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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 January 31, 2003
[ ] 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's common stock, par value
$.001, was 19,994,860 as of January 31, 2003.
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -- unaudited
Consolidated Balance Sheets --
January 31, 2003 and July 31, 2002 ....................................
Consolidated Statements of Operations -- for the three and six month
periods ended January 31, 2003 and 2002, and cumulative from
November 2, 1995 to January 31, 2003...................................
Consolidated Statements of Cash Flows -- For the six month
period ended January 31, 2003 and 2002, and cumulative from
November 2, 1995 to January 31, 2003...................................
Notes to Consolidated Financial Statements.............................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................
Item 3. Quantitative and Qualitative Disclosures
About Market Risk......................................................
Item 4. Controls and Procedures................................................
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................................
Item 2. Changes in Securities and Use of Proceeds..............................
Item 3. Defaults Upon Senior Securities........................................
....
Item 4. Submission of Matters to a Vote of Security Holders....................
Item 5. Other Information......................................................
Item 6. Exhibits and Reports on Form 8-K.......................................
Signatures......................................................................
Part I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
January 31, July 31,
2003 2002
---------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 11,706,498 $ 8,131,463
Restricted cash 171,129 --
Short-term investments 2,180,502 12,862,757
Officers' loans receivable -- 1,114,084
Miscellaneous receivables 1,069 12,493
Other current assets 155,331 221,629
---------------- ---------------
Total Current Assets 14,214,529 22,342,426
Property and Equipment, Net 4,022,141 4,033,094
Assets Held for Investment, Net 1,741,222 --
Patents, Net 880,143 830,142
Deposits 31,972 632,401
Due From Related Party 332,594 322,685
---------------- ---------------
TOTAL ASSETS $ 21,222,601 $ 28,160,748
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 982,028 $ 1,898,943
Current maturities of long-term debt 11,096 172,453
Current maturities of long-term debt - assets
held for investment 52,363 --
---------------- ----------------
Total Current Liabilities 1,045,487 2,071,396
Long-term Debt:
Long-term debt, less current maturities 667,429 490,860
Long-term debt, less current maturities - assets
held for investment 1,038,469 --
---------------- ----------------
Total Long-term Debt 1,705,898 490,860
Commitments and Contingencies
Series A, preferred stock, $.001 par value; authorized 1,000,000 shares, 1,123
and 1,060 shares issued and
outstanding at January 31, 2003 and July 31, 2002, respectively 13,492,845 12,735,900
Stockholders' Equity:
Special Voting Rights Preferred stock, $.001 par value; authorized, issued
and outstanding 1,000 shares at
January 31, 2003 and July 31, 2002 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued 20,737,076 and 20,697,326 shares at January 31, 2003
and July 31, 2002, and outstanding 19,994,860 and 20,600,826
shares at January 31, 2003 and July 31, 2002, respectively 20,737 20,697
Treasury stock, at cost; 742,216 and 96,500 shares at January
31, 2003 and July 31, 2002, respectively (1,610,746) (395,531)
Additional paid-in capital 78,463,576 77,220,231
Notes receivable - common stock (348,089) (336,885)
Deficit accumulated during the development stage (71,328,506) (63,327,869)
Accumulated other comprehensive loss (218,602) (318,052)
---------------- ---------------
Total Stockholders' Equity 4,978,371 12,862,592
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,222,601 $ 28,160,748
================ ===============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative
From
November 2,
For the Three Months Ended For the Six Months Ended 1995 (Date of
January 31, January 31, Inception)
-------------------------- ------------------------ to January 31,
2003 2002 2003 2002 2003
---------- --------- --------- --------- ---------
Contract Research Revenues $ -- $ -- $ -- $ -- $ 1,000,000
Operating Expenses:
Research and development 1,765,845 1,814,408 2,766,321 2,490,747 36,260,976
Research and development - related party -- -- -- -- 220,218
General and administrative 2,934,800 1,967,117 4,727,811 4,195,342 39,610,967
General and administrative - related party -- -- -- -- 314,328
------------- ------------ ----------- ----------- ------------
Total Operating Expenses 4,700,645 3,781,525 7,494,132 6,686,089 76,406,489
------------- ------------ ----------- ----------- ------------
Operating Loss (4,700,645) (3,781,525) (7,494,132) (6,686,089) (75,406,489)
Other Income (Expense):
Miscellaneous income 17,828 3,914 43,355 7,911 77,920
Income from rental operations, net 12,082 -- 21,583 21,583
Interest income 115,864 232,933 220,609 566,467 2,799,621
Interest expense (20,159) (15,885) (35,732) (32,087) (381,481)
------------- ------------ ----------- ----------- ------------
Net Loss Before Minority Interest Share of Loss (4,575,030) (3,560,563) (7,244,317) (6,143,798) (72,888,846)
Minority Interest Share of Loss -- 1,860 625 1,860 3,038,185
------------- ------------ ----------- ----------- ------------
Net Loss (4,575,030) (3,558,703) (7,243,692) (6,141,938) (69,850,661)
Preferred Stock Dividend 756,945 720,900 756,945 720,900 1,477,845
------------- ------------ ----------- ----------- ------------
Net Loss Available to Common Stockholders $ (5,331,975) $ (4,279,603) $ 8,000,637) $(6,862,838) $(71,328,506)
============ ============ =========== =========== ============
Basic and Diluted Net Loss Per Common
Share $ (.27) $ (.21) $ (.40) $ (.33)
============ ============ =========== ===========
Weighted Average Number of Shares of
Common Stock Outstanding 19,987,985 20,679,730 20,084,753 20,681,670
============ ============ =========== ===========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative From
For the Six Months Ended November 2, 1995
January 31, (Date of Inception)
----------------------------------------- to January 31,
2003 2002 2003
---------------- ------------------- ----------------
Cash Flows From Operating Activities:
Net loss $ (7,243,692) $ (6,141,938) $ (69,850,661)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 276,869 198,379 1,149,693
Minority interest share of loss (625) (1,860) (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 83,475 71,172 2,224,639
Stock options and warrants issued for
services rendered 1,159,910 25,000 6,107,685
Preferred stock issued for services rendered -- -- 100
Founders' shares transferred for services rendered -- -- 353,506
Changes in operating assets and liabilities:
Miscellaneous receivables 11,526 -- 42,146
Other current assets 67,750 35,158 (158,466)
Accounts payable and accrued expenses (926,231) (960,240) 1,825,571
Other, net -- -- 110,317
--------------- --------------- ----------------
Net Cash Used in Operating Activities (6,561,884) (6,774,329) (57,394,443)
Cash Flows From Investing Activities:
Purchase of property and equipment (267,037) (559,285) (3,343,527)
Costs incurred for patents (79,016) (152,433) (986,647)
Change in restricted cash (167,058) -- (172,653)
Proceeds from maturity of short term investments 15,095,089 27,195,000 114,210,997
Purchases of short-term investments (4,412,834) (28,804,436) (116,391,499)
Increase in officers' loans receivable (12,073) (44,948) (1,126,157)
Change in deposits 100,000 20,000 (484,949)
Change in notes receivable - common stock (11,204) (11,220) (48,089)
Change in due from related parties -- -- (2,255,197)
Other, net -- -- 89,683
--------------- -------------- ----------------
Net Cash Provided by (Used in) Investing Activities 10,245,867 (2,357,322) (10,508,038)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 993,149
Repayment of long-term debt (26,333) (4,554) (1,001,680)
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 issuance of common stock, net -- -- 61,999,294
Proceeds from issuance of preferred stock -- -- 12,015,000
Proceeds from minority interest investment 625 1,860 3,038,185
Purchase of treasury stock (89,058) (39,150) (484,589)
Purchase and retirement of common stock -- -- (119,066)
--------------- -------------- ----------------
Net Cash Provided by (Used in) Financing
Activities (114,766) (14,344) 79,623,816
Effect of Exchange Rates on Cash 5,818 (14,197) (14,837)
--------------- -------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 3,575,035 (9,160,192) 11,706,498
Cash and Cash Equivalents, Beginning of Period 8,131,463 10,109,559 --
--------------- -------------- ----------------
Cash and Cash Equivalents, End of Period $ 11,706,498 $ 949,367 $ 11,706,498
=============== ============== ================
The Notes to Consolidated Financial Statements
are an integral part of these statements.
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 on 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 and six 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 Statement of Financial Accounting
Standards ("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, will be
affected by the provisions of SFAS No. 142. This statement provides
that intangible assets with finite useful lives be amortized and that
intangible assets with indefinite lives and goodwill will not be
amortized, but will rather be tested at least annually for
impairment. 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 it 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
adoption of FIN No. 45 did not have a significant impact on the
Company's consolidated financial position or results of operations.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Effects of Recent Accounting Pronouncements (continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" which amends
SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation, and requires disclosure
about those effects in both annual and interim financial statements.
SFAS No. 148 is effective for the Company's third quarter of fiscal
2003. The adoption of SFAS No. 148 is not expected to have an impact
on the Company's consolidated financial position or results of
operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities". FIN No. 46 clarifies the application of
Accounting Research Bulletin No. 51 for certain entities in which
equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN No. 46 applies to variable
interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after
that date. It applies in the fourth quarter of fiscal 2003 to
variable interest entities in which the Company may hold a variable
interest that it acquired before February 1, 2003. The provisions of
FIN No. 46 require that the Company immediately disclose certain
information if it is reasonably possible that the Company will be
required to consolidate or disclose variable interest entities when
FIN No. 46 becomes effective. The Company has determined that it does
not have a significant interest in such entities requiring the
related disclosure based on its preliminary analysis and assessment.
3. Comprehensive Income/(Loss)
Comprehensive loss, which includes net loss and the change in the
foreign currency translation account during the period, for the six
months ended January 31, 2003 and 2002, was $7,144,242 and
$6,241,239, respectively.
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
January 31, July 31,
2003 2002
----------- ------------
Accounts Payable $ 735,218 $ 778,184
Accrued Legal Fees 246,810 460,840
Executive Compensation -- 584,919
Financial Services -- 75,000
---------- ------------
Total $ 982,028 $ 1,898,943
========== ============
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Property Acquisition for Investment Purposes
In August 2002, the Company purchased approximately $1.6 million of
property for investment purposes, which is included at book value 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 which 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 $120,742 of rental income and $99,159 of rental expenses,
including interest charges of $36,363, for the six months ended
January 31, 2003.
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.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Pending Litigation (continued)
Pursuant to an arbitration award dated September 22, 1999, the
arbitration panel that heard this case awarded Sands $14,070 and
issued a declaratory judgment requiring the Company to issue to Sands
a warrant to purchase 1,530,020 shares of the Company's common stock
pursuant to and in accordance with the terms of the purported October
1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of
the State of New York, County of New York (the "New York Supreme
Court"). On November 10, 1999, the Company moved to vacate the
arbitration award. On March 20, 2000, the New York Supreme Court
granted Sands' petition to confirm the award and denied the Company's
motion to vacate the award. The Company appealed and on January 23,
2001, the New York State Appellate Division, First Department (the
"Appellate Division"), modified the judgment of the New York Supreme
Court that had confirmed the arbitration award against the Company.
The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of
$14,070 to Sands but modified the judgment to vacate the portion of
the arbitration award directing the issuance to Sands of a warrant to
purchase 1,530,020 shares of the Company's common stock. The
Appellate Division held that the portion of the award directing the
Company to issue warrants to Sands is too indefinite to be
enforceable and remanded the matter to the arbitration panel for a
final and definite award with respect to such relief or its
equivalent (including possibly an award of monetary damages). The
arbitration panel commenced hearings on the matters remanded by the
Appellate Division in June 2001.
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.
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.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Pending Litigation (continued)
In February 2001, a former business associate of the Vice President
of Research and Development (VP), and an entity called Centrum
Technologies Inc. ("CTI") 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 CTI. On July 20, 2001, the Company filed a
preliminary motion to dismiss the action of CTI as a nonexistent
entity or, alternatively, to stay such action on the grounds of want
of authority of such entity to commence the action. The plaintiffs
brought a cross motion to amend the statement of claim to substitute
Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a corporation
of which 50 percent of the shares are owned by 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 plaintiffs' 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 was heard on February 26, 2003, and the Court has
reserved its decision. 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.
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.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Pending Litigation (continued)
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 and six months ended January
31, 2003 and 2002 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 Six Months Ended
January 31,
------------------------------
2003 2002
------------ -----------
Cash paid during the period for:
Interest $ 72,095 $ 32,087
Income taxes $ -- $ --
Disclosure of non-cash investing and financing activities:
Issuance of Series A Preferred Stock as preferred stock
Dividend $ 756,945 $ 720,900
Settlement of officer loans receivable in exchange for
shares of common stock held in treasury $ 1,126,157 $ --
Assumption of long-term debt in conjunction with building
purchase $ 1,080,486 $ --
Utilization of deposit in conjunction with building purchase $ 501,839 $ --
9. Transactions with Related Parties
The Company's change in "Due from Related Parties" for the six months
ended January 31, 2003 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 unaffiliated broker had been
used.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Transactions with Related Parties (Continued)
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.
10. Preferred Stock Dividend
On January 15, 2003, the Company paid a 6 percent stock dividend on
the Company's Series A Preferred Stock. The dividend was paid in
shares of Series A Preferred Stock, and resulted in a charge to
accumulated deficit of $756,945, which was based on the original
issue price of the preferred shares.
11. Stockholders' Equity
During the six months ended January 31, 2003, the Company purchased
53,000 shares of Company common stock to be held in treasury.
In November 2002, the Company issued 30,000 shares of common stock to
a consultant for services rendered, which resulted in a charge to
general and administrative expense of $63,000. In addition, the
Company also issued 9,750 shares of common stock as employee bonuses,
which resulted in additional compensation expense of $20,475.
In November 2002, the Company issued 665,000 warrants in exchange for
services rendered, which resulted in a charge to general and
administrative expense of $988,550. The warrants have exercise prices
ranging from $2.50 to $6.00 and are each for the purchase of one
share of Company common stock.
In November 2002, the Company issued 970,000 stock options with an
exercise price of $2.10. All of the options, except for 110,000, were
issued to employees and qualified as incentive stock options;
accordingly no charge to operations was incurred. Options issued to
other than employees, did not qualify as incentive stock options and,
therefore, the Company recorded a charge to operations of $171,360.
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 existing or potential development and
license agreements for third party collaborations and joint ventures;
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.
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"). To date,
over 700 patients with diabetes have been dosed with our oral insulin product at
approved facilities in seven countries. We have conducted several clinical
trials with insulin supplied by Lilly under our agreement. Lilly did not,
however, authorize or conduct any clinical trials or provide financial support
for those trials. We are currently discussing a change in our contractual
relationship with Lilly. We did receive a $1,000,000 up front payment from
Lilly.
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 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 and six months ended January 31, 2003 and 2002
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 January 31, 2003 increased to $4,575,030
versus $3,558,703 in the corresponding quarter of the prior fiscal year
primarily due to an issuance of warrants and options to various advisors and
consultants for a total non-cash charge of approximately $1.1 million to general
and administrative expenses.
Total operating expenses for the quarter ended January 31, 2003 increased to
$4,700,645 versus $3,781,525 in the corresponding quarter of the prior fiscal
year due to an increase in general and administrative expenses. This increase
was offset by a small decrease of $48,563 in research and development expenses.
General and administrative expenses increased $967,683 in the quarter ended
January 31, 2003, versus the corresponding quarter of the prior fiscal year
primarily due to additional non-cash expenses incurred in connection with the
issuance of options and warrants to consultants. The increase in general and
administrative expenses was offset by a reduction in legal fees and advertising
and travel expenses.
Our net loss for the six months ended January 31, 2003 increased to $7,243,692,
versus $6,141,938 for the corresponding period of the prior fiscal year. The
increase in operating expenses of $808,043 was attributable to increased
research and development expenses (reflecting the increased level of research
and development activities, particularly in the first quarter of fiscal 2003)
and increased general and administrative expenses (reflecting the issuance of
options and warrants to consultants during the second quarter of fiscal 2003).
During January 2003, we issued 63 additional shares of Series A Preferred Stock
to an affiliate of Elan in payment of the 6% annual stock dividend that was
required to be paid on the 1,060 outstanding shares of such stock (which were
issued in January 2001 as part of our joint venture with Elan). This resulted in
a non-cash charge to accumulated deficit of $756,945 that increased the "net
loss available to common stockholders" for the three months and six months ended
January 31, 2003 by a corresponding amount.
Financial Condition, Liquidity and Resources
To date we have financed our development stage activities primarily through
private placements of common stock. In September 2001, we began a program to
repurchase up to $1 million of our common stock from the open market. Through
January 31, 2003, we repurchased a total of 149,500 shares of common stock to be
held in treasury for $484,588, at an average price of $3.24 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.
At January 31, 2003, we had cash and short term investments (primarily notes of
United States corporations) of approximately $14 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. 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 of
America. 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.
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.
New Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards
("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, will be affected by
the provisions of SFAS No. 142. This statement provides that intangible assets
with finite useful lives be amortized and that intangible assets with indefinite
lives and goodwill will not be amortized, but will rather be tested at least
annually for impairment. The adoption of SFAS No. 142 during the current fiscal
year 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. 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 it 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 adoption of FIN No. 45 did not have a
significant impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amends SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation, and requires disclosure about those effects
in both annual and interim financial statements. SFAS No. 148 is effective for
the Company's third quarter of fiscal 2003. The adoption of SFAS No. 148 is not
expected to have an impact on the Company's financial position or results of
operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN No. 46 clarifies the application of Accounting Research Bulletin
No. 51 for certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the fourth quarter of fiscal 2003 to variable interest entities in
which the Company may hold a variable interest that it acquired before February
1, 2003. The provisions of FIN No. 46 require that the Company immediately
disclose certain information if it is reasonably possible that the Company will
be required to consolidate or disclose variable interest entities when FIN No.
46 becomes effective. The Company has determined that it does not have a
significant interest in such entities requiring the related disclosure based on
its preliminary analysis and assessment.
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 U.S. and Canadian currencies.
We have neither issued nor own any long term debt instruments, or any other
financial instruments as to which we would be subject to material risks. 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.
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 March 18, 2003,
the Appellate Division denied Sands' 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.
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.
While over 700 patients with diabetes have been dosed with our oral insulin
formulation at approved facilities in seven countries, our clinical program has
not reached a point where we are prepared to apply for regulatory approvals to
market the product in any country.
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 could 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.
We may not be able to develop our insulin product successfully. In order to
obtain regulatory approvals for our insulin product, it will be necessary to
demonstrate, among other things, that:
o the product is physically and chemically stable under a range of storage,
shipping and usage conditions;
o the results of administering the product to patients are reproducible in
terms of the amounts of insulin delivered to the oral cavity and absorbed in
the bloodstream; and
o there are no serious adverse safety issues associated with use of the
product.
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 partners or independently. 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.
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. We may
not be able to enter into beneficial contracts, and 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.
Our stock may be delisted from the NASDAQ National Market and/or become subject
to Penny Stock regulations.
The National Association of Securities Dealers, Inc. (the "NASD") has
established certain standards for the continued listing of a security on the
NASDAQ National Market. The standards for continued listing require, among other
things, that our stockholders' equity be at least $10 million, or alternatively
that the market value of our common stock be at least $50 million, the market
value of our publicly held securities be at least $15 million and the bid price
for our stock be at least $3. When the bid price for our stock decreased below
$3, the market value of our common stock also decreased below $50 million, and
we became subject to the $10 million stockholders' equity standard.
By the end of the first quarter of fiscal 2003, primarily due to a determination
that our Series A Preferred Stock should be reclassified from stockholders'
equity to the mezzanine section of the balance sheet, our stockholders' equity
fell below the minimum $10 million requirement. As a result, our stockholders'
equity does not meet the required minimum for continued listing on the NASDAQ
National Market. We have provided the NASDAQ staff with a plan to achieve
compliance with the standards and no further action has been taken by NASDAQ to
date. However, as of the filing of this report, we have not yet been able to
execute on our plan. As a result, we may receive a delisting notice from NASDAQ
after filing this report. We will provide NASDAQ staff with additional
information regarding the progress of our plan, but we cannot be sure that this
will have any effect on the NASDAQ staff's decision. If we receive a notice of
delisting, we intend to appeal the decision to an appeals panel. Pending
decision of the appeal, our stock will continue to be listed on the NASDAQ
National Market. If we are able to execute on our plan pending appeal, we
believe we will be able to avoid delisting. However, we cannot be certain that
we will execute our plan or that we will avoid delisting. If we do not win such
an appeal, we will apply to list our common stock on the NASDAQ SmallCap Market.
In addition, for continued listing on both the NASDAQ National Market and
SmallCap Market, our stock price must be at least $1.00. During periods in
fiscal 2002 and the beginning of fiscal 2003, our share price dropped to close
to $1.00 per share. If we do not meet this requirement in the future, we may be
subject to delisting by NASDAQ.
If our stock is delisted from either NASDAQ Market, 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.
If our stock is not listed on the Nasdaq SmallCap Market 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. Additionally, 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. To date, Lilly has not provided financial support for clinical trials
for our oral insulin formulation.
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.
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.
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.
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 portfolio 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
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 March 18, 2003,
the Appellate Division denied Sands' motion. 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
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. Any 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 any corporate collaborators will share our perspectives on the relative
importance of our program, that they will commit sufficient resources to our
program to move it forward effectively, or that the program will advance as
rapidly as it might if we had retained complete control of all research,
development, regulatory and commercialization decisions. Additionally, we may
find it necessary from time to time to seek new or additional partners to assist
us in commercializing our products. It is uncertain whether we would be
successful in establishing any such new or additional relationships.
Third party reimbursement for our products is uncertain.
In both domestic and foreign markets, sales of our potential products depends in
part on the availability of reimbursement for third-party payors such as
government health administration authorities, private health insurers and other
organizations. Third-party payors often challenge the price and
cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products. We
cannot assure you that any of our products will be reimburseable by third-party
payors. In addition, we cannot assure you that our products will be considered
cost effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize a profit. Legislation
and regulations affecting the pricing of pharmaceuticals may change before our
products are approved for marketing and any such changes could further limit
reimbursement.
We have a history of losses and may incur additional losses.
To date, we have not been profitable and our accumulated net loss before
preferred stock dividend is $69,850,661 at January 31, 2003. Our losses have
resulted principally from costs incurred in research and development, including
clinical trials, and from general and administrative costs associated with our
operations. While we seek to attain profitability, we cannot be sure that we
will ever achieve product and other revenue sufficient for us to attain this
objective.
Our product candidates are in research or early stages of pre-clinical and
clinical development. We will need to conduct substantial additional research,
development and clinical trials. We will also need to receive necessary
regulatory clearances both in the United States and foreign countries and obtain
meaningful patent protection for and establish freedom to commercialize each of
our product candidates. We cannot be sure that we will obtain required
regulatory approvals, or successfully develop, commercialize, manufacture and
market any other product candidates. We expect that these activities, together
with future general and administrative activities, will result in significant
expenses for the forseeable future.
The price of our shares may be volatile.
There may be wide fluctuation in the price of our shares. These fluctuations may
be caused by several factors including:
o announcements of research activities and technology innovations or new
products by us or our competitors;
o changes in market valuation of companies in our industry generally;
o variations in operating results;
o changes in governmental regulations;
o developments in patent and other proprietary rights;
o public concern as to the safety of drugs developed by us or others;
o results of clinical trials of our products or our competitors' products; and
o regulatory action or inaction on our products or our competitors' products.
From time to time, we may hire companies to assist us in pursuing investor
relations strategies to generate increased volumes of investment in our shares.
Such activities may result, among other things, in causing the price of our
shares to increase on a short-term basis.
Furthermore, the stock market generally and the market for stocks of companies
with lower market capitalizations and small biopharmaceutical companies, like
us, have from time to time experienced, and likely will again experience
significant price and volume fluctuations that are unrelated to the operating
performance of a particular company.
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 January 31,
2003:
o On November 5, 2002, the Company filed a Current Report on Form 8-K
announcing the election of Dr. Gerald Bernstein 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 the 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, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: March 14, 2003
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Rose C. Perri
- -------------------------------
Rose C. Perri
Principal Financial Officer
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: March 14, 2003 /s/ Anna E. Gluskin
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Anna E. Gluskin, Chief Executive Officer
and President
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: March 14, 2003 /s/ Rose C. Perri
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Rose C. Perri, Chief Operating Officer
(principal financial officer)