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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 2002
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from_______________________ to _______________________
COMMISSION FILE NUMBER: 0-25169
GENEREX BIOTECHNOLOGY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 98-0178636
- ------------------------------- --------------------
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
33 HARBOUR SQUARE, SUITE 202
TORONTO, ONTARIO
CANADA M5J 2G2
----------------------------------------
(Address of principal executive offices)
416/364-2551
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
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 reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's common stock, par value
$.001, was 20,693,434 as of October 31, 2002.
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -- unaudited
Consolidated Balance Sheets --
October 31, 2002 and July 31, 2002 .................................................... 3
Consolidated Statements of Operations -- for the three month
period ended October 31, 2002 and 2001, and cumulative from
November 2, 1995 to October 31, 2002................................................... 4
Consolidated Statements of Cash Flows -- For the three month
period ended October 31, 2002 and 2001, and cumulative from
November 2, 1995 to October 31, 2002................................................... 5
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................................................... 19
Item 4. Controls and Procedures................................................................ 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 20
Item 2. Changes in Securities and Use of Proceeds.............................................. 21
Item 3. Defaults Upon Senior Securities........................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.................................... 21
Item 5. Other Information...................................................................... 21
Item 6. Exhibits and Reports on Form 8-K....................................................... 32
Signatures........................................................................................... 32
2
Part I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements
Item 1. Consolidated financial statements
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 31, July 31,
2002 2002
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,417,263 $ 8,131,463
Restricted cash 166,252 --
Short-term investments 6,714,396 12,862,757
Officers' loans receivable -- 1,114,084
Miscellaneous receivables -- 12,493
Other current assets 138,925 221,629
------------ ------------
Total Current Assets 17,436,836 22,342,426
Property and Equipment, Net 4,041,774 4,033,094
Assets Held for Investment, Net 1,675,303 --
Patents, Net 839,414 830,142
Deposits 31,200 632,401
Due From Related Party 324,565 322,685
------------ ------------
TOTAL ASSETS $ 24,349,092 $ 28,160,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 851,725 $ 1,898,943
Current maturities of long-term debt 172,364 172,453
Current maturities of long-term debt - assets
held for investment 51,099 --
------------ ------------
Total Current Liabilities 1,075,188 2,071,396
Long-term Debt:
Long-term debt, less current maturities 492,008 490,860
Long-term debt, less current maturities - assets
held for investment 1,026,175 --
------------ ------------
Total Long-term Debt 1,518,183 490,860
Commitments and Contingencies
Series A, preferred stock, $.001 par value; authorized
1,000,000 shares, 1,060 shares issued and outstanding
at October 31, 2002 and July 31, 2002 12,735,900 12,735,900
Stockholders' Equity:
Special Voting Rights Preferred stock, $.001 par value;
authorized, issued and outstanding 1,000 shares at
October 31, 2002 and July 31, 2002 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued 20,697,326 shares at October 31, 2002 and July 31, 2002,
and outstanding 19,968,110 and 20,600,826 shares at October 31,
2002 and July 31, 2002, respectively 20,697 20,697
Treasury stock, at cost; 729,216 and 96,500 shares at October
31, 2002 and July 31, 2002, respectively (1,583,982) (395,531)
Additional paid-in capital 77,220,231 77,220,231
Notes receivable - common stock (342,258) (336,885)
Deficit accumulated during the development stage (65,996,531) (63,327,869)
Accumulated other comprehensive loss (298,337) (318,052)
------------ ------------
Total Stockholders' Equity 9,019,821 12,862,592
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,349,092 $ 28,160,748
============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
3
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative
From
November 2,
For the Three Months Ended 1995 (Date of
October 31, Inception) to
----------------------------------- October 31,
2002 2001 2002
-------------- ------------- ---------------
Contract Research Revenues $ -- $ -- $ 1,000,000
Operating Expenses:
Research and development 1,000,476 676,339 34,495,131
Research and development - related party -- -- 220,218
General and administrative 1,804,895 2,228,225 36,688,051
General and administrative - related party -- -- 314,328
-------------- -------------- ------------
Total Operating Expenses 2,805,371 2,904,564 71,717,728
-------------- -------------- ------------
Operating Loss (2,805,371) (2,904,564) (70,717,728)
Other Income (Expense):
Miscellaneous income 25,527 3,997 60,092
Income from Rental Operations, net 21,385 -- 21,385
Interest income 104,745 333,534 2,683,757
Interest expense (15,573) (16,202) (361,322)
-------------- -------------- ------------
Net Loss Before Minority Interest Share of Loss (2,669,287) (2,583,235) (68,313,816)
Minority Interest Share of Loss 625 -- 3,038,185
-------------- -------------- ------------
Net Loss (2,668,662) (2,583,235) (65,275,631)
Preferred Stock Dividend -- -- 720,900
-------------- -------------- ------------
Net Loss Available to Common Shareholders $ (2,668,662) $ (2,583,235) $(65,996,531)
============== ============== ============
Basic and Diluted Net Loss Per Common
Share $ (.13) $ (.12)
============== ==============
Weighted Average Number of Shares of
Common Stock Outstanding 20,278,083 20,683,646
============== ==============
The Notes to Consolidated Financial Statements are an integral part of these statements.
4
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative From
For the Three Months Ended November 2, 1995
October 31, (Date of Inception)
----------------------------------- to October 31,
2002 2001 2002
-------------- ------------- ------------------
Cash Flows From Operating Activities:
Net loss $ (2,668,662) $ (2,583,235) $ (65,275,631)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 135,493 91,777 1,008,317
Minority interest share of loss (625) -- (3,038,185)
Reduction of notes receivable - common
stock in exchange for services rendered -- -- 423,882
Write-off of deferred offering costs -- -- 3,406,196
Write-off of abandoned patents 9,134 -- 9,134
Common stock issued for services rendered -- -- 2,141,164
Stock options and warrants issued for
services rendered -- -- 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 12,504 -- 43,124
Other current assets 82,972 39,387 (143,244)
Accounts payable and accrued expenses (1,048,753) (591,025) 1,703,049
Other, net -- -- 110,317
------------ ------------ ------------
Net Cash Used in Operating Activities (3,477,937) (3,043,096) (54,310,496)
Cash Flows From Investing Activities:
Purchase of property and equipment (200,073) (168,794) (3,276,563)
Costs incurred for patents (30,200) (68,094) (937,831)
Change in restricted cash (165,440) -- (171,035)
Proceeds from maturity of short term investments 10,561,195 9,806,000 109,677,103)
Purchases of short-term investments (4,412,834) (14,446,413) (116,391,499)
Increase in officers' loans receivable (12,073) (22,472) (1,126,157)
Change in deposits 100,000 2,840 (484,949)
Change in notes receivable - common stock (5,373) (5,561) (42,258)
Change in due from related parties -- -- (2,255,197)
Other, net -- -- 89,683
------------ ------------ ------------
Net Cash Provided by (Used in) Investing Activities 5,835,202 (4,902,494) (14,918,703)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 993,149
Repayment of long-term debt (11,266) (2,274) (986,613)
Change in due to related parties -- -- 154,541
Proceeds from exercise of warrants -- -- 2,256,482
Proceeds from exercise of stock options -- 27,500 772,500
Proceeds from minority interest investment 625 -- 3,038,185
Proceeds from issuance of preferred stock -- -- 12,015,000
Purchase of treasury stock (62,294) (39,150) (457,825)
Proceeds from issuance of common stock, net -- -- 61,999,294
Purchase and retirement of common stock -- -- (119,066)
------------ ------------ ------------
Net Cash Provided by (Used in) Financing
Activities (72,935) (13,924) 79,665,647
Effect of Exchange Rates on Cash 1,470 (12,714) (19,185)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,285,800 (7,972,228) 10,417,263
Cash and Cash Equivalents, Beginning of Period 8,131,463 10,109,559 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 10,417,263 $ 2,137,331 $ 10,417,263
============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
5
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations for reporting Form
10-Q. Accordingly, certain information and disclosures required by
generally accepted accounting principles for complete financial statements
are not included herein. The interim statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K. The results for the three
months may not be indicative of the results for the entire year.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the fiscal year 2003; in the
Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and
recurring nature.
2. Effects of Recent Accounting Pronouncements
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. Goodwill and intangible assets previously recorded, in the
Company's financial statements, are 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. The adoption of SFAS No. 142 during the current fiscal year
did not have any effect 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. The adoption of SFAS
No. 144 during the current fiscal year did not have a significant impact on
the Company's consolidated financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation, "FIN," No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
addresses the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees
that is has issued. Under FIN No. 45 recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year end. The disclosure requirements in FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company's management does not expect the adoption of FIN No. 45
to have a significant impact on the Company's consolidated financial
position or results of operations.
6
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Comprehensive Income/(Loss)
Comprehensive loss, which includes net loss and the change in the foreign
currency translation account during the period, for the three months ended
October 31, 2002 and 2001, was $2,648,947 and $2,665,854, respectively.
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
October 31, July 31,
2002 2002
----------- ---------
Accounts Payable $ 605,920 $ 778,184
Accrued Legal Fees 195,805 460,840
Executive Compensation -- 584,919
Financial Services 50,000 75,000
---------- -----------
Total $ 851,725 $ 1,898,943
========== ===========
5. Property Acquisition for Investment Purposes
During the three months ended October 31, 2002, the Company purchased
approximately $1.6 million of property for investment purposes, which is
included in assets held for investment, net. The property is situated in
the same location as the Company's pilot plant. In conjunction with the
purchase, the Company incurred approximately $1.09 million of additional
long-term debt, which is included in long-term debt - assets held for
investment. Included in the $1.09 million is approximately $766,450 due to
the Bank of Nova Scotia which is to be repaid in 35 monthly principal
installments of approximately $4,250 plus interest, with final payment of
the remaining principal balance due on the 36th month, bears an interest
rate of prime plus 1.5 percent per annum, and is secured by the property
acquired, assignment of rental income of the property, funds on deposit of
approximately $160,000 and a general guarantee by the Company of $766,450.
The guarantee is limited to $1.2 million Canadian Dollars (approximately
$766,450), and is extended for as long as a balance is outstanding on the
original loan. Also included in the $1.09 million is approximately $319,000
due to the seller, with monthly interest payments at 10% per annum for 24
months with the principal due on July 31, 2004, and is subordinated to the
$766,450 due to the Bank of Nova Scotia.
The Company's intent is to hold this property for investment purposes and
collect rental income. Included in income from rental operations, net is
$58,204 of rental income and $36,819 of rental expenses, including interest
charges of $17,297, for the quarter ended October 31, 2002.
7
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. 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.
8
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Pending Litigation (continued)
On October 29, 2002, the Appellate Division issued a decision and order
unanimously modifying the lower court's order by remanding the issue of
damages to a new panel of arbitrators and otherwise affirming the lower
court's order. The Appellate Division's decision and order limits the issue
of damages before the new panel of arbitrators to reliance damages which is
not to include an award of lost profits. Reliance damages are out-of-pocket
damages incurred by Sands. The Appellate Division stated that the lower
court properly determined that the arbitration award, which had granted
Sands warrants for 1,530,020 shares of the registrant's stock, was "totally
irrational."
On November 27, 2002, Sands filed with the Appellate Division a motion to
reargue the appeal, or, in the alternative, for leave to appeal to the
Court of Appeals of New York from the order of the Appellate Division. On
December 3, 2002, the Company filed a response in opposition to that
motion. 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.
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 Centrum Technologies Inc. On
July 20, 2001, the Company filed a preliminary motion to dismiss the action
of Centrum Technologies Inc. ("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 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 February
2003. 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.
9
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. 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.
7. Net Loss Per Share
Basic EPS and Diluted EPS for the three months ended October 31, 2002 and
2001 have been computed by dividing the net loss for each respective period
by the weighted average number of shares outstanding during that period.
All outstanding warrants and options, approximately 8,741,934 incremental
shares, have been excluded from the computation of Diluted EPS as they are
antidilutive.
8. Supplemental Disclosure of Cash Flow Information
For the Three Months Ended
October 31,
2002 2001
----------------- ---------------
Cash paid during the period for:
Interest $ 32,870 $ 16,202
Income taxes $ -- $ --
Disclosure of non-cash investing and financing activities:
Settlement of officer loans receivable in exchange for
shares of common stock held in treasury $ 1,114,084 $ --
Assumption of long-term debt in conjunction with building
purchase $ 1,080,486 $ --
Utilization of deposit in conjunction with building purchase $ 501,839 $ --
10
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Transactions with Related Parties
The Company's change in "Due from Related Parties" for the quarter ended
October 31, 2002 represents only the effect of change in quarter end
exchange rate versus that in effect at July 31, 2002.
On August 7, 2002 the Company purchased real estate with an aggregate
purchase price of approximately $1.6 million, from an unaffiliated party.
In connection with that transaction, Angara Enterprises, Inc., a licensed
real estate broker that is an affiliate of a senior officer of the Company,
received a commission from the proceeds of the sale to the seller, in the
amount of 3% of the purchase price. Management believes that this is less
than the aggregate commission which would have been payable if an
arms-length broker had been used.
In September of 2002, 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.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
We have made statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Report that may be
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. Our
forward-looking statements address, among other things:
o our expectations concerning product candidates for our technology;
o our expectations concerning our development and license agreement with
Eli Lilly and Company and other third party collaborations including
our joint venture with a subsidiary of Elan Corporation, plc;
o our expectations of when different phases of clinical activity may
commence; and
o 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 may
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 identification and initial
development of product candidates;
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;
o adverse developments in our collaboration with Eli Lilly & Company
regarding buccal insulin; and
o adverse developments in our joint venture with a subsidiary of Elan
Corporation, plc regarding buccal morphine.
12
Additional factors that could affect future results are set forth in Item 5 to
this Report. We caution investors that the forward-looking statements contained
in this Report must be interpreted and understood in light of conditions and
circumstances that exist as of the date of this Report. We expressly disclaim
any obligation or undertaking to update or revise forward-looking statements
made in this Report to reflect any changes in management's expectations
resulting from future events or changes in the conditions or circumstances upon
which such expectations are based.
General
Corporate History. We were incorporated in Delaware in September 1997 for the
purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian corporation
formed in November 1995 to engage in pharmaceutical and biotechnological
research and other activities. Our acquisition of Generex Pharmaceuticals was
completed in October 1997 in a transaction in which the holders of all
outstanding shares of Generex Pharmaceuticals exchanged their shares for shares
of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green Mt. P.
S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of
this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
Business History. We are engaged in the development of proprietary drug delivery
technology. Our principal business focus has been to develop a technology for
buccal delivery (absorption through the inner cheek walls) of large molecule
drugs, i.e., drugs composed of molecules with molecular weights above a
specified level. Large molecule drugs historically have been administered only
by injection because their size inhibits or precludes absorption if administered
by oral, transdermal, transnasal or other means.
Our first product is an insulin formulation that is administered as a fine spray
into the oral cavity using a hand-held aerosol spray applicator. Between January
1999 and September 2000, we conducted limited 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 ("Lilly"). Under
this agreement (the "Lilly Agreement"), Lilly will be responsible generally for
clinical trials of the product, securing regulatory approvals and marketing on a
worldwide basis. To date, Lilly has not yet authorized the commencement of
clinical trials under the Lilly Agreement.
13
We received $1,000,000 in connection with our entry into the Lilly 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-owned subsidiary of Elan Corporation, plc (EIS
and Elan Corporation, plc being collectively referred to as "Elan"), to 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 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 for development under the joint venture. 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 joint venture is being conducted through Generex (Bermuda), Ltd., a Bermuda
limited liability company. In connection with the formation of the joint venture
in January 2001, 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 ownership interest in the joint
venture entity. While we presently 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 equity ownership
of the joint venture entity.
Generex (Bermuda), Ltd. has been granted non-exclusive licenses to utilize our
buccal delivery technology and certain Elan drug delivery technologies. In
January 2001, 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.
Our buccal delivery technology is a platform technology that we believe has
application to a significant number of large molecule drugs in addition to
insulin and morphine. In the future, we expect to undertake development of
additional products based on this technology that are not covered by the Lilly
Agreement or the joint venture with Elan. In April 2002, we successfully
completed a proof of concept clinical study of fentanyl citrate (a drug used for
14
the treatment of acute pain) using our proprietary platform technology. 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. In May 2002, we
successfully completed a proof of concept clinical study of low molecular weight
heparin (a cardiovascular drug used in the treatment of deep vein thrombosis and
for the prevention of blood clots) using our proprietary platform technology.
Results of Operations - Three months ended October 31, 2002 and 2001
We have been in the development stage since inception and have not generated any
operating revenues to date, other than $1,000,000 in revenues received in
connection with the Lilly Agreement in the quarter ended October 31, 2000.
Our net loss for the quarter ended October 31, 2002 was $2,668,662 versus
$2,583,235 in the corresponding quarter of the prior fiscal year. The net loss
increased in this fiscal quarter versus the corresponding quarter of the prior
fiscal year primarily due to a decrease in the net interest income resulting
from the lower cash and short-term investment balances during the first quarter
of this year, compared to the same quarter of last year.
Total operating expenses decreased to $2,805,371 in the quarter ended October
31, 2002, versus $2,904,564 in the same quarter last year due to a decrease in
general and administrative expenses and despite an increase in the research and
development expenses.
Research and development expenses increased by $324,137 in the quarter ended
October 31, 2002, compared to the quarter ended October 31, 2001, reflecting the
additional clinical program activities related to application of our buccal
delivery technology to products other than insulin.
The decrease in general and administrative expenses of $423,330 in the quarter
ended October 31, 2002, compared to the quarter ended October 31, 2001, was
primarily the result of additional expenses incurred last year associated with
the bonus compensation awarded during the quarter ended October 31, 2001 to
management personnel by the Compensation Committee of the Board of Directors in
respect of their fiscal 2001 performance. Bonuses for fiscal 2002 were
subsequently awarded to management after the quarter ended October 31, 2002. The
amount of these bonuses however, was smaller than the bonuses awarded in the
quarter ended October 31, 2001. General and administrative expenses also
decreased due to the reduction of travel expenses and legal fees. This reduction
was partially offset by the increase in financial services expenses and a
write-off of forfeited deposits.
Financial Condition, Liquidity and Resources
To date we have financed our development stage activities primarily through
private placements of common stock. In the first quarter of fiscal 2003, none of
our expenses were financed through the issuance of options and warrants. In
September 2001, we began a program to repurchase up to $1 million of our common
stock from the open market. Through October 31, 2002, we repurchased a total of
136,500 shares of common stock to be held in treasury for $457,824, at an
average price of $3.35 per share. The total number of treasury shares shown on
our balance sheet includes these shares and 592,716 shares received in
satisfaction of outstanding loans to officers, as described in "Transactions
with Affiliates", below.
15
At October 31, 2002, we had cash and short term investments (primarily notes of
United States corporations) of approximately $17 million. At July 31, 2002, our
cash and short term investments were approximately $21 million. The decrease was
attributable to the use of cash for ongoing operations.
We believe that our current cash position is sufficient to meet all of our
working capital needs for at least the next 12 months based on the pace of our
current development activities (including our activities under our
collaborations with Lilly and Elan). Beyond that, we may require additional
funds to support our working capital requirements or for other purposes. From
time to time as deemed appropriate by management, we 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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is 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. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". If it
is determined that an impairment loss has occurred based upon expected
future cash flows, the loss is recognized in 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 flows 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 charges against these
assets.
16
o Estimating accrued liabilities, specifically litigation accruals.
Management's current estimated range of liabilities related to pending
litigation is 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.
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. Pursuant to a decision made by the
Compensation Committee as of August 30, 2002, these loans were satisfied through
the application of 592,716 shares 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" and "General and Administrative -- 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.
On August 7, 2002, Generex Pharmaceuticals purchased real estate with an
aggregate purchase price of approximately $1.6 million from an unaffiliated
party. In connection with that transaction, Angara Enterprises, Inc., a licensed
real estate broker that is an affiliate of Ms. Gluskin, received a commission
from the proceeds of the sale to the seller in the amount of 3% of the purchase
price, or $45,714. Management believes that this is less than the aggregate
commission which would have been payable if a commission had been negotiated
with an unaffiliated broker on an arm's length basis.
17
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, are 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 is effective for the Company's fiscal year 2003. 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. 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. SFAS No. 143 is applicable to financial statements
issued for fiscal years beginning after June 15, 2002. The adoption of this
statement did not have a significant impact on the Company's 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 was effective for fiscal years
beginning after December 15, 2001 and the interim periods within. The adoption
of SFAS No. 144 did not have a significant impact on the Company's 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 an Activity (including Certain Costs Incurred
18
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 a significant impact on the
Company's financial position or results of operations
In November 2002, the FASB issued FASB Interpretation, "FIN," No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that is has issued.
Under FIN No. 45 recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year end. The disclosure requirements in
FIN No. 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002. The Company's management does not expect the
adoption of FIN No. 45 to have a significant impact on the Company's financial
position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are not presently subject to any material market risk exposures. We
are exposed to market risk associated with interest rate changes and changes in
the exchange rate between US 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.
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. 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.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures. Based on their evaluation of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Company's chief executive officer and chief
financial officer have concluded that the Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.
19
Changes in internal controls. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information contains an update to the description of our pending
legal proceeding with Sands Brothers & Co., Ltd.
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 the registrant's common
stock purportedly pursuant to and in accordance with the terms of the October
1997 letter agreement. Sands submitted a motion to the Supreme Court of New
York, County of New York (the "Supreme Court") to modify and to confirm the
arbitration panel's award. We opposed Sands' motion and we also 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 1,530,000 shares of the
registrant's common stock. The Supreme Court concluded that that the arbitration
panel had "disregarded the plain meaning" of the directive given by the New York
State Appellate Division, First Department (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 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.
On October 29, 2002, the Appellate Division issued a decision and order
unanimously modifying the lower court's order by remanding the issue of damages
to a new panel of arbitrators and otherwise affirming the lower court's order.
The Appellate Division's decision and order limits the issue of damages before
the new panel of arbitrators to reliance damages which is not to include an
award of lost profits. Reliance damages are out-of-pocket damages incurred by
Sands. The Appellate Division stated that the lower court properly determined
that the arbitration award, which had granted Sands warrants for 1,530,020
shares of the registrant's stock, was "totally irrational."
On November 27, 2002, Sands filed with the Appellate Division a motion to
reargue the appeal, or, in the alternative, for leave to appeal to the Court of
Appeals of New York from the order of the Appellate Division. On December 3,
2002, the Company filed a response in opposition to that motion. We are not able
to estimate an amount or range of potential loss from this legal proceeding at
the present time.
For a full description of the foregoing legal proceeding, and all other legal
proceedings against the Company, see the Company's Report on Form 10-K for the
year ended July 31, 2002, which is incorporated herein by reference.
20
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
An investment in our stock is very speculative and involves a high degree of
risk. You should consider the following important factors, as well as the other
information in this Report and the other reports that we have filed heretofore
(and will file hereafter) with the Securities and Exchange Commission, carefully
before purchasing our stock. The following discussion outlines certain factors
that we think could cause our actual outcomes and results to differ materially
from our forward-looking statements.
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, and/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.
21
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.
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
22
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:
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.
23
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.
If our stock price drops, our stock may be delisted from NASDAQ and become
subject to Penny Stock regulations.
During periods in fiscal 2002 and the beginning of fiscal 2003, 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
24
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
80.1% 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.
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.
25
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.
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.
26
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.
Outcome of an arbitration proceeding with Sands Brothers 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
27
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 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 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.
On October 29, 2002, the Appellate Division issued a decision and order
unanimously modifying the lower court's order by remanding the issue of damages
to a new panel of arbitrators and otherwise affirming the lower court's order.
The Appellate Division's decision and order limits the issue of damages before
the new panel of arbitrators to reliance damages which is not to include an
award of lost profits. Reliance damages are out-of-pocket damages incurred by
Sands. The Appellate Division stated that the lower court properly determined
that the arbitration award, which had granted Sands warrants for 1,530,020
shares of the registrant's stock, was "totally irrational."
On November 27, 2002, Sands filed with the Appellate Division a motion to
reargue the appeal, or, in the alternative, for leave to appeal to the Court of
Appeals of New York from the order of the Appellate Division. On December 3,
2002, the Company filed a response to that motion. We are not able to estimate
28
an amount or range of potential loss from this legal proceeding at the present
time. We are not able to estimate an amount or range of potential loss from this
legal proceeding at the present time.
Our consolidated financial condition would be materially adversely affected to
the extent that Sands receives shares of our common stock for little or no
consideration or substantial monetary damages as a result of this legal
proceeding.
We face significant product liability risks, which may have a negative effect on
our financial performance.
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims whether or not the drugs
are actually at fault for causing an injury. Furthermore, our products may
cause, or may appear to have caused, serious adverse side effects (including
death) or potentially dangerous drug interactions that we may not learn about or
understand fully until the drug has been administered to patients for some time.
Product liability claims can be expensive to defend and may result in large
judgments or settlements against us, which could have a negative effect on our
financial performance. We maintain product liability insurance in amounts we
believe to be commercially reasonable for our current level of activity and
exposure, but claims could exceed our coverage limits. Furthermore, we cannot be
certain that we will always be able to purchase sufficient insurance at an
affordable price. Even if a product liability claim is not successful, the
adverse publicity and time and expense of defending such a claim may interfere
with our business.
The results and timing of our research and development activities, including
future clinical trials, are difficult to predict, subject to future setbacks
and, ultimately, may not result in any additional pharmaceutical products, which
may adversely affect our business.
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
29
advanced stages of disease. During the course of treatment, these patients may
die or suffer other adverse medical effects for reasons that may not be related
to the pharmaceutical agent being tested. Such events can have a negative impact
on the statistical analysis of clinical trial results.
The completion of clinical trials of product candidates may be delayed by many
factors. One such factor is the rate of enrollment of patients. We cannot
control the rate at which patients would present themselves for enrollment, and
we cannot be sure that the rate of patient enrollment would be consistent with
our expectations or be sufficient to enable clinical trials of product
candidates to be completed in a timely manner or at all. Any significant delays
in, or termination of, clinical trials of product candidates can have a material
adverse effect on our business.
We cannot be sure that we will be permitted by regulatory authorities to
undertake additional clinical trials for any product candidates, or that if such
trials are conducted, any product candidates will prove to be safe and
efficacious or will receive regulatory approvals. Any delays in or termination
of these clinical trial efforts can have a material adverse effect on product
development.
Our research and development and marketing efforts are highly dependent at
present on corporate collaborators and other third parties who may not devote
sufficient time, resources and attention to our programs, which may limit our
efforts to successfully develop and market potential products.
Because we have limited resources, we have sought to enter into collaboration
agreements with other pharmaceutical companies 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.
30
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.
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 $66 million at October 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.
31
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.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of chief executive officer and chief financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The following Reports on Form 8-K were filed in the quarter ended October
31, 2002:
o On October 8, 2002, the Company filed a Current Report on Form 8-K
announcing the election of Peter Levitch to the Company's Board of
Directors under Item 5 of Form 8-K - "Other Events".
o On November 5, 2002, the Company filed a Current Report on Form 8-K
announcing the election of Gerald Bernstein, M.D. to the Company's
Board of Directors under Item 5 of Form 8-K - "Other Events".
o On November 15, 2002, the Company filed a Current Report on Form 8-K to
update our description of the Sands legal proceeding under Item 5 of
Form 8-K - "Other Events".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we
have duly caused this report to be signed on our behalf by the undersigned.
DATE: December 13, 2002
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Rose C. Perri
--------------------------------
Rose C. Perri
Principal Financial Officer
32
I, Anna E. Gluskin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Generex Biotechnology
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 13, 2002
/s/ Anna E. Gluskin
- -------------------------------
Anna E. Gluskin, Chief Executive Officer and President
33
I, Rose C. Perri, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Generex Biotechnology
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 13, 2002 /s/ Rose C. Perri
----------------------------
Rose C. Perri, Chief Operating Officer
(principal financial officer)
34