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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, 2002
[ ] 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
GENEREX BIOTECHNOLOGY CORPORATION
(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
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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at October 10, 2002, based on the closing price as of that date, was
approximately $20,659,926.
At October 10, 2002, the registrant had 20,100,718 shares of common stock
outstanding.
Documents incorporated by reference: Proxy statement to be filed
within 120 days after the end of the fiscal year.
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) 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 and other third party collaborations including our joint
venture with a subsidiary of Elan Corporation, 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; and
o adverse developments in our joint venture with a subsidiary of Elan
Corporation.
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.
2
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. In January of 2002, the parties expanded the joint venture to include
buccal morphine for the management of pain and selected buccal morphine as the
initial product for development under Generex (Bermuda), Ltd. This expansion of
the joint venture occurred after we successfully completed a proof of concept
clinical study of morphine delivery using our proprietary buccal delivery
technology.
3
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 prior
fiscal year had not received any revenues from operations. We have no products
approved for commercial sale by drug regulatory authorities. We have begun the
regulatory approval process for only three products, our oral insulin
formulation, morphine and fentanyl. 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. 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 a 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 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. We are also evaluating the use of our RapidMist device for the delivery
of both morphine and fentanyl.
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.
4
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.
5
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.
Morphine and Fentanyl
- ---------------------
The delivery of morphine and fentanyl by oral formulation (pills) and injection
for the treatment of moderate to severe break through and postoperative pain
fail to provide patients with adequate relief and control. (Breakthrough and
postoperative pain are characterized as being moderate to severe in intensity,
having a rapid onset of action and a short to medium duration.) Not only does
delivery by pills and injection have a slow onset of action, it is often
difficult for patients to adjust their doses, with the result that patients are
either over or under medicated. In addition, injections are invasive and require
an attendant to administer the medication which reduces the patient's control
over the pain and may cause increased anxiety. Often, patients must wait in pain
until an attendant can medicate them.
We are attempting to develop a buccal delivery formulation for morphine and
fentanyl that will have a critical series of attributes well suited for the
treatment of breakthrough and post operative pain and which will be cost
effective and will have a demonstrable improvement over current delivery
methods. These include fast access to the circulatory system, precise dosing
control and a simple, self-administration procedure.
We made an Investigatory New Drug submission for buccal morphine to the Health
Protection Branch in Canada in January 2002, and received permission from the
Canadian regulators to proceed with clinical trials in March 2002. We have
commenced clinical trials in Ecuador and we are in the process of recruiting
investigators to conduct clinical trials in Canada. In January of 2002, we filed
an Investigational New Drug Application for buccal morphine with the Food and
Drug Administration. The buccal morphine product is being developed under our
joint venture with a subsidiary of Elan Corporation.
We made an Investigatory New Drug submission for fentanyl to the Health
Protection Branch in Canada in August 2002, and received permission from the
Canadian regulators to proceed with clinical trials in October 2002.
Other Products
- --------------
We have had discussions of possible research collaborations with various
pharmaceutical companies concerning use of our large molecule drug delivery
technology with these compounds, including monoclonal antibodies, human growth
hormone, fertility hormone, estrogen and heparin, and a number of vaccines.
6
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 believe we have
sufficient financial resources to pursue the development of our current products
and the initial exploration 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.
7
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.
Pre-clinical 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 pre-clinical 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. We filed an Investigational New Drug application for
buccal morphine in January of 2002.
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.
8
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 pre-clinical 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 of our oral insulin formulation in Canada in November 1998. In
Ecuador, regulatory authorities approved the limited non-commercial distribution
of our oral insulin formulation in September 1998. We obtained regulatory
approval to begin clinical trials of our buccal morphine product in Canada in
March 2002 and received regulatory approval to begin clinical trials of our
fentanyl product in Canada in October, 2002. We are currently in the process of
recruiting investigators to conduct clinical trials of our buccal morphine
product.
9
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. With respect
to the joint venture with Elan, Elan, may, at its option, choose to market
morphine or any other product developed under the joint venture. Except for
these arrangements, 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, all 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.
10
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 also expect to use the RapidMist device in
connection with our buccal morphine and fentanyl products. 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. While morphine is a controlled
substance, it is readily available for use in clinical trials. We currently have
the appropriate licenses and facilities for acquiring and storing morphine in
Canada. Various regulatory issues surround the import of morphine into the
United States and we will need to address these issues prior to commencing
clinical trials in the United States.
Intellectual Property
We currently have fifteen issued U.S. patents pertaining to aspects of buccal
delivery technology and covering our oral insulin formulation, and we have three
U.S. patent applications and one Canadian patent application pending, also
related to aspects of our buccal delivery technology, our oral insulin
formulation and our oral morphine formulation. In addition, we hold one U.S.
patent and two Canadian patents and have one U.S. application pending that
pertains 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.
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.
11
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.
Oral Insulin
- ------------
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 III testing of
its inhalation product in the second half of 1998.
12
Other companies have announced development efforts relating to alternative (to
injection) methods of delivering insulin or other large molecule drugs,
including 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 Technologies (pills taken orally), Nobex
Corporation (pills taken orally), and Nastech Pharmaceuticals (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.
Pain Management: Morphine and Fentanyl
- --------------------------------------
Cephalon, Inc. currently markets Actiq(R) in the United States and has recently
acquired the rights to the product in Europe. Actiq delivers buccal transmucosal
fentanyl to the cheek walls through the use of a lollipop. On November 4, 1998
the FDA cleared Actiq(R) for marketing for use in the management of breakthrough
cancer pain. The product was launched in March 1999 in the United States.
Aradigm Corporation is developing the hand-held AERx Pain Management System for
the treatment of breakthrough cancer pain. The AERx Pain Management System is a
pulmonary delivery system to deliver the drug through inhalation. AERx has
distinct advantages over the administration by injection of morphine and similar
opiate-derived pain control drugs. Aradigm has completed Phase II clinical
trials of this formulation.
Nastech Pharmaceuticals is developing an intranasal formulation of morphine that
is in Phase II clinical trials. Results reported to date show the product to be
safe and efficacious in the treatment of episodes of breakthrough pain. Nastech
is currently seeking a licensing partner for this product.
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.
13
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, 2002, our expenditures on
research and development were $33,806,737. These included $6,618,820 in the year
ended July 31, 2002; $19,929,799 in the year ended July 31, 2001, and $3,568,300
in the year ended July 31, 2000. The increase in our research and development
expenses from 2000 to 2001, and the decrease in our research and development
expenses in from 2001 to 2002, are due principally to 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 in 2001 (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). Without the charge related to this license fee, our research
and development expenses would have been $4,929,799 in 2001. This amount has not
been adjusted for minority share of loss.
Employees
At September 30, 2002, we had twenty-three 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, six 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. We also use non-employee consultants to assist us in
business development. 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.
14
EXECUTIVE OFFICERS AND DIRECTORS
Name Age Position Held with Generex
- ---- --- --------------------------
Gerald Bernstein 69 Director
Anna E. Gluskin 51 President, Chief Executive Officer and
Director
Michael Hawke, M.D. 61 Director
Peter Levitch 70 Director
Pankaj Modi, Ph.D. 48 Vice President, Research and
Development and Director
Rose C. Perri 35 Chief Operating Officer, Treasurer,
Secretary and Director
J. Michael Rosen 51 Director
Mark Perri, our former Chairman and Chief Financial Officer, passed away on
November 6, 2002.
Gerald Bernstein, M.D. -- Director since October 2002. Dr. Gerald Bernstein was
elected a Vice President of the Company effective as of October 1, 2001. Dr.
Bernstein acts as a key liaison for the Company on medical and scientific
affairs to the medical, scientific and financial communities and consults with
the company under a consulting agreement on research and medical affairs and on
development activities. Dr. Bernstein has been an associate clinical professor
at the Albert Einstein College of Medicine in New York and an attending
physician at Beth Israel Medical Center, Lenox Hill Hospital and Montefore
Medical Center, all in New York. He is a former president of the American
Diabetes Association. Dr. Bernstein was elected a director of the Company on
October 23, 2002.
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.
Michael Hawke, M.D. -- Director since March 2000. Dr. Hawke presently is a
Professor in the Departments of Otolaryngology and Pathology at the University
of Toronto, and is on the staff of the Departments of Otolaryngology at St.
Joseph's Health Center, The Toronto Hospital and Mount Sinai Hospital, all
located in Toronto. He has held these positions for more than the previous five
years. Dr. Hawke has approximately thirty years experience as a medical
researcher, educator and practitioner.
Peter Levitch - Director since October 2002. Mr. Levitch has been President of
Peter Levitch & Associates, an independent consulting firm to health
professionals since 1981. In this capacity, he advises companies through the
various stages of the development of pharmaceuticals, medical devices, biologics
and diagnostics, including clinical evaluation and the FDA regulatory approval
phases. He has served as an advisor to more than 200 leading biotechnology and
biological firms, including Amgen, Genentech, Immunex, DuPont, Baxter and
Johnson and Johnson. Prior to 1981, Mr. Levitch was Vice President, Clinical and
Regulatory Affairs at Oxford Research International Corp. and held senior
positions managing the regulatory and clinical programs at Ortho Diagnostic
Systems (a subsidiary of Johnson & Johnson).
Pankaj Modi, Ph.D. -- Director since September 1997. Dr. Modi has served as Vice
President, Research and Development of Generex 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, 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.
15
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.
J. Michael Rosen -- Director since August 2000. Mr. Rosen has been a principal
in a number of related travel management and hotel marketing businesses since
1978. The principal companies in this group, all of which are headquartered in
Ontario, are Uniworld Travel & Tours, Inc., Nevada Vacations, Inc., Casino
Vacations, Inc. and Casino Tours, Inc. Mr. Rosen presently serves as the
President or a Vice President, and the Chief Financial Officer, of each of these
companies. Mr. Rosen is an accountant by training, and was engaged in the
private practice of accounting prior to 1978.
Generex entered into a joint venture with Elan Corporation, plc ("Elan") and
certain affiliates of Elan in January 2001. Pursuant to a Securities Purchase
Agreement dated January 16, 2001 between Generex, Elan and Elan International
Services, Ltd. ("EIS"), a subsidiary of Elan, EIS has the right to nominate one
director to Generex's Board of Directors for so long as EIS or its affiliates
own at least 1.0% of the issued and outstanding shares of common stock. Dr.
Lieberburg was the nominee of EIS thereunder. Dr. Lieberburg resigned effective
August 1, 2002. EIS has not informed Generex of its nominee to replace Dr.
Lieberburg. Under the terms of the Securities Purchase Agreement, the
EIS-nominated director may not in any event have more than 15% of the aggregate
voting power of the Board of Directors as a whole.
Dr. Modi holds the position of Vice President, Research and Development pursuant
to a consulting agreement that was originally entered into as of October 1,
1996, that was amended and supplemented as of January 7, 1998, and that was
amended and supplemented as of December 31, 2000. An amendment to Dr. Modi's
consulting agreement was approved by the Board of Directors in January 2002.
Under the consulting agreement, Generex must use its best efforts to cause Dr.
Modi to be nominated for election and elected a director of Generex for as long
as the consulting agreement is in force.
There are no family relationships among our officers and directors.
Other Key Employees and Consultants
Slava Jarnitskii is our Financial Controller. He began his employment with
Generex Pharmaceuticals in September 1996 and has been in the employment of the
Company since its acquisition of Generex Pharmaceuticals in October 1997. Before
his employment with Generex Pharmaceuticals, Mr. Jarnitskii received a Masters
of Business Administration degree from York University in September 1996.
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.
16
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. To be profitable, we must successfully research, develop,
obtain regulatory approval for, manufacture, introduce, market and distribute
our products under development. We may not be successful in one or more of these
stages of the development of our products, or any of the products we develop may
not be commercially viable.
In September 2000 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 technology successfully with
other large molecule drugs in addition to insulin. In January 2001, 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. In January
2002, we and Elan agreed to expand the joint venture to encompass the buccal
delivery of morphine for the treatment of pain and agreed to pursue buccal
morphine as the initial pharmaceutical product under the joint venture. We
cannot be certain that we can successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market or distribute the buccal morphine
product to be developed under the joint venture with Elan, nor can we be certain
that any buccal morphine product we may develop will be commercially viable.
Similarly, we cannot be certain that we can successfully research, develop,
obtain regulatory approval for and eventually commercialize any product for
which we have completed proof of concept studies. Proof of concept studies are
the very first step in the long process of product development. It can be years
before we will know whether a product for which we might have completed a
successful proof of concept will be commercially viable.
17
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 our oral insulin
formulation, buccal morphine and fentanyl products.
Pre-clinical and clinical trials of our products, and the manufacturing and
marketing of our technology, are subject to extensive, costly and rigorous
regulation by governmental authorities in the United States, Canada and other
countries. The process of obtaining required regulatory approvals from the FDA
and other regulatory authorities often takes many years, is expensive and can
vary significantly based on the type, complexity and novelty of the product
candidates. We cannot assure you that any technologies or products developed by
us, either independently or in collaboration with others, will meet the
applicable regulatory criteria in order to receive the required approvals for
manufacturing and marketing. Delays in obtaining United States or foreign
approvals for our products could result in substantial additional costs to us,
and, therefore, could adversely affect our ability to compete with other
companies. If regulatory approval is ultimately granted, the approval may place
limitations on the intended use of the product we wish to commercialize, and may
restrict the way in which we are permitted to market the product.
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.
For similar reasons, we also cannot be certain that we will be able to
successfully secure regulatory approval or develop a buccal morphine product or
any other product chosen for development under the joint venture with Elan.
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 or any other
product candidate 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:
18
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 are in a highly competitive market and our competitors may develop
alternative therapies.
We are in competition with pharmaceutical, biotechnology and drug delivery
companies, hospitals, research organizations, individual scientists and
nonprofit organizations engaged in the development of alternative drug delivery
systems or new drug research and testing, as well as with entities producing and
developing injectable drugs. We are aware of a number of companies that are
currently seeking to develop new products and non-invasive alternatives to
injectable drug delivery, including oral delivery systems, intranasal delivery
systems, transdermal systems, and colonic absorption systems. Many of these
companies may have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than we do.
Accordingly, our competitors may succeed in developing competing technologies,
obtaining FDA approval for products or gaining market acceptance more rapidly
than we can.
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 and the
agreement with Elan relating to products developed under our joint venture with
Elan, 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.
19
If our stock price drops, our stock may be delisted from NASDAQ and become
subject to Penny Stock regulations.
During periods in fiscal 2001 and the beginning of fiscal 2002, our share price
dropped to close to $1.00 per share. The Nasdaq National Market requires our
stock price to be at least $1.00. If we do not meet this requirement in the
future, we may be subject to delisting by Nasdaq. We may also be subject to
delisting by Nasdaq for failure to meet other criteria, which we currently now
meet, such as minimum net tangible assets and net income requirements. If our
stock is delisted from Nasdaq, there will be less interest for our stock in the
market. This may result in lower prices for our stock and make it more difficult
for you to sell your shares. In addition, if our stock is not listed on Nasdaq
and fails to maintain a price of $5.00 or more per share, our stock would become
subject to the SEC's "Penny Stock" rules. These rules require a broker to
deliver, prior to any transaction involving a Penny Stock, a disclosure schedule
explaining the Penny Stock Market and its risks. In addition, broker/dealers who
recommend Penny Stocks to persons other than established customers and
accredited investors must make a special written suitability determination and
receive the purchaser's written agreement to a transaction prior to the sale. In
the event our stock becomes subject to these rules, it will become more
difficult for broker/dealers to sell our common stock. Therefore shareholders
may have more difficulty selling our common stock in the public market.
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 have, and may continue
to, 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 buccal 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. We anticipate that our existing capital resources will enable
us to maintain currently planned operations through the next twelve months.
However, this expectation is based on our current operating plan, which could
change as a result of many factors, and we may need additional funding sooner
than anticipated. To the extent operating and capital resources are insufficient
to meet future requirements, we will have to raise additional funds to continue
the development and commercialization of our products. Unforeseen problems,
including materially negative developments in our relationship with Lilly or in
our joint venture with Elan, 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.
20
Even if we raise funds through equity financing, it will have a dilutive effect
on existing holders of our shares by reducing their percentage ownership. The
shares may be sold at a time when the market price is low because we need the
funds. This will dilute existing holders more than if our stock price was
higher. In addition, equity financings normally involve shares sold at a
discount to the current market price.
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.
We depend upon proprietary technology and the status of patents and proprietary
technology is uncertain.
Our long-term success will substantially depend upon our ability to protect our
proprietary technology from infringement, misappropriation, discovery and
duplication and avoid infringing the proprietary rights of others. We currently
have fifteen issued U.S. patents pertaining to aspects of buccal delivery
technology and covering our oral insulin formulation, and we have three U.S.
patent applications and one Canadian patent application pending, also related to
aspects of our buccal delivery technology, our oral insulin formulation and our
oral morphine formulation. In addition, we hold one U.S. patent and two Canadian
patents and have one U.S. application pending that pertains 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.
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 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 be
valid and enforceable and provide us with meaningful protection from
competition. There can be no assurance that we will possess the financial
resources necessary to enforce any of our patents. Patents already issued to us
or our pending applications may become subject to dispute, and any dispute could
be resolved against us. There can also be no assurance that any products that we
(or a licensee) may develop will not infringe upon any patent or other
intellectual property right of a third party.
Furthermore, patent applications are in some situations 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 technology that we currently are
developing.
21
We have conducted original research on a number of aspects relating to buccal
drug delivery. While we cannot assure you that any of our products will provide
significant commercial advantage, these patents are intended to provide
protection for important aspects of our technology, including our insulin
formulation and the delivery of our insulin formulation as a spray. Because a
substantial number of patents have been issued in the field of alternative drug
delivery and because patent positions can be highly uncertain and frequently
involve complex legal and factual questions, the breadth of claims obtained in
any application or the enforceability of our patents cannot be predicted. The
coverage claimed in a patent can be significantly reduced before a patent is
issued, either in the United States or abroad. Consequently, we do not know
whether any of our pending or future patent applications will result in the
issuance of patents or, to the extent patents have been issued or will be
issued, whether these patents will be subject to further proceedings limiting
their scope, will provide significant proprietary protection or competitive
advantage, or will be circumvented or invalidated.
There can be no assurance that any products that we (or a licensee) may develop
will not infringe upon any patent or other intellectual property right of a
third party. For example, we are aware of certain patents owned by third parties
that such parties could attempt to use in the future in efforts to affect our
freedom to practice some of the patents that we own or have applied for. Based
upon the science and scope of these third party patents, we believe that the
patents that we own or have applied for do not infringe any such third party
patents, however, there can be no assurance that we could successfully defend
our position, if challenged. We may incur substantial costs if we are required
to defend ourselves in patent suits brought by third parties. These legal
actions could seek damages and seek to enjoin testing, manufacturing and
marketing of the accused product or process. In addition to potential liability
for significant damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process and we cannot assure you
that any license required under any such patent would be made available to us on
acceptable terms, if at all. Litigation may also be necessary to enforce our
patents against others or to protect our trade secrets. Such litigation could
result in substantial expense, and we cannot assure you that any litigation
would be resolved in our favor.
In addition, intellectual property for our technologies and products will be a
crucial factor in our ability to develop and commercialize our products. Large
pharmaceutical companies consider a strong patent estate critical when they
evaluate whether to enter into a collaborative arrangement to support the
research, development and commercialization of a technology. Without the
prospect of reasonable intellectual property protection, it would be difficult
for a corporate partner to justify the time and money that is necessary to
complete the development of a product.
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.
22
Enforcement of an arbitration award may result in adverse effects upon Generex.
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 Generex Biotechnology common stock since outstanding shares of
Generex Pharmaceuticals common stock were converted into shares of Generex
Biotechnology 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
Generex Biotechnology 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.
On November 7, 2001, the arbitration panel issued an award again requiring us to
issue to Sands a warrant to purchase 1,530,020 shares of Generex Biotechnology
common stock purportedly pursuant to and in accordance with the terms of the
October 1997 letter agreement. Thereafter, Sands submitted a motion to the
Supreme Court to modify the judgment and to confirm the arbitration panel's
award while we filed a motion with the court to vacate the arbitration award.
On February 25, 2002, the Supreme Court vacated the arbitration panel's November
7, 2001 award to Sands of a warrant to purchase 1,530,020 shares of the our
common stock. The Supreme Court concluded that the arbitration panel had
"disregarded the plain meaning" of the directive given by the Appellate Division
in the Appellate Division's January 23, 2001 decision that remanded the matter
of the warrant for reconsideration by the panel. The Supreme Court found that
the arbitration panel's award "lacks a rational basis". The Supreme Court also
remanded the matter to the New York Stock Exchange on the issue of whether the
arbitration panel should be disqualified. Sands has appealed the February 25,
2002 order of the Supreme Court to the Appellate Division. We filed a
cross-appeal on issues relating to the disqualification of the arbitration
panel. We are not able to estimate an amount or range of potential loss from
this legal proceeding at the present time.
23
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.
In developing our products, we may undertake a range of activities, which
include engaging in discovery research and process development, conducting
pre-clinical 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.
Pre-clinical testing and clinical trials must demonstrate that a product
candidate is safe and efficacious. The results from pre-clinical 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.
24
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 that will assist us in
developing, testing, obtaining governmental approval for and commercializing
products using our platform technology. 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.
Third party reimbursement for our products is uncertain.
In both domestic and foreign markets, sales of our potential products depends in
part on the availability of reimbursement for third-party payors such as
government health administration authorities, private health insurers and other
organizations. Third-party payors often challenge the price and
cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products. We
cannot assure you that any of our products will be reimburseable by third-party
payors. In addition, we cannot assure you that our products will be considered
cost effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize a profit. Legislation
and regulations affecting the pricing of pharmaceuticals may change before our
products are approved for marketing and any such changes could further limit
reimbursement.
25
We have a history of losses and may incur additional losses.
To date, we have not been profitable and our accumulated net loss is
approximately $63 million at July 31, 2002. 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.
Our product candidates are in research or early stages of pre-clinical and
clinical development. We will need to conduct substantial additional research,
development and clinical trials. We will also need to receive necessary
regulatory clearances both in the United States and foreign countries and obtain
meaningful patent protection for and establish freedom to commercialize each of
our product candidates. We cannot be sure that we will obtain required
regulatory approvals, or successfully develop, commercialize, manufacture and
market any other product candidates. We expect that these activities, together
with future general and administrative activities, will result in significant
expenses for the forseeable future.
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 developments in patent and other proprietary rights;
o public concern as to the safety of drugs developed by us or others;
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.
From time to time, we may hire companies to assist us in pursuing investor
relations strategies to generate increased volumes of investment in our shares.
Such activities may result, among other things, in causing the price of our
shares to increase on a short-term basis.
Furthermore, the stock market generally and the market for stocks of companies
with lower market capitalizations and small biopharmaceutical companies, like
us, have from time to time experienced, and likely will again experience
significant price and volume fluctuations that are unrelated to the operating
performance of a particular company.
26
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.
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. We also own two additional spaces at this
location one of which is currently leased to third parties and one of which is
used for storage. Both of these spaces could be used for manufacturing
facilities if necessary. 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.
In August of 2002, we purchased approximately 23,500 square feet of property
located at 11 Carlaw Avenue in Toronto for $2,400,000 CAN, or approximately
$1,525,000 US for investment purposes. The property is located adjacent to our
current laboratory facility and is currently leased to third parties.
Any additional properties that we own could be used for research, development
and tests related to our current and anticipated drug indications as well as
potential acquisitions if our current facilities prove inadequate for our needs.
We have first mortgages on our Toronto properties (excluding the property
purchased in August 2002) totaling $663,313 at July 31, 2002. Our mortgages
require the payment of interest, with minimal principal reduction, prior to
their due date (November 1, 2002 with respect to $166,032 and May 25, 2005 with
respect to $497,281).
At this time, we do not expect to need manufacturing capabilities beyond our
pilot facility before the end of the current fiscal year. We own 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.
27
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 Generex Biotechnology 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 Generex Biotechnology common stock since
outstanding shares of Generex Pharmaceuticals common stock were converted into
shares of Generex Biotechnology 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 Generex
Biotechnology 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 Generex Biotechnology 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.
On November 7, 2001, the arbitration panel issued an award again requiring us to
issue to Sands a warrant to purchase 1,530,020 shares of Generex Biotechnology
common stock purportedly pursuant to and in accordance with the terms of the
October 1997 letter agreement. Thereafter, Sands submitted a motion to the
New York Supreme Court to modify the judgment and to confirm the arbitration
panel's award while we filed a motion with the court to vacate the arbitration
award.
On February 25, 2002, the New York Supreme Court vacated the arbitration panel's
November 7, 2001 award to Sands of a warrant to purchase 1,530,020 shares of
Generex Biotechnology common stock. The New York Supreme Court concluded that
the arbitration panel had "disregarded the plain meaning" of the directive given
by the Appellate Division in the Appellate Division's January 23, 2001 decision
that remanded the matter of the warrant for reconsideration by the panel. The
New York Supreme Court found that the arbitration panel's award "lacks a
rational basis". The New York Supreme Court also remanded the matter to the New
York Stock Exchange on the issue of whether the arbitration panel should be
disqualified. Sands has appealed the February 25, 2002 order of the New York
Supreme Court to the Appellate Division. We filed a cross-appeal on issues
relating to the disqualification of the arbitration panel. We are not able to
estimate an amount or range of potential loss from this legal proceeding at the
present time.
28
Subash Chandarana et al. v Generex Biotechnology Corporation et al. In February
2001, Subash Chandarana, a former business associate of Dr. Pankaj Modi, and an
entity called Centrum Technologies Inc. ("CTI") 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 CTI. On July 20, 2001, we
filed a preliminary motion to dismiss the action of CTI as a nonexistent entity
or, alternatively, to stay such action on the grounds of want of authority of
such entity to commence the action. The Plaintiffs brought a cross-motion to
amend the statement of claim to substitute Centrum Biotechnologies, Inc. ("CBI")
for CTI. CBI is a corporation of which 50 percent of the shares are owned by
Chandarana and the remaining 50 percent are owned by us. Consequently, the
shareholders of CBI are in a deadlock. The Court granted our motion to dismiss
the action of CTI and denied the plaintiff's cross motion without prejudice to
Chandarana to seek leave to bring a derivative action in the name of or on
behalf of CBI. Chandarana subsequently filed an application with the Ontario
Superior Court of Justice for an order granting him leave to file an action in
the name of and on behalf of CBI against Dr. Modi and us. We have opposed the
application which is now pending before the Court. 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.
Hope Manufacturing, Inc. and Steven Wood. In July, 2002 Hope Manufacturing and
Steven Wood commenced actions against certain defendants, including us and
certain of our officers, in the Ontario Superior Court of Justice claiming
compensatory damages, punitive damages and various forms of injunctive and
declaratory relief for breach of contract and various business torts. We believe
the claims against us are frivolous and completely without merit. We are not a
party to any agreement with the plaintiffs. Most of the requested relief relates
to restrictions on the use of patents and information allegedly owned by the
plaintiffs, and an accounting for the use of such items. We have not used any
patents or information owned by the plaintiffs. All of the patents and
information claimed to be owned by the plaintiffs are completely unrelated to
any product or technology we are currently developing or intend to develop.
Therefore, even if the court were to award some declaratory or injunctive
relief, we would not be affected. We are defending 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, 2002.
29
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 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 sales prices of our common stock
reported by The Nasdaq National Market for the calendar quarters beginning
January 1, 2001.
- -------------------------------------- -----------------------------------
Sales Prices
(actual transactions)
- -------------------------------------- --------------------- -------------
High Low
- -------------------------------------- --------------------- -------------
- -------------------------------------- --------------------- -------------
2001
- -------------------------------------- --------------------- -------------
First quarter $11.50 $4.25
- -------------------------------------- --------------------- -------------
Second quarter $11.60 $4.58
- -------------------------------------- --------------------- -------------
Third quarter $10.00 $2.91
- -------------------------------------- --------------------- -------------
Fourth quarter $7.76 $3.55
- -------------------------------------- --------------------- -------------
- -------------------------------------- --------------------- -------------
2002
- -------------------------------------- --------------------- -------------
First quarter $7.40 $3.86
- -------------------------------------- --------------------- -------------
Second quarter $5.24 $2.62
- -------------------------------------- --------------------- -------------
Third quarter $3.20 $0.85
- -------------------------------------- --------------------- -------------
Fourth quarter (through $1.55 $1.05
October 10, 2002)
- -------------------------------------- --------------------- -------------
The closing sales price for our common stock reported on October 10, 2002, was
$1.41.
At October 10, 2002, there were 634 holders of record of our common stock.
30
Existing Stock Compensation Plans
The following table sets forth information regarding our existing compensation
plans and individual compensation arrangements pursuant to which our equity
securities are authorized for issuance to employees or non-employees (such as
directors, consultants and advisors) in exchange for consideration in the form
of services:
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
(a) (b) (c)
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation
plans approved by
security holders
1998 Stock Option Plan
1,292,500 $5.12 0
2000 Stock Option Plan
1,924,500 $7.70 75,500
2002 Stock Option Plan
1,665,159 $8.73 2,334,841
--------- ----- ---------
Total
4,882,159* $8.68 2,410,341
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation
plans not approved by
security holders 0 0 0
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Total 4,882,159 $8.68 2,410,341
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
*Does not include 125,000 options granted to consultants in 2001 that were not
granted pursuant to a stock option plan.
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, 2001 until July 31, 2002, we did not offer or sell
common stock and other securities in transactions in reliance upon exemptions
from the registration requirements of the Securities Act of 1933.
31
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 on Form 10-K. Our financial statements as of
July 31, 2002 and for the years ended July 31, 2002 and 2001 have been audited
by Deloitte & Touche LLP. Our financial statements for the year ended July 31,
2000 were audited by WithumSmith+Brown.
In thousands, except per share data Year Ended July 31
------------------
2002 2001 2000 1999 1998 2002*
---- ---- ---- ---- ----- -----
As Restated**
Operating Results
Revenue $ -- $ 1,000 $ -- $ -- $ -- $ 1,000
Net Loss $(13,693) $ (27,097) $ (8,841) $ (6,240) $ (4,664) $(62,706)
Net Loss Available to
Common Stockholders $(14,414) $ (27,097) $ (8,841) $ (6,240) $ (4,664) $(63,328)
Cash Dividends per share $ -- $ -- $ -- $ -- $ -- $ --
Common Stockholders
Loss per Common Share:
Basic and diluted Net loss
per common share (.70) (1.44) (.58) (.47) (.46) --
Financial Positions:
Total Assets $ 28,161 $ 42,666 $ 10,341 $ 8,890 $ 5,456 --
Long-term Debt $ 663 $ 693 $ 772 $ 996 $ 1,324 --
Stockholder's Equity $ 12,863 $ 27,307 $ 8,415 $ 7,310 $ 2,642 --
*Cumulative from November 2, 1995 (Date of Inception) to July 31, 2002.
**See Note 17 to the Consolidated Financial Statements included in Item 8.
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.
32
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. In January of 2002, the
parties expanded the joint venture to include buccal morphine for the management
of pain and selected buccal morphine as the initial product for development
under Generex (Bermuda) Ltd. This expansion of the joint venture occurred after
we successfully completed a proof of concept clinical study of morphine delivery
using our proprietary buccal delivery technology.
33
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. In January of 2002, pursuant to the terms
of the agreement with EIS, EIS received a 6% stock dividend of Series A
Preferred Stock.
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.
We do not expect to receive any revenues from product sales in the current
fiscal year. We expect, however, to satisfy all of our cash needs during the
current year from capital raised through prior equity financing.
Restatement
Subsequent to the issuance of its financial statements for the year ended July
31, 2001, management determined that its Series A Preferred stock should be
reclassified from stockholders' equity, in accordance with Emerging Issues Task
Force Topic D-98, "Classification and Measurement of Redeemable Securities,"
because the redemption feature of the Series A Preferred stock is beyond the
control of the Company. This restatement did not affect net loss for the year
ended July 31, 2001, nor did it affect total assets. The Series A Preferred
stock should have been included outside the statement of stockholders' equity
from the date of its issuance in January 2001.
Results of Operations - - 2002 Compared with 2001
We had a net loss of $13,693,034 for the year ended July 31, 2002 (FY 2002)
compared to a loss of $27,097,210 in the year ended July 31, 2001 (FY 2001). The
net loss for FY 2002 excludes $720,900 in preferred stock dividend on preferred
shares. The decrease in our FY 2002 net loss resulted from:
o decreases in research and development expenses (to $6,618,820 from
$19,929,799) and
o decreases in general and administrative expenses (to $7,911,626 from
$12,507,740).
The decrease in our expenses was partially offset by a decrease in interest and
other income. Our interest and miscellaneous income (net of income expense) in
FY 2002 decreased to $784,852 from $1,355,329 in FY 2001 due to decreases in our
cash and short-term investments. We did not receive any revenues in FY 2002. In
FY 2001, we received $1,000,000 in revenue from our agreement with Lilly.
The principal reasons for the decrease in our research and development expense
from 2002 to 2001 resulted from 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 in
2001 (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.).
34
Our general and administrative expenses decreased due to reductions in various
categories of these expenses, including:
o a reduction of approximately $4,000,000 in financial services
expenses, principally due to a decrease in the number and value of
compensatory warrants and options issued; and
o a reduction of approximately $700,000 in the amount of consulting
fees paid.
Our expense reductions were partially offset by an increase in executive
compensation of approximately $900,000 and small increases in other expense
categories.
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 ($1,144,252 in FY 2002 and $5,100,361 in
FY 2001) were paid partially through the issuance of shares of common stock
and/or warrants and options to purchase common stock.
In addition, in FY 2002, the minority shareholder's share of the loss generated
by Generex (Bermuda), Ltd., was $52,560 as compared to a $2,985,000 minority
interest share of loss in FY 2001.
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 $19,929,799 from $3,568,300) and in general and
administrative expenses (to $12,507,740 from $5,475,656). Our interest and
miscellaneous income (net of interest expense) 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.
35
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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements which have been prepared in
conformity with accounting principles generally accepted in the United States.
It 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 date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
We consider certain accounting policies related to impairment of long-lived
assets, intangible assets and accrued liabilities to be critical to our business
operations and the understanding of our results of operations:
o Impairment of Long-Lived Assets. Management reviews for impairment whenever
events or changes in circumstances indicate that the carrying amount of
property and equipment may not be recoverable under the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". If it is determined that an impairment loss has occurred based upon
expected future cash flows, the loss is recognized on the Statement of
Operations.
o Intangible Assets. The Company has intangible assets related to patents.
The determination of the related estimated useful lives and whether or not
these assets are impaired involves significant judgments. In assessing the
recoverability of these intangible assets, the Company uses an estimate of
undiscounted operating income and related cash flow over the remaining
useful life, market conditions and other factors to determine the
recoverability of the asset. If these estimates or their related
assumptions change in the future, the Company may be required to record
impairment changes for these assets not previously recorded. o Estimating
accrued liabilities, specifically litigation accruals. Management's current
estimated ranges of liabilities related to pending litigation are based on
management's best estimate of future costs. While the final resolution of
the litigation could result in amounts different than current accruals, and
therefore have an impact on the Company's consolidated financial results in
a future reporting period, management believes the ultimate outcome will
not have a significant effect on the Company's consolidated results of
operations, financial position or cash flows.
Liquidity and Capital Resources
To date we have financed our development stage activities primarily through
private placements of common stock. In FY 2002, we granted stock options,
warrants and shares of common stock to consultants, advisors and employees with
a value of $430,887 for services rendered, all of which are included in general
and administrative expenses. In September 2001, we began a program to repurchase
up to $1 million of our common stock from the open market. Through July 31,
2002, we repurchased a total of 96,500 shares of common stock to be held in
treasury for $395,531, at an average price of $4.10 per share. Notwithstanding
the repurchase of 96,500 shares of common stock, our net loss resulted in a
decrease in stockholders' equity to $25,598,492 at July 31, 2002, versus
$39,322,440 at July 31, 2001.
At July 31, 2002, we had on hand cash and short term investments (primarily
notes of U.S. corporations) of approximately $21 million versus approximately
$37 million at July 31, 2001.
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.
36
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 bore interest at 8.5 percent per annum and were payable in full on
May 1, 2002. These notes were 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 owned by this related company. On June 3, 2002, the Company's Board of
Directors extended the maturity date of the loans to October 1, 2002. The other
terms and conditions of the loans and guaranty remained unchanged and in full
force and effect. As of July 31, 2002, the balance outstanding on these notes,
including accrued interest, was $1,114,084. Subsequent to July 31, 2002,
pursuant to a decision made as of August 30, 2002, these loans were satisfied by
application of pledged stock, at a value of $1.90 per share, which represented
the lowest closing price during the sixty days prior to August 30, 2002.
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.
Contractual Obligations
The following is a summary of our contractual obligations as of July 31, 2002:
Payments Due by Period
- ---------------------------------------------------------------------------------------------------------
Less than 1 After
Contractual Obligations Total Year 1-3 Years 4-5 Years 5 years
- ---------------------------------------------------------------------------------------------------------
Long-Term Debt $663,313 172,453 490,860 None None
- ---------------------------------------------------------------------------------------------------------
Operating Leases $ 50,195 22,352 27,033 810 None
- ---------------------------------------------------------------------------------------------------------
Total Contractual Cash $713,508 194,805 517,893 810 None
Obligations
- ---------------------------------------------------------------------------------------------------------
New Accounting Pronouncements
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. 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 2003, and management does
not expect the adoption of SFAS No. 142 will have a significant effect on the
Company's financial position and results of operations.
37
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires companies to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred, which is adjusted to its present value each period. In addition,
companies must capitalize a corresponding amount by increasing the carrying
amount of the related long-lived asset, which is depreciated over the useful
life of the related asset. The Company will adopt SFAS No. 143 on January 1,
2003, and does not expect that this statement will have a material impact on the
Company's consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of", and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" for the disposal of a
segment of a business. SFAS No. 144 establishes a single accounting model for
assets to be disposed of by sale whether previously held and used or newly
acquired. SFAS No. 144 retains the provisions of APB No. 30 for presentation of
discontinued operations in the income statement, but broadens the presentation
to include a component of an entity. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001 and the interim periods within. The Company's
management does not expect the adoption of SFAS No. 144 to have a significant
impact on our consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which supercedes Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring)". SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and requires that a
liability be recognized when it is incurred and should initially be measured and
recorded at fair value. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002 and the Company's
management does not expect the adoption to have an impact on the Company's
consolidated financial position or 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.
38
Item 8. Financial Statements and Supplementary Data
Supplementary Financial Information
- -----------------------------------
The following schedule sets forth certain unaudited financial data for the
preceding eight quarters ending July 31, 2002. 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, 2002:
- --------------------------
As Previously Reported
- ----------------------
Contract research revenue $ -- $ -- $ -- $ --
Operating loss $ (2,904,564) $ (3,781,525) $ (3,401,056) $ (3,927,708)
Net loss $ (2,583,235) $ (3,558,703) $ (3,239,150) $ (3,812,708)
Net loss available to common
Shareholders $ (2,583,235) $ (4,279,603) $ (3,239,150) $ (3,812,708)
Net loss per share $ (0.12) $ (0.21) $ (0.16) $ (.18)
Series A Preferred stock $ -- $ -- $ -- $ 12,735,900
Stockholders' Equity:
Series A Preferred stock 1 1 1 --
Special Voting Rights,
preferred stock 1 1 1 1
Common stock 20,686 20,697 20,697 20,697
Treasury stock (39,150) (39,150) (278,828) (395,531)
Additional paid in capital 88,804,354 89,621,415 89,823,743 77,220,231
Notes receivable - common
stock (319,861) (325,520) (331,091) (336,885)
Accumulated deficit (51,497,170) (55,776,773) (59,015,923) (63,327,869)
Accumulated other
comprehensive loss (329,486) (346,168) (307,970) (318,052)
------------- ------------- ------------- --------------
Total Stockholders' Equity $ 36,639,375 $ 33,154,503 $ 29,910,630 $ 12,862,592
============= ============= ============= ==============
As Restated
- -----------
Contract research revenue $ -- $ -- $ -- $ --
Operating loss $ (2,904,564) $ (3,781,525) $ (3,401,056) $ (3,927,708)
Net loss $ (2,583,235) $ (3,558,703) $ (3,239,150) $ (3,812,708)
Net loss available to common
Shareholders $ (2,583,235) $ (4,279,603) $ (3,239,150) $ (3,812,708)
Net loss per share $ (0.12) $ (0.21) $ (0.16) $ (.18)
Series A Preferred stock(1) $ 12,015,000 $ 12,735,900 $ 12,735,900 $ 12,735,900
Stockholders' Equity:
Special Voting Rights,
preferred stock $ 1 $ 1 $ 1 $ 1
Common stock 20,686 20,697 20,697 20,697
Treasury stock (39,150) (39,150) (278,828) (395,531)
Additional paid in capital 76,789,355 76,885,516 77,087,844 77,220,231
Notes receivable - common
stock (319,861) (325,520) (331,091) (336,885)
Accumulated deficit (51,497,170) (55,776,773) (59,015,923) (63,327,869)
Accumulated other
comprehensive loss (329,486) (346,168) (307,970) (318,052)
------------- ------------- ------------- --------------
Total Stockholders' Equity(1) $ 24,624,375 $ 20,418,603 $ 17,174,730 $ 12,862,592
============= ============= ============= ==============
Q1 Q2 Q3 Q4
------------- -------------- ------------- ------------
Fiscal Year July 31, 2001:
- --------------------------
As 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)
Series A Preferred stock $ -- $ -- $ -- $ --
Stockholders' Equity:
Series A Preferred stock -- 1 1 1
Special Voting Rights,
preferred stock 1 1 1 1
Common stock 18,769 19,185 19,294 20,681
Additional paid in capital 57,855,993 75,109,464 75,785,956 88,776,859
Notes receivable - common
stock (54,118) (55,949) (308,992) (314,300)
Accumulated deficit (22,960,932) (37,166,237) (39,880,334) (48,913,935)
Accumulated other
comprehensive loss (254,735) (214,075) (284,181) (246,867)
------------- -------------- ------------- ------------
Total Stockholders' Equity $ 34,604,978 $ 37,692,390 $ 35,331,745 $ 39,322,440
============= ============== ============= ============
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)
Series A Preferred stock(1) $ -- $ 12,015,000 $ 12,015,000 $ 12,015,000
Stockholders' Equity:
Special Voting Rights,
preferred stock 1 1 1 1
Common stock 18,769 19,185 19,294 20,681
Additional paid in capital 57,855,993 63,094,465 63,770,957 76,761,860
Notes receivable - common
stock (54,118) (55,949) (308,992) (314,300)
Accumulated deficit (22,960,932) (37,166,237) (39,880,334) (48,913,935)
Accumulated other
comprehensive loss (254,735) (214,075) (284,181) (246,867)
------------- -------------- ------------- ------------
Total Stockholders' Equity(1) $ 34,604,978 $ 25,677,390 $ 23,316,745 $ 27,307,440
============= ============== ============= ===========
(1) The Company's interim financial information for Q2 of fiscal year ended
July 31, 2001 through Q3 of fiscal year ended July 31, 2002, has been
restated to reflect a management's determination that its Series A
preferred stock should be reclassified from stockholders' equity to the
mezzanine section of the balance sheet. See Note 17 to audited financial
statements.
39
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, 2002 and 2001 (as restated) F-3
Consolidated Statements of Operations
For the Years Ended July 31, 2002, 2001 and 2000
and Cumulative From Inception to July 31, 2002 F-4
Consolidated Statements of Changes in Stockholders' Equity
For the Period November 2, 1995 (Date of Inception)
to July 31, 2002 (as restated) F-5-11
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2002, 2001 and 2000
and Cumulative From Inception to July 31, 2002 F-12
Notes to Consolidated Financial Statements F-13-34
Independent Auditors' Report
To the Board of Directors and Stockholders of
Generex Biotechnology Corporation
We have audited the accompanying consolidated balance sheets of Generex
Biotechnology Corporation and subsidiaries (a development stage company) as of
July 31, 2002 and 2001 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years then ended, and for
the period from November 2, 1995 (date of inception) to July 31, 2002. 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. The Company's financial statements as of and for the year ended July
31, 2000, and for the period from November 2, 1995 (date of inception) through
July 31, 2000 were audited by other auditors whose report, dated September 14,
2000, expressed an unqualified opinion on those statements. The financial
statements for the period November 2, 1995 (date of inception) through July 31,
2000 reflect total revenues and net loss of $-0- and $21,816,725, respectively,
of the related totals. The other auditors' report has been furnished to us, and
our opinion, insofar as it relates to the amounts included for such prior
period, is based solely on the report of such other auditors.
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 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 audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of the Company as at July 31, 2002 and 2001 and the results of its
operations and its cash flows for the years then ended, and for the period from
November 2, 1995 (date of inception) to July 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 17, the financial statements for the year ended July 31,
2001 have been restated.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Chartered Accountants
Toronto, Ontario
October 7, 2002
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
Generex Biotechnology Corporation:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows the year 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 of Generex Biotechnology Corporation and
Subsidiaries (a development stage company). 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 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows for
the year 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 of
Generex Biotechnology Corporation and Subsidiaries in conformity with accounting
principles generally accepted in the United States of America.
/s/ 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,
------------------------------------
2002 2001
---------------- --------------
As Restated
(see Note 17)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,131,463 $ 10,109,559
Short-term investments 12,862,757 26,892,729
Officers' loans receivable 1,114,084 1,023,743
Miscellaneous receivables 12,493 12,865
Other current assets 221,629 112,620
---------------- ---------------
Total Current Assets 22,342,426 38,151,516
Property and Equipment, Net 4,033,094 3,727,761
Patents, Net 830,142 434,307
Deposits 632,401 20,000
Due From Related Party 322,685 332,289
---------------- ---------------
TOTAL ASSETS $ 28,160,748 $ 42,665,873
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,898,943 $ 2,650,773
Current maturities of long-term debt 172,453 9,634
---------------- ---------------
Total Current Liabilities 2,071,396 2,660,407
Long-Term Debt, Less Current Maturities 490,860 683,026
Commitments and Contingencies (Note 7)
Series A Preferred stock, $.001 par value; authorized 1,000,000
shares, issued and outstanding 1,060 and 1,000 at July 31, 2002
and 2001, respectively 12,735,900 12,015,000
Stockholders' Equity:
Special Voting Rights Preferred stock, $.001 par value; authorized,
issued and outstanding 1,000 shares at July 31, 2002 and 2001 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued 20,697,326 and 20,681,526 shares at July 31, 2002
and 2001, respectively and outstanding 20,600,826 and
20,681,526 shares at July 31, 2002 and 2001, respectively 20,697 20,681
Treasury stock, at cost; 96,500 shares of common stock
at July 31, 2002 (395,531) --
Additional paid-in capital 77,220,231 76,761,860
Notes receivable - common stock (336,885) (314,300)
Deficit accumulated during the development stage (63,327,869) (48,913,935)
Accumulated other comprehensive loss (318,052) (246,867)
---------------- ---------------
Total Stockholders' Equity 12,862,592 27,307,440
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,160,748 $ 42,665,873
================ ===============
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
2002 2001 2000 July 31, 2002
---------------- ---------------- --------------- ---------------
Revenues $ -- $ 1,000,000 $ -- $ 1,000,000
Operating Expenses:
Research and development 6,618,820 19,929,799 3,568,300 33,586,519
Research and development - related party -- -- -- 220,218
General and administrative 7,911,626 12,507,740 5,475,656 34,791,292
General and administrative- related party -- -- -- 314,328
------------ ------------ ------------ ------------
Total Operating Expenses 14,530,446 32,437,539 9,043,956 68,912,357
------------ ------------ ------------ ------------
Operating Loss (14,530,446) (31,437,539) (9,043,956) (67,912,357)
Other Income (Expense):
Miscellaneous income 15,995 10,664 7,906 34,565
Interest income 833,167 1,417,847 272,808 2,579,012
Interest expense (64,310) (73,182) (77,805) (345,749)
------------ ------------ ------------ ------------
Net Loss Before Undernoted (13,745,594) (30,082,210) (8,841,047) (65,644,529)
Minority Interest Share of Loss 52,560 2,985,000 -- 3,037,560
------------ ------------ ------------ ------------
Net Loss (13,693,034) (27,097,210) (8,841,047) (62,606,969)
Preferred Stock Dividend 720,900 -- -- 720,900
------------ ------------ ------------ ------------
Net Loss Available to Common Stockholders $(14,413,934) $(27,097,210) $ (8,841,047) $(63,327,869)
============ ============ ============ ============
Basic and Diluted Net Loss Per Common
Share $ (.70) $ (1.44) $ (.58)
============ ============ ============
Weighted Average Number of Shares of
Common Stock Outstanding 20,660,079 18,769,077 15,189,781
============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-4
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2002
SVR
Preferred Common Treasury
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 - $ -
====== ======= =========== ========= ======== ==========
Deficit
Notes Accumulated Accumulated
Additional Receivable During the Other Total
Paid-In - Common Development Comprehensive Stockholders'
Capital Stock Stage Income (Loss) 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) - - (693,448) (4,017) (697,465)
------------ ---------- ------------ ------------- ------------
Balance, July 31, 1996 $ 2,708,501 $ ($693,448) ($4,017) $2,015,624
============ ========== ============ =============================
F-5
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2002
SVR
Preferred Common Treasury
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 - $ -
====== ======= =========== ========= ======== ==========
Deficit
Notes Accumulated Accumulated
Additional Receivable During the Other Total
Paid-In - Common Development Comprehensive Stockholders'
Capital Stock Stage Income (Loss) Equity
------------ ---------- ------------ ------------- ------------
Balance, August 1, 1996 $2,708,501 $ - ($693,448) ($4,017) $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) (1,379,024) 3,543 (1,375,481)
------------ ---------- ------------ ------------- ------------
Balance, July 31, 1997 $5,512,782 $ - ($2,072,472) ($474) $3,448,836
============ ========== ============ ============= ============
F-6
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2002
SVR
Preferred Common Treasury
Stock Stock Stock
----- ----- -----
Shares Amount Shares Amount Shares Amount
------ ------- ----------- --------- -------- ----------
Balance, August 1, 1997 - $ - 9,000,118 $9,000 - $ -
Issuance of warrants issued in exchange
for services rendered, October 1997, $.50 - - - - - -
Issuance of common stock in exchange
for services rendered, December 1997, $0.05 - - 234,000 234 - -
Issuance of SVR Preferred Stock in exchange
for services rendered, January 1998, $.001 1,000 1 - - - -
Shares issued pursuant to the January 9, 1998
reverse merger between GBC-Delaware, Inc.
and Generex Biotechnology Corporation - - 1,105,000 1,105 - -
Issuance of common stock for cash, March
1998, $2.50 - - 70,753 71 - -
Issuance of common stock for cash, April
1998, $2.50 - - 60,000 60 - -
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 - - 38,172 38 - -
Issuance of common stock for cash, May
1998, $2.50 - - 756,500 757 - -
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 - - 162,000 162 - -
Issuance of warrants issued in exchange
for services rendered, May 1998, $.60 - - - - - -
Issuance of common stock for cash, June
1998, $2.50 - - 286,000 286 - -
Exercise of warrants for cash, June
1998, $0.0667 - - 234,000 234 - -
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 - - 24,729 24 - -
Comprehensive Income (Loss):
Net loss
Other comprehensive income (loss)
Currency translation adjustment - - - - - -
Total Comprehensive Income (Loss)
------ ------- ----------- --------- -------- ----------
Balance, July 31, 1998 1,000 $1 11,971,272 $11,971 - $ -
====== ======= =========== ========= ======== ==========
Deficit
Notes Accumulated Accumulated
Additional Receivable During the Other Total
Paid-In - Common Development Comprehensive Stockholders'
Capital Stock Stage Income (Loss) Equity
------------ ---------- ------------ ------------- ------------
Balance, August 1, 1997 $ 5,512,782 $ - ($2,072,472) ($474) $3,448,836
Issuance of warrants issued in exchange
for services rendered, October 1997, $.50 234,000 - - - 234,000
Issuance of common stock in exchange
for services rendered, December 1997, $0.05 10,698 - - - 10,932
Issuance of SVR Preferred Stock in exchange
for services rendered, January 1998, $.001 99 - - - 100
Shares issued pursuant to the January 9, 1998
reverse merger between GBC-Delaware, Inc.
and Generex Biotechnology Corporation (1,105) - - - -
Issuance of common stock for cash, March
1998, $2.50 176,812 - - - 176,883
Issuance of common stock for cash, April
1998, $2.50 149,940 - - - 150,000
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 95,392 - - - 95,430
Issuance of common stock for cash, May
1998, $2.50 1,890,493 - - - 1,891,250
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 404,838 - - - 405,000
Issuance of warrants issued in exchange
for services rendered, May 1998, $.60 300,000 - - - 300,000
Issuance of common stock for cash, June
1998, $2.50 714,714 - - - 715,000
Exercise of warrants for cash, June
1998, $0.0667 15,374 - - - 15,608
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 61,799 - - - 61,823
Comprehensive Income (Loss):
Net loss - - (4,663,604) - (4,663,604)
Other comprehensive income (loss)
Currency translation adjustment - - - (198,959) (198,959)
------------ ------------
Total Comprehensive Income (Loss) - - (4,663,604) (198,959) (4,862,563)
------------ ---------- ------------ ------------- ------------
Balance, July 31, 1998 $9,565,836 $ - ($6,736,076) ($199,433) $2,642,299
============ ========== ============ ============= ============
F-7
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2002
SVR
Preferred Common Treasury
Stock Stock Stock
----- ----- -----
Shares Amount Shares Amount Shares Amount
------ ------ ---------- ------- ------ -------
Balance, August 1, 1998 1,000 $1.00 11,971,272 $11,971 - $ -
Issuance of common stock for cash, August
1998, $3.00 - - 100,000 100 - -
Issuance of common stock for cash, August
1998, $3.50 - - 19,482 19 - -
Redemption of common stock for cash,
September 1998, $7.75 - - (15,357) (15) - -
Issuance of common stock for cash,
September - October 1998, $3.00 - - 220,297 220 - -
Issuance of common stock for cash, August -
October 1998, $4.10 - - 210,818 211 - -
Issuance of common stock in exchange for
services rendered, August - October 1998,-$2.50 - - 21,439 21 - -
Issuance of common stock in exchange for
services rendered, August - October 1998,-$4.10 - - 18,065 18 - -
Issuance of Common Stock in exchange
for services rendered,
September 1998, 4.10 - - 180,000 180 - -
Issuance of warrants in exchange for
services rendered, October 1998, $.26 - - - - - -
Issuance of stock options in exchange for
services rendered, November 1998, $1.85 - - - - - -
Issuance of warrants in exchange for
services rendered, November 1998, $1.64 - - - - - -
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 - - 180,000 180 - -
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 - - 275,000 275 - -
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 - - 96,852 97 - -
Issuance of common stock in exchange
for services rendered, November 1998 -
January 1999, $4.10 - - 28,718 29 - -
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 - - 20,000 20 - -
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 - - 15,000 15 - -
Issuance of common stock in exchange for
services rendered, January 1999, $5.00 - - 392 - - -
Issuance of common stock for cash,
February 1999, $5.00 - - 6,000 6 - -
Issuance of common stock in exchange for
services rendered, February 1999, $6.00 - - 5,000 5 - -
Issuance of common stock for cash,
March 1999, $6.00 - - 11,000 11 - -
Issuance of common stock for cash,
April 1999, $5.50 - - 363,637 364 - -
Issuance of warrants in exchange for
services rendered, April 1999, $3.21 - - - - - -
Issuance of warrants in exchange for
services rendered, April 1999, $3.17 - - - - - -
Issuance of warrants in exchange for
services rendered, April 1999, $2.89 - - - - - -
Issuance of warrants in exchange for
services rendered, April 1999, $3.27 - - - - - -
Stock adjustment - - 714 1 - -
Issuance of common stock for cash,
May 1999, $5.50 - - 272,728 273 - -
Issuance of common stock in exchange for
services rendered, May - June 1999, $5.50 - - 60,874 61 - -
Exercise of warrants for cash, June 1999, $5.50 - - 388,375 389 - -
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 - - 94,776 95 - -
Exercise of warrants in exchange for services
rendered, June 1999, $5.00 - - 13,396 3 - -
Reduction of note receivable in exchange for
services rendered - - - - - -
Shares tendered in conjunction with warrant
exercise, June 1999, $7.8125 - - (323,920) (324) - -
Exercise of warrants for shares tendered,
June 1999, $5.00 - - 506,125 506 - -
Cost of warrants redeemed for cash - - - - - -
Cost related to warrant redemption, June 1999 - - - - - -
Costs related to issuance of common stock - - - - - -
Comprehensive Income (Loss):
Net Loss - - - - - -
Other comprehensive income (loss):
Currency translation adjustment - - - - - -
Total Comprehensive Income (Loss)
------ ------- ---------- --------- -------- ------
Balance, July 31, 1999 $1,000 $1 14,740,683 $14,741 $ -
====== ======= ========== ========= ======== ======
Deficit
Notes Accumulated Accumulated
Additional Receivable During the Other Total
Paid-In - Common Development Comprehensive Stockholders'
Capital Stock Stage Income (Loss) Equity
------------ ---------- ------------ ------------- ------------
Balance, August 1, 1998 $9,565,836 $ - ($6,736,076) ($199,433) $2,642,299
Issuance of common stock for cash, August
1998, $3.00 299,900 - - - 300,000
Issuance of common stock for cash, August
1998, $3.50 68,168 - - - 68,187
Redemption of common stock for cash,
September 1998, $7.75 (119,051) - - - (119,066)
Issuance of common stock for cash,
September - October 1998, $3.00 660,671 - - - 660,891
Issuance of common stock for cash, August -
October 1998, $4.10 864,142 - - - 864,353
Issuance of common stock in exchange for
services rendered, August - October 1998,-$2.50 53,577 - - - 53,598
Issuance of common stock in exchange for
services rendered, August - October 1998,-$4.10 74,048 - - - 74,066
Issuance of Common Stock in exchange
for services rendered,
September 1998, 4.10 737,820 - - - 738,000
Issuance of warrants in exchange for
services rendered, October 1998, $.26 2,064 - - - 2,064
Issuance of stock options in exchange for
services rendered, November 1998, $1.85 92,500 - - - 92,500
Issuance of warrants in exchange for
services rendered, November 1998, $1.64 246,000 - - - 246,000
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 629,820 - - - 630,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 1,099,725 - - - 1,100,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 397,003 - - - 397,100
Issuance of common stock in exchange
for services rendered, November 1998 -
January 1999, $4.10 117,715 - - - 117,744
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 99,980 - - - 100,000
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 82,485 - - - 82,500
Issuance of common stock in exchange for
services rendered, January 1999, $5.00 1,960 - - - 1,960
Issuance of common stock for cash,
February 1999, $5.00 29,994 - - - 30,000
Issuance of common stock in exchange for
services rendered, February 1999, $6.00 29,995 - - - 30,000
Issuance of common stock for cash,
March 1999, $6.00 65,989 - - - 66,000
Issuance of common stock for cash,
April 1999, $5.50 1,999,640 - - - 2,000,004
Issuance of warrants in exchange for
services rendered, April 1999, $3.21 160,500 - - - 160,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.17 317,000 - - - 317,000
Issuance of warrants in exchange for
services rendered, April 1999, $2.89 144,500 - - - 144,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.27 184,310 - - - 184,310
Stock adjustment (1) - - - -
Issuance of common stock for cash,
May 1999, $5.50 1,499,731 - - - 1,500,004
Issuance of common stock in exchange for
services rendered, May - June 1999, $5.50 334,746 - - - 334,807
Exercise of warrants for cash, June 1999, $5.50 1,941,484 - - - 1,941,873
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 473,787 (473,882) - - -
Exercise of warrants in exchange for services
rendered, June 1999, $5.00 66,967 - - - 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 (2,530,301) - - - (2,530,625)
Exercise of warrants for shares tendered,
June 1999, $5.00 2,530,119 - - - 2,530,625
Cost of warrants redeemed for cash (3,769) - - - (3,769)
Cost related to warrant redemption, June 1999 (135,431) - - - (135,431)
Costs related to issuance of common stock (1,179,895) - - - (1,179,895)
Comprehensive Income (Loss):
Net Loss - - (6,239,602) - (6,239,602)
Other comprehensive income (loss):
Currency translation adjustment - - - 1,393 1,393
------------ ------------- ------------
Total Comprehensive Income (Loss) (6,239,602) 1,393 (6,238,209)
------------ ---------- ------------ ------------- ------------
Balance, July 31, 1999 $20,903,728 ($434,903) ($12,975,678 ($198,040) $7,309,849
============ ========== ============ ============= ============
F-8
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2002
SVR
Preferred Common Treasury
Stock Stock Stock
----- ----- -----
Shares Amount Shares Amount Shares Amount
------ ------ ----------- ------- ------ ----------
Balance, August 1, 1999 1,000 $1 14,740,683 $14,741 - $ -
Adjustment for exercise of warrants recorded
June 1999, $5.00 - - (2,300) (2) - -
Issuance of common stock for cash,
September 1999, $6.00 - - 2,500 2 - -
Issuance of common stock for cash pursuant to
private placement, January 2000, $4.25 - - 470,590 471 - -
Financing costs associated with private placement,
January, 2000 - - - - - -
Issuance of stock in exchange for services
rendered, January 2000, $5.00 - - 8,100 8 - -
Granting of stock options for services
rendered, January 2000 - - - - - -
Granting of 150,000 stock warrants for services
rendered, January 2000 - - - - - -
Exercise of stock warrants for cash,
February 2000, $5.50 - - 2,000 2 - -
Exercise of stock warrants for cash,
March 2000, $5.50 - - 29,091 29 - -
Exercise of stock warrants for cash,
March 2000, $6.00 - - 2,000 2 - -
Exercise of stock warrants for cash,
March 2000, $7.50 - - 8,000 8 - -
Issuance of common stock for cash pursuant to
private placement, June 2000, $6.00 - - 1,041,669 1,042 - -
Financing costs associated with private
placement, June 2000 - - - - - -
Issuance of common stock for services,
June 2000, $6.00 - - 4,300 4 - -
Exercise of warrants for cash, July 2000, $6.00 - - 3,000 3 - -
Exercise of warrants for cash, July 2000, $7.50 - - 16,700 17 - -
Granting of stock options for services
rendered, July 2000 - - - - - -
Reduction of note receivable in exchange for
services rendered - - - - - -
Accrued interest on note receivable - - - - - -
Comprehensive Income (Loss):
Net Loss - - - - - -
Other comprehensive income (loss):
Currency translation adjustment - - - - - -
Total Comprehensive Income (Loss)
------ ------ ---------- ------- ------ ----------
Balance, July 31, 2000 1,000 $1 16,326,333 $16,327 - $ -
====== ====== ========== ======= ====== ==========
Deficit
Notes Accumulated Accumulated
Additional Receivable During the Other Total
Paid-In - Common Development Comprehensive Stockholders'
Capital Stock Stage Income (Loss) Equity
------------ ---------- ------------ ------------- ------------
Balance, August 1, 1999 $20,903,728 ($434,903) (12,975,678) ($198,040) $7,309,849
Adjustment for exercise of warrants recorded
June 1999, $5.00 2 - - - -
Issuance of common stock for cash,
September 1999, $6.00 14,998 - - - 15,000
Issuance of common stock for cash pursuant to
private placement, January 2000, $4.25 1,999,537 - - - 2,000,008
Financing costs associated with private placement,
January, 2000 (220,192) - - - (220,192)
Issuance of stock in exchange for services
rendered, January 2000, $5.00 40,492 - - - 40,500
Granting of stock options for services
rendered, January 2000 568,850 - - - 568,850
Granting of 150,000 stock warrants for services
rendered, January 2000 355,500 - - - 355,500
Exercise of stock warrants for cash,
February 2000, $5.50 10,998 - - - 11,000
Exercise of stock warrants for cash,
March 2000, $5.50 159,972 - - - 160,001
Exercise of stock warrants for cash,
March 2000, $6.00 11,998 - - - 12,000
Exercise of stock warrants for cash,
March 2000, $7.50 59,992 - - - 60,000
Issuance of common stock for cash pursuant to
private placement, June 2000, $6.00 6,248,972 - - - 6,250,014
Financing costs associated with private
placement, June 2000 (385,607) - - - (385,607)
Issuance of common stock for services,
June 2000, $6.00 25,796 - - - 25,800
Exercise of warrants for cash, July 2000, $6.00 17,997 - - - 18,000
Exercise of warrants for cash, July 2000, $7.50 125,233 - - - 125,250
Granting of stock options for services
rendered, July 2000 496,800 - - - 496,800
Reduction of note receivable in exchange for
services rendered - 384,903 - - 384,903
Accrued 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) (8,841,047) 32,514 (8,808,533)
------------ ---------- ------------ ------------- ------------
Balance, July 31, 2000 $30,435,066 ($54,118) ($21,816,725) ($165,526) $8,415,025
============ ========== ============ ============= ============
F-9
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2002
SVR
Preferred Common Treasury
Stock Stock Stock
----- ----- -----
Shares Amount Shares Amount Shares Amount
------ ------ ---------- -------- ------- ----------
Balance, August 1, 2000 1,000 $1 16,326,333 $16,327 - $ -
Exercise of stock warrants for cash,
August 2000, $6.00 - - 2,000 2 - -
Issuance of common stock for services rendered
August 2000 - - 35,000 35 - -
Issuance of stock warrants in exchange for equity line
agreement, August 2000 - - - - - -
Exercise of stock warrants for cash,
August 2000, $7.50 - - 30,300 30 - -
Exercise of stock warrants for cash,
August 2000, $8.6625 - - 30,000 30 - -
Cashless exercise of stock warrants,
August 2000 - - 8,600 9 - -
Exercise of stock warrants for cash,
August 2000, $10.00 - - 10,000 10 - -
Exercise of stock warrants for cash,
September 2000, $8.6625 - - 63,335 63 - -
Exercise of stock warrants for cash,
September 2000, $5.50 - - 16,182 16 - -
Exercise of stock warrants for cash,
September 2000, $6.00 - - 53,087 53 - -
Exercise of stock warrants for cash,
September 2000, $10.00 - - 9,584 10 - -
Exercise of stock warrants for cash,
September 2000, $7.50 - - 32,416 32 - -
Issuance of common stock for cash pursuant to
private placement, October 2000, $11.00 - - 2,151,093 2,151 - -
Exercise of stock warrants for cash, Oct. 2000, $6.00 - - 1,000 1 - -
Financing costs associated with private
placement, October 2000 - - - - -
Exercise of stock warrants for cash,
November - December 2000, $4.25 - - 23,528 23 - -
Cashless exercise of stock warrants, December 2000 - - 3,118 3 - -
Exercise of stock warrants for cash,
November - December 2000, $6.00 - - 22,913 23 - -
Exercise of stock warrants for cash,
December 2000, $7.00 - - 8,823 9 - -
Issuance of common stock as employee
compensation, December 2000 - - 8,650 8 - -
Exercise of stock warrants for cash,
January 2001, $6.00 - - 3,000 3 - -
Issuance of common stock for cash pursuant to
private placement, January 2001, $14.53 - - 344,116 344 - -
Financing costs associated with private
placement, January 2001 - - - - - -
Issuance of common stock pursuant to litigation
settlement, January 2001 - - 2,832 2 - -
Granting of stock options in exchange for services
rendered, January 2001 - - - - - -
Granting of stock options in exchange for services
rendered, February 2001 - - - - - -
Exercise of stock options for cash,
February 2001, $5.00 - - 50,000 50 - -
Exercise of stock warrants for cash,
March 2001, $6.00 - - 500 1 - -
Exercise of stock options in exchange for note
receivable, March 2001 - - 50,000 50 - -
Issuance of common stock in exchange for services
rendered, March 2001, $5.50 - - 8,000 8 - -
Granting of stock options in exchange for services
rendered, May 2001 - - - - - -
Exercise of stock options for cash, June 2001- $5.00 - - 75,000 75 - -
Exercise of stock options for cash, June 2001- $5.50 - - 12,500 12 - -
Exercise of warrants for cash, June 2001, $6.00 - - 4,000 4 - -
Exercise of stock options for cash, July 2001- $5.00 - - 7,500 8 - -
Exercise of stock options for cash, July 2001- $5.50 - - 2,500 3 - -
Exercise of warrants for cash, July 2001, $6.00 - - 2,000 2 - -
Issuance of common stock for cash pursuant to
private placement, July 2001, $9.25 - - 1,254,053 1,254 - -
Financing costs associated with private
placement, July 2001 - - - - - -
Shares issued in exchange for services rendered,
July 2001, $9.25 - - 23,784 24 - -
Shares issued for Anti-Dilution Provisions, July 2001 - - 5,779 6 - -
Issuance of stock warrants in exchange for services
rendered, July 2001 - - - - - -
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 as restated (see Note 17) 1,000 $1 20,681,526 $20,681 $ -
====== ====== ========== ======== ======== ==========
Deficit
Notes Accumulated Accumulated
Additional Receivable During the Other Total
Paid-In - Common Development Comprehensive Stockholders'
Capital Stock Stage Income (Loss) Equity
------------ ---------- ------------ ------------- ------------
Balance, August 1, 2000 $30,435,066 ($54,118) ($21,816,725) ($165,526) $8,415,025
Exercise of stock warrants for cash,
August 2000, $6.00 11,998 - - - 12,000
Issuance of common stock for services rendered
August 2000 411,215 - - - 411,250
Issuance of stock warrants in exchange for equity line
agreement, August 2000 3,406,196 - - - 3,406,196
Exercise of stock warrants for cash,
August 2000, $7.50 227,220 - - - 227,250
Exercise of stock warrants for cash,
August 2000, $8.6625 259,845 - - - 259,875
Cashless exercise of stock warrants,
August 2000 (9) - - - -
Exercise of stock warrants for cash,
August 2000, $10.00 99,990 - - - 100,000
Exercise of stock warrants for cash,
September 2000, $8.6625 548,576 - - - 548,639
Exercise of stock warrants for cash,
September 2000, $5.50 88,986 - - - 89,002
Exercise of stock warrants for cash,
September 2000, $6.00 318,470 - - - 318,523
Exercise of stock warrants for cash,
September 2000, $10.00 95,830 - - - 95,840
Exercise of stock warrants for cash,
September 2000, $7.50 243,088 - - - 243,120
Issuance of common stock for cash pursuant to
private placement, October 2000, $11.00 23,659,872 - - - 23,662,023
Exercise of stock warrants for cash, Oct. 2000, $6.00 5,999 - - - 6,000
Financing costs associated with private
placement, October 2000 (1,956,340) - - - (1,956,340)
Exercise of stock warrants for cash,
November - December 2000, $4.25 99,971 - - - 99,994
Cashless exercise of stock warrants, December 2000 (3) - - - -
Exercise of stock warrants for cash,
November - December 2000, $6.00 137,455 - - - 137,478
Exercise of stock warrants for cash,
December 2000, $7.00 61,752 - - - 61,761
Issuance of common stock as employee
compensation, December 2000 100,548 - - - 100,556
Exercise of stock warrants for cash,
January 2001, $6.00 17,997 - - - 18,000
Issuance of common stock for cash pursuant to
private placement, January 2001, $14.53 4,999,656 - - - 5,000,000
Financing costs associated with private
placement, January 2001 (200,000) - - - (200,000)
Issuance of common stock pursuant to litigation
settlement, January 2001 21,096 - - - 21,098
Granting of stock options in exchange for services
rendered, January 2001 745,000 - - - 745,000
Granting of stock options in exchange for services
rendered, February 2001 129,600 - - - 129,600
Exercise of stock options for cash,
February 2001, $5.00 249,950 - - - 250,000
Exercise of stock warrants for cash,
March 2001, $6.00 2,999 - - - 3,000
Exercise of stock options in exchange for note
receivable, March 2001 249,950 (250,000) - - -
Issuance of common stock in exchange for services
rendered, March 2001, $5.50 43,992 - - - 44,000
Granting of stock options in exchange for services
rendered, May 2001 592,300 - - - 592,300
Exercise of stock options for cash, June 2001- $5.00 374,925 - - - 375,000
Exercise of stock options for cash, June 2001- $5.50 68,738 - - - 68,750
Exercise of warrants for cash, June 2001, $6.00 23,996 - - - 24,000
Exercise of stock options for cash, July 2001- $5.00 37,492 - - - 37,500
Exercise of stock options for cash, July 2001- $5.50 13,747 - - - 13,750
Exercise of warrants for cash, July 2001, $6.00 11,998 - - - 12,000
Issuance of common stock for cash pursuant to
private placement, July 2001, $9.25 11,598,736 - - - 11,599,990
Financing costs associated with private
placement, July 2001 (768,599) - - - (768,599)
Shares issued in exchange for services rendered,
July 2001, $9.25 219,978 - - - 220,002
Shares issued for Anti-Dilution Provisions, July 2001 53,450 - - - 53,456
Issuance of stock warrants in exchange for services
rendered, July 2001 19,134 - - - 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) (27,097,210) (81,341) (27,178,551)
------------ -------------------------- ------------- ------------
Balance at July 31, 2001 as restated (see Note 17) $76,761,861 ($314,300) ($48,913,935) ($246,867) $27,307,440
============ ========== ============ ============= ============
F-10
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2002
SVR
Preferred Common Treasury
Stock Stock Stock
----- ----- -----
Shares Amount Shares Amount Shares Amount
------- -------------------- -------- -----------------------
Balance, August 1, 2001 as restated
(see Note 17) 1,000 $1 20,681,526 $20,681 - $ -
Exercise of stock options for cash,
August 2001, $5.50 - - 5,000 5 - -
Purchase of Treasury Stock for cash
October 2001, $3.915 - - - - (10,000) (39,150)
Issuance of stock options in exchange for
services rendered, December 2001 - - - - - -
Issuance of common stock as employee
compensation, January 2002 - - 10,800 11 -
Preferred stock dividend paid January 2002 - - - - - -
Purchase of Treasury Stock for cash
February 2002, $4.693 - - - - (31,400) (147,346)
Issuance of warrants in exchange for services
rendered, March 2002 - - - - - -
Purchase of Treasury Stock for cash
March 2002, $4.911 - - - - (7,700) (37,816)
Purchase of Treasury Stock for cash
April 2002, $4.025 - - - - (12,800) (54,516)
Issuance of stock options in exchange for
services rendered, June 2002 - - - - -
Purchase of Treasury Stock for cash
July 2002, $4.025 - - - - (34,600) (116,703)
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, 2002 1,000 $1 20,697,326 $20,697 (96,500) ($395,531)
====== ======= =========== ======== ======== =========
Deficit
Notes Accumulated Accumulated
Additional Receivable During the Other Total
Paid-In - Common Development Comprehensive Stockholders'
Capital Stock Stage Income (Loss) Equity
------------- -------------------------- ------------- ------------
Balance, August 1, 2001 as restated
(see Note 17) $76,761,860 ($314,300) ($48,913,935) ($246,867) $27,307,440
Exercise of stock options for cash,
August 2001, $5.50 27,495 - - - 27,500
Purchase of Treasury Stock for cash
October 2001, $3.915 - - - - (39,150)
Issuance of stock options in exchange for
services rendered, December 2001 25,000 - - - 25,000
Issuance of common stock as employee
compensation, January 2002 71,161 - - - 71,172
Preferred stock dividend paid January 2002 - - (720,900) - (720,900)
Purchase of Treasury Stock for cash
February 2002, $4.693 - - - - (147,346)
Issuance of warrants in exchange for services
rendered, March 2002 202,328 - - - 202,328
Purchase of Treasury Stock for cash
March 2002, $4.911 - - - - (37,816)
Purchase of Treasury Stock for cash
April 2002, $4.025 - - - - (54,516)
Issuance of stock options in exchange for
services rendered, June 2002 132,387 - - - 132,387
Purchase of Treasury Stock for cash
July 2002, $4.025 - - - - (116,703)
Accrued interest on note receivable - (22,585) - - (22,585)
Comprehensive Income (Loss):
Net Loss - - (13,693,034) - (13,693,034)
Other comprehensive income (loss):
Currency translation adjustment - - - (71,185) (71,185)
----------- ------------- -----------
Total Comprehensive Income (Loss) - - (13,693,034) (71,185) (13,764,219)
----------- -------------------------- ------------- ------------
Balance at July 31, 2002 $77,220,231 ($336,885) ($63,327,889) ($318,052) $12,862,592
=========== ========== ============ ============= ============
F-11
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended Cumulative From
July 31, November 2, 1995
------------------------------------------------- (Date of Inception)
2002 2001 2000 to July 31, 2002
-------------- ---------------- ------------- ----------------
Cash Flows Used in Operating Activities:
Net loss $ (13,693,034) $ (27,097,210) $ (8,841,047) $ (62,606,969)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 431,547 230,600 86,804 872,824
Minority interest share of loss (52,560) (2,985,000) -- (3,037,560)
Reduction of notes receivable - common stock
in exchange for services rendered -- -- 384,903 423,882
Write-off of deferred offering costs -- 3,406,196 -- 3,406,196
Common stock issued for services rendered 71,172 829,264 66,300 2,141,164
Stock options and warrants issued for services
rendered 359,715 1,486,036 1,421,150 4,947,775
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 30,620
Other current assets (108,610) (14,858) 21,219 (226,216)
Accounts payable and accrued expenses (740,319) 1,479,803 773,506 2,751,802
Other, net -- -- -- 110,317
---------------- -------------- --------------- ----------------
Net Cash Used in Operating Activities (13,732,089) (22,662,422) (5,916,684) (50,832,559)
Cash Flows From Investing Activities:
Purchase of property and equipment (779,519) (1,623,017) (381,163) (3,076,490)
Costs incurred for patents (440,698) (197,434) (269,499) (907,631)
Change in restricted cash -- -- -- (5,595)
Increase in officers' loans receivable (90,341) (1,023,743) -- (1,114,084)
Change in short-term investments - net 14,029,972 (22,926,466) (3,733,918) (12,862,757)
Change in deposits (614,464) 27,396 19,720 (584,949)
Change in notes receivable - common stock (22,585) (10,182) (4,118) (36,885)
Change in due from related parties -- -- 290,973 (2,255,197)
Other, net -- -- -- 89,683
---------------- -------------- --------------- ----------------
Net Cash (Used in) Provided By
Investing Activities 12,082,365 (25,753,446) (4,078,005) (20,753,905)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- -- 993,149
Repayment of long-term debt (9,363) (5,208) (480,738) (975,347)
Change in due to related parties -- -- -- 154,541
Proceeds from exercise of warrants -- 2,256,482 -- 2,256,482
Proceeds from exercise of stock options 27,500 745,000 -- 772,500
Proceeds from minority interest investment 52,560 2,985,000 -- 3,037,560
Proceeds from issuance of common stock, net -- 37,337,074 8,045,474 61,999,294
Proceeds from issuance of preferred stock -- 12,015,000 -- 12,015,000
Purchase and retirement of common stock -- -- -- (119,066)
Purchase of treasury stock (395,531) -- -- (395,531)
---------------- -------------- --------------- ----------------
Net Cash (Used In) Provided By
Financing Activities (324,834) 55,333,348 7,564,736 79,738,582
Effect of Exchange Rate Changes on Cash (3,538) (12,826) 1,657 (20,655)
---------------- -------------- --------------- ----------------
Net Increase (Decrease) in Cash and Cash
Equivalents (1,978,096) 6,904,654 (2,428,296) 8,131,463
Cash and Cash Equivalents, Beginning of Year 10,109,559 3,204,905 5,633,201 --
---------------- -------------- --------------- ----------------
Cash and Cash Equivalents, End of Year $ 8,131,463 $ 10,109,559 $ 3,204,905 $ 8,131,463
================ ============== =============== ================
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-12
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Business:
- -----------------------------------
Generex Biotechnology Corporation (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.
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, 2002 and 2001, short-term investments consisted of
short-term notes of U.S. corporations with original maturities of
between three to twelve months. These short-term notes are classified
as held to maturity and are valued at amortized cost. At July 31,
2002 and 2001, 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.
Impairment of Long-Lived Assets
The Company assesses the impairment of patents under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. A determination of impairment (if any) is made based on
estimates of future cash flows.
F-13
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
- ----------------------------------------------------------------
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 current income tax expense.
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.
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
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 13 for methodology for determining
net loss per share.
Comprehensive Loss
Other comprehensive income (loss), which includes only foreign
currency translation adjustments, is shown in the Statement of
Changes in Stockholders' Equity.
F-14
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
- ----------------------------------------------------------------
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 loss
component of stockholders' equity.
Financial Instruments
The carrying values of accounts payable, accrued expenses and
long-term debt approximate their fair values. It was not practical to
estimate the fair value of the officers' loans receivable due to the
related party nature of these items.
Effective August 1, 2000 the Company adopted the provisions of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires 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
Company's adoption of this statement did not have and continues not
to have a significant impact on the Company's financial position or
results of operations.
Reclassifications
Certain amounts reported in the 2001 and 2000 financial statements
have been reclassified to conform to the 2002 presentation.
Effects of Recent Accounting Pronouncements
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, as well as requiring use of the purchase accounting
method of recording transactions. SFAS No. 141 is applicable to
business combinations after July 1, 2001. The adoption of this
statement did not have a significant impact on the Company's
financial position or results of operations.
F-15
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. 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 measurement of
intangible assets acquired outside of a business combination whether
acquired individually or with a group of other assets. 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 2003, and management does not expect the adoption of SFAS No.
142 to have a significant effect on the Company's consolidated
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires companies to record
the fair value of a liability for an asset retirement obligation in
the period in which it is incurred, which is adjusted to its present
value each period. In addition, companies must capitalize a
corresponding amount by increasing the carrying amount of the related
long-lived asset, which is depreciated over the useful life of the
related asset. The Company will adopt SFAS No. 143 on August 1, 2003,
and does not expect that this statement will have a material impact
on the Company's consolidated financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business. SFAS No. 144 establishes a single accounting
model for assets to be disposed of by sale whether previously held
and used or newly acquired. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001 and the interim periods
within. Management does not expect the adoption of SFAS No. 144 to
have a significant impact on the Company's consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supercedes
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit and Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
requires that a liability be recognized when it is incurred and
should initially be measured and recorded at fair value. This
statement is effective for exit or disposal activities that are
initiated after December 31, 2002 and management does not expect the
adoption to have an impact on the Company's consolidated financial
position or results of operations.
F-16
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,
-----------------------------------
2002 2001
-------------- --------------
Land $ 285,407 $ 293,902
Buildings and Improvements 1,936,548 1,901,907
Furniture and Fixtures 76,956 68,229
Office Equipment 93,491 60,229
Lab Equipment 2,434,409 1,814,028
-------------- --------------
Total Property and Equipment 4,826,811 4,138,295
Less: Accumulated Depreciation 793,717 410,534
-------------- --------------
Property and Equipment, Net $ 4,033,094 $ 3,727,761
============== ==============
Depreciation expense amounted to $393,655, $209,114 and $85,781 for
the years ended 2002, 2001 and 2000, respectively.
Note 4 - Patents:
- -----------------
The costs and accumulated amortization of patents are summarized as
follows:
July 31,
---------------------------------
2002 2001
------------ ------------
Patents $ 890,061 $ 456,860
Less: Accumulated Amortization 59,919 22,553
------------ ------------
Patents, Net $ 830,142 $ 434,307
============ ============
Amortization expense amounted to $37,892, $21,486 and $1,023 for the
years ended July 31, 2002, 2001 and 2000, 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, 2002, the Company has net operating loss carryforwards in
Generex Biotechnology Corporation of approximately $27,846,057, which
expire in 2013 through 2022, and in Generex Pharmaceuticals Inc. of
approximately $12,776,626, which expire in 2005 through 2009. These
loss carryforwards are subject to limitation in future years should
certain ownership changes occur.
For the years ended July 31, 2002, 2001 and 2000, 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-17
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Income Taxes (Continued):
- ----------------------------------
Deferred income taxes consist of the following:
July 31,
-------------------------------------
2002 2001
--------------- ---------------
Deferred Tax Assets:
Net operating loss carryforwards $ 16,887,905 $ 12,513,777
Other timing differences 2,415,561 295,314
--------------- --------------
Total deferred tax assets 19,303,466 12,809,901
Valuation allowance (19,303,466) (12,809,091)
--------------- --------------
Net deferred income taxes $ -- $ --
=============== ==============
Note 6 - Accounts Payable and Accrued Expense:
- ----------------------------------------------
Accounts payable and accrued expenses consist of the following:
July 31,
-----------------------------------
2002 2001
--------------- ---------------
Accounts Payable $ 778,184 $ 896,061
Clinical -- 147,699
Accrued Legal 460,840 612,013
Executive Compensation 584,919 --
Financial Services 75,000 995,000
-------------- --------------
Total $ 1,898,943 $ 2,650,773
============== ==============
Note 7- Commitments and Contingent Liabilities:
- -----------------------------------------------
Consulting Services
The Company's Consulting Agreement with its Vice President of
Research and Development (the V.P.) 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 11 for description
of Special Voting Rights Preferred Stock.
F-18
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7- Commitments and Contingent Liabilities (Continued):
- -----------------------------------------------------------
Leases
The Company has entered into various operating lease agreements for
the use of vehicles and office equipment.
Aggregate minimum annual lease commitments of the Company under
non-cancelable operating leases as of July 31, 2002 are as follows:
Year Amount
---- ------
2003 $ 22,352
2004 14,289
2005 8,098
2006 4,646
2007 810
Thereafter --
-----------
Total Minimum Lease Payments $ 50,195
===========
Lease expense amounted to $13,766, $20,753 and $20,175 for the years
ended July 31, 2002, 2001 and 2000, 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.
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 under current lease agreements to be received in
years ending after July 31, 2002:
Year Amount
---- ------
2003 $ 32,955
2004 33,245
2005 33,535
2006 9,610
Thereafter --
------------
Total $ 109,345
============
F-19
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7- Commitments and Contingent Liabilities (Continued):
- -----------------------------------------------------------
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. These milestone payments are based on exceeding
certain specified levels of product purchases. If the milestone
obligations are not met after a five-year period, the Company may
elect to pay Valois an annual payment of $50,000 until the milestone
obligation is met in order to maintain exclusive rights under the
agreement. 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. There were no milestone payments required by the
agreement in the years ended July 31, 2002 and 2001.
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 units, and thereafter,
shall continue until terminated by either party by giving twelve
months written notice.
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 during
the fiscal year ended July 31, 2001, which was included in revenues
as all necessary requirements have been satisfied.
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
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.
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. On November 7, 2001, the arbitration
panel issued an award again requiring the Company to issue to Sands a
warrant to purchase 1,530,020 shares of the Company's common stock
purportedly pursuant to and in accordance with the terms of the
October 1997 letter agreement. Thereafter, Sands submitted a motion
to the New York Supreme Court to modify and confirm the arbitration
panel's award while the Company filed a motion with the court to
vacate the arbitration award. On February 25, 2002, the New York
Supreme Court vacated the arbitration panel's award. The Supreme
Court concluded that the arbitration panel had "disregarded the plain
meaning" of the directive given by the Appellate Division in the
Appellate Division's January 23, 2001 decision that remanded the
matter of the warrant for reconsideration by the panel. The Supreme
Court found that the arbitration panel's award "lacks a rational
basis". The Supreme Court also remanded the matter to the New York
Stock Exchange on the issue of whether the arbitration panel should
be disqualified. Sands has appealed the February 25, 2002 order of
the Supreme Court to the Appellate Division. The Company filed a
cross-appeal on issues relating to the disqualification of the
arbitration panel. At the present time, the Company is not able to
predict the ultimate outcome of this legal proceeding or to estimate
a range of possible loss from this legal proceeding. Therefore, no
provision has been recorded in the accompanying financial statements.
F-21
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 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. The plaintiffs
brought a cross motion to amend the statement of claim to substitute
Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a corporation
of which 50 percent of the shares are owned by the former business
associate and the remaining 50 percent are owned by the Company.
Consequently, the shareholders of CBI are in a deadlock. The court
granted the Company's motion to dismiss the action of CTI and denied
the plaintiff's cross motion without prejudice to the former business
associate to seek leave to bring a derivative action in the name of
or on behalf of CBI. The former business associate subsequently filed
an application with the Ontario Superior Court of Justice for an
order granting him leave to file an action in the name of and on
behalf of CBI against the VP and the Company. The Company has opposed
the application which is now pending before the Court. The Company
intends to continue its vigorous defense of this legal proceeding.
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.
In February 1997, an individual alleging to be 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 appeal is scheduled to commence in November 2002. 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 is not material to the consolidated
financial position of the Company.
F-22
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 July 2002 an individual and his related corporation commenced
actions against certain defendants, including the Company and certain
officers of the Company, in the Ontario Superior Court of Justice,
claiming compensatory damages, punitive damages and various forms of
injunctive and declaratory relief for breach of contract and various
business torts. Management believes the claims against the Company
and the officers are frivolous and completely without merit. Neither
the Company nor its officers are a party to any agreement with the
plaintiffs. Most of the requested relief relates to restrictions on
the use of patents and information allegedly owned by the plaintiffs,
and an accounting for the use of such items. Neither the Company nor
its officers have used any patents or information owned by the
plaintiffs. All of the patents and information claimed to be owned by
the plaintiffs are completely unrelated to any product or technology
the Company is currently developing or intends to develop. Therefore,
even if the court were to award some declaratory or injunctive
relief, neither the Company nor its officers would be affected.
Management is defending 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.
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.
Note 8 - Related Party Transactions:
- ------------------------------------
The amount due from a related party at July 31, exclusive of the
officers' loans receivable, is as follows:
EBI, Inc.
--------
Beginning Balance, August 1, 2000 $343,773
Effect of foreign currency translation adjustments (11,484)
--------
Ending Balance, July 31, 2001 332,289
Effect of foreign currency translation adjustments (9,604)
--------
Ending Balance, July 31, 2002 $322,685
========
This amount, which is due from EBI, Inc., is non-interest bearing,
unsecured and has no fixed terms of repayment. EBI, Inc is a
shareholder of the Company and is owned in part by the Company's
Chairman of the Board.
F-23
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions (Continued):
- ------------------------------------------------
The Company estimates the following additional amounts would have
been recorded if such transaction was consummated under arms-length
agreements:
For the Years Ended July 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Interest Income $ 31,250 $32,209 $60,962
Interest Expense $ -- $ -- $14,938
The interest income/expense amounts were computed at estimated
prevailing rates based on the average receivable/payable balance
outstanding during the periods reflected.
For the years ended July 31, 2002 and 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 $1,075,847 and
$672,477 for the years ended July 31, 2002 and 2001, respectively.
For the year ended 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
for the year ended July 31, 2000.
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 were originally payable in full on May 1, 2002.
The notes have been extended until October 1, 2002, at terms
comparable to the original notes. 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, 2002, the balance outstanding on
these notes, including accrued interest, was $1,114,084. (See Note 18
for settlement of amounts outstanding).
F-24
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Long-Term Debt:
- ------------------------
Long-term debt consists of the following:
July 31,
----------------------------
2002 2001
------------ ------------
Mortgage payable - interest at 9.7 percent per annum, monthly
payments of principal and interest of $4,453, final payment due May
25, 2005, secured by first mortgage over real property located at 17
Carlaw Avenue and 33 Harbour Square, Toronto, Canada $ 497,281 $ 518,095
Mortgage payable - interest at 10 percent per annum, monthly payments
of principal and interest of $1,662, final payment due November 1,
2002, secured by real property located at 11 Carlaw Avenue, Toronto,
Canada 166,032 174,565
------------ ------------
Total Debt 663,313 692,660
Less Current Maturities 172,453 9,634
------------ ------------
Long-Term Debt, Less Current Maturities $ 490,860 $ 683,026
============ ============
Aggregate maturities of long-term debt of the Company due within the
next five years ending July 31, are as follows:
Year Amount
---- ------
2003 $ 172,453
2004 7,058
2005 483,802
Thereafter --
------------
Total $ 663,313
============
In July 2002, Generex Pharmaceuticals secured a line of credit with
the Bank of Nova Scotia with an available credit line of $762,000, at
an interest rate of 5.8 percent per annum, for the purpose of
acquiring additional property for investment purposes. The terms of
the line of credit are such that the loan is to be fully drawn down
by August 15, 2002, and fully repaid within three years, in 35 equal
monthly principal installments of $4,233 plus accrued interest, with
the final balance due in the 36th month. The credit line, when
utilized, is to be secured by an assigned collateral interest in the
property being acquired, a guarantee by the Company and restricted
funds in the amount of $158,750 on deposit with the Bank of Nova
Scotia.
F-25
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Series A Preferred Stock
- ----------------------------------
During 2001 the Company issued 1,000 shares of Series A Preferred
stock (Series A) with a par value of $.001 per share. 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. Any
Series A shares outstanding on January 16, 2007 are to be redeemed
for cash or shares of common stock.
On January 15, 2002, the Company paid a 6 percent stock dividend on
the Company's Series A Preferred stock. The dividend was paid in
shares of Series A Preferred stock, and resulted in a charge to
accumulated deficit of $720,900, which was calculated based upon the
original issue price of the preferred shares.
Note 11 - Stockholders' Equity:
- -------------------------------
Warrants
As of July 31, 2002, 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 21, 2003
568,647 $12.15 August 12, 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
328,878 $12.99 September 29, 2005
215,109 $13.20 September 29, 2005
75,000 $25.15 January 16, 2006
313,515 $10.18 July 6, 2006
74,000 $12.99 March 18, 2007
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, was due July 31, 2002. On
July 31, 2002, the uncollected balance on this note, including
accrued interest was $61,867 and a new promissory note was signed.
Under the terms of the new note, the principal of $61,867, together
with accrued interest at 7 percent is due July 31, 2003. 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
was originally due on March 15, 2002, when a new promissory note was
signed, effectively extending the due date to March 15, 2003. As of
July 31, 2002 the outstanding balance on this note, including accrued
interest at 7 percent was $275,018.
Preferred Stock
The Company has authorized 1,000,000 shares with a par value of
one-tenth of a cent ($.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.
F-26
Note 11 - Stockholders' Equity (Continued):
- -------------------------------------------
Special Voting Rights Preferred Stock
In 1997, the Company 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.
Treasury Stock
In September 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. During the fiscal year ended July 31, 2002, the
Company purchased 96,500 shares of common stock to be held in
treasury at a cost of $395,531.
F-27
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - 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 1998, 2000 and 2001 Plans (the Plans) are administered by the
Compensation Committee (the Committee). 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 is also 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 hereunder 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.
F-28
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stock Based Compensation (Continued):
- -----------------------------------------------
Stock Option Plans (continued)
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, 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 6.36
Granted 780,159 5.42
Canceled 80,000 5.65
Exercised 5,000 5.50
---------
Outstanding - July 31, 2002 5,007,159 $6.22
=========
The following table summarizes information on stock options
outstanding at July 31, 2002:
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, 2002 (Years) Price July 31, 2002 Price
-------------- ---------------- -------------- ----------- ------------- ---------
$2.19 150,000 5.00 $ 2.19 150,000 $ 2.19
$5.00-$5.50 2,602,500 3.37 $ 5.10 2,311,000 $ 5.09
$6.54-$8.70 2,154,659 3.01 $ 7.67 2,154,659 $ 7.67
$10.21 100,000 3.50 $10.21 70,000 $10.21
--------- ---------
5,007,159 4,685,659
========= =========
Options exercisable at July 31 are as follows:
2000 1,162,500
2001 3,182,000
2002 4,685,659
During the years ended July 31, 2002, 2001 and 2000, no amount was
charged to compensation expense with respect to options granted to
employees and directors of the Company.
F-29
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stock Based Compensation (Continued):
- -----------------------------------------------
Stock Option Plans (continued)
Had compensation cost for the Company's options granted to employees
been determined consistent with SFAS 123, the Company's net loss
available to common stockholders and loss per share would be affected
as follows:
For the Years Ended July 31,
--------------------------------------
2002 2001 2000
----------- ----------- -----------
Net Loss Available to Common Stockholders:
As reported $14,413,934 $27,097,210 $ 8,841,047
=========== =========== ===========
Pro forma $17,191,334 $31,755,510 $17,230,637
=========== =========== ===========
Loss Per Share:
As reported $ (.70) $ (1.44) $ (.58)
=========== =========== ==========
Pro forma $ (.83) $ (1.69) $ (1.13)
=========== =========== ==========
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, 2002 1.74% 4.81 .9641 --
July 31, 2001 4.66% 4.25 .9332 --
July 31, 2000 4.85% 4.98 .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, 2002, 2001 and 2000 was
$4.33, $4.12 and $3.22 per share, respectively.
Note 13 - Net Loss Per Share:
- -----------------------------
Basic EPS and Diluted EPS for the years ended July 31, 2002, 2001 and
2000 have been computed by dividing the net loss available to common
stockholders for each respective period by the weighted average
shares outstanding during that period. All outstanding warrants and
options, representing approximately 8,771,934 incremental shares,
have been excluded from the computation of Diluted EPS as they are
antidilutive due to the losses generated in each year.
F-30
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Supplemental Disclosure of Cash Flow Information:
- -----------------------------------------------------------
For the Years Ended July 31,
-------------------------------------------
2002 2001 2000
---------- ---------- ----------
Cash paid during the year for:
Interest $ 64,310 $77,230 $ 73,687
Income taxes $ -- $ -- $ --
Disclosure of non-cash investing and financing activities:
Year Ended July 31, 2002
------------------------
Issuance of Series A Preferred stock as preferred stock dividend $ 720,900
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
Note 15 - 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 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.
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.
F-31
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Segment Information (Continued):
- ------------------------------------------
The regions in 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
------------ ------------
2002
----
General Corporate $ 22,575,641 $ 6,252,134
Canada 5,585,107 8,248,622
United States -- --
Bermuda -- 29,690
------------ ------------
Total $ 28,160,748 $ 14,530,446
============ ============
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
============ ============
F-32
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 agreed to 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. In
January 2002, the parties expanded the joint venture agreement to
include buccal morphine for the management of pain. The parties will
conduct the joint venture through Generex (Bermuda), Ltd. (Generex
Bermuda), 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 Notes 10 and
17) to form Generex Bermuda. The Company's interest in this company
consists of 6,000 shares of Generex Bermuda common stock and 3,612
shares of convertible preferred stock, representing an 80.1% equity
ownership interest in Generex Bermuda. At the same time, EIS remitted
$2,985,000 to purchase 2,388 shares of Generex Bermuda convertible
preferred stock, representing a 19.9% equity ownership interest in
Generex Bermuda. The Series A preferred stock has an exchange feature
which allows EIS to acquire an additional 30.1% equity ownership
interest in Generex Bermuda. As of July 31, 2002 and 2001, the
minority interest has been reduced to $-0- due to their share of
Generex Bermuda's net loss.
Generex Bermuda was 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 paid a nonrefundable license fee of
$15,000,000 to Elan in consideration for being granted rights to use
the Elan drug delivery technologies during the year ended July 31,
2001. 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. During the year ended July 31, 2002, Generex Bermuda
continued to incur research and development and operational expenses
in conjunction with the joint venture's operations.
Note 17 - Restatement:
- ----------------------
Subsequent to the issuance of its financial statements for the year
ended July 31, 2001, management determined that its Series A
Preferred stock should be reclassified from stockholders' equity, in
accordance with Emerging Issues Task Force Topic D-98,
"Classification and Measurement of Redeemable Securities," because
the redemption feature of the Series A Preferred stock is beyond the
control of the Company. This restatement did not affect net loss for
the year ended July 31, 2001, nor did it affect total assets. The
Series A Preferred stock should have been included outside the
statement of stockholders' equity from the date of its issuance in
January 2001.
F-33
The reclassification as of July 31, 2001, had the following effects:
As Previously As
Reported Restated
------------- ------------
Series A Preferred stock $ -- $ 12,015,000
Stockholders' Equity:
Series A Preferred stock 1 --
Special Voting Rights preferred stock 1 1
Common stock 20,681 20,681
Additional paid in capital 88,776,859 76,761,860
Notes receivable - common stock (314,300) (314,300)
Accumulated deficit (48,913,935) (48,913,935)
Accumulated other comprehensive loss (246,867) (246,867)
------------- ------------
Total Stockholders' Equity $ 39,322,440 $ 27,307,440
============= ============
Note 18 - Subsequent Events:
- ----------------------------
On August 7, 2002, the Company purchased additional real estate
property for investment purposes. The total purchase price paid was
approximately $1,525,000 US and the property is currently being
leased to third parties.
Subsequent to the year-end, Promissory Notes receivable from the
officers of the Company were redeemed pursuant to the Stock Pledge
Agreement with the officers and a guaranteeing party. The outstanding
balance of $1,121,939 was repaid with 592,716 shares of common stock,
as determined by the Compensation Committee. These shares effectively
became treasury stock.
Included in Deposits is $100,000 paid to an unrelated company for the
right to exclusive negotiations for the formation of a future
business relationship. An additional payment of $50,000 was made
subsequent to year-end. While the exclusivity period has subsequently
expired, the negotiations are still ongoing and the structure of any
future relationship is still undetermined. The deposit is
non-refundable and the exact future benefit of this deposit cannot be
estimated at this time.
F-34
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 with the Commission on 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 with the Commission on
July 12, 1999 ("1999 S-1") is incorporated herein by reference.
4.1.1 Form of common stock certificate filed as Exhibit 4.1 to our 1999 S-1
is incorporated herein by reference.
4.1.2 Certificate of Designations, Preferences and Rights of Series A
Preferred Stock filed as Exhibit 4.4 to our Report on Form 8-K filed
with the Commission on January 23, 2001 ("January 2001 8-K") 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 for the
fiscal year ended July 31, 2000 filed with the Commission on October
30, 2000 is incorporated herein by reference.
4.2.3 2001 Stock Option Plan filed as Exhibit 4.2.3 to our Form 10-K for the
fiscal year ended July 31, 2001 filed with the Commission on October
29, 2001 ("2001 10-K").
4.3 Form of Warrant issued to Ladenburg Thalmann & Co., Inc. dated July 6,
2001, filed as Exhibit 4.15 to our Registration Statement on Form S-3
(File No. 333-67118) filed with the Commission on August 8, 2001 is
incorporated herein by reference.
4.4.1 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 Exhibit 1 to our Report on Form 8-K dated
July 6, 2001 and filed with the Commission on July 17, 2001 ("July 2001
8-K") is incorporated herein by reference.
40
4.4.2 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 Exhibit 2 to our July 2001 8-K is
incorporated herein by reference.
4.4.3 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 Exhibit 3 to our
July 2001 8-K is incorporated herein by reference.
4.5.1 Securities Purchase Agreement entered into with Capital Ventures
International, dated July 3, 2001, filed as Exhibit 4 to our July 2001
8-K is incorporated herein by reference.
4.5.2 Registration Rights Agreement entered into with Capital Ventures
International, dated July 3, 2001, filed as Exhibit 5 to our July 2001
8-K is incorporated herein by reference.
4.5.3 Warrant granted to Capital Ventures International, dated July 3, 2001,
filed as Exhibit 6 to our July 2001 8-K is incorporated herein by
reference.
4.6.1 Form of Securities Purchase Agreement entered into with Elliott
International, L.P. and Elliott Associates, L.P., dated July 3, 2001,
filed as Exhibit 7 to our July 2001 8-K is incorporated herein by
reference.
4.6.2 Form of Registration Rights Agreement entered into with Elliott
International, L.P. and Elliott Associates, L.P., dated July 3, 2001,
filed as Exhibit 8 to our July 2001 8-K is incorporated herein by
reference.
4.6.3 Warrant issued to Elliott International, L.P. and Elliott Associates,
L.P., dated July 5, 2001, filed as Exhibit 9 to our July 2001 8-K is
incorporated herein by reference.
4.7.1 Securities Purchase Agreement between Generex Biotechnology
Corporation, Elan International Services, Ltd. and Elan Corporation,
plc., dated January 16, 2001, filed as Exhibit 4.1 to our Report on
Form 8-K/A dated January 16, 2001 filed with the Commission on February
1, 2001 is incorporated herein by reference.
4.7.2 Registration Rights Agreement between Generex Biotechnology Corporation
and Elan International Services, Ltd. dated January 16, 2001 filed as
Exhibit 4.2 to our January 2001 8-K is incorporated herein by
reference.
41
4.7.3 Form of Warrant issued to Elan International Services, Ltd. filed as
Exhibit 4.3 to our January 2001 8-K is incorporated herein by
reference.
4.8.1 Form of Securities Purchase Agreement entered into with certain parties
to October 2000 Private Placement filed as Exhibit 2 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.
4.8.2 Form of Registration Rights Agreement entered into with certain parties
to October 2000 Private Placement filed as Exhibit 3 to our October
2000 8-K is incorporated herein by reference.
4.8.3 Form of Warrant issued to certain parties to October 2000 Private
Placement filed as Exhibit 4 to our October 2000 8-K is incorporated
herein by reference.
4.9 Securities Purchase Agreement entered into with Smallcap World Fund,
Inc. dated September 29, 2000 filed as Exhibit 1 to our October 2000
8-K is incorporated herein by reference.
4.10 Form of Warrant (GCR Series) held by Robert P. Carter, Harvey Kaye,
Fittube, Inc., Edward Maskaly and Gulfstream Capital Group, L.C. filed
as Exhibit 4.4.2 to our Registration Statement on Form 10 filed with
the Commission December 14, 1998, as amended February 24, 1999 ("Form
10"), is incorporated herein by reference.
4.11 Letter Agreement and Warrant with M. H. Meyerson & Co., Inc. dated
November 17, 1998 filed as Exhibit 4.4.4 to our Form 10 is incorporated
herein by reference.
4.12 Option Agreement with Wolfe Axelrod Weinberger LLC dated January 3,
2000, filed as Exhibit 4.5 to our Quarterly Report on Form 10-Q for the
quarter ended January 31, 2000 filed with the Commission on March 14,
2000 is incorporated herein by reference.
10.1.1 Memorandum of Agreement dated January 7, 1998 between Generex
Pharmaceuticals, Inc., GHI Inc., Generex Biotechnology Corporation, Dr.
Pankaj Modi and Galaxy Technology, Canada and Consulting Agreement
between Generex Pharmaceuticals and Pankaj Modi dated October 1, 1996
filed as Exhibit 10.1.1 to our Form 10 is incorporated herein by
reference.
10.1.2 Assignment and Assumption Agreement between Generex Pharmaceuticals and
Pankaj Modi dated October 1, 1996 filed as Exhibit 10.1.2 to our
Registration Statement on Form 10/A filed with the Commission on
February 24, 1999 is incorporated herein by reference
10.1.3 Supplemental Agreement dated December 31, 2000 between Generex
Pharmaceuticals, Inc., Generex Biotechnology Corporation and Dr. Pankaj
Modi, filed as Exhibit 10.1.4 to our 2001 10-K.
42
10.2.1 Development and License Agreement dated September 5, 2000 between
Generex Biotechnology Corporation and Eli Lilly and Company filed as
Exhibit 10.1 to our Report on Form 8-K/A dated September 5, 2000 and
filed with the Commission on January 24, 2001 is incorporated herein by
reference.
10.3.1 Amended and Restated Subscription, Joint Development and Operating
Agreement dated January 15, 2002, between Elan Corporation, plc, Elan
International Services, Ltd. and Generex Biotechnology Corporation and
Generex (Bermuda), Ltd. filed as Exhibit 10.1 to our Report on Form 8-K
dated January 16, 2002 and filed with the Commission on May 3, 2002
(May 2002 8-K) is incorporated herein by reference.
10.3.2 Amended and Restated License Agreement dated January 15, 2002, between
Elan Corporation, plc and Generex (Bermuda), Ltd. filed as Exhibit 10.2
to May 2002 8-K is incorporated herein by reference.
10.3.3 Amended and Restated License Agreement dated January 15, 2002, between
Generex Biotechnology Corporation and Generex (Bermuda), Ltd. filed as
Exhibit 10.3 to our 2002 8-K is incorporated herein by reference.
21 Subsidiaries of the Registrant.*
23.1 Consent of Deloitte & Touche LLP, independent auditors.*
23.2 Consent of WithumSmith+Brown, independent auditors.*
24 Powers of Attorney, filed as Exhibit 24 to our 2001 10-K.
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
- ----------------
* 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 3, 2002, requesting
confidential treatment for the Amended and Restated Subscription, Joint
Development and Operating Agreement dated January 15, 2002, between Elan
Corporation, plc, Elan International Services, Ltd. and Generex Biotechnology
Corporation and Generex (Bermuda), Ltd.; the Amended and Restated License
Agreement dated January 15, 2002, between Elan Corporation, plc and Generex
(Bermuda), Ltd.; and the Amended and Restated License Agreement dated January
15, 2002, between Generex Biotechnology Corporation and Generex (Bermuda), Ltd.
43
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 12th day of November,
2002.
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/ Gerald Bernstein Director November 12, 2002
- --------------------
Gerald Bernstein
/s/ Anna E. Gluskin President and Chief November 12, 2002
- ------------------- Executive Officer
Anna E. Gluskin
/s/ Rose C. Perri Secretary, Treasurer and November 12, 2002
- ----------------- Chief Operating Officer
Rose C. Perri
/s/Pankaj Modi Vice President, Research November 12, 2002
- -------------- and Development
Pankaj Modi
/s/ Michael Hawke Director November 12, 2002
- ------------------
Michael Hawke
/s/ Peter Levitch Director November 12, 2002
- -----------------
Peter Levitch
/s/ Jan Michael Rosen Director November 12, 2002
- ----------------------
Jan Michael Rosen
44
CERTIFICATIONS
I, Anna E. Gluskin, Chief Executive Officer and President of Generex
Biotechnology Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Generex Biotechnology
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
DATE: November 8, 2002 By: /s/ Anna E. Gluskin
--------------------
Anna E. Gluskin, Chief Executive Officer
(Principal Executive Officer)
I, Rose C. Perri, Chief Operating Officer (Principal Financial Officer) of
Generex Biotechnology Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Generex Biotechnology
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
DATE: November 8, 2002 By: /s/ Rose C. Perri
----------------------------------------------
Rose C. Perri, Chief Operating Officer
(Principal Financial and Accounting
Officer)
45