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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, 2004
[ ] 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)
Internet Website: www.generex.com
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 31,436,260 as of March 9, 2004.
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -- unaudited
Consolidated Balance Sheets --
January 31, 2004 and July 31, 2003.........................................
Consolidated Statements of Operations -- for the three and six month
periods ended January 31, 2004 and 2003, and cumulative from
November 2, 1995 to January 31, 2004.......................................
Consolidated Statements of Cash Flows -- For the six month
periods ended January 31, 2004 and 2003, and cumulative from
November 2, 1995 to January 31, 2004.......................................
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......................................................................
Item 1. Consolidated Financial Statements
The Notes to Consolidated Financial Statements are an integral part of these
statements
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
January 31, July 31,
2004 2003
----------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,277,784 $12,356,578
Restricted cash 202,010 188,967
Short-term investments 2,729,912 2,362,071
Other current assets 908,987 319,293
----------- -----------
Total Current Assets 11,118,693 15,226,909
Property and Equipment, Net 4,351,011 4,218,832
Assets Held for Investment, Net 1,978,469 1,906,312
Patents, Net 5,803,635 898,876
Deposits 495,000 25,000
Due From Related Party 382,191 362,779
----------- -----------
TOTAL ASSETS $24,128,999 $22,638,708
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,931,372 $ 1,386,214
Current maturities of long-term debt 450,253 426,767
----------- -----------
Total Current Liabilities 2,381,625 1,812,981
Long-Term Debt, Less Current Maturities 1,510,032 1,468,708
Commitments and Contingencies
Series A Preferred stock, $.001 par value; authorized 1,000,000 shares, stated
at redemption value, 1,191 and 1,123 shares issued and outstanding
at January 31, 2004 and July 31, 2003, respectively 14,310,057 13,500,054
Stockholders' Equity:
Special Voting Rights Preferred stock, $.001 par value; authorized, issued
and outstanding 1,000 shares at January 31, 2004 and July 31, 2003 1 1
Common stock, $.001 par value; authorized 150,000,000 and 50,000,000
shares at January 31, 2004 and July 31, 2003, respectively, issued
30,677,990 and 26,017,524 shares at January 31, 2004 and July 31, 2003, respectively,
and outstanding 30,677,990 and 25,275,308 shares at January 31, 2004 and
July 31, 2003, respectively 30,679 26,017
Treasury stock, at cost; -0- and 742,216 shares at January 31, 2004
and July 31, 2003, respectively -- (1,610,026)
Additional paid-in capital 92,479,152 85,065,980
Notes receivable - common stock (372,434) (359,998)
Deficit accumulated during the development stage (86,550,680) (77,353,787)
Accumulated other comprehensive income 340,567 88,778
----------- -----------
Total Stockholders' Equity 5,927,285 5,856,965
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,128,999 $22,638,708
=========== ===========
The Notes to Consolidated Financial Statements are an itergral part of these
statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
January 31, January 31,
-------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues $ 117,503 $ -- $ 185,564 $ --
Operating Expenses:
Research and development 1,956,588 1,765,845 2,985,117 2,766,321
Research and development - related party -- -- -- --
General and administrative 2,907,443 2,934,800 5,737,759 4,727,811
General and administrative - related party -- -- -- --
---------- ---------- ---------- ----------
Total Operating Expenses 4,864,031 4,700,645 8,722,876 7,494,132
---------- ---------- ---------- ----------
Operating Loss (4,746,528) (4,700,645) (8,537,312) (7,494,132)
Other Income (Expense):
Miscellaneous income (expense) (164) 17,828 (3,862) 43,355
Income from Rental Operations, net 33,052 12,082 37,133 21,583
Interest income (19,704) 115,864 176,613 220,609
Interest expense (41,276) (20,159) (59,462) (35,732)
---------- ---------- ---------- ----------
Net Loss Before Undernoted (4,774,620) (4,575,030) (8,386,890) (7,244,317)
Minority Interest Share of Loss -- -- -- 625
---------- ---------- ---------- ----------
Net Loss (4,774,620) (4,575,030) (8,386,890) (7,243,692)
Preferred Stock Dividend 810,003 756,945 810,003 756,945
---------- ---------- ---------- ----------
Net Loss Available to Common Shareholders $(5,584,623) $(5,331,975) $(9,196,893) $ (8,000,637)
---------- ---------- ---------- ----------
Basic and Diluted Net Loss Per Common Share $ (.19) $ (.27) $ (.32) $ (.40)
---------- ---------- ---------- ----------
Weighted Average Number of Shares of Common
Stock Outstanding 29,167,180 19,987,985 28,534,124 20,084,753
========== ========== ========== ==========
The Notes to Consolidated Financial Statements are an intergral part of these
statements.
[RESTUBBED TABLE]
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative From
November 2, 1995
(Date of Inception)
to January 31,
2004
-------------------
Revenues $ 1,185,564
Operating Expenses:
Research and development 41,629,847
Research and development - related party 220,218
General and administrative 49,319,530
General and administrative - related party 314,328
------------
Total Operating Expenses 91,483,923
------------
Operating Loss (90,298,359)
Other Income (Expense):
Miscellaneous income (expense) 125,079
Income from Rental Operations, net 57,923
Interest income 3,298,961
Interest expense (477,412)
------------
Net Loss Before Undernoted (87,293,808)
Minority Interest Share of Loss 3,038,185
------------
Net Loss (84,255,623)
------------
Preferred Stock Dividend 2,295,057
------------
Net Loss Available to Common Shareholders $(86,550,680)
============
Basic and Diluted Net Loss Per Common Share
Weighted Average Number of Shares of Common
Stock Outstanding
The Notes to Consolidated Financial Statements are an intergral 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,
2004 2003 2004
---- ---- -----------------
Cash Flows From Operating Activities:
Net loss $ (8,386,890) $ (7,243,692) $ (84,255,623)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 497,959 276,869 1,960,619
Minority interest share of loss -- (625) (3,038,185)
Reduction of notes receivable - common stock in exchange
for services rendered -- -- 423,882
Write-off of deferred offering costs -- -- 3,406,196
Write-off of abandoned patents -- 9,134 9,134
Common stock issued for services rendered 918,000 83,475 3,212,839
Non-cash compensation expense 75,390 -- 75,390
Stock options and warrants issued for services rendered 178,433 1,159,910 6,286,118
Preferred stock issued for services rendered -- -- 100
Founders' shares transferred for services rendered -- -- 353,506
Changes in operating assets and liabilities (excluding the effects
of acquisition):
Miscellaneous receivables -- 11,526 43,812
Other current assets (578,104) 67,750 (1,378,206)
Accounts payable and accrued expenses 415,774 (926,231) 2,613,970
Other, net -- -- 110,317
---------- ---------- -----------
Net Cash Used in Operating Activities (6,879,438) (6,561,884) (70,176,131)
Cash Flows From Investing Activities:
Purchase of property and equipment (246,419) (267,037) (3,829,017)
Costs incurred for patents (200,688) (79,016) (1,216,895)
Change in restricted cash (2,982) (167,058) (186,065)
Proceeds from maturity of short term investments 4,270,942 15,095,089 123,957,134
Purchases of short-term investments (4,638,783) (4,412,834) (126,687,046)
Cash received in conjunction with merger 82,232 -- 82,232
Advances to Antigen Express, Inc. (32,000) -- (32,000)
Increase in officers' loans receivable -- (12,073) (1,126,157)
Change in deposits (495,000) 100,000 (477,194)
Change in notes receivable - common stock (12,436) (11,204) (72,434)
Change in due from related parties -- -- (2,255,197)
Other, net -- -- 89,683
---------- ---------- -----------
Net Cash Provided by (Used in) Investing Activities (1,275,134) 10,245,867 (11,752,956)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 993,149
Repayment of long-term debt (37,264) (26,333) (1,072,615)
Change in due to related parties -- -- 154,541
Proceeds from exercise of warrants -- -- 4,552,984
Proceeds from exercise of stock options 126,640 -- 1,010,440
Proceeds from minority interest investment -- 625 3,038,185
Proceeds from issuance of preferred stock -- -- 12,015,000
Purchase of treasury stock -- (89,058) (483,869)
Proceeds from issuance of common stock, net 2,931,988 -- 69,060,964
Purchase and retirement of common stock -- -- (119,066)
---------- ---------- -----------
Net Cash Provided by (Used in) Financing Activities 3,021,364 (114,766) 89,149,713
Effect of Exchange Rates on Cash 54,414 5,818 57,158
---------- ---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (5,078,794) 3,575,035 7,277,784
Cash and Cash Equivalents, Beginning of Period 12,356,578 8,131,463 --
---------- ---------- -----------
Cash and Cash Equivalents, End of Period $ 7,277,784 $ 11,706,498 $ 7,277,784
=========== ============ =============
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 2004, 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 January 2003, the FASB issued interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". The primary objectives of
this interpretation are to provide guidance on the identification of
entities for which control is achieved through means other than through
voting rights ("variable interest entities") and how to determine when and
which business enterprise (the "primary beneficiary") should consolidate
the variable interest entity. This new model for consolidation applies to
an entity in which either (i) the equity investors (if any) do not have a
controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition,
FIN 46 requires that the primary beneficiary, as well as all other
enterprises with a significant variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation
issues. The effective dates and impact of FIN 46 and FIN 46-R are as
follows: (i) Special-purpose entities ("SPEs") created prior to February 1,
2003. The Company must apply either the provisions of FIN 46 or early adopt
the provisions of FIN 46-R at the end of the first interim or annual
reporting period ending after December 15, 2003. (ii) Non-SPEs created
prior to February 1, 2003. The Company is required to adopt FIN 46-R at the
end of the first interim or annual reporting period ending after March 15,
2004. (iii) All entities, regardless of whether an SPE, that were created
subsequent to January 31, 2003. The provisions of FIN 46 were applicable
for variable interests in entities obtained after January 31, 2003. The
Company does not have any arrangements with variable interest entities that
will require consolidation of their financial information in the financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The changes are intended to improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. Additionally, those changes are
expected to result in more consistent reporting of contracts as either
derivatives or hybrid instruments. SFAS No. 149 is effective for contracts
and hedging relationships entered into or modified after June 30, 2003, and
for provisions that relate to SFAS No. 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003, apply
in accordance with their respective effective dates. The adoption of this
statement did not have a significant effect 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 May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liability and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liability and equity. It also requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for
mandatorily redeemable noncontrolling interests. The adoption of this
statement did not have a significant effect on the Company's consolidated
financial position or results of operations.
3. Employee Stock Plans
The Company has elected to continue to account for its stock compensation
plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees" and related interpretations. Under APB 25, no compensation cost
is generally recognized for fixed stock options in which the exercise price
is greater than or equal to the market price on the grant date. In
connection with the termination of certain employees, the company repriced
790,000 options. The repriced options are accounted for under variable
accounting and compensation cost is recognized for the difference between
the exercise price and the market price of the common shares until such
options are exercised, expired or forfeited. During the three and six
months ended January 31, 2004, the Company recognized compensation expense
of $75,390 in connection with these options.
The following table illustrates the effect on net loss and loss per share
as if the Company had applied the fair value recognition provisions of
SFAS 123.
Three Months Ended Six Months Ended
January 31, January 31,
2004 2003 2004 2003
---- ---- ---- ----
Net Loss Available to Common
Stockholders, as Reported $(5,584,623) $(5,331,975) $ (9,196,893) $(8,000,637)
Add: Total stock-based employee
compensation included in reported
net loss (75,390) -- (75,390) --
Deduct: Total Stock-Based Employee
Compensation Income Determined
Under Fair Value Based Method,
Net of Related Tax Effect 1,183,720 1,949,600 1,359,220 1,970,200
--------- --------- --------- ---------
Pro Forma Net Loss Available
to Common Stockholders $(6,692,953) $(7.281.575) $(10,480,723) $(9,970,837)
=========== =========== ============ ===========
Loss Per Share:
Basic and diluted, as reported $ (0.19) $ (0.27) $ (0.32) $ (0.40)
=========== =========== ============ ===========
Basic and diluted, pro forma $ (0.23) $ (0.36) $ (0.37) $ (0.50)
=========== =========== ============ ===========
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Comprehensive Income/(Loss)
Comprehensive loss, which includes net loss and the change in the foreign
currency translation account during the period, for the three months ended
January 31, 2004 and 2003, was $4,782,455 and $4,495,295 and six months
ended January 31, 2004 and 2003, was $8,135,101 and $7,144,242,
respectively.
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
January 31, July 31,
2004 2003
----------- ------------
Accounts Payable $ 1,160,682 $ 1,094,129
Accrued Legal Fees 177,815 292,085
Accrued Severance Payments 592,875 --
----------- ------------
Total $ 1,931,372 $ 1,386,214
=========== ============
6. Acquisitions
On August 8, 2003, the Company acquired all of the outstanding capital
stock of Antigen Express, Inc. ("Antigen") pursuant to an Agreement and
Plan of Merger ("Merger Agreement") and Antigen became a wholly-owned
subsidiary of the Company. (See Note 14)
Antigen's facilities and headquarters are located in Worcester,
Massachusetts. Antigen is engaged in research and development efforts
focused on the development of immunomedicines for the treatment of
malignant, infectious, autoimmune and allergic diseases.
The acquisition of Antigen brings two additional platform technologies to
the Company. The immunomedicines based on these technologies allow for
specific modulation of the immune system to allow for activation and
re-activation against cancer and infectious agents and de-activation in the
case of if allergy and autoimmune disease. The delivery technologies
currently possessed by the Company, when used with Antigen's active
immunotherapies may provide for breakthrough therapeutics.
The Merger Agreement also calls for the Company to fund an aggregate amount
of not less than $2,000,000 ratably over the two year period following the
effective date of the agreement. The advances will be debt, equity or a
combination thereof in the sole discretion of the Company.
In conjunction with this acquisition, the Company recorded approximately
$4,878,012 of intangible assets, consisting of granted patents and pending
patent applications, which are being amortized on a straight-line basis
over their estimated useful lives which range from ten to twenty years.
The following table summarizes the fair value of the assets acquired and
liabilities assumed in the acquisition:
Current assets $ 100,558
Property and equipment 10,026
Patents 4,878,012
----------------
Total assets acquired $ 4,988,596
Current liabilities 191,187
----------------
Net assets acquired $ 4,797,409
================
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Acquisitions (continued)
The results of operations of Antigen have been included in the consolidated
financial statements since the date of acquisition.
The following unaudited pro forma financial information assumes that the
acquisition consummated in 2003 had occurred as of the beginning of each
period:
For the Three Months Ended For the Six Months Ended
January 31, January 31,
2003 2004 2003 2004
----------- ----------- ----------- -----------
Total Revenues $ 117,503 $ 93,556 $ 185,564 $ 97,821
Net Loss Available to Common
Stockholders $ 5,584,623 $ 5,527,701 $ 9,196,893 $ 8,275,388
Basic and Diluted Net Loss Per
Common Share $ (.19) $ (.24) $ (.32) $ (.36)
7. Intangible Assets
The components of the Company's identifiable intangible assets were
as follows:
January 31, July 31,
2003 2004
------------- -----------
Patents $ 6,114,661 $ 1,020,805
Less: Accumulated Amortization 311,026 121,929
----------- -----------
Patents, Net $ 5,803,635 $ 898,876
=========== ===========
Weighted Average Life 16.4 years 17 years
Amortization expense amounted to $186,520 and $26,496 for the six months
ended January 31, 2004 and 2003, respectively. Amortization expense is
expected to be approximately $347,000 per year for the years ended July 31,
2004, 2005, 2006, 2007 and 2008.
8. 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 percent 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)
8. 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 March 18, 2003, the Appellate Division of the Supreme Court of New York
denied a motion by Sands for re-argument of the October 29, 2002 decision,
or, in the alternative, for leave to appeal to the Court of Appeals. A new
arbitration hearing has been scheduled for early June 2004.
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)
8. 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. In September 2003, the Ontario Superior Court of Justice
granted the request and issued an order giving the former business
associate leave to file an action in the name of and on behalf of CBI
against the VP and the Company. 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 the
Company's predecessor, 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 Appeals for Ontario in April 2000. The
appeal was heard on February 26, 2003, and on February 28, 2003, the Court
of Appeals dismissed the appeal with costs. The Company has sought leave to
appeal the Courts of Appeal's decision to the Supreme Court of Canada. 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 financial position,
operations and cash flows of the Company.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Pending Litigation (continued)
In July 2002 an individual and his related corporation commenced actions
against certain defendants, including the Company and certain officers of
the Company, in the Ontario Superior Court of Justice, claiming
compensatory damages, punitive damages and various forms of injunctive and
declaratory relief for breach of contract and various business torts. 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. In October 2003, the parties signed Minutes of
Settlement resolving all outstanding issues in the action. The settlement
is presently in the process of being finalized and the Company believes
that the resolution will not have a material adverse effect on the
Company's financial position, operations or cash flows.
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 financial position, operations or cash
flows.
With respect to all litigation, as additional information concerning the
estimates used by the Company becomes known, the Company reassesses its
position both with respect to accrued liabilities and other potential
exposures.
9. Employment Agreements
On August 6, 2003, in conjunction with the Antigen acquisition, (see Note
6) the Company entered into at will employment agreements with five Antigen
employees requiring the Company to pay an annual aggregate salary of
$621,500 to the five employees. In the event any agreement is terminated by
reason other than death, disability, a voluntary termination not for good
reason (as defined in the agreement) or a termination for cause, the
Company is required to pay the employee severance in accordance with the
terms of the individual employment agreement. On November 19, 2003, the
Company terminated an employment agreement with one of these individuals
(see Note 13).
10. Net Loss Per Share
Basic EPS and Diluted EPS for the three and six months ended January 31,
2004 and 2003 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
14,024,396 and 8,741,934 incremental shares at January 31, 2004 and 2003,
respectively, have been excluded from the computation of Diluted EPS as
they are antidilutive.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. Supplemental Disclosure of Cash Flow Information
For the Six Months Ended
January 31,
-----------------------------
2004 2003
-----------------------------
Cash paid during the period for:
Interest $ 53,546 $ 72,095
Income taxes $ -- $ --
Disclosure of non-cash investing and financing activities:
Issuance of Series A Preferred Stock as a preferred stock
dividend $ 810,003 $ 756,945
Application of deposit to advances to Antigen Express, Inc. $ 25,000 $ --
Settlement of officers' 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 $ -- $ 1,080,846
Utilization of deposit in conjunction with building purchase $ -- $ 501,839
Acquisition of Antigen Express, Inc through the issuance
of common stock and the assumption of stock options $ 4,797,409 $ --
Retirement of treasury stock $ 1,610,026 $ --
12. Transactions with Related Party
The Company's change in "Due from Related Party" for the six months ended
January 31, 2004 represents only the effect of change in quarter end
exchange rate versus that in effect at July 31, 2003.
13. Commitments and Contingencies
On November 5, 2003, the Company entered into an agreement with Eli Lilly
and Company to terminate the September 2000 Development and License
Agreement, effective June 2, 2003. At the same time, the parties entered
into a Bulk Supply Agreement (the "Bulk Supply Agreement") for the sale of
human insulin crystals by Lilly to the Company over a three year period.
The Bulk Supply Agreement establishes purchase prices, minimum purchase
requirements, maximum amounts which may be purchased in each year and a
non-refundable prepayment of $1,500,000 to be applied against amounts due
for purchases. The prepayment is being expensed as purchases are made. The
current and long-term portions have been determined based upon the purchase
requirements as established in the agreement less amounts purchased. As of
January 31, 2003 $660,000 is included in other current assets and $495,000
is included in deposits, which represents the remaining balance of the
prepayment.
On November 19, 2003, the Company terminated its employment agreement with
an employee of its wholly owned subsidiary, Antigen Express, Inc. In
accordance with the terms of the agreement, the terminated employee will
receive severance salary in the amount of $175,000, payable in twelve
monthly installments of $14,583 each, less withholdings mandated by
applicable law. In addition, the terminated employee's benefits package
will remain in effect for a period of one year from the date of
termination. The remaining installments are included in accounts payable
and accrued expenses.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. Stockholders' Equity
On August 8, 2003, the Company, in conjunction with the Antigen acquisition
(see Note 6), issued 1,779,974 shares of common stock in exchange for
outstanding shares of Antigen. The Company issued an additional 1,000,000
shares of common stock to the stockholders as defined in the Merger
Agreement on January 31, 2004, of which 944,560 shares have been
distributed to date. The 2,779,974 shares were valued at $1.67 per share,
which represented the fair market value of the Company's common stock on
the date the terms of the Merger Agreement were essentially agreed upon,
resulting in an aggregate value of $4,642,557, which was assigned to the
purchase price of Antigen. In addition, all outstanding options to purchase
shares of common stock of Antigen, which totaled 112,400 shares, became
fully vested and exercisable for shares of the Company's common stock under
the terms of the Merger Agreement. The options were valued at $154,852
under the Black Scholes pricing model and also included in the purchase
price. The total purchase price of $4,797,409 was assigned to the net
assets acquired, including $4,878,012 of intangible assets, and liabilities
assumed.
During the six months ended January 31, 2004, 150,400 stock options were
exercised with exercise prices ranging from $0.30 to $2.10 per share,
resulting in proceeds of $126,640.
In October 2003, the Company issued 487,500 shares of unrestricted common
stock to consultants for services rendered, which resulted in charges to
the statement of operations of $918,000 based on the quoted market price of
the Company stock on the date of issuance.
In October 2003, the Company issued 20,000 warrants in exchange for
services rendered. The warrants were fully vested on the date of issuance
and exercisable at $2.50 each for the purchase of one share of the
Company's common stock. The warrants, which were valued using the Black
Scholes pricing model, resulted in a charge to general and administrative
expense of $27,000.
On November 4, 2003, the Company granted a total of 1,046,000 options to
purchase shares of its common stock with an exercise price of $1.71, which
equaled the market price of the Company common stock on the date of
issuance. All of the options, except for 115,000, were issued to employees;
accordingly no charge to operations was incurred as the Company follows APB
25 (See Note 2). Options issued to other than employees were valued using
the Black Scholes pricing model and resulted in a charge to operations of
$151,433.
On November 25, 2003, the Company cancelled all 742,216 shares held in
Treasury Stock. The Company originally purchased these shares for
$1,610,026.
In January 2004 the Company completed a series of private placements,
raising $3,000,000 net of issuance costs of $68,012, through the issuance
of 1,984,808 shares of common stock. In conjunction with the placements,
the Company issued 496,202 warrants to purchase shares of the Company's
common stock at exercise prices ranging from $1.86 to $2.20 per share. In
addition to the shares of common stock and warrants purchased by the
investors at each closing, each investor received an additional investment
right to purchase for a period of time up to the same number of shares of
common stock and warrants initially purchased by such investor.
On January 15, 2004, the Company paid a six percent (6%) 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 shares of
deficit of $810,003, which was based upon the aggregagte original issue
price of the shares of preferred stock.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
15. Subsequent Events
The following events occurred subsequent to January 31, 2004:
In February 2004, the Company completed three additional private placements
for aggregate gross proceeds of $1,264,000 through the issuance of 829,092
shares of common stock and 207,274 warrants to purchase shares of the
Company's common stock. In addition to the shares of common stock and
warrants purchased by the investors at each closing, each investor received
an additional investment right to purchase for a period of time up to the
same number of shares of common stock and warrants initially purchased by
such investor.
In February 2004, the Company issued 175,000 shares of common stock to
consultants for services rendered. The shares were fair valued at quoted
market price at date of issuance and resulted in a charge to operations of
$287,000.
On March 9, 2004, the Company entered into a Memorandum of Agreement as a
result of the termination of one of its employees whereby the Company has
committed to pay approximately $432,000 ($575,000 Canadian dollars), which
is included in accounts payable and accrued expenses at January 31, 2004,
and issue options to purchase 450,000 shares of common stock at an exercise
price of $1.47.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
We have made statements in 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; and
o the inherent uncertainties associated with the process of obtaining
regulatory approval to market product candidates.
Additional factors that could affect future results are set forth in Item 5
of Part II of 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 stockholders (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 stockholders
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.
In August, 2003, we acquired Antigen Express, Inc. ("Antigen") pursuant to
the terms of an Agreement and Plan of Merger (the "Merger Agreement").
Antigen is engaged in the research and development of technologies and
immunomedicines for the treatment of malignant, infectious, autoimmune and
allergic diseases. For details about this acquisition, see "Business
History."
Business History. We are primarily 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 (the "Development and License
Agreement") to develop this product with Eli Lilly and Company ("Lilly").
To date, over 750 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 the
Development and License Agreement. Lilly did not, however, authorize or
conduct any clinical trials or provide financial support for those trials.
We did receive a $1,000,000 up front payment from Lilly. On May 23, 2003,
we announced that we had agreed with Lilly to end the Development and
License Agreement for the development and commercialization of buccal
delivery of insulin. On November 5, 2003, we entered into a termination
agreement with Lilly terminating the Development and License Agreement,
effective as of June 2, 2003. We will retain all of the intellectual
property and commercialization rights with respect to buccal spray drug
delivery technology, and we will have the continuing right to develop and
commercialize the product. We also entered into a Bulk Supply Agreement
(the "Bulk Supply Agreement") for the sale of human insulin crystals by
Lilly to us over a three year period. The Bulk Supply Agreement establishes
purchase prices, minimum purchase requirements, maximum amounts which may
be purchased in each year and a non-refundable prepayment of $1,500,000 to
be applied against amounts due for purchases.
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 Generex (Bermuda) Ltd., the entity through which the
joint venture is being conducted ("Generex Bermuda"). This expansion of the
joint venture occurred after we successfully completed a proof of concept
clinical study of morphine delivery using our proprietary buccal delivery
technology.
In connection with the joint venture, EIS purchased 1,000 shares of a new
series of our preferred stock, designated as Series A Preferred Stock, for
$12,015,000. We applied the proceeds from the sale of the Series A
Preferred Stock to subscribe for an 80.1% equity ownership interest in
Generex Bermuda. 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 Generex Bermuda, the Elan affiliate 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 Generex
Bermuda. Alternatively, the Series A Preferred Stock may be converted,
under certain conditions, into shares of our common stock. Subsequent to
its purchase of the Shares of Series A Preferred Stock, EIS transferred the
shares to an affiliate of Elan. In accordance with the terms of the Series
A Preferred Stock, if any shares of Series A Preferred Stock are
outstanding on January 16, 2007, we are required to redeem the shares of
Series A Preferred Stock at a redemption price equal to the aggregate
Series A Preferred Stock liquidation preference (which currently equals the
aggregate original purchase price of the Series A Preferred Stock), either
in cash, or in shares of common stock with a fair market value equal to the
redemption price. In January 2002, 2003 and 2004, pursuant to the terms of
our agreement with EIS, the Elan affiliate received a 6% stock dividend of
Series A Preferred Stock.
EIS also purchased 344,116 shares of our common stock for $5,000,000. We
were permitted to use the proceeds of this sale for any corporate purpose.
If the joint venture achieves certain milestones, we may require EIS to
purchase an additional $1,000,000 of our common stock at a 30% premium to
the then prevailing fair market value of our common stock.
Generex Bermuda was granted non-exclusive licenses to utilize our buccal
delivery technology and certain Elan drug delivery technologies. Using the
funds from its initial capitalization, Generex Bermuda 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.
To date we have not received any substantial economic support from Elan in
connection with the joint venture or the development of the morphine
product, other than its initial capital contribution. However, we have
continued to conduct research and development activities with the morphine
product.
Our new subsidiary Antigen is engaged in research and development of
technologies and immunomedicines for the treatment of malignant,
infectious, autoimmune and allergic diseases. Our immunomedicine products
work by stimulating the immune system to either attack offending agents
(i.e., cancer cells, bacteria, and viruses) or to stop attacking benign
elements (i.e., self proteins and allergens). Our immunomedicine products
are based on two platform technologies that were discovered by an executive
officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. The
immunomedicine products are in the pre-clinical stage of development, and
trials in human patients are not expected for at least 12 months.
Development efforts are underway in melanoma, breast cancer, prostate
cancer, HIV, SARS vaccine and Type I diabetes. We are establishing
collaborations with academic centers to advance the technology, with the
ultimate goal of conducting human clinical testing.
We do not expect to receive any revenues from product sales in the current
fiscal year. However, we have received and we expect to continue to receive
some revenue from research grants for Antigen's immunomedicine products. To
date, we have received a total of $185,564 in such research grants. We do
not expect the research grants to fully fund Antigen's expenses. We expect
to satisfy all of our cash needs during the current year from capital
raised through equity financings.
Disclosure Regarding Research and Development Projects
Our major research and development projects are the refinement of our basic
buccal delivery technology, our buccal insulin product and our buccal
morphine product.
Both our insulin product and our morphine product are in clinical trials.
In Canada, we have recently begun Phase II-B trials for insulin. In order
to obtain FDA and Canadian HPB approval for any of our product candidates,
we will be required to complete "Phase III" trials which involve testing
our products with a large number of patients over a significant period of
time. The conduct of Phase III trials will require significantly greater
funds than we either have on hand or have experience in raising in any year
or two years' time. We will therefore need to receive funding from a
corporate collaborator, or engage in fundraising on a scale with which we
have no experience.
Because of various uncertainties, we cannot predict the timing of
completion of our buccal insulin or buccal morphine products. These
uncertainties include the success of current studies, our ability to obtain
the required financing and the time required to obtain regulatory approval
even if our research and development efforts are completed and successful.
For the same reasons, we cannot predict when any products may begin to
produce net cash inflows.
Most of our buccal delivery research and development activities to date
have involved developing our platform technology for use with insulin and
morphine. Insubstantial amounts have been expended on projects with other
drugs, and those projects involved a substantial amount of platform
technology development. Therefore, in the past, we have not made
significant distinctions in the accounting for research and development
expenses among products, as a significant portion of all research has
involved improvements to the platform technology in connection with
insulin, which may benefit all of our potential products. In the first six
months of fiscal 2004, approximately 90% of our $2,985,117 in research and
development expenses was attributable to insulin and platform technology
development, and approximately 1% was attributable to morphine and fentanyl
projects. As morphine and fentanyl are both narcotic painkillers, the
research is related. In the same period of 2003, approximately 80% of our
$2,766,321 of research and development expenses was expended for insulin
and platform technology, and approximately 20% for morphine and fentanyl.
Approximately 9%, or $273,030 of our research and development expenses for
the six month period ended January 31, 2004 were related to Antigen's
immunomedicine products. Because these products are in a very early,
pre-clinical stage of development, all of the expenses were accounted for
as basic research and no distinctions were made as to particular products.
Because of the early stage of development, we cannot predict the timing of
completion of any products arising from this technology, or when products
from this technology might begin producing revenues. However, we can
predict that we do not expect to begin clinical trials during the current
fiscal year.
Developments in Fiscal Quarter ended January 31, 2004
-----------------------------------------------------
In January 2004, we completed three private placements of our common stock
and warrants. Under the terms of the private placements, we sold units,
consisting of an aggregate of 1,984,808 shares of common stock and
five-year warrants to purchase an aggregate of 496,202 shares of common
stock, to four accredited investors for gross proceeds of $3,000,000. In
addition to the shares of common stock and warrants purchased by the
investors at each closing, each investor received an additional investment
right to purchase for a period of time up to the same number of shares of
common stock and warrants initially purchased by such investor.
We anticipate using the proceeds from the private placements for working
capital and other general corporate purposes directly related to our
growth, and the development of our products.
On January 31, 2004, we distributed 944,560 of the issued 1,000,000 shares
of our common stock we were obligated to issue to the former shareholders
of Antigen in accordance with the terms of the Merger Agreement.
Developments subsequent to Fiscal Quarter ended January 31, 2004
----------------------------------------------------------------
In February 2004, we completed three additional private placements of
common stock and warrants with three accredited investors. Pursuant to the
terms of these private placements, we sold units, consisting of 829,092
shares of common stock and five year warrants to purchase 207,274 shares of
common stock, for gross proceeds of $1,264,000. In addition to the shares
of common stock and warrants purchased by the investors at each closing,
each investor received an additional investment right to purchase for a
period of time up to the same number of shares of common stock and warrants
initially purchased by such investor.
We anticipate using the proceeds from the private placements for working
capital and other general corporate purposes directly related to our
growth, and the development of our products.
On February 3, 2004, we announced the resignations of Peter Levitch and Dr.
Pankaj Modi from our Board of Directors. Dr. Modi will remain as our Vice
President, Research and Development and Mr. Levitch is currently consulting
us in regulatory matters.
On February 12, 2004, we announced the appointment of Mindy J.
Allport-Settle to our Board of Directors, filling the vacancy left from Mr.
Levitch's resignation. Ms. Allport-Settle has been President and Chief
Executive Officer of Integrated Development, LLC ("Integrated") since 1998.
Integrated is an independent consulting firm to the pharmaceutical
industry, providing informed guidance in operational, project and contract
management, new business development and regulatory compliance. In addition
to her position with Integrated, Ms. Allport-Settle has been a
Vice-President of Impact Management Services, Inc. ("IMS") since 2003,
which also provides consulting services to the pharmaceutical industry. In
her current positions at Integrated and IMS, Ms. Allport-Settle has worked
with companies such as GlaxoSmithKline, Pfizer, AstraZeneca, Johnson
Controls and DSM Pharmaceuticals.
On March 9, 2004, we entered into a Memorandum of Agreement as a result of
termination of one of our employees, whereby we are required to pay
approximately $432,000 and issue stock options to purchase 450,000 shares
of our common stock at $1.47 per share.
Results of Operations - Three and six months ended January 31, 2004
and 2003
-------------------------------------------------------------------
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 Development and License Agreement with
Lilly in the quarter ended October 31, 2000 and $185,564 in research grants
received by Antigen during the six months ended January 31, 2004.
Our net loss for the quarter ended January 31, 2004 was $4,774,620 versus
$4,575,030 in the corresponding quarter of the prior fiscal year. The
slight increase in net loss in this fiscal quarter versus the corresponding
quarter of the prior fiscal year is primarily due to an increase in
research and development expenses of $190,743, which was offset by a
moderate decrease in general and administrative expenses of $27,357.
The decrease in general and administrative expenses in the quarter ended
January 31, 2004, compared to the quarter ended January 31, 2003, was the
result of additional non-cash expenses incurred last year in connection
with the issuance of common stock to consultants. The decrease in general
and administrative expenses was offset by a slight increase in audit and
accounting expenses, legal fees, advertising and travel expenses, and
accrual for the severance paid to an employee.
The moderate increase in research and development expenses in the
three-month period ending January 31, 2004 compared to the corresponding
period of the prior fiscal year reflects the additional research and
development activities by Antigen in the three-month period ending January
31, 2004 and increased insulin purchases from Lilly pursuant to the Bulk
Supply Agreement.
Our net loss for the six months ended January 31, 2004 increased to
$8,386,890 versus $7,243,692 for the corresponding period of the prior
fiscal year. The increase in net loss was due primarily to an increase in
operating expenses of $1,228,744. This increase in operating expenses was
due to research and development expenses of $2,985,117, versus $2,766,321
for the corresponding period of the prior fiscal year and general and
administrative expenses of $5,737,759, versus $4,727,811 for the
corresponding period of the prior fiscal year. The increase in operating
expenses was related to the activities of Antigen and accrual of the
severance paid to an employee.
During January 2004, we issued 68 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 1123 outstanding shares of such stock
(1,000 of which were issued in January 2001 as part of our joint venture
with Elan and 123 of which have been issued as dividends). This resulted in
a non-cash charge to accumulated deficit of $810,003 that increased the
"net loss available to common stockholders" over the three months and six
months ended January 31, 2004 by a corresponding amount.
Inflation and changing prices have not had a significant effect on
continuing operations and are not expected to have a material effect in the
foreseeable future.
Financial Condition, Liquidity and Resources
--------------------------------------------
To date we have financed our development stage activities primarily through
private placements of common stock. In January 2004, we completed three
private placements of our common stock and warrants. Under the terms of the
private placements, we sold units, consisting of an aggregate of 1,984,808
shares of common stock and five-year warrants to purchase an aggregate of
496,202 shares of common stock, to four accredited investors for gross
proceeds of $3,000,000. In February 2004, we completed three additional
private placements of common stock and warrants with three accredited
investors. Pursuant to the terms of these private placements, we sold
units, consisting of 829,092 shares of common stock and five year warrants
to purchase 207,274 shares of common stock for gross proceeds of
$1,264,000. In addition to the shares of common stock and warrants
purchased by the investors at each closing, each investor received an
additional investment right to purchase for a period of time up to the same
number of shares of common stock and warrants initially purchased by such
investor. 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. No
repurchases have been made since January 31, 2003. 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. On November 25,
2003, the Company cancelled all 742,216 shares held in Treasury Stock.
At January 31, 2004, we had cash and short-term investments (primarily
notes of United States corporations) of approximately $10 million. At July
31, 2003, our cash and short term investments were approximately $14.7
million. The decrease was attributable to the use of $6,879,438 for ongoing
operations, which was somewhat offset by the infusion of $3,000,000 million
received by us in the private placements completed in January. Our proceeds
from the maturity of short term investments was $4,270,942 during the six
month period ended January 31, 2004 versus $15,095,089 during the six month
period ended January 31, 2004. The change is primarily attributable to the
lower cash balances in the current period and higher short term interest
rates in the same period last year. 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 will likely 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 additional funds
through private or public equity financing or from other sources. If we are
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 affect our prospects materially and adversely.
In the past, we have funded most of our development and other costs with
equity financing. Often this equity financing is through private placements
of our securities in below market transactions. Our stock is listed on the
NASDAQ Stock Market, which imposes tight restrictions on the use of below
market issuances to raise capital. While we have been able to raise equity
capital as required in the past, the NASDAQ rules and regulations may limit
our ability to raise capital through these private placements in the
future. In addition, 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:
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.
Intangible Assets. We have 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, we use 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, we may be required to record impairment
charges against these assets.
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 our consolidated
financial results in a future reporting period, management believes the
ultimate outcome will not have a significant effect on our consolidated
results of operations, financial position or cash flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
-----------------------------------------------------------------------------------------------------------------------
Payments Due by Period
Contractual Obligations Total Less than 1-3 years 3-5 years More than
1 year 5 years
-----------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations 1,960,285 450,253 1,510,032 0 0
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 72,148 29,723 41,995 430 0
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities Reflected on the 0 0 0 0 0
Registrant's Balance Sheet under GAAP
Total 2,032,433 479,976 1,552,027 430 0
Transactions with Affiliates
On May 3, 2001, we advanced $334,300 to each of three senior officers, who
are also our stockholders, 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 our common stock
owned by this related company. On June 3, 2002, our 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, we 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 Anna 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. We believe 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.
We utilize a management company to manage all of our real properties. The
property management company is owned by Rose Perri, Anna Gluskin and the
estate of Mark Perri, our former Chairman of the Board. In the fiscal
quarters ended January 31, 2004 and 2003 we paid the management company
approximately $8,980 and $6,588, respectively, in management fees.
New Accounting Pronouncements
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The primary objectives of
this interpretation are to provide guidance on the identification of
entities for which control is achieved through means other than through
voting rights ("variable interest entities") and how to determine when and
which business enterprise (the "primary beneficiary") should consolidate
the variable interest entity. This new model for consolidation applies to
an entity in which either (i) the equity investors (if any) do not have a
controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition,
FIN 46 requires that the primary beneficiary, as well as all other
enterprises with a significant variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation
issues. The effective dates and impact of FIN 46 and FIN 46-R are as
follows: (i) Special-purpose entities ("SPEs") created prior to February 1,
2003. The Company must apply either the provisions of FIN 46 or early adopt
the provisions of FIN 46-R at the end of the first interim or annual
reporting period ending after December 15, 2003. (ii) Non-SPEs created
prior to February 1, 2003. The Company is required to adopt FIN 46-R at the
end of the first interim or annual reporting period ending after March 15,
2004. (iii) All entities, regardless of whether an SPE, that were created
subsequent to January 31, 2003. The provisions of FIN 46 were applicable
for variable interests in entities obtained after January 31, 2003. The
Company does not have any arrangements with variable interest entities that
will require consolidation of their financial information in the financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The changes are intended to improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. Additionally, those changes are
expected to result in more consistent reporting of contracts as either
derivatives or hybrid instruments. SFAS No. 149 is effective for contracts
and hedging relationships entered into or modified after June 30, 2003, and
for provisions that relate to SFAS No. 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003, apply
in accordance with their respective effective dates. The adoption of this
statement did not have a significant effect on the Company's consolidated
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liability and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liability and equity. It also requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for
mandatorily redeemable noncontrolling interests. The adoption of this
statement did not have a significant effect on the Company's consolidated
financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks associated with changes in the exchange
rates between U.S. and Canadian currencies and with changes in the interest
rates related to our fixed rate debt. We do not believe that any of these
risks will have a material impact on our financial condition, results of
operations and cash flows.
At the present time, we maintain our cash in short term government or
government guaranteed instruments, short term commercial paper, interest
bearing bank deposits or demand bank deposits which do not earn interest. A
substantial majority of these instruments and deposits are denominated in
U.S. dollars, with the exception of funds denominated in Canadian dollars
on deposit in Canadian banks to meet short term operating needs in Canada.
At the present time, with the exception of professional fees and costs
associated with the conduct of clinical trials in the United States and
Europe, substantially all of our operating expense obligations are
denominated in Canadian dollars. We do not presently employ any hedging or
similar strategy intended to mitigate against losses that could be incurred
as a result of fluctuations in the exchange rates between U.S. and Canadian
currencies.
As of January 31, 2004, we have fixed rate debt totaling $1,960,285, of
which $817,278, $577,309 and $565,698 bears interest at a fixed rate of
5.8%, 9.7% and 10%, respectively. These debt instruments mature from July
2004 through October 2005. As our fixed rate debt matures, we will likely
refinance such debt at their existing market interest rates which may be
more or less than the interest rates on the maturing debt. Since this debt
is fixed rate debt, if interest rates were to increase 100 basis points
prior to maturity, there would be no impact on earnings or cash flows.
We have neither issued nor own any long term debt instruments, or any other
financial instruments, for trading purposes and as to which we would be
subject to material market risks.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures.
Based on our management's evaluation (with the participation of our
principal executive officer and principal financial officer), as of the end
of the period covered by this Quarterly Report on Form 10-Q, our chief
executive officer and chief financial officer have concluded that our
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")) are effective to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
Changes in internal controls.
There was no change in our internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15(d) - 15(f) under the Exchange Act) during
the period covered by this Quarterly Report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Hope Manufacturing, Inc. and Steven Wood. In October 2003, the parties
signed Minutes of Settlement resolving all outstanding issues in this
previously reported Ontario Superior Court action. The Settlement requires
the payment of a non-material sum of money by us. The settlement is
presently in the process of being finalized.
There were no other legal proceedings which first became reportable or in
which there were material developments during the fiscal quarter ended
January 31, 2004.
For a full description of the foregoing legal proceeding, and all other
legal proceedings against us, see our Report on Form 10-K, as amended, for
the year ended July 31, 2003, which is incorporated herein by reference.
Item 2. Changes in Securities and Use of Proceeds
The following transaction occurred during fiscal quarter ended January 31,
2004.
o In January 2004, we completed three private placements of our common
stock and warrants. Under the terms of the private placements, we sold
units, consisting of an aggregate of 1,984,808 shares of common stock
and five-year warrants to purchase an aggregate of 496,202 shares of
common stock, to four accredited investors for gross proceeds of
$3,000,000. In addition to the shares of common stock and warrants
purchased by the investors at each closing, each investor received an
additional investment right to purchase for a period of time up to the
same number of shares of common stock and warrants initially purchased
by such investor. Each investor's additional investment right is
exercisable into additional shares of our common stock and warrants at
an exercise price equal to the last bid price, on a consolidated basis,
on the trading day immediately proceeding the date on which definitive
agreements were signed by us and each investor. The exercise price of
all warrants is equal to 130% of such bid price. We undertook the
offerings in reliance upon Rule 506 of Regulation D and Section
18(b)(4)(D) of the Securities Act of 1933, as amended (the "Securities
Act"). The proceeds from the private placements will be used for
working capital and other general corporate purposes directly related
to our growth, and the development of our products. All of these shares
have been registered for resale on form S-3.
The following events occurred subsequent to January 31, 2004.
o In February 2004, we completed three additional private placements of
common stock and warrants with three accredited investors. Pursuant to
the terms of these private placements, we sold units, consisting of
829,092 shares of common stock and five year warrants to purchase
207,274 shares of common stock, for gross proceeds of $1,264,000. In
addition to the shares of common stock and warrants purchased by the
investors at each closing, each investor received an additional
investment right to purchase for a period of time up to the same number
of shares of common stock and warrants initially purchased by such
investor. Each investor's additional investment right is exercisable
into additional shares of our common stock and warrants at an exercise
price equal to the last bid price, on a consolidated basis, on the
trading day immediately proceeding the date on which definitive
agreements were signed by us and each investor. The exercise price of
all warrants is equal to 130% of such bid price. We undertook the
offerings in reliance upon Rule 506 of Regulation D and Section
18(b)(4)(D) of the Securities Act. The proceeds from the private
placements will be used for working capital and other general corporate
purposes directly related to our growth, and the development of our
products. All of these shares have been registered for resale on form
S-3.
o On February 6, 2004, we authorized the issuance of an aggregate of
175,000 shares to Sound Capital Incorporated and Global Advisory
Services, LLC for consulting services. For financial reporting
purposes, we recognized an expense of $287,000 in connection with the
issuance of these shares for services, approximately equal to the fair
market value of the shares when issued. As transactions were not
eligible for S-8 registration, we relied on Section 4(2) of the
Securities Act in connection with the issuance of these shares. The
shares are restricted, and each of the consultants, being primarily
engaged in the financial industry, had access to the information which
would have been presented in a registration statement and sufficient
sophistication so as to not require the protections afforded by
registration under the Securities Act. All of these shares have been
registered for resale on form S-3.
The following is an update to a transaction that occurred during fiscal
quarter ended October 31, 2003 and was previously reported in our annual
report on Form 10-K, as amended, for the fiscal year ended July 31, 2003
and our quarterly report on Form 10-Q for the fiscal quarter ended October
31, 2003.
o On August 8, 2003, we acquired all of the outstanding capital stock of
Antigen Express, Inc. ("Antigen") pursuant to an Agreement and Plan of
Merger ("Merger Agreement"). Pursuant to the Merger Agreement, Antigen
became our wholly-owned subsidiary. In addition to the 1,779,974 shares
of our common stock we issued upon consummation of the merger to the
former shareholders of Antigen in exchange for the all of the
outstanding shares of capital stock of Antigen, we also became
obligated to issue an additional 1,000,000 shares of our common stock
on January 31, 2004 in connection with the Merger Agreement. On January
31, 2004, we distributed 944,560 of the issued 1,000,000 shares of our
common stock we were obligated to issue to the former shareholders of
Antigen in accordance with the terms of the Merger Agreement.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
We held a Special Meeting of our Stockholders on November 4, 2003, (i) to
approve an amendment to our Restated Certificate of Incorporation,
increasing the number of our authorized shares of common stock to
150,000,000, (ii) to authorize the Board of Directors to issue our
securities in certain below market issuances, and (iii) to approve an
amendment to our 2001 Stock Option Plan increasing the number of options
issuable thereunder from 4,000,000 to 8,000,000. For a full description of
the meeting and the proposals voted upon, see our quarterly report on Form
10-Q for the fiscal quarter ended October 31, 2003, which is incorporated
herein by reference.
Item 5. Other Information
An investment in our stock is very speculative and involves a high degree
of risk. You should carefully 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 SEC, 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.
We have a history of losses, and will incur additional losses.
We are a development stage company with a limited history of operations,
and do not expect ongoing revenues from operation in the immediately
foreseeable future. To date, we have not been profitable and our
accumulated net loss before preferred stock dividend was $84,255,623 at
January 31, 2004. 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 research,
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
foreseeable future.
To progress in product development or marketing, we will need additional
capital which may not be available to us. This may delay our progress in
product development or market.
We will 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 buccal and immunomedicine products;
o to develop new products based on our buccal delivery and
immunomedicine technologies, including clinical testing relating to new
products;
o to develop or acquire other technologies or other lines of business;
o to establish and expand our manufacturing capabilities;
o to finance general and administrative and research activities that
are not related to specific products under development; and
o to finance the research and development activities of our new
subsidiary Antigen. We have agreed to fund at least $2,000,000 of
Antigen expenditures during the first two years following the
acquisition. To date we have funded approximately $400,000 of those
expenditures.
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 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.
It is 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.
New equity financing could dilute current stockholders.
If we raise funds through equity financing to meet the needs discussed
above, 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.
Our research and development and marketing efforts are likely to be highly
dependent 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 buccal delivery and immunomedicine
technologies. 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. Therefore, these collaborators
may not 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.
Risks Related to Our Technologies
---------------------------------
Because our technologies and products are at an early stage of development,
we cannot expect revenues in the 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 750 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. Until we have developed a
commercially viable product which receives regulatory approval, we will not
receive revenues from ongoing operations.
We will not receive revenues from operations until we receive regulatory
approval to sell our products. Many factors impact our ability to obtain
approvals for commercially viable products.
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. Our
immunomedicine products are in the pre-clinical stage of development.
Pre-clinical and clinical trials of our products, and the manufacturing and
marketing of our technologies, 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. For these reasons, it is
possible we will never receive approval for one or more product candidates.
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.
Due to legal and factual uncertainties regarding the scope and protection
afforded by patents and other proprietary rights, we may not have
meaningful protection from competition.
Our long-term success will substantially depend upon our ability to protect
our proprietary technologies from infringement, misappropriation, discovery
and duplication and avoid infringing the proprietary rights of others. Our
patent rights, and the patent rights of biotechnology and pharmaceutical
companies in general, are highly uncertain and include complex legal and
factual issues. Because of this, our pending patent applications may not be
granted. These uncertainties also mean that any patents that we own or will
obtain in the future could be subject to challenge, and even if not
challenged, may not provide us with meaningful protection from competition.
Due to our financial uncertainties, we may not possess the financial
resources necessary to enforce our patents. Patents already issued to us or
our pending applications may become subject to dispute, and any dispute
could be resolved against us.
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. 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.
Also because of these legal and factual uncertainties, and because pending
patent applications are held in secrecy for varying periods in the United
States and other countries, even after reasonable investigation we may not
know with certainty whether any products that we (or a licensee) may
develop will 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, we cannot know for certain
whether 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.
Risks Related to Marketing of Our Potential Products
----------------------------------------------------
We may not become, or stay, profitable even if our products are approved
for sale.
Even if we obtain regulatory approval to market our oral insulin product or
any other product candidate, 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 or treatment by health care
professionals and diabetic patients;
o the availability, effectiveness and relative cost of alternative
diabetes or immunomedicine treatments that may be developed by
competitors; and
o the availability of third-party (i.e., insurer and governmental
agency) reimbursements.
We may not be able to compete with treatments now being marketed and
developed, or which may be developed and marketed in the future by other
companies.
Our products will compete with existing and new therapies and treatments.
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. We are also aware of a number of
companies currently seeking to develop alternative means of enhancing and
suppressing peptides. In the longer term, we also face competition from
companies that seek to develop cures for diabetes and other malignant,
infectious, autoimmune and allergic diseases through techniques for
correcting the genetic deficiencies that underlie such diseases.
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.
Numerous pharmaceutical, biotechnology and drug delivery companies,
hospitals, research organizations, individual scientists and nonprofit
organizations are engaged in the development of alternatives to our
technologies. Many of these companies 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.
If government programs and insurance companies do not agree to pay for or
reimburse patients for our products, we will not be successful.
Sales of our potential products depend in part on the availability of
reimbursement by 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. FDA approval of health
care products does not guarantee that these third party payors will pay for
the products. Even if third party payors do accept our product, the amounts
they pay may not be adequate to enable us 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.
Risks Related to Potential Liabilities
--------------------------------------
We face significant product liability risks, which may have a negative
effect on our financial condition.
The administration of drugs or treatments to humans, whether in clinical
trials or commercially, can result in product liability claims whether or
not the drugs or treatments 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
or treatment 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 severe negative
effect on our financial condition. 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, due to factors in the insurance market generally and our own
experience, we may not 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.
Outcome of an Arbitration Proceeding with Sands Brothers may have an
adverse impact on us.
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based
investment banking and brokerage firm, initiated an arbitration against us
under New York Stock Exchange rules. Sands alleged that it had the right to
receive, for nominal consideration, approximately 1.5 million shares of our
common stock. Sands based its claim upon an October 1997 letter agreement
that was purported by Sands to confirm an agreement appointing Sands as the
exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary
that we acquired in late 1997. In exchange therefor, the letter agreement
purported to grant Sands the right to acquire 17% of Generex
Pharmaceuticals' common stock for nominal consideration. Sands claimed that
its right to receive shares of Generex Pharmaceuticals' common stock
applies to our common stock since outstanding shares of Generex
Pharmaceuticals' common stock were converted into shares of our common
stock in the acquisition. Sands' claims also included additional shares
allegedly due as a fee related to that acquisition, and $144,000 in monthly
fees allegedly due under the terms of the purported agreement.
After several arbitration and court proceedings, on October 29, 2002, the
Appellate Division of the New York Supreme Court issued a decision
remanding the issue of damages to a new panel of arbitrators and limiting
the issue of damages before the new panel to reliance damages which is not
to include an award of lost profits. Reliance damages are out-of-pocket
damages incurred by Sands.
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.
Despite the recent favorable decisions, the case is still ongoing and our
ultimate liability cannot yet be determined with certainty. Our 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 are awarded to Sands as a result of this legal
proceeding. We are not able to estimate an amount or range of potential
loss from this legal proceeding at the present time.
Risks Related to the Market for Our Common Stock
------------------------------------------------
If our common stock is delisted from the NASDAQ SmallCap Market and/or
becomes subject to Penny Stock regulations, the market price for our stock
may be reduced and it may be more difficult for us to obtain financing.
On June 5, 2003, our common stock was delisted from the NASDAQ National
Market because of our failure to maintain a minimum of $10,000,000 in
stockholders' equity. On June 5, 2003, our stock began trading on the
NASDAQ SmallCap Market. The NASDAQ SmallCap Market has its own standards
for continued listing, including a minimum of $2.5 million stockholders'
equity. As of July 31, 2003, our stockholders' equity was $5,856,965.
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 stock price dropped 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 NASDAQ, there will be less interest for our
stock in the market. This may result in lower prices for our stock and make
it more difficult for us to obtain financing.
If our stock is not listed on NASDAQ and fails to maintain a price of $5.00
or more per share, our stock would become subject to the Securities and
Exchange Commission'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, it may be more difficult for us to obtain
financing.
The price of Our Common Stock may be volatile.
There may be wide fluctuation in the price of our common stock. 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 or treatments 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
common stock. Such activities may result, among other things, in causing
the price of our common stock 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
Restated Certificate of Incorporation could delay or prevent the
acquisition or sale of our business.
Holders of our Special Voting Rights Preferred Stock have the ability to
prevent any change of control in us. Our Vice President of Research and
Development, Dr. Pankaj Modi, owns all of our Special Voting Rights
Preferred Stock. In addition, our Restated 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 our stockholders. 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 stockholder approval for an acquisition of our
business or increase the cost of any such acquisition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation, as amended, of Generex
Biotechnology Corporation.*
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
------------------------------------------
* Filed herewith.
(b) Reports on Form 8-K.
The following Reports on Form 8-K were filed in the quarter ended January
31, 2004 and thereafter:
o On January 6, 2004, we filed a Current Report on Form 8-K announcing
the completion of a private placement with certain accredited investors
under Item 5 of Form 8-K - "Other Events". An exhibit relating to the
private placement was filed under Item 7.
o On February 3, 2004, we filed Current Report on Form 8-K announcing
the resignations of Peter Levitch and Pankaj Modi, Ph.D. from our Board
of Directors under Item 5 of Form 8-K - "Other Events."
o On February 12, 2004, we filed a Current Report on Form 8-K
announcing the election of Mindy J. Allport Settle to our Board of
Directors and announcing the postponement of our annual meeting of
stockholders for the 2003 fiscal year under Item 5 of Form 8-K - "Other
Events."
o On March 1, 2004, we filed a Current Report on Form 8-K announcing
the completion of private placements with certain accredited investors
under Item 5 of Form 8-K - "Other Events." Exhibits relating to the
private placements were filed under Item 7.
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 15, 2004
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Rose C. Perri By: /s/ Anna Gluskin
--------------------------- -----------------------
Principal Financial Officer Chief Executive Officer