- -- -- -- --
Other comprehensive income:
Currency translation adjustment -- -- -- -- -- -- --
Total Comprehensive Income (Loss)
----------- ----------- ------- ------- ------- ------- ------------
Balance, July 31, 1999 14,740,683 $ 14,741 -- $ -- 1,000 $ 1 $ 20,903,728
=========== ============ ======= ======= ======= ======= ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001--
(Continued)
[RESTUBBED TABLE]
Deficit
Notes Accumulated
Receivable Other During the Total
- Common Comprehensive Development Stockholders'
Stock Income (Loss) Stage Equity
------------ ------------- ------------ -------------
Balance, August 1, 1998 $ -- $ (199,433) $(6,736,076) $ 2,642,299
Issuance of common stock for cash, August
1998, $3.00 -- -- -- 300,000
Issuance of common stock for cash, August
1998, $3.50 -- -- -- 68,187
Redemption of Common Stock for cash,
September 1998, $7.75 -- -- -- (119,066)
Issuance of common stock for cash,
September - October 1998, $3.00 -- -- -- 660,891
Issuance of common stock for cash, August -
October 1998, $4.10 -- -- -- 864,353
Issuance of common stock in exchange for
services rendered, August -
October 1998, $2.50 -- -- -- 53,598
Issuance of common stock in exchange for
services rendered, August -
October 1998, $4.10 -- -- -- 74,066
Issuance of Common Stock in exchange
for services rendered, September
1998, $4.10 -- -- -- 738,000
Issuance of warrants in exchange for
services rendered, October 1998, $.26 -- -- -- 2,064
Issuance of stock options in exchange for
services rendered, November 1998, $1.85 -- -- -- 92,500
Issuance of warrants in exchange for
services rendered, November 1998, $1.64 -- -- -- 246,000
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 -- -- -- 630,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 -- -- -- 1,100,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 -- -- -- 397,100
Issuance of common stock in exchange
for services rendered, November 1998 -
January 1999, $4.10 -- -- -- 117,744
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 -- -- -- 100,000
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 -- -- -- 82,500
Issuance of common stock in exchange for
services rendered, January 1999, $5.00 -- -- -- 1,960
Issuance of common stock for cash,
February 1999, $5.00 -- -- -- 30,000
Issuance of common stock in exchange for
services rendered, February 1999, $6.00 -- -- -- 30,000
Issuance of common stock for cash,
March 1999, $6.00 -- -- -- 66,000
Issuance of common stock for cash,
April 1999, $5.50 -- -- -- 2,000,004
Issuance of warrants in exchange for
services rendered, April 1999, $3.21 -- -- -- 160,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.17 -- -- -- 317,000
Issuance of warrants in exchange for
services rendered, April 1999, $2.89 -- -- -- 144,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.27 -- -- -- 184,310
Stock adjustment -- -- -- --
Issuance of common stock for cash,
May 1999, $5.50 -- -- -- 1,500,004
Issuance of common stock in exchange for
services rendered, May - June 1999, $5.50 -- -- -- 334,807
Exercise of warrants for cash, June 1999, $5.00 -- -- -- 1,941,873
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 (473,882) -- -- --
Exercise of warrants in exchange for
services rendered, June 1999, $5.00 -- -- -- 66,980
Reduction of note receivable in exchange for
services rendered 38,979 -- -- 38,979
Shares tendered in conjunction with warrant
exercise, June 1999, $7.8125 -- -- -- (2,530,625)
Exercise of warrants for shares tendered,
June 1999, $5.00 -- -- -- 2,530,625
Cost of warrants redeemed for cash -- -- -- (3,769)
Cost related to warrant redemption, June 1999 -- -- -- (135,431)
Costs related to issuance of common stock -- -- -- (1,179,895)
Comprehensive Income (Loss):
Net Loss -- -- (6,239,602) (6,239,602)
Other comprehensive income:
Currency translation adjustment -- 1,393 -- 1,393
---------- ------------ ------------
Total Comprehensive Income (Loss) 1,393 (6,239,602) (6,238,209)
---------- ---------- ------------ ------------
Balance, July 31, 1999 $ (434,903) $ (198,040) $(12,975,678) $ 7,309,849
========== ========== ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-8
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001
Series A SVR
Common Preferred Preferred
Stock Stock Stock Additional
----- ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
---------- ------- ------ ------ ------ ------ ------------
Balance, August 1, 1999 14,740,683 $ 14,741 -- $ -- 1,000 $ 1 $ 20,903,728
Adjustment for exercise of warrants recorded
June 1999, $5.00 (2,300) (2) -- -- -- -- 2
Issuance of common stock for cash,
September 1999, $6.00 2,500 2 -- -- -- -- 14,998
Issuance of common stock for cash pursuant to
private placement, January 2000, $4.25 470,590 471 -- -- -- -- 1,999,537
Financing costs associated with private
placement, January, 2000 -- -- -- -- -- -- (220,192)
Issuance of stock in exchange for services
rendered, January 2000, $5.00 8,100 8 -- -- -- -- 40,492
Granting of stock options for services
rendered, January 2000 -- -- -- -- -- -- 568,850
Granting of 150,000 stock warrants for
services rendered, January 2000 -- -- -- -- -- -- 355,500
Exercise of stock warrants for cash,
February 2000, $5.50 2,000 2 -- -- -- -- 10,998
Exercise of stock warrants for cash,
March 2000, $5.50 29,091 29 -- -- -- -- 159,972
Exercise of stock warrants for cash,
March 2000, $6.00 2,000 2 -- -- -- -- 11,998
Exercise of stock warrants for cash,
March 2000, $7.50 8,000 8 -- -- -- -- 59,992
Issuance of common stock for cash pursuant to
private placement, June 2000, $6.00 1,041,669 1,042 -- -- -- -- 6,248,972
Financing costs associated with private
placement, June 2000 -- -- -- -- -- -- (385,607)
Issuance of common stock for services,
June 2000, $6.00 4,300 4 -- -- -- -- 25,796
Exercise of warrants for cash, July 2000, $6.00 3,000 3 -- -- -- -- 17,997
Exercise of warrants for cash, July 2000, $7.50 16,700 17 -- -- -- -- 125,233
Granting of stock options for services
rendered, July 2000 -- -- -- -- -- -- 496,800
Reduction of note receivable in exchange for
services rendered -- -- -- -- -- -- --
Accrue interest on note receivable -- -- -- -- -- -- --
Comprehensive Income (Loss):
Net Loss -- -- -- -- -- -- --
Other comprehensive income (loss):
Currency translation adjustment -- -- -- -- -- -- --
Total Comprehensive Income (Loss)
---------- -------- ---- ---- ----- ---- ------------
Balance, July 31, 2000 16,326,333 $ 16,327 -- $ -- 1,000 $ 1 $ 30,435,066
========== ======== ==== ==== ===== ==== ============
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001--
(Continued)
(RESTUBBED TABLE)
Deficit
Notes Accumulated
Receivable Other During the Total
- Common Comprehensive Development Stockholders'
Stock Income (Loss) Stage Equity
---------- ------------- -------------- -------------
Balance, August 1, 1999 $ (434,903) $ (198,040) $(12,975,678) $ 7,309,849
Adjustment for exercise of warrants recorded
June 1999, $5.00 -- -- -- --
Issuance of common stock for cash,
September 1999, $6.00 -- -- -- 15,000
Issuance of common stock for cash pursuant to
private placement, January 2000, $4.25 -- -- -- 2,000,008
Financing costs associated with private
placement, January, 2000 -- -- -- (220,192)
Issuance of stock in exchange for services
rendered, January 2000, $5.00 -- -- -- 40,500
Granting of stock options for services
rendered, January 2000 -- -- -- 568,850
Granting of 150,000 stock warrants for
services rendered, January 2000 -- -- -- 355,500
Exercise of stock warrants for cash,
February 2000, $5.50 -- -- -- 11,000
Exercise of stock warrants for cash,
March 2000, $5.50 -- -- -- 160,001
Exercise of stock warrants for cash,
March 2000, $6.00 -- -- -- 12,000
Exercise of stock warrants for cash,
March 2000, $7.50 -- -- -- 60,000
Issuance of common stock for cash pursuant to
private placement, June 2000, $6.00 -- -- -- 6,250,014
Financing costs associated with private
placement, June 2000 -- -- -- (385,607)
Issuance of common stock for services,
June 2000, $6.00 -- -- -- 25,800
Exercise of warrants for cash, July 2000, $6.00 -- -- -- 18,000
Exercise of warrants for cash, July 2000, $7.50 -- -- -- 125,250
Granting of stock options for services
rendered, July 2000 -- -- -- 496,800
Reduction of note receivable in exchange for
services rendered 384,903 -- -- 384,903
Accrue interest on note receivable (4,118) -- -- (4,118)
Comprehensive Income (Loss):
Net Loss -- -- (8,841,047) (8,841,047)
Other comprehensive income (loss):
Currency translation adjustment -- 32,514 -- 32,514
------- ---------- ------------ -----------
Total Comprehensive Income (Loss) 32,514 (8,841,047) (8,808,533)
---------- ---------- ------------ -----------
Balance, July 31, 2000 $ (54,118) $ (165,526) $(21,816,725) $ 8,415,025
========== ========== ============ ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-9
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001
Series A SVR
Common Preferred Preferred
Stock Stock Stock Additional
------ ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- -------- ------- ------ ------ ----------- -----------
Balance, August 1, 2000 16,326,333 $ 16,327 -- $ -- 1,000 $ 1 $ 30,435,066
Exercise of stock warrants for cash,
August 2000, $6.00 2,000 2 -- -- -- -- 11,998
Issuance of common stock for services rendered
August 2000 35,000 35 -- -- -- -- 411,215
Issuance of stock warrants in exchange for
equity line agreement, August 2000 -- -- -- -- -- -- 3,406,196
Exercise of stock warrants for cash,
August 2000, $7.50 30,300 30 -- -- -- -- 227,220
Exercise of stock warrants for cash,
August 2000, $8.6625 30,000 30 -- -- -- -- 259,845
Cashless exercise of stock warrants,
August 2000 8,600 9 -- -- -- -- (9)
Exercise of stock warrants for cash,
August 2000, $10.00 10,000 10 -- -- -- -- 99,990
Exercise of stock warrants for cash,
September 2000, $8.6625 63,335 63 -- -- -- -- 548,576
Exercise of stock warrants for cash,
September 2000, $5.50 16,182 16 -- -- -- -- 88,986
Exercise of stock warrants for cash,
September 2000, $6.00 53,087 53 -- -- -- -- 318,470
Exercise of stock warrants for cash,
September 2000, $10.00 9,584 10 -- -- -- -- 95,830
Exercise of stock warrants for cash,
September 2000, $7.50 32,416 32 -- -- -- -- 243,088
Issuance of common stock for cash pursuant to
private placement, October 2000, $11.00 2,151,093 2,151 -- -- -- -- 23,659,872
Exercise of stock warrants for cash, Oct.
2000, $6.00 1,000 1 -- -- -- -- 5,999
Financing costs associated with private
placement, October 2000 -- -- -- -- -- -- (1,956,340)
Exercise of stock warrants for cash,
November - December 2000, $4.25 23,528 23 -- -- -- -- 99,971
Cashless exercise of stock warrants,
December 2000 3,118 3 -- -- -- -- (3)
Exercise of stock warrants for cash,
November - December 2000, $6.00 22,913 23 -- -- -- -- 137,455
Exercise of stock warrants for cash,
December 2000, $7.00 8,823 9 -- -- -- -- 61,752
Issuance of common stock as employee
compensation, December 2000 8,650 8 -- -- -- -- 100,548
Exercise of stock warrants for cash,
January 2001, $6.00 3,000 3 -- -- -- -- 17,997
Issuance of common stock for cash pursuant to
private placement, January 2001, $14.53 344,116 344 -- -- -- -- 4,999,656
Financing costs associated with private
placement, January 2001 -- -- -- -- -- -- (200,000)
Issuance of common stock pursuant to
litigation settlement, January 2001 2,832 2 -- -- -- -- 21,096
Issuance of Series A Preferred Stock,
January 2001 -- -- 1,000 1 -- -- 12,014,999
Granting of stock options in exchange for
services rendered, January 2001 -- -- -- -- -- -- 745,000
Granting of stock options in exchange for
services rendered, February 2001 -- -- -- -- -- -- 129,600
Exercise of stock options for cash,
February 2001, $5.00 50,000 50 -- -- -- -- 249,950
Exercise of stock warrants for cash,
March 2001, $6.00 500 1 -- -- -- -- 2,999
Exercise of stock options in exchange for
note receivable, March 2001 50,000 50 -- -- -- -- 249,950
Issuance of common stock in exchange for
services rendered, March 2001, $5.50 8,000 8 -- -- -- -- 43,992
Granting of stock options in exchange for
services rendered, May 2001 -- -- -- -- -- -- 592,300
Exercise of stock options for cash, June 2001,
$5.00 75,000 75 -- -- -- -- 374,925
Exercise of stock options for cash, June 2001,
$5.50 12,500 12 -- -- -- -- 68,738
Exercise of warrants for cash, June 2001, $6.00 4,000 4 -- -- -- -- 23,996
Exercise of stock options for cash, July 2001,
$5.00 7,500 8 -- -- -- -- 37,492
Exercise of stock options for cash, July 2001,
$5.50 2,500 3 -- -- -- -- 13,747
Exercise of warrants for cash, July 2001, $6.00 2,000 2 -- -- -- -- 11,998
Issuance of common stock for cash pursuant to
private placement, July 2001, $9.25 1,254,053 1,254 -- -- -- -- 11,598,736
Financing costs associated with private
placement, July 2001 -- -- -- -- -- -- (768,599)
Shares issued in exchange for services
rendered, July 2001, 9.25 23,784 24 -- -- -- -- 219,978
Shares issued for Anti-Dilution Provisions,
July 2001 5,779 6 -- -- -- -- 53,450
Issuance of stock warrants in exchange for
services, rendered, July 2001 -- -- -- -- -- -- 19,134
Accrued interest on note receivable -- -- -- -- -- -- --
Comprehensive Income (Loss):
Net Loss -- -- -- -- -- -- --
Other comprehensive income (loss):
Currency translation adjustment -- -- -- -- -- -- --
Total Comprehensive Income (Loss)
----------- ----------- ------- ------- ------ -------- ------------
Balance at July 31, 2001 20,681,526 $ 20,681 1,000 $ 1 1,000 $ 1 $ 88,776,859
=========== =========== ======= ======= ====== ======= ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2001--
(Continued)
[RESTUBBED TABLE]
Deficit
Notes Accumulated
Receivable Other During the Total
- Common Comprehensive Development Stockholders'
Stock Income (Loss) Stage Equity
------------ ------------- ------------ -------------
Balance, August 1, 2000 $ (54,118) $ (165,526) $ (21,816,725) $ 8,415,025
Exercise of stock warrants for cash,
August 2000, $6.00 -- -- -- 12,000
Issuance of common stock for services rendered
August 2000 -- -- -- 411,250
Issuance of stock warrants in exchange for
equity line agreement, August 2000 -- -- -- 3,406,196
Exercise of stock warrants for cash,
August 2000, $7.50 -- -- -- 227,250
Exercise of stock warrants for cash,
August 2000, $8.6625 -- -- -- 259,875
Cashless exercise of stock warrants,
August 2000 -- -- -- --
Exercise of stock warrants for cash,
August 2000, $10.00 -- -- -- 100,000
Exercise of stock warrants for cash,
September 2000, $8.6625 -- -- -- 548,639
Exercise of stock warrants for cash,
September 2000, $5.50 -- -- -- 89,002
Exercise of stock warrants for cash,
September 2000, $6.00 -- -- -- 318,523
Exercise of stock warrants for cash,
September 2000, $10.00 -- -- -- 95,840
Exercise of stock warrants for cash,
September 2000, $7.50 -- -- -- 243,120
Issuance of common stock for cash pursuant to
private placement, October 2000, $11.00 -- -- -- 23,662,023
Exercise of stock warrants for cash, Oct.
2000, $6.00 -- -- -- 6,000
Financing costs associated with private
placement, October 2000 -- -- -- (1,956,340)
Exercise of stock warrants for cash,
November - December 2000, $4.25 -- -- -- 99,994
Cashless exercise of stock warrants,
December 2000 -- -- -- --
Exercise of stock warrants for cash,
November - December 2000, $6.00 -- -- -- 137,478
Exercise of stock warrants for cash,
December 2000, $7.00 -- -- -- 61,761
Issuance of common stock as employee
compensation, December 2000 -- -- -- 100,556
Exercise of stock warrants for cash,
January 2001, $6.00 -- -- -- 18,000
Issuance of common stock for cash pursuant to
private placement, January 2001, $14.53 -- -- -- 5,000,000
Financing costs associated with private
placement, January 2001 -- -- -- (200,000)
Issuance of common stock pursuant to
litigation settlement, January 2001 -- -- -- 21,098
Issuance of Series A Preferred Stock,
January 2001 -- -- -- 12,015,000
Granting of stock options in exchange for
services rendered, January 2001 -- -- -- 745,000
Granting of stock options in exchange for
services rendered, February 2001 -- -- -- 129,600
Exercise of stock options for cash,
February 2001, $5.00 -- -- -- 250,000
Exercise of stock warrants for cash,
March 2001, $6.00 -- -- -- 3,000
Exercise of stock options in exchange for
note receivable, March 2001 (250,000) -- -- --
Issuance of common stock in exchange for
services rendered, March 2001, $5.50 -- -- -- 44,000
Granting of stock options in exchange for
services rendered, May 2001 -- -- -- 592,300
Exercise of stock options for cash, June 2001,
$5.00 -- -- -- 375,000
Exercise of stock options for cash, June 2001,
$5.50 -- -- -- 68,750
Exercise of warrants for cash, June 2001,
$6.00 -- -- -- 24,000
Exercise of stock options for cash, July 2001,
$5.00 -- -- -- 37,500
Exercise of stock options for cash, July 2001,
$5.50 -- -- -- 13,750
Exercise of warrants for cash, July 2001,
$6.00 -- -- -- 12,000
Issuance of common stock for cash pursuant
to private placement, July 2001, $9.25 -- -- -- 11,599,990
Financing costs associated with private
placement, July 2001 -- -- -- (768,599)
Shares issued in exchange for services
rendered, July 2001, 9.25 -- -- -- 220,002
Shares issued for Anti-Dilution Provisions,
July 2001 -- -- -- 53,456
Issuance of stock warrants in exchange for
services, rendered, July 2001 -- -- -- 19,134
Accrued interest on note receivable (10,182) -- -- (10,182)
Comprehensive Income (Loss):
Net Loss -- -- (27,097,210) (27,097,210)
Other comprehensive income (loss):
Currency translation adjustment -- (81,341) -- (81,341)
----------- ------------ -----------
Total Comprehensive Income (Loss) (81,341) (27,097,210) (27,178,551)
---------- ---------- ------------ -----------
Balance at July 31, 2001 $ (314,300) $ (246,867) $(48,913,935) $39,322,440
========== ========== ============ ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-10
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
For the Years Ended November 2,
July 31, 1995 (Date of
------------------------------------------------ Inception) to
2001 2000 1999 July 31, 2001
-------------- --------------- ------------- -------------
Cash Flows Used in Operating Activities:
Net loss $(27,097,210) $(8,841,047) $(6,239,602) $(48,913,935)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 230,600 86,804 79,784 441,277
Minority interest share of loss (2,985,000) -- -- (2,985,000)
Reduction of notes receivable - common stock
in exchange for services rendered -- 384,903 38,979 423,882
Write-off of deferred offering costs 3,406,196 -- -- 3,406,196
Common stock issued for services rendered 829,264 66,300 612,175 2,069,992
Stock options and warrants issued for services
rendered 1,486,036 1,421,150 1,146,874 4,588,060
Preferred stock issued for services rendered -- -- -- 100
Founders' shares transferred for services
rendered -- -- -- 353,506
Changes in operating assets and liabilities:
Miscellaneous receivables 2,747 170,481 27,571 30,620
Other current assets (14,858) 21,219 12,610 (117,606)
Accounts payable and accrued expenses 1,479,803 773,506 (87,134) 3,492,121
Other, net -- -- -- 110,317
------------ ----------- ----------- ------------
Net Cash Used in Operating Activities (22,662,422) (5,916,684) (4,408,743) (37,100,470)
Cash Flows From Investing Activities:
Purchase of property and equipment (1,623,017) (381,163) (217,018) (2,296,971)
Costs incurred for patents (197,434) (269,499) -- (466,933)
Change in restricted cash -- -- 105,655 (5,595)
Increase in officers' loans receivable (1,023,743) -- -- (1,023,743)
Purchase of short-term investments (22,926,466) (3,733,918) (232,345) (26,892,729)
Change in deposits 27,396 19,720 -- 29,515
Change in notes receivable - common stock (10,182) (4,118) -- (14,300)
Change in due from related parties -- 290,973 428,216 (2,255,197)
Other, net -- -- -- 89,683
------------ ----------- ----------- ------------
Net Cash (Used in)Provided By
Investing Activities (25,753,446) (4,078,005) 84,508 (32,836,270)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- -- 993,149
Repayment of long-term debt (5,208) (480,738) (416,649) (965,984)
Change in due to related parties -- -- (81,483) 154,541
Proceeds from exercise of warrants 2,256,482 -- -- 2,256,482
Proceeds from exercise of stock options 745,000 -- -- 745,000
Proceeds from minority interest investment 2,985,000 -- -- 2,985,000
Proceeds from issuance of common stock, net 37,337,074 8,045,474 8,488,798 61,999,294
Proceeds from issuance of preferred stock 12,015,000 -- -- 12,015,000
Purchase and retirement of common stock -- -- (119,066) (119,066)
------------ ----------- ----------- ------------
Net Cash Provided By Financing Activities 55,333,348 7,564,736 7,871,600 80,063,416
Effect of Exchange Rates on Cash (12,826) 1,657 (4,991) (17,117)
------------ ----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents 6,904,654 (2,428,296) 3,542,374 10,109,559
Cash and Cash Equivalents, Beginning of Year 3,204,905 5,633,201 2,090,827 --
------------ ----------- ----------- ------------
Cash and Cash Equivalents, End of Year $ 10,109,559 $ 3,204,905 $ 5,633,201 $ 10,109,559
============ =========== =========== ============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-11
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Business:
-----------------------------------
Generex Biotechnology Corporation (the Company) was incorporated in
Delaware in September 1997 for the purpose of acquiring Generex
Pharmaceuticals, Inc. (Generex Pharmaceuticals), a Canadian corporation
formed in November 1995 to engage in pharmaceutical and
biotechnological research and other activities. The Company's
acquisition of Generex Pharmaceuticals was completed in October 1997 in
a transaction in which the holders of all outstanding shares of Generex
Pharmaceuticals exchanged their shares for shares of the Company's
common stock.
In January 1998, the Company participated in a "reverse acquisition"
with Green Mt. P.S., Inc., a previously inactive Idaho corporation
formed in 1983. As a result of this transaction, the Company's
shareholders (the former shareholders of Generex Pharmaceuticals)
acquired a majority (approximately 90%) of the outstanding capital
stock of Green Mt. P.S., Inc., the Company became a wholly-owned
subsidiary of Green Mt. P. S., Inc., Green Mt. P.S., Inc. changed its
corporate name to Generex Biotechnology Corporation (Generex Idaho),
and the Company changed its corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in the Company's shareholders
becoming the majority holders of Generex Idaho, the Company was treated
as the acquiring corporation in the transaction for accounting
purposes. Thus, the Company's historical financial statements, which
essentially represented the historical financial statements of Generex
Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, the Company completed a reorganization in which the
Company merged with Generex Idaho. In this transaction, all outstanding
shares of Generex Idaho were converted into the Company's shares,
Generex Idaho ceased to exist as a separate entity, and the Company
changed its corporate name back to Generex Biotechnology Corporation.
This reorganization did not result in any material change in the
Company's historical financial statements or current financial
reporting.
The Company is engaged in the research and development of drug delivery
systems and technology. Since its inception, the Company has devoted
its efforts and resources to the development of a platform technology
for the oral administration of large molecule drugs, including
proteins, peptides, monoclonal antibodies, hormones and vaccines, which
historically have been administered by injection, either subcutaneously
or intravenously.
The Company is a development stage company, which has a limited history
of operations and has not generated any revenues from operations with
the exception of the $1 million received in conjunction with the
execution of a development agreement (see Note 7). The Company has no
products approved for commercial sale at the present time. There can be
no assurance that the Company will be successful in obtaining
regulatory clearance for the sale of existing or any future products or
that any of the Company's products will be commercially viable.
Note 2 - Summary of Significant Accounting Policies:
----------------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which a controlling interest is
maintained. For those consolidated subsidiaries where the Company
ownership is less than 100 percent, the outside stockholders' interests
are shown as minority interests. All significant intercompany
transactions and balances have been eliminated.
F-12
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
----------------------------------------------------------------
Development Stage Corporation
The accompanying consolidated financial statements have been prepared
in accordance with the provisions of Statement of Financial Accounting
Standard No. 7, "Accounting and Reporting by Development Stage
Enterprises."
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Short-Term Investments
At July 31, 2001 and 2000, short-term investments consisted of
short-term notes of U.S. corporations with original maturities of
between three to twelve months. At July 31, 2001 and 2000, the cost of
the investments approximated market value.
Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on the straight-line method over
the estimated useful lives of the assets, which range from three to
thirty years. Gains and losses on depreciable assets retired or sold
are recognized in the statement of operations in the year of disposal.
Repairs and maintenance expenditures are expensed as incurred.
Patents
Legal costs incurred to establish patents are capitalized. Capitalized
costs are amortized on the straight-line method over the related patent
term.
Research and Development Costs
Expenditures for research and development are expensed as incurred and
include, among other costs, those related to the production of
experimental drugs, including payroll costs, and amounts incurred for
conducting clinical trials. Amounts expected to be received from
governments under research and development tax credit arrangements are
offset against the related expenses. Included in miscellaneous
receivables is $12,865 and $16,138 of such a receivable due from the
Canadian government at July 31, 2001 and 2000, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded for
temporary differences between financial statement carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets and
liabilities reflect the tax rates expected to be in effect for the
years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of
the deferred tax asset will not be realized.
Reclassification
Certain amounts reported in the 2000 financial statements have been
reclassified to conform to the 2001 presentation.
F-13
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
----------------------------------------------------------------
Stock-Based Compensation
As permitted by the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock option plans.
Under APB 25, if the exercise price of the Company's employee stock
options equals or exceeds the fair market value of the underlying stock
on the date of grant, no compensation expense is recognized. Stock
options and warrants issued to non employees are accounted for based on
the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128), which requires presentation of
basic earnings per share (Basic EPS) and diluted earnings per share
(Diluted EPS) by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or
contingent stock arrangements).
Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period. The computation
of Diluted EPS does not assume conversion, exercise or contingent
exercise of securities that would have an antidilutive effect on
earnings. Refer to Note 12 for methodology for determining net loss per
share.
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Other comprehensive income
(loss), which includes only foreign currency translation adjustments,
is shown in the Statement of Changes in Stockholders' Equity.
Effects of Recent Accounting Pronouncements
In June 1998, 1999, and 2000, the FASB issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133, and SFAS no. 138,
Accounting for Certain Derivative Instruments and Certain Hedging
Activities, respectively. These statements require companies to record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The adoption
of these statements on August 1, 2000 did not have a significant impact
on the Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), Revenue Recognition in Financial Statements. SAB 101 provides
guidance on the recognition, presentation, and disclosure of revenues
in financial statements of all public registrants. In October 2000, the
SEC issued a Frequently Asked Questions document related to SAB 101
which provides interpretive guidance. The Company adopted SAB 101 in
fiscal year 2001, and the adoption of SAB 101 did not have a
significant impact on the Company's financial position or results of
operations.
F-14
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
----------------------------------------------------------------
Effects of Recent Accounting Pronouncements (Continued)
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 addresses the initial recognition and measurement of goodwill
and other intangible assets acquired in a business combination. SFAS
No. 141 is applicable to business combinations beginning July 1, 2001.
The adoption of this statement did not have a significant impact on the
Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 addresses the recognition and
measurement of goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 also addresses the initial recognition and
measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other
assets. Goodwill and intangible assets previously recorded, in the
Company's financial statements, will be affected by the provisions of
SFAS No. 142. This statement provides that intangible assets with
finite useful lives be amortized and that intangible assets with
indefinite lives and goodwill will not be amortized, but will rather be
tested at least annually for impairment. SFAS No. 142 will be effective
for the Company's fiscal year 2002, however management is assessing the
impact that SFAS No. 142 will have on the Company's financial position
and results of operations.
Concentration of Credit Risk
The Company maintains cash balances, at times, with financial
institutions in the amount which are more than amounts insured by the
Canada Deposit Insurance Corporation and the Federal Deposit Insurance
Corporation. Management monitors the soundness of these institutions
and considers the Company's risk negligible.
The Company places its short-term investments in short-term debt
instruments of high quality U.S. corporations. The Company does not
believe there is a significant credit risk relating to these
investments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
Foreign Currency Translation
Foreign denominated assets and liabilities of the Company are
translated into US dollars at the prevailing exchange rates in effect
at the end of the reporting period. Income statement accounts are
translated at a weighted average of exchange rates which were in effect
during the period. Translation adjustments that arise from translating
the foreign subsidiary's financial statements from local currency to US
currency are recorded in the other comprehensive income (loss)
component of stockholders' equity.
Financial Instruments
The carrying values of accounts payable and accrued expenses
approximate their fair values. The fair value of the Company's
long-term debt is assumed to approximate its book value.
F-15
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Property and Equipment:
--------------------------------
The costs and accumulated depreciation of property and equipment are
summarized as follows:
July 31,
-----------------------------------
2001 2000
-------------- --------------
Land $ 293,902 $ 304,060
Buildings and Improvements 1,901,907 1,814,724
Furniture and Fixtures 68,229 8,190
Office Equipment 60,229 62,311
Lab Equipment 1,814,028 415,753
---------- ----------
Total Property and Equipment 4,138,295 2,605,038
Less: Accumulated Depreciation 410,534 209,171
---------- ----------
Property and Equipment, Net $3,727,761 $2,395,867
========== ==========
Depreciation expense amounted to $209,114, $85,781 and $79,784 for the
years ended 2001, 2000 and 1999, respectively.
Note 4 - Patents:
-----------------
The costs and accumulated amortization of patents are summarized as
follows:
July 31,
-------------------------------
2001 2000
------------ ----------
Patents $456,860 $268,392
Less: Accumulated Amortization 22,553 1,023
-------- --------
Patents, Net $434,307 $267,369
======== ========
Amortization expense amounted to $21,486, $1,023 and $-0- for the years
ended July 31, 2001 2000 and 1999, respectively.
Note 5 - Income Taxes:
----------------------
The Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss carryforwards
arise from both United States and Canadian sources. As of July 31,
2001, the Company has approximately $19,730,659 and $10,270,030 in net
operating loss carryforwards to offset taxable income in the United
States, which expire in 2013 through 2016, and Canada, which expire in
2005 through 2008, respectively. These loss carryforwards are subject
to limitation in future years should certain ownership changes occur.
For the years ended July 31, 2001, 2000 and 1999, the Company's
effective tax rate differs from the federal statutory rate principally
due to net operating losses and other temporary differences for which
no benefit was recorded.
F-16
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Income Taxes (Continued):
----------------------------------
Deferred tax assets consist of the following:
July 31,
----------------------------------
2001 2000
-------------- -------------
Net operating loss carryforwards $ 12,513,777 $ 7,169,137
Amortization of financing fees 80,922 84,629
Amortization of reorganization costs 214,392 --
------------ -----------
Total deferred tax assets 12,809,091 7,253,766
Valuation allowance (12,809,091) (7,253,766)
------------ -----------
Net deferred tax assets $ -- $ --
============ ==========
Note 6 - Accounts Payable and Accrued Expense:
---------------------------------------------
Accounts payable and accrued expenses consist of the following:
July 31,
-----------------------------------
2001 2000
--------------- ---------------
Accounts Payable $ 896,061 $ 863,660
Litigation 191,653 234,504
Clinical 147,699 --
Accrued Legal Fees 420,360 106,118
Financial Services 995,000 --
---------- ----------
Total $2,650,773 $1,204,282
========== ==========
Note 7 - Commitments and Contingent Liabilities:
------------------------------------------------
Consulting Services
In October 1996, the Company entered into a Consulting Agreement with
its Vice President of Research and Development (the V.P.) pursuant to
which, among other things, the V.P. assigned to the Company his entire
right, title and interest in and to all inventions, ideas, designs and
discoveries made by him during the term of such agreements which relate
in any manner to the actual or demonstratably anticipated business,
work, undertaking or research and development of the Company.
Concurrently with execution of this Consulting Agreement, the V.P. and
the Company entered into an Assignment and Assumption Agreement
pursuant to which the V.P. assigned to the Company his interests in and
to specific drug delivery systems, controlled release drug delivery
systems, and technology patents invented/discovered/conceived by the
V.P. prior to the execution of the Agreement, including three existing
patents covering insulin delivery systems, applicable to peptides and
proteins; drug vaccines and hormones delivery; and controlled release
of drugs and hormones (the "Existing Patents"). In addition to the
Existing Patents, the V.P. assigned to the Company his interest in four
US and/or Canadian patent applications and certain abstracts covering,
among other things, liposomes drug delivery for vaccines, drugs,
hormones, peptides and cosmetic delivery; transdermal drug delivery for
proteins, peptides, hormones and small molecules; controlled release
drug delivery systems for capsules, caplets, and liquid suspensions;
and DNA technology relating to insulin preparation (collectively,
"Other Existing Technology"). At the time of this assignment, the
Existing Patents were owned of record by a Canadian corporation, which
was 50 percent owned by the V.P. The Company subsequently acquired the
V.P.'s interest in this corporation for no additional consideration.
F-17
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
------------------------------------------------------------
Consulting Services (Continued)
The Consulting Agreement was amended and supplemented as of January 7,
1998 and further amended and supplemented as of December 31, 2000. The
Consulting Agreement, as amended and supplemented, continues through
July 31, 2010, subject to termination without cause by the V.P. or the
Company at any time after January 31, 2003 upon 12 months' prior
written notice. The Consulting Agreement provides for an annual base
compensation of $250,000 per year (starting August 1, 2000), subject to
annual increases. In addition, the Consulting Agreement provides for
certain bonus compensation to be paid to the V.P. for achievement of
certain milestones under the Company's development agreements with
pharmaceutical companies. During the 2001 fiscal year, the Company paid
the V.P. $300,000 for his involvement in securing a development
agreement for a specific product with a pharmaceutical company. The
Consulting Agreement also provides for the V.P. to be granted options
to purchase 150,000 shares of common stock in each of the next 10
fiscal years, starting with the 2001 fiscal year. The options must be
granted under option plans approved by the Company's stockholders.
In connection with amending and supplementing the Consulting Agreement
in January 1998, the Company issued 1,000 shares of Special Voting
Rights Preferred Stock to the V.P. See Note 10 for description of
Special Voting Rights Preferred Stock.
Leases
The Company has entered into various lease agreements for the use of
vehicles and office equipment.
Aggregate minimum annual lease commitments of the Company as of July
31, 2001 are as follows:
Year Amount
---- ------
2002 $22,008
2003 18,099
2004 9,801
2005 3,431
Thereafter --
-------
Total Minimum Lease Payments $53,339
=======
Lease expense amounted to $20,753, $20,175 and $19,240 for the years
ended July 31, 2001, 2000 and 1999, respectively.
The preceding data reflects existing leases and does not include
replacements upon their expiration. In the normal course of business,
operating leases are generally renewed or replaced by other leases.
F-18
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
------------------------------------------------------------
Rental Operations
The Company leases a portion of the floor that it owns in an office
building located in Toronto, Canada, as well as two commercial
buildings. The following represents the approximate minimum amount of
sublease income to be received in years ending after July 31, 2001:
Year Amount
---- ------
2002 $ 36,240
2003 24,817
2004 24,817
2005 24,817
2006 4,136
Thereafter --
--------
Total $114,827
========
Supply Agreements
On July 19, 2000, the Company entered into a supply agreement with
Valois, S.A. and Valois of America, Inc. (collectively Valois), to
supply the Company with certain products developed and manufactured by
Valois. In August 2000, in conjunction with the execution of the
exclusive supply agreement, the Company delivered 35,000 shares of its
common stock to Valois and recorded an expense of $411,250. Pursuant to
the agreement, the Company shall pay milestone payments to Valois
within 30 days of July 19 beginning in fiscal 2001 for the next five
years. If the milestone obligations are not met after a five-year
period, the Company shall pay Valois an annual payment of $50,000. In
the event the Company chooses to end the agreement after the fifth
anniversary, the Company shall pay Valois a one-time payment of
$350,000.
On August 28, 2000, the Company entered into a supply agreement with
Presspart Manufacturing Limited, whereby the Company will purchase its
entire requirements for products to use in the administration of
insulin through the buccal mucosa and shall not purchase the products
or any metal containers competitive to the products from any other
person in exchange for an exclusive non-transferable royalty free
irrevocable license to use the products. The contract shall continue
for a minimum period of four contract years from the end of the first
contract year in which the quantity of products purchased by the
Company from Presspart exceeds 10,000,000, and thereafter, shall
continue until terminated by either party by giving twelve months
written notice.
Pending Litigation
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based
investment banking and brokerage firm, initiated an arbitration against
the Company under New York Stock Exchange rules. Sands alleged that it
had the right to receive, for nominal consideration, approximately 1.5
million shares of the Company's common stock. Sands based its claim
upon an October 1997 letter agreement that was purported by Sands to
confirm an agreement appointing Sands as the exclusive financial
advisor to Generex Pharmaceuticals, Inc., a subsidiary of the Company
that was acquired in late 1997. In exchange, the letter agreement
purported to grant Sands the right to acquire 17% of Generex
Pharmaceuticals common stock for nominal consideration. Sands claimed
that its right to receive shares of Generex Pharmaceuticals common
stock applies to the Company's common stock since outstanding shares of
Generex Pharmaceuticals common stock were converted into shares of the
Company's common stock in the acquisition. Sands' claims also included
additional shares allegedly due as a fee related to that acquisition,
and $144,000 in monthly fees allegedly due under the terms of the
purported agreement.
F-19
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
------------------------------------------------------------
Pending Litigation (Continued)
Pursuant to an arbitration award dated September 22, 1999, the
arbitration panel that heard this case awarded Sands $14,070 and issued
a declaratory judgment requiring the Company to issue to Sands a
warrant to purchase 1,530,020 shares of the Company's common stock
pursuant to and in accordance with the terms of the purported October
1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of the
State of New York, County of New York (the "New York Supreme Court").
On November 10, 1999, the Company moved to vacate the arbitration
award. On March 20, 2000, the New York Supreme Court granted Sands'
petition to confirm the award and denied the Company's motion to vacate
the award. The Company appealed and on January 23, 2001, the New York
State Appellate Division, First Department (the "Appellate Division"),
modified the judgment of the New York Supreme Court that had confirmed
the arbitration award against the Company. The Appellate Division
affirmed the portion of the New York Supreme Court judgment that had
confirmed the granting of monetary relief of $14,070 to Sands but
modified the judgment to vacate the portion of the arbitration award
directing the issuance to Sands of a warrant to purchase 1,530,020
shares of the Company's common stock. The Appellate Division held that
the portion of the award directing the Company to issue warrants to
Sands is too indefinite to be enforceable and remanded the matter to
the arbitration panel for a final and definite award with respect to
such relief or its equivalent (including possibly an award of monetary
damages). The arbitration panel commenced hearings on the matters
remanded by the Appellate Division in June 2001 and is expected to
conclude its consideration of such matters and render its decision
during the fourth calendar quarter of 2001. The Company is not able to
estimate an amount or range of potential loss from this legal
proceeding at the present time. Therefore, no provision has been
recorded in the accompanying financial statements.
In February 1999, MQS, Inc., a former consultant, commenced a civil
action against the Company in the United States District Court for the
District of New Jersey claiming, among other things, that 242,168
shares of common stock and $243,066 were due to it for services that it
rendered through December 22, 1998. In January 2001, the Company
entered into a settlement agreement with MQS whereby the Company paid
the plaintiff certain amounts in cash and common stock that were not
material to the consolidated financial position of the Company and
whereby the claims of the parties were dismissed with prejudice.
In February 2001, a former business associate of the Vice President of
Research and Development (VP), and an entity called Centrum
Technologies Inc. commenced an action in the Ontario Superior Court of
Justice against the Company and the VP seeking, among other things,
damages for alleged breaches of contract and tortious acts related to a
business relationship between this former associate and the VP that
ceased in July 1996. The plaintiffs' statement of claim also seeks to
enjoin the use, if any, by the Company of three patents allegedly owned
by the company called Centrum Technologies Inc. On July 20, 2001, the
Company filed a preliminary motion to dismiss the action of Centrum
Technologies Inc. as a nonexistent entity or, alternatively, to stay
such action on the grounds of want of authority of such entity to
commence the action and, in the further alternative, to dismiss such
action for failure to produce documents referred to in the statement of
claim. The Company intends to defend this action vigorously. The
Company is not able to predict the ultimate outcome of this legal
proceeding at the present time or to estimate an amount or range of
potential loss, if any, from this legal proceeding.
F-20
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
------------------------------------------------------------
Pending Litigation (Continued)
In February 1997, a former employee of Generex Pharmaceuticals, Inc.,
commenced an action in the Ontario Superior Court of Justice for
wrongful dismissal. The Ontario Superior Court of Justice rendered
judgment in favor of the plaintiff for approximately $127,000 plus
interest in November 1999 and further awarded costs to the plaintiff in
March 2000. An appeal of the judgment was filed with the Court of
Appeal for Ontario in April 2000. The Company intends to continue its
vigorous defense of this action. The Company does not believe that the
ultimate resolution of this legal proceeding will have a material
effect on the consolidated financial position of the Company. The
Company has established a reserve for potential loss contingencies
related to the resolution of this legal proceeding, the amount of which
of is not material to the consolidated financial position of the
Company.
In March 1999, a former consultant to the Company commenced an action
in the Ontario Superior Court of Justice against the Company seeking
approximately $94,000 and 1,465 shares of the Company's Common Stock
for alleged breach of contract damages and additional amounts in
punitive damages. In April 1999, the Company filed a counterclaim for
monies the Company believes are due to the Company from this former
consultant. The parties have nearly completed discovery, pending the
resolution of certain outstanding motions. The Company intends to
continue its vigorous defense of this action. The Company does not
believe that the ultimate resolution of this legal proceeding will have
a material effect on the consolidated financial position of the
Company. The Company has established a reserve for potential loss
contingencies related to the resolution of this legal proceeding, the
amount of which of is not material to the consolidated financial
position of the Company.
The Company is involved in certain other legal proceedings in addition
to those specifically described herein. Subject to the uncertainty
inherent in all litigation, the Company does not believe at the present
time that the resolution of any of these legal proceedings is likely to
have a material adverse effect on the Company's consolidated financial
position.
With respect to all litigation, as additional information concerning
the estimates used by the Company become known, the Company reassesses
its position both with respect to accrued liabilities and other
potential exposures. Estimates that are particularly sensitive to
future change relate to legal matters, which are subject to change as
events evolve and as additional information becomes available during
the administration and litigation process.
Concentrations In Development Arrangements
The Company has a development arrangement with a major pharmaceutical
company, whereby the pharmaceutical company is primarily responsible
for conducting clinical trials related to a specific agreed upon
product, securing regulatory approvals and marketing on a worldwide
basis. The Company is primarily responsible for completing all
necessary product research and development. Although the Company
presently has sufficient funds to meet its foreseeable obligations, the
costs of the Company's obligations may be significant, and may exceed
current funds. If the development arrangement were to be curtailed or
terminated, the market perception of the prospects for the Company's
product, the timing of regulatory approvals, and the Company's ability
to raise funds could be adversely affected.
In conjunction with the execution of this development arrangement, the
Company received an agreement signing fee of $1,000,000 which is
included in revenues as all necessary requirements have been satisfied.
F-21
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions:
------------------------------------
The amounts due from (to) related parties at July 31, exclusive of the
officers' loans receivable, are as follows:
Golden
The Angara Angara Ching Bull
Great Tao Equities Investments, Chew An Estates,
Inc. Inc. Inc. Breweries Inc. EBI, Inc.
-------------- -------------- --------------- --------- ------------ ------------
Beginning Balance,
August 1, 1999 $(102,638) $ 274,700 $(52,651) $(94) $164,998 $337,293
Cash advance -- (213,871) -- -- (30,300) --
Company expenses
paid by related parties -- -- -- -- (46,953) --
Other (b) (2,457) 6,578 (1,261) (3) 3,952 6,480
Transfer/assumption
of related party
liabilities (a) 105,095 (67,407) 53,912 97 (91,697) --
--------- --------- -------- ----- -------- --------
Ending Balance,
July 31, 2000 -- -- -- -- -- 343,773
Other (b) -- -- -- -- -- (11,484)
--------- --------- -------- ----- -------- --------
Ending Balance,
July 31, 2001 $ -- $ -- $ -- $ -- $ -- $332,289
========= ========= ======== ===== ======== ========
(a) Officers of the Company are also shareholders in the related
companies and have agreed to the transfer/assumption of the
offsetting amounts which were due from (to) related parties.
(b) Effect of foreign currency translation adjustments.
These amounts are non-interest bearing. There are no fixed terms of
repayment.
Each of the above related parties is owned in whole or in part by the
Company's Chairman of the Board. In addition, EBI, Inc. and Golden Bull
Estates, Inc. are shareholders of the Company.
Management feels that the related party expenses provided by such
parties were transacted at terms and amounts that would have been
obtained had the transactions been consummated with unrelated third
parties. The exception to this is the non-recording of interest income
and expense on the balances due to/from related parties. The Company
estimates the following additional amounts would have been recorded if
such transactions were consummated under arms length agreements:
For the Years Ended July 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Interest Income $32,209 $60,962 $79,118
Interest Expense $ -- $14,938 $18,117
F-22
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions (Continued):
------------------------------------------------
The interest income/expense amounts were computed at estimated
prevailing rates based on the average receivable/payable balance
outstanding during the periods reflected.
As of July 31, 2001, the Company's four senior officers, who are also
shareholders of the Company were compensated indirectly by the Company
through management services contracts between the Company and
management firms of which they are owners. The amounts paid to these
management firms amounted to $672,477 for the year ended July 31, 2001.
As of July 31, 2000, the Company's three senior officers, who are also
shareholders of the Company were compensated indirectly by the Company
through management services contracts between the Company and a
management firm of which they were equal owners. The amounts paid to
this management firm amounted to $343,594 and $388,420 for the years
ended July 31, 2000 and 1999 respectively.
See Note 7 for a discussion of the consulting agreement with the
Company's Vice President of Research and Development.
On May 3, 2001, the Company's three senior officers, who are also
shareholders of the Company, were given loans of $334,300 each, in
exchange for promissory notes. These notes bear interest at 8.5 percent
per annum and are payable in full on May 1, 2002. These notes are
guaranteed by a related company owned by these officers and secured by
2,500,000 pledged shares of the Company Common Stock currently owned by
this related company. As of July 31, 2001, the balance outstanding on
these notes, including accrued interest, was $1,023,743.
Note 9 - Long-Term Debt:
------------------------
Long-term debt consists of the following:
July 31,
----------------------------
2001 2000
------------ ------------
Mortgage payable - interest at 9.7 percent per annum, monthly
payments of principal and interest of $4,778, final payment due May
25, 2005, secured by all assets of the Company $518,095 $541,661
Mortgage payable - interest at 10 percent per annum, monthly payments
of principal and interest of $1,782, final payment due November 1,
2002, secured by real property located at 11 Carlaw Avenue, Toronto,
Canada 174,565 180,302
-------- --------
Total Debt 692,660 721,963
Less Current Maturities 9,634 9,404
-------- --------
Long-Term Debt, Less Current Maturities $683,026 $712,559
======== ========
F-23
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Long-Term Debt (Continued):
------------------------------------
Aggregate maturities of long-term debt of the Company due within the
next five years ending July 31, are as follows:
Year Amount
---- ------
2002 $ 9,634
2003 177,556
2004 7,268
2005 498,202
Thereafter --
--------
Total $692,660
========
Note 10 - Stockholders' Equity:
-------------------------------
Reverse Merger
On January 9, 1998, the Company issued 9,234,118 shares of common
stock to acquire GBC - Delaware, Inc.. For accounting purposes, the
acquisition of GBC - Delaware, Inc. by the Company has been treated as
a reverse merger. Accordingly, the 9,234,118 shares issued to acquire
GBC - Delaware, Inc. have been treated as outstanding from November 2,
1995 (as adjusted for historical issuances of GBC - Delaware, Inc. and
Generex Pharmaceuticals, Inc. during the period from November 2, 1995
to January 8, 1998) and the previously outstanding 1,105,000 shares
have been treated as issued on the acquisition date. Since the assets
and liabilities acquired on this date were immaterial, no amounts have
been assigned to common stock as a result of this transaction. (See
Note 1)
Warrants
As of July 31, 2001, the Company has the following warrants to
purchase common stock outstanding:
Number of Shares Warrant Exercise Warrant
To be Purchased Price Per Share Expiration Date
---------------- ----------------- -----------------
7,937 $21.82 September 6, 2002
370,589 $ 7.00 January 17, 2003
500,000 $ 2.50 March 31, 2003
568,647 $12.15 August 15, 2003
150,000 $10.00 November 17, 2003
112,584 $ 7.50 January 31, 2004
3,500 $ 6.00 February 17, 2004
53,000 $ 6.00 April 6, 2004
9,091 $ 5.50 April 26, 2004
3,243 $14.53 July 6, 2004
11,764 $ 4.25 January 7, 2005
948,334 $ 8.66 May 17, 2005
19,584 $10.00 May 17, 2005
543,987 $12.99 September 29, 2005
75,000 $25.15 January 16, 2006
313,515 $10.18 July 6, 2006
F-24
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Stockholders' Equity (Continued):
-------------------------------------------
Notes Receivable - Common Stock
Notes receivable - common stock consists of two separate promissory
notes. The first promissory note was issued in conjunction with the
redemption of Series A Redeemable Common Stock Purchase Warrants in
June 1999, and was for $50,000. This note, which was originally due on
December 1, 1999, was initially extended until October 1, 2000, and
then extended until June 1, 2001. On July 31, 2001 the uncollected
balance on this note, including accrued interest at 7 percent was
$57,720 and a new promissory note was signed. Under the terms of the
new note, the principal of $57,720, together with accrued interest at
7 percent per annum, is due July 31, 2002. The second promissory note
was issued in conjunction with the exercise of 50,000 Common Stock
Options in March 2001, and was for $250,000. This note is due on March
15, 2002. As of July 31, 2001 the outstanding balance on this note,
including accrued interest at 7 percent was $256,580.
Preferred Stock
The Company has authorized 1,000,000 shares with a par value of
one-tenth of a cent ($.001) per share of preferred stock. The
preferred stock may be issued in various series and shall have
preference as to dividends and to liquidation of the Company. The
Company's Board of Directors is authorized to establish the specific
rights, preferences, voting privileges and restrictions of such
preferred stock, or any series thereof.
Series A Preferred Stock
The Company has issued 1,000 shares of Series A Preferred Stock
(Series A) with a par value of $.001. The holder has the right at any
time after January 16, 2004 to convert Series A shares into shares of
common stock of the Company; the number of shares of common stock
issuable upon conversion is variable based on a formula which reflects
the common stock price. The holder also has the option to exchange the
shares of the Company's Series A Preferred stock for 3,612 shares of
the Company's convertible preferred shares of Generex (Bermuda), Ltd.
which represents 30.1% of the Company's equity ownership in Generex
(Bermuda) Ltd. Upon exercise, the holder and the Company would each
own 50% of Generex (Bermuda) Ltd. (See Note 16 for discussions of
Generex (Bermuda), Ltd.) Holders of Series A shares are not entitled
to vote. In addition, the holders of Series A shares are entitled to
receive a dividend per share equal to the dividend declared and paid
on shares of the Company's common stock as and when dividends are
declared and paid on the Company's common stock and are also entitled
to receive a mandatory annual dividend equal to 6 percent per year on
the original issue price of $12,015 per share. This dividend is to be
compounded each anniversary of the date of issuance of the Series A
shares and payable by issuance of additional Series A shares valued at
the original issue price. The Company has the right to redeem all
outstanding Series A shares on January 16, 2007 for cash or shares of
common stock upon written notice.
Special Voting Rights Preferred Stock
The Company has issued 1,000 shares of Special Voting Rights Preferred
Stock (SVR) with a par value of $.001. The Company has the right at
any time after December 31, 2000, upon written notice to all holders
of preferred shares, to redeem SVR Shares at $.10 per share. Holders
of SVR Shares are not entitled to vote, except as specifically
required by applicable law or in the event of change in control, as
defined. In addition, holders of SVR Shares are entitled to receive a
dividend per share equal to the dividend declared and paid on shares
of the Company's common stock as and when dividends are declared and
paid on the Company's common stock.
F-25
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Based Compensation:
-----------------------------------
Stock Option Plans
The Company has three stock option plans under which options
exercisable for shares of common stock have been or may be granted to
employees, directors, consultants and advisors. A total of 1,500,000
shares of common stock are reserved for issuance under the 1998 Stock
Option Plan (the 1998 Plan), a total of 2,000,000 shares of common
stock are reserved for issuance under the 2000 Stock Option Plan (the
2000 Plan) and a total of 4,000,000 shares of common stock are
reserved for issuance under the 2001 Stock Option Plan (the 2001
Plan). The 2001 Plan was adopted in May 2001 by the Board of
Directors, but is subject to stockholder approval at the next annual
meeting of stockholders.
The 1998, 2000 and 2001 Plans (the Plans) have been administered by
the Board of Directors, but are expected to be administered by the
Compensation Committee (the Committee) in the future. References to
the Committee herein include the Board of Directors so long as it
continues to administer the Plans directly.
The Committee is authorized to select from among eligible employees,
directors, advisors and consultants those individuals to whom options
are to be granted and to determine the number of shares to be subject
to, and the terms and conditions of, the options. The Committee also
is authorized to prescribe, amend and rescind terms relating to
options granted under the Plans and the interpretation of options.
Generally, the interpretation and construction of any provision of the
Plans or any options granted thereunder is within the discretion of
the Committee.
The Plans provide that options may or may not be Incentive Stock
Options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive
ISOs, while employees and non-employee directors, advisors and
consultants are eligible to receive options which are not ISOs, i.e.
"Non-Qualified Options." The options granted by the Board in
connection with its adoption of the Plans are Non-Qualified Options.
The following is a summary of the common stock options granted,
canceled or exercised under the Plan:
Weighted Average
Exercise Price Per
Shares Share
------------- -------------------
Outstanding - August 1, 1998 -- --
Granted 50,000 $8.00
Canceled -- --
Exercised -- --
---------
Outstanding - July 31, 1999 50,000 $8.00
Granted 3,004,500 6.35
Canceled -- --
Exercised -- --
---------
Outstanding - July 31, 2000 3,054,500 6.38
Granted 1,455,000 6.14
Canceled -- --
Exercised 197,500 5.04
---------
Outstanding - July 31, 2001 4,312,000 $6.59
=========
F-26
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Based Compensation (Continued):
-----------------------------------------------
Stock Option Plans (continued)
The following table summarizes information on stock options
outstanding at July 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Contractual Average Exercisable Average
Range of at Life Exercise at Exercise
Exercise Price July 31, 2001 (Years) Price July 31, 2001 Price
-------------- ---------------- ------------ ----------- ------------- ------------
$5.00-$5.50 2,237,500 4.12 $ 5.09 1,217,500 $ 5.01
$7.56-$8.00 1,974,500 3.89 $ 7.60 1,924,500 $ 7.60
$10.21 100,000 3.50 $10.21 40,000 $10.21
Options exercisable at July 31 are as follows:
1999 50,000
2000 1,162,500
Had compensation cost for the Company's options granted to employees
been determined consistent with SFAS 123, the Company's net loss and
loss per share would be affected as follows:
For the Years Ended July 31,
----------------------------------------------------
2001 2000 1999
----------------- ---------------- --------------
Net Loss:
As reported $27,097,210 $ 8,841,047 $6,239,602
=========== =========== ==========
Pro forma $31,755,510 $17,230,637 $6,239,602
=========== =========== ==========
Loss Per Share:
As reported $ (1.44) $ (.58) $ (.47)
=========== ========== =========
Pro forma $ (1.69) $ (1.13) $ (.47)
=========== ========== =========
The fair value of each option granted is estimated on grant date using
the Black-Scholes option pricing model which takes into account as of
the grant date the exercise price and expected life of the option, the
current price of the underlying stock and its expected volatility,
expected dividends on the stock and the risk-free interest rate for
the term of the option. The following is the average of the data used
to calculate the fair value:
Risk-Free Expected Expected Expected
Interest Rate Life (Years) Volatility Dividends
------------- ----------- ---------- ---------
July 31, 2001 4.66% 5 .9332 --
July 31, 2000 4.80% 5 .6200 --
The weighted average fair value of the Company's stock options
calculated using the Black-Scholes option-pricing model for options
granted during the years ended July 31, 2001, 2000 and 1999 was $4.12,
$3.22 and $1.85 per share, respectively.
F-27
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Net Loss Per Share:
-----------------------------
Basic EPS and Diluted EPS for the years ended July 31, 2001, 2000 and
1999 have been computed by dividing the net loss for each respective
period by the weighted average shares outstanding during that period.
All outstanding warrants and options have been excluded from the
computation of Diluted EPS as they are antidilutive due to the losses
generated in each year.
Note 13 - Supplemental Disclosure of Cash Flow Information:
-----------------------------------------------------------
For the Years Ended July 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -----------------
Cash paid during the year for:
Interest $77,230 $73,687 $67,161
Income taxes $ -- $ -- $ --
Disclosure of non-cash investing and financing activities:
Year Ended July 31, 2001
------------------------
The fair value of warrants issued as consideration for an equity
financing agreement was initially capitalized as deferred
offering
costs and subsequently expensed $3,406,196
Note receivable was accepted in conjunction with exercise of
common stock options $ 250,000
Common stock was issued as settlement of an accrued liability $ 21,098
Year Ended July 31, 2000
------------------------
Long-term debt was assumed in conjunction with acquisition
of property $ 186,805
Long-term debt was refinanced with new long-term debt $ 541,200
Amounts due from related parties were transferred in conjunction
with the assumption of amounts due to related parties $ 159,022
Year Ended July 31, 1999
------------------------
Long-term debt was assumed in conjunction with acquisition
of property $ 82,968
Settlement of liability arising from the violation of financing
agreement with issuance of common stock $ 738,000
Deposit was utilized to acquire property and equipment $ 16,740
Notes receivable were accepted in conjunction with issuance
of common stock $ 473,882
Note 14 - Segment Information:
------------------------------
The Company follows Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information: (SFAS 131). SFAS 131 superseded Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 establishes standards for the way that
public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers.
F-28
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Segment Information (Continued):
------------------------------------------
The Company has three reportable operating segments, United States,
Canada and Bermuda, which are organized, managed and analyzed
geographically and operate in one industry segment: the development of
proprietary drug delivery technology focused on formulations to
administer large molecule drugs by mouth. The Company evaluates
operating segment performance based primarily on certain operating
expenses.
The regions to which the Company had identifiable assets and operating
losses are presented in the following table. Identifiable assets are
those that can be directly associated with a geographic area.
Operating loss by geographic segment does not include an allocation of
general corporate expenses.
Identifiable Operating
Assets Loss
---------------- ---------------
2001
----
General Corporate $38,227,315 $11,768,696
Canada 4,438,558 19,668,843
United States -- --
Bermuda -- --
----------- -----------
Total $42,665,873 $31,437,539
=========== ===========
2000
----
General Corporate $ 7,314,834 $ 4,741,225
Canada 3,026,436 4,302,731
United States -- --
----------- -----------
Total $10,341,270 $ 9,043,956
=========== ===========
1999
----
General Corporate $ 5,427,170 $ 3,758,685
Canada 3,462,496 2,468,946
United States -- --
----------- -----------
Total $ 8,889,666 $ 6,227,631
=========== ===========
F-29
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Quarterly Information (Unaudited):
--------------------------------------------
The following schedule sets forth certain unaudited financial data for
the preceding eight quarters ending July 31, 2001. In our opinion, the
unaudited information set forth below has been prepared on the same
basis as the audited information and includes all adjustments
necessary to present fairly the information set forth herein. The
operating results for the quarter are not indicative of results for
any future period.
Q1 Q2 Q3 Q4
--------------- ---------------- --------------- ----------------
Fiscal Year July 31, 2001:
-------------------------
Previously reported
Contract research revenue $ 1,000,000 $ -- $ -- $ --
Operating loss $(1,344,532) $(17,673,192) $(3,087,422) $(8,587,393)
Net loss $(1,144,207) $(14,205,305) $(2,714,097) $(8,288,601)
Net loss per share $ (0.07) $ (0.75) $ (0.14) $ (0.42)
As Restated
Contract research revenue $ 1,000,000 $ -- $ -- $ --
Operating loss $(1,344,532) $(18,418,192) $(3,087,422) $(8,587,393)
Net loss $(1,144,207) $(14,950,305) $(2,714,097) $(8,288,601)
Net loss per share $ (0.07) $ (0.79) $ (0.14) $ (0.42)
Fiscal Year July 31, 2000:
-------------------------
Contract research revenue $ -- $ -- $ -- $ --
Operating loss $(1,182,342) $ (2,913,996) $(2,323,101) $(2,624,517)
Net loss $(1,118,772) $ (2,878,873) $(2,291,130) $(2,552,272)
Net loss per share $ (0.08) $ (0.19) $ (0.15) $ (0.16)
The Company's interim financial information for Q2 has been restated
to recognize additional compensation expense related to stock options
issued to a consultant.
Note 16 - Collaborative Agreements:
-----------------------------------
On January 16, 2001, the Company established a joint venture with Elan
International Services, Ltd. ("EIS"), a wholly owned subsidiary of
Elan Corporation, plc (EIS and Elan Corporation, plc being
collectively referred to as "Elan"). Through the joint venture, the
parties will pursue the application of certain of the Company's and
Elan's drug delivery technologies, including the Company's platform
technology for the buccal delivery of large molecule drugs, to
pharmaceutical products for the treatment of prostate cancer,
endometriosis and/or the suppression of testosterone and estrogen. The
parties will conduct the joint venture through Generex (Bermuda),
Ltd., a Bermuda limited liability company. The parties are free to
develop other products on their own outside the field of the joint
venture.
The Company applied the $12,015,000 that it received from EIS for the
shares of the Company's Series A Preferred Stock (see Note 10) to form
Generex (Bermuda), Ltd. The Company's interest in this company
consists of 6,000 shares of Generex (Bermuda) Ltd. common stock and
3,612 shares of convertible preferred stock, representing an 80.1%
equity ownership interest in Generex (Bermuda) Ltd. At the same time,
EIS remitted $2,985,000 to purchase 2,388 shares of Generex (Bermuda)
Ltd. convertible preferred stock, representing a 19.9% equity
ownership interest in Generex (Bermuda) Ltd. As of July 31, 2001, the
minority interest has been reduced to $-0- due to their share of
Generex (Bermuda), Ltd.'s net loss.
F-30
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Collaborative Agreements (Continued):
-----------------------------------------------
The parties intend to select at least one pharmaceutical product for
research and development under the joint venture by January 2002. The
parties will establish a research and development plan and budget upon
selection of the pharmaceutical product that will be the initial focus
of the joint venture. Generex (Bermuda), Ltd. has been granted rights
to use the Company's buccal delivery technology and certain Elan drug
delivery technologies for purposes of the joint venture. Using the
funds from the initial capitalization, Generex (Bermuda) Ltd. paid a
nonrefundable license fee of $15,000,000 to Elan in consideration for
being granted rights to use the Elan drug delivery technologies. The
Company expensed the entire cost of the license as a research and
development expense because of the uncertainties surrounding the
future realization of revenue from the use of the license.
Note 17 - Subsequent Events (Unaudited):
----------------------------------------
Subsequent events occurring after July 31, 2001 consist of the
following:
On August 7, 2001, the Company entered into a termination agreement
with Tradersbloom, Limited, pursuant to which the parties terminated
the equity draw down facility entered into August 14, 2000. Under the
terms of this facility, the Company was able to sell to Tradersbloom,
from time to time, shares of their common stock up to a maximum sale
of $50,000,000. In conjunction with the execution of this agreement,
warrants to purchase 568,647 shares of common stock were issued. The
fair value of these warrants was capitalized as deferred financing
costs. In conjunction with the termination of this agreement, the
Company paid $245,000 to satisfy its obligations to Tradersbloom and
expensed the deferred financing costs in the year ended July 31, 2001.
Neither the Company nor Tradersbloom has any further rights or
obligations under the equity draw down facility.
On September 25, 2001, the Board of Directors of the Company
authorized the repurchase of up to $1 million of the Company's common
stock from the open market.
F-31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
The information required by Item 10 "Directors and Executive Officers of the
Registrant"; Item 11 "Executive Compensation"; Item 12 "Security Ownership of
Certain Beneficial Owners and Management"; and Item 13 "Certain Relationships
and Related Transactions" will be provided in an amendment to this Annual Report
on Form 10-K to be filed with the Commission not later than 120 days after the
end of the fiscal year to which this report relates.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of Generex Biotechnology
Corporation filed as Exhibit 3.1 to our Quarterly Report on Form
10-Q for the quarter ended April 30, 1999 filed June 14, 1999 is
incorporated herein by reference.
3.2 Bylaws of the Company filed as Exhibit 3.2 to our Registration
Statement on Form S-1 (File no. 333-82667) filed July 12, 1999
("1999 S-1") is incorporated herein by reference.
4.1 Form of common stock certificate filed as Exhibit 4.2 with our 1999
S-1 is incorporated herein by reference.
4.2.1 1998 Stock Option Plan filed as Exhibit 4.3 to our 1999 S-1 is
incorporated herein by reference.
4.2.2 2000 Stock Option Plan, filed as Exhibit 4.3.2 to our Form 10-K
filed with the Commission on October 30, 2001, is incorporated
herein by reference.
4.2.3* 2001 Stock Option Plan.
4.3 Form of Securities Purchase Agreement entered into with Cranshire
Capital, L.P.; RAM Trading Ltd.; Gryphon Master Fund; Kodiak
Opportunity, L.P.; Kodiak Opportunity 3C7, L.P.; Kodiak Opportunity
Offshore, Ltd.; Novelly Exempt Trust; Langley Partners, L.P.;
Montrose Investments, Ltd.; WEC Asset Management, LLC; ZLP Master
Technology Fund, Ltd.; Alpha Capital Aktiengesellschaft; and The
dotCOM Fund, LLC, dated July 3, 2001 filed as an exhibit to our
Report on Form 8-K dated July 6, 2001 and filed on July 17, 2001
("July 2001 8-K") is incorporated herein by reference.
4.4 Form of Registration Rights Agreement entered into with Cranshire
Capital, L.P.; RAM Trading Ltd.; Gryphon Master Fund; Kodiak
Opportunity, L.P.; Kodiak Opportunity 3C7, L.P.; Kodiak Opportunity
Offshore, Ltd.; Novelly Exempt Trust; Langley Partners, L.P.;
Montrose Investments, Ltd.; WEC Asset Management, LLC; ZLP Master
Technology Fund, Ltd.; Alpha Capital Aktiengesellschaft; and The
dotCOM Fund, LLC, dated July 3, 2001 filed as an exhibit to our July
2001 8-K is incorporated herein by reference.
4.5 Form of Warrant granted to Cranshire Capital, L.P.; RAM Trading
Ltd.; Gryphon Master Fund; Kodiak Opportunity, L.P.; Kodiak
Opportunity 3C7, L.P.; Kodiak Opportunity Offshore, Ltd.; Novelly
Exempt Trust; Langley Partners, L.P.; Montrose Investments, Ltd.;
WEC Asset Management, LLC; ZLP Master Technology Fund, Ltd.; Alpha
Capital Aktiengesellschaft; and The dotCOM Fund, LLC, dated July 6,
2001, filed as an exhibit to our July 2001 8-K, is incorporated
herein by reference.
4.6 Securities Purchase Agreement entered into with Capital Ventures
International, dated July 3, 2001, filed as an exhibit to our July
2001 8-K, is incorporated herein by reference.
4.7 Registration Rights Agreement entered into with Capital Ventures
International, dated July 3, 2001, filed as an exhibit to our July
2001 8-K, is incorporated herein by reference.
4.8 Warrant granted to Capital Ventures International, dated July 3,
2001, filed as an exhibit to our July 2001 8-K, is incorporated
herein by reference.
4.9 Form of Securities Purchase Agreement entered into with Elliott
International, L.P.; and Elliott Associates, L.P., dated July 3,
2001, filed as an exhibit to our July 2001 8-K, is incorporated
herein by reference.
4.10 Form of Registration Rights Agreement entered into with Elliott
International, L.P.; and Elliott Associates, L.P., dated July 3,
2001, filed as an exhibit to our July 2001 8-K, is incorporated
herein by reference.
4.11 Warrant issued to Elliott International, L.P. and Elliott
Associates, L.P., dated July 5, 2001, filed as an exhibit to our
July 2001 8-K, is incorporated herein by reference.
4.12 Form of Warrant issued to Ladenburg Thalmann & Co., Inc. dated July
6, 2001, filed as an exhibit to our Registration Statement on Form
S-3 (File No. 333-67118) filed August 8, 2001, is incorporated
herein by reference.
4.13 Registration Rights Agreement dated January 16, 2001 between Generex
Biotechnology Corporation and Elan International Services, Ltd.
filed as an exhibit to our Report on Form 8-K dated January 16, 2001
and filed on January 23, 2001 ("January 2001 8-K") is incorporated
herein by reference.
4.14 Form of Warrant issued to Elan International Services, Ltd. filed as
an exhibit to our January 2001 8-K is incorporated herein by
reference.
4.15 Certificate of Designations, Preferences and Rights of Series A
Preferred Stock filed as an exhibit to our January 2001 8-K is
incorporated herein by reference.
4.16 Securities Purchase Agreement dated January 16, 2001, between
Generex Biotechnology Corporation, Elan International Services, Ltd.
and Elan Corporation, plc., filed as an exhibit to our Report on
Form 8-K/A dated January 16, 2001 and filed on February 1, 2001 is
incorporated herein by reference.
4.17 Form of Securities Purchase Agreement entered into with certain
parties to October 2000 Private Placement filed as an exhibit to our
Report on Form 8-K dated October 4, 2000 and filed on October 16,
2000 ("October 2000 8-K") is incorporated herein by reference.
4.18 Form of Registration Rights Agreement entered into with certain
parties to October 2000 Private Placement filed as an exhibit to our
October 2000 8-K is incorporated herein by reference.
4.19 Form of Warrant issued to certain parties to October 2000 Private
Placement filed as an exhibit to our October 2000 8-K is
incorporated herein by reference.
10.1.1 Consulting Agreement with Pankaj Modi filed as Exhibit 10.1.1 to our
Registration Statement on Form 10 filed December 14, 1999 ("1999
Form 10") is incorporated herein by reference.
10.1.2 Assignment and Assumption Agreement with Pankaj Modi filed as
Exhibit 10.1.2 to our 1999 Form 10 is incorporated herein by
reference.
10.1.3* Memorandum of Agreement dated January 7, 1998 between Generex
Pharmaceuticals, Inc., GHI Inc., Generex Biotechnology Corporation,
Dr. Pankaj Modi and Galaxy Technology, Canada.
10.1.4* Supplemental Agreement dated December 31, 2000 between Generex
Pharmaceuticals, Inc., Generex Biotechnology Corporation and Dr.
Pankaj Modi.
21* Subsidiaries of the Registrant
23.1.1* Consent of Deloitte & Touche LLP, independent public accountants.
23.1.2* Consent of WithumSmith+Brown, independent public accountants.
24* Powers of Attorney
-------------------------------------
* Filed herewith. All other exhibits are incorporated by reference,
as described.
(b) Reports on Form 8- K
The following Reports on Form 8-K were filed during the last quarter of
the fiscal year:
1. Report on Form 8-K, filed with the Commission on May 22, 2001,
announcing an increase in the size of Generex's Board of
Directors from six to seven members, the appointment of Ivan
Lieberburg, Ph.D., M.D. as a director of Generex, and the
removal of Generex from the Nasdaq Biotechnology Index.
2. Report on Form 8-K, filed with the Commission on July 17,
2001, announcing two private placements completed on or about
July 6, 2001 in which Generex raised $11,59,994.75 through the
sale of units consisting of one share of common stock and a
warrant to purchase .25 shares of common stock. The units were
sold without registration under the Securities Act of 1933 in
reliance upon the exemption from registration provided in
Section 4(2) thereof and Rule 506 of Regulation D promulgated
thereunder.
3. Report on Form 8-K, filed with the Commission on August 15,
2001, announcing that Generex had entered into a termination
agreement with Tradersbloom Limited pursuant to which the
equity draw down facility was terminated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 23rd day of October
2001.
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Anna E. Gluskin
----------------------------
Anna E. Gluskin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Capacity in Which
Name Signed Date
---- ----------------- ----
/s/ Anna E. Gluskin President and Chief October 23, 2001
-------------------- Executive Officer
Anna E. Gluskin
/s/ E. Mark Perri Chairman, Chief October 23, 2001
-------------------- Financial and Accounting Officer
E. Mark Perri
/s/ Rose C. Perri Secretary, Treasurer and October 23, 2001
------------------- Chief Operating Officer
Rose C. Perri
/s/Pankaj Modi* Vice President, Research October 23, 2001
------------------ and Development
Pankaj Modi
/s/ Michael Hawke* Director October 23, 2001
------------------
Michael Hawke
/s/ Ivan M. Lieberburg* Director October 23, 2001
-----------------------
Ivan M. Lieberburg
/s/ Jan Michael Rosen* Director October 23, 2001
-----------------------
Jan Michael Rosen
*By: /s/ E. Mark Perri
----------------------
E. Mark Perri, as Attorney-in-fact