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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 APRIL 30, 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 31,772,632 as of June 9, 2004.
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -- unaudited............................. 3
Consolidated Balance Sheets --
April 30, 2004 and July 31, 2003........................................... 3
Consolidated Statements of Operations -- for the three and nine month
periods ended April 30, 2004 and 2003, and cumulative from
November 2, 1995 to April 30, 2004......................................... 4
Consolidated Statements of Cash Flows -- For the nine month
periods ended April 30, 2004 and 2003, and cumulative from
November 2, 1995 to April 30, 2004......................................... 5
Notes to Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................................... 24
Item 4. Controls and Procedures.................................................... 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 25
Item 2. Changes in Securities and Use of Proceeds.................................. 25
Item 3. Defaults Upon Senior Securities............................................ 26
Item 4. Submission of Matters to a Vote of Security Holders........................ 26
Item 5. Other Information.......................................................... 27
Item 6. Exhibits and Reports on Form 8-K........................................... 33
Signatures.......................................................................... 34
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 30, July 31,
2004 2003
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,195,539 $ 12,356,578
Restricted cash 197,975 188,967
Short-term investments 466,038 2,362,071
Other current assets 1,132,054 319,293
------------ ------------
Total Current Assets 7,991,606 15,226,909
Property and Equipment, Net 4,264,891 4,218,832
Assets Held for Investment, Net 1,905,063 1,906,312
Patents, Net 5,751,068 898,876
Deposits 359,662 25,000
Due From Related Party 370,808 362,779
------------ ------------
TOTAL ASSETS $ 20,643,098 $ 22,638,708
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,899,543 $ 1,386,214
Current maturities of long-term debt 437,175 426,767
------------ ------------
Total Current Liabilities 2,336,718 1,812,981
Long-Term Debt, Less Current Maturities 1,446,851 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 April 30, 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
April 30, 2004 and July 31, 2003 1 1
Common stock, $.001 par value; authorized 150,000,000 and 50,000,000
shares at April 30, 2004 and July 31, 2003, respectively
issued 31,803,432 and 26,017,524 shares at April 30, 2004,
and July 31, 2003, respectively, and outstanding 31,803,432 and 25,275,308
shares at April 30, 2004 and July 31, 2003, respectively 31,805 26,017
Treasury stock, at cost; -0- and 742,216 shares at April 30, 2004
and July 31, 2003, respectively -- (1,610,026)
Additional paid-in capital 94,150,625 85,065,980
Notes receivable - common stock (378,585) (359,998)
Deficit accumulated during the development stage (91,450,755) (77,353,787)
Accumulated other comprehensive income 196,381 88,778
------------ ------------
Total Stockholders' Equity 2,549,472 5,856,965
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,643,098 $ 22,638,708
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements
3
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative From
For the Three Months Ended For the Nine Months Ended November 2, 1995
April 30, April 30, (Date of Inception)
---------------------------- ---------------------------- to April 30,
2004 2003 2004 2003 2004
------------ ------------ ------------ ------------ ------------
Revenues $ 235,129 $ -- $ 420,693 $ -- $ 1,420,693
Operating Expenses:
Research and development 2,393,167 731,104 5,378,284 3,497,425 44,023,014
Research and development - related party -- -- -- -- 220,218
General and administrative 2,750,055 2,032,637 8,487,814 6,760,448 52,069,585
General and administrative - related party -- -- -- -- 314,328
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 5,143,222 2,763,741 13,866,098 10,257,873 96,627,145
------------ ------------ ------------ ------------ ------------
Operating Loss (4,908,093) (2,763,741) (13,445,405) (10,257,873) (95,206,452)
Other Income (Expense):
Miscellaneous income (expense) 102 24,380 (3,760) 67,735 125,181
Income from Rental Operations, net 31,470 (4,079) 68,603 17,504 89,393
Interest income 13,906 152,532 190,519 373,141 3,312,867
Interest expense (37,460) (16,963) (96,922) (52,695) (514,872)
------------ ------------ ------------ ------------ ------------
Net Loss Before Undernoted (4,900,075) (2,607,871) (13,286,965) (9,852,188) (92,193,883)
Minority Interest Share of Loss -- -- -- 625 3,038,185
------------ ------------ ------------ ------------ ------------
Net Loss (4,900,075) (2,607,871) (13,286,965) (9,851,563) (89,155,698)
Preferred Stock Dividend -- -- 810,003 756,945 2,295,057
------------ ------------ ------------ ------------ ------------
Net Loss Available to Common Shareholders $ (4,900,075) $ (2,607,871) $(14,096,968) $(10,608,508) $(91,450,755)
============ ============ ============ ============ ============
Basic and Diluted Net Loss Per Common Share $ (.16) $ (.13) $ (.48) $ (.53)
============ ============ ============ ============
Weighted Average Number of Shares of Common
Stock Outstanding 31,315,745 20,027,893 29,447,887 20,066,234
============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements
4
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative From
For the Nine Months Ended November 2, 1995
April 30, (Date of Inception)
------------------------------ to April 30,
2004 2003 2004
------------- ------------- ------------------
Cash Flows From Operating Activities:
Net loss $ (13,286,965) $ (9,851,563) $ (89,155,698)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 754,037 428,787 2,216,697
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 1,356,599 153,475 3,651,438
Non-cash compensation expense 45,390 -- 45,390
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 -- 12,802 43,812
Other current assets (814,084) (147,130) (1,119,186)
Accounts payable and accrued expenses 403,794 (619,926) 2,601,990
Other, net -- -- 110,317
------------- ------------- -------------
Net Cash Used in Operating Activities (11,362,796) (8,855,136) (74,164,489)
Cash Flows From Investing Activities:
Purchase of property and equipment (395,468) (401,958) (3,978,066)
Costs incurred for patents (251,820) (148,236) (1,268,027)
Change in restricted cash (4,964) (170,993) (188,047)
Proceeds from maturity of short term investments 6,534,816 15,095,089 126,221,008
Purchases of short-term investments (4,638,783) (8,493,397) (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 (360,084) 100,000 (837,278)
Change in notes receivable - common stock (18,587) (17,028) (78,585)
Change in due from related parties -- -- (2,255,197)
Other, net -- -- 89,683
------------- ------------- -------------
Net Cash Provided by (Used in) Investing Activities 915,342 5,951,404 (10,057,480)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 993,149
Repayment of long-term debt (54,937) (42,493) (1,090,288)
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 4,195,988 -- 70,324,964
Purchase and retirement of common stock -- -- (119,066)
------------- ------------- -------------
Net Cash Provided by (Used in) Financing Activities 4,267,691 (130,926) 90,396,040
Effect of Exchange Rates on Cash 18,724 26,952 21,468
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (6,161,039) (3,007,706) 6,195,539
Cash and Cash Equivalents, Beginning of Period 12,356,578 8,131,463 --
------------- ------------- -------------
Cash and Cash Equivalents, End of Period $ 6,195,539 $ 5,123,757 $ 6,195,539
============= ============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements
5
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations for
reporting 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 nine 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.
6
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 1,240,000 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
nine months ended April 30, 2004, the Company recaptured/recognized
$(30,000) and $45,390 of compensation expense in connection with
these options, respectively. During the three and nine months ended
April 30, 2003, the Company recorded no compensation expense in
connection with options issued.
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 Nine Months Ended
April 30, April 30,
2004 2003 2004 2003
-------------- ------------- -------------- --------------
Net Loss Available to Common
Stockholders, as Reported $ (4,900,075) $ (2,607,871) $ (14,096,968) $ (10,608,508)
Add: Total Stock-Based Employee
Compensation Included in Reported
Net Loss 30,000 -- (45,390) --
Deduct: Total Stock-Based Employee
Compensation Income Determined
Under Fair Value Based Method,
Net of Related Tax Effect 508,500 337,781 1,867,720 2,920,689
------------- ------------ ------------- -------------
Pro Forma Net Loss Available
to Common Stockholders $ (5,438,575) $ (2,945,652) $ (15,919,298) $ (13,529,197)
============= ============ ============= =============
Loss Per Share:
Basic and diluted, as reported $ (0.16) $ (0.13) $ (0.48) $ (0.53)
========= ======== ========= ========
Basic and diluted, pro forma $ (0.17) $ (0.15) $ (0.54) $ (0.67)
========= ======== ========= ========
7
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 April 30, 2004 and 2003, was $5,036,597 and $2,401,879
and nine months ended April 30, 2004 and 2003, was $13,179,362 and
$9,546,121, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
April 30, July 31,
2004 2003
------------- --------------
Accounts Payable $ 1,629,543 $ 1,094,129
Accrued Legal Fees and Settlement 270,000 292,085
------------- --------------
Total $ 1,899,543 $ 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
============
8
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 Nine Months Ended
April 30, April 30,
2004 2003 2004 2003
------------ ------------- ------------ ------------
Total Revenues $ 235,129 $ 83,908 $ 420,693 $ 275,285
Net Loss Available to Common
Stockholders $ 4,900,075 $ 2,647,901 $ 14,096,968 $ 10,923,290
Basic and Diluted Net Loss Per
Common Share $ (.16) $ (.12) $ (.48) $ (.48)
7. INTANGIBLE ASSETS
The components of the Company's identifiable intangible assets were
as follows:
April 30, July 31,
2004 2003
------------ --------------
Patents $ 6,156,906 $ 1,020,805
Less: Accumulated Amortization 405,838 121,929
------------ -------------
Patents, Net $ 5,751,068 $ 898,876
============ =============
Weighted Average Life 16.4 years 17 years
Amortization expense amounted to $283,147 and $41,988 for the nine
months ended April 30, 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.
9
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 took place in early June 2004. A decision
has not been rendered by the arbitrators.
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.
10
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 the company called 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
Modi 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
Generex Pharmaceuticals, Inc., commenced an action in the Ontario
Superior Court of Justice for wrongful dismissal. The Ontario
Superior Court of Justice rendered judgment in favor of the plaintiff
for approximately $127,000 plus interest in November 1999 and further
awarded costs to the plaintiff in March 2000. An appeal of the
judgment was filed with the Court of Appeal for Ontario in April
2000. The appeal was heard on February 26, 2003, and on February 28,
2003, the Court of Appeals dismissed the appeal with costs. Generex
Pharmaceuticals, Inc., has sought leave to appeal the Courts of
Appeal's decision to the Supreme Court of Canada. The appeal was
dismissed. The parties have signed Minutes of Settlement in April
2004, pursuant to which the Company is required to pay the plaintiff
a total of $280,000 Canadian (approximately $205,000 US) in monthly
installments. The installments consist of $20,000 CND on May 1, 2004,
$20,000 CND on June 1, 2004, $50,000 CND on July 1, 2004 and 7
monthly payments of $27,142.86 CND each from August 1, 2004 to
February 1, 2005.
11
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. Management believes the claims against the Company
and the officers are frivolous and completely without merit. Neither
the Company nor its officers are a party to any agreement with the
plaintiffs. Most of the requested relief relates to restrictions on
the use of patents and information allegedly owned by the plaintiffs,
and an accounting for the use of such items. Neither the Company nor
its officers have used any patents or information owned by the
plaintiffs. All of the patents and information claimed to be owned by
the plaintiffs are completely unrelated to any product or technology
the Company is currently developing or intends to develop. Therefore,
even if the court were to award some declaratory or injunctive
relief, neither the Company nor its officers would be affected.
Management is defending this action vigorously. The parties have now
signed Minutes of Settlement resolving all outstanding issues in the
action. The settlement did 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 nine months ended April
30, 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 14,478,070 and 10,778,408 incremental shares at April
30, 2004 and 2003, respectively, have been excluded from the
computation of Diluted EPS as they are antidilutive.
12
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Nine Months Ended
April 30,
------------------------------
2004 2003
------------------------------
Cash paid during the period for:
Interest $ 97,701 $ 97,191
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 nine months
ended April 30, 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
("Termination 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 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 April 30, 2004, $660,000 is included in
other current assets and $345,000 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.
13
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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), the unpaid portion of $328,365 is included in
accounts payable and accrued expenses at April 30, 2004, and issue
options to purchase 450,000 shares of common stock at an exercise
price of $1.47.
On March 25, 2004, the Company signed a Letter of Intent with
PharmaBrand S.A. ("PharmaBrand") for the procurement of any and all
requisite or desirable governmental, regulatory and other
registrations, approvals, authorizations and contents for the
manufacturing, packaging, marketing, distribution and sale of
pharmaceutical products in Latin America and Central America. The
final terms of the Joint Venture are still being negotiated.
On March 30, 2004, the Company entered into an agreement to acquire
certain real property for a purchase price of $164,183 ($225,000
Canadian), $14,594 ($20,000 Canadian) of which has been deposited
into attorney trust for application to the final acquisition (see
Note 15).
In April 2004 the Company entered into a settlement agreement with an
individual requiring payments of totaling approximately $205,000
($280,000 Canadian dollars) commencing May 2004 (see Note 8). This
amount is included in accounts payable as of April 30, 2004.
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. The 2,779,974
were valued at $1.67 per share, which represented the fair market
value of the Company common stock on the date the terms of the
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, became fully vested
and exercisable for shares of the Company under the terms of the
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 assets
acquired, including $4,878,012 of intangible assets, and liabilities
assumed.
During the nine months ended April 30, 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 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.
14
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
On November 4, 2003, the Company granted a total of 1,046,000 options
to purchase shares of 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 3). 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 performed 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
placement, 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 at a rate of one share for every four shares of common stock
purchased. In addition to the shares of common stock and warrants
purchased by the investor 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 the investor.
On January 15, 2004, the Company paid a 6 percent stock dividend on
the Company's Series A Preferred Stock. The dividend was paid in
shares of Series A Preferred stock, and resulted in a charge to
accumulated deficit of $810,003, which was based upon the original
issue price of the preferred shares.
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 207,275 warrants to
purchase shares of the Company's common stock. In addition to the
shares of common stock and warrants purchased by the investor 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
commons stock and warrants initially purchased by such investor.
In February 2004, the Company issued 287,500 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 $425,501.
In February 2004, the Company issued 8,850 shares of common stock to
employees as compensation for past service. The shares were fair
valued at quoted market price at date of issuance and resulted in a
charge to operations of $13,098.
15. SUBSEQUENT EVENTS
The following event occurred subsequent to April 30, 2004:
On June 8, 2004, the Company completed its acquisition of certain
real property (see Note 13).
15
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
16
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 our 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. 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
17
subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS
paid in capital of $2,985,000 to subscribe for a 19.9% equity ownership interest
in the joint venture entity. 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. While we presently own 80.1% of the joint
venture entity, 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 the joint venture entity. 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
the 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), Ltd. was granted non-exclusive licenses to utilize our buccal
delivery technology and certain Elan drug delivery technologies. Using the funds
from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable
license fee of $15,000,000 to Elan in consideration for being granted the rights
to utilize the Elan drug delivery technologies.
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 $420,693 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 project 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 product 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
18
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 nine months of fiscal 2004, approximately 90% of our
$5,378,284 in research 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 83% of our
$3,497,425 of research and development was expended for insulin and platform
technology, and approximately 7% for morphine and fentanyl.
Approximately 10%, or $547.370 of our research and development expenses for the
nine month period ended April 30, 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 April 30, 2004
- ---------------------------------------------------
In February 2004, we completed three 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 continues to serve as an
officer of the Company.
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.
19
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.
On March 17, 2004, we announced the appointment of Brian T. McGee to our Board,
filling the vacancy left by Dr. Modi's resignation. With the addition of Mr.
McGee, a majority of the Company's directors are independent directors, as such
term is defined under NASDAQ Rule 4200(a)(15). McGee has been a partner of
Zeifman & Company, LLP ("Zeifman"), since 1995. Mr. McGee began working at
Zeifman shortly after receiving a B.A. degree in Commerce from the University of
Toronto in 1985. Zeifman is a Chartered Accounting firm based in Toronto,
Ontario. A significant element of Zeifman's business is public corporation
accounting and auditing. Mr. McGee is a Chartered Accountant.
Developments subsequent to Fiscal Quarter ended April 30, 2004
- --------------------------------------------------------------
On May 17, 2004, we held our Annual Meeting of Stockholders. At the meeting, the
stockholders re-elected all incumbent directors, including Ms. Allport-Settle
and Mr. McGee.
Results of Operations - Three and nine months ended April 30, 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 $420,693 in research grants received by Antigen
during the nine months ended April 30, 2004.
Our net loss for the quarter ended April 30, 2004 was $4,900,075 versus
$2,607,871 in the corresponding quarter of the prior fiscal year. The increase
in net loss in this fiscal quarter versus the corresponding quarter of the prior
fiscal year is primarily due to a significant increase in research and
development expenses and an increase in our general and administrative expenses.
The increase in general and administrative expenses in the quarter ended April
30, 2004, compared to the quarter ended April 30, 2003, was the result of the
increase in financial and consulting services and advertising expenses this
year, compared to the same period last year. The increase in general and
administrative expenses was partially offset by a reduction in legal expenses.
The significant increase of $1,662,063 in research and development expenses in
the three-month period ending April 30, 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 April 30, 2004, increased
activities in the clinical development program for our oral insulin formulation
and reduced research and development activities last year compared to the same
period in 2004. Last year's reduction is attributable to contraction of our
research and development activities under our collaboration agreements with
Lilly and Elan.
Our net loss for the nine months ended April 30, 2004 increased to $13,286,965
versus $9,851,563 for the corresponding period of the prior fiscal year. The
increase in net loss was due to an increase in research and development
activities of $1,880,859 and an increase in general and administrative expenses
of 1,727,366 this year, compared to the same period in 2003. This increase in
research and development expenses was due the activities of Antigen and the
increased level of activities of our oral insulin program compared to last year.
The increase in general and administrative expenses for the nine month ended
April 30, 2004 was primarily due to activities of Antigen, accrual of the
severance paid to an employee and an increase in financial and consulting
services this year compared to 2003.
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 1,124 outstanding shares of such stock (1,000 of
which were issued in January 2001 as part of our joint venture with Elan and 124
20
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 nine months ended April 30, 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 February 2004, we completed 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. We repurchased a
total of 149,500 shares of common stock to be held in treasury for $484,588, at
an average price of $3.24 per share. The Company cancelled all shares held in
Treasury Stock on November 25, 2003 that included 592,716 shares received in
satisfaction of outstanding loans to officers, as described in "Transactions
with Affiliates," below.
At April 30, 2004, we had cash and short-term investments (primarily notes of
United States corporations) of approximately $6.7 million. At July 31, 2003, our
cash and short term investments were approximately $14.7 million. The decrease
was attributable to the use of approximately $12.2 million for ongoing
operations, which was somewhat offset by the infusion of approximately $4.2
million received by us in the private placements completed in January and
February. Our proceeds from the maturity of short term investments were
$6,534,816 during the nine month period ended April 30, 2004 versus $15,095,089
during the nine month period ended April 30, 2003. 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 7 months based on the pace of our current development activities.
Therefore, we will require additional funds to support our working capital
requirements in the near future. 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
21
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 1-3 YEARS 3-5 YEARS MORE THAN
YEAR 5 YEARS
- ---------------------------------------------------- ------------ ------------- ------------- ------------- --------------
Long-Term Debt Obligations 1,884,026 437,175 843,646 116,758 486,447
- ---------------------------------------------------- ------------ ------------- ------------- ------------- --------------
Capital Lease Obligations 0 0 0 0 0
- ---------------------------------------------------- ------------ ------------- ------------- ------------- --------------
Operating Lease Obligations 62,721 27,197 35,524 0 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 1,946,747 464,372 879,170 116,758 486,447
- ---------------------------------------------------- ------------ ------------- ------------- ------------- --------------
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
22
$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
April 30, 2004 and 2003 we paid the management company approximately $9,394 and
$8,498, 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
23
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 mandatory 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 April 30, 2004, we have fixed rate debt totaling $1,884,026 of which
$778,342, $558,066 and $547,618 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 mature, we will likely refinance such debt at their
existing market interest rates which may be more or less than 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.
24
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. This previously reported Ontario
Superior Court action has been settled by our payment of a non-material sum of
money. The parties have executed a mutual full and final release
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation.
A new arbitration hearing was held in early June, 2004. A decision has not yet
been rendered by the new arbitration panel which held that hearing.
There were no other legal proceedings which first became reportable or in which
there were material developments during the fiscal quarter ended April 30, 2004.
For a full description of the foregoing legal proceedings, 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 April 30, 2004:
o In February 2004, we completed two additional private placements of
common stock and warrants with two 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.
o On February 6, 2004, we authorized the issuance of an aggregate of
287,500 shares of common stock to three consultants for consulting
services. The shares were fair valued at quoted market price at date of
issuance and resulted in a charge to operations of $425,501. As the
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.
25
o In February 2004, the Company issued 8,850 shares of common stock to
employees as compensation for past service. The shares were fair valued
at quoted market price at date of issuance and resulted in a charge to
operations of $13,098. We relied on the exemption provided by section
4(2) of the securities ACT, or, alternatively, on the fact that no
consideration was given as there was no prior agreement as to the
issuance of these shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Generex Biotechnology Corporation
was held on March 17, 2004. At the meeting, 19,786,399 shares of Common Stock
were represented and entitled to vote. Generex stockholders elected all nominees
to the Board of Directors, approved a proposal relating to issuance of common
stock at less than market value and ratified the appointment of BDO Dunwoody,
LLP as independent public accountants for the fiscal year ending July 31, 2004.
The results of the vote for the Board of Directors was as follows:
Election of nominees to Board of
Directors for terms expiring May 2004 Votes For Votes Against Abstentions
- ------------------------------------- --------- ------------- -----------
Mindy Allport- Settle 19,492,947 0 293,452
John P. Barratt 19,497,602 0 288,797
Gerald Bernstein, M.D. 19,324,977 0 461,422
Anna E. Gluskin 19,466,979 0 319,420
Brian T. McGee 19,479,476 0 306,923
Rose C. Perri 19,454,744 0 331,655
J. Michael Rosen 19,489,126 0 297,273
The proposal approved relating to issuance of below market priced securities was
to authorize the Board of Directors, in the three-month period commencing with
the date of the meeting, to issue, without prior stockholder approval, in
connection with capital raising transactions, and/or acquisitions of assets,
businesses or companies, up to 10,000,000 shares of common stock, including
options, warrants, securities or other rights convertible into common stock, in
the aggregate, in excess of the number of shares that NASDAQ's Rules
4350(i)(1)(C) and (D) permit the Company to issue in such transactions without
prior stockholder approval. The issuance of such 10,000,000 shares to be upon
such terms as the Board of Directors shall deem to be in the best interests of
the Company, for a price of not less than 70% of the at the time of such
issuance and for an aggregate consideration not to exceed $50,000,000. The
authorization also applies to prior issuances of common stock which are
considered retroactively to have been issued at below market price dud to
"integration" with a new issuance
26
The results of the votes on the proposals were as follows:
Broker
Votes For Votes Against Abstention Non-Votes
---------- ------------- ----------- -----------
Proposal to Authorize Issuance 6,052,604 834,765 57,382 12,841,648
of Shares at below Market Prices
Ratification of BDO Dunwoody 19,547,356 189,187 49,856 0
As Independent Public Accountants
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 $89,158,333 at April 30, 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.
We need for additional capital
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 with the development of our buccal insulin product
o to proceed under our joint venture with Elan, which requires us to fund
80.1% of initial product development costs;
o to develop other 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;
27
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 $900,000 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 seven 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. Because our operating and capital resources are insufficient
to meet future requirements, we will have to raise additional funds in the near
future 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.
Recent changes in the application of the rules of the NASDAQ Stock Market may
also make it more difficult for us to raise private equity capital.
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.
28
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
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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.
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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. A new arbitration hearing was held
in early June, 2004. A decision has not yet been rendered by the new arbitration
panel which held that hearing.
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 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.
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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 April 30, 2004,
our stockholders' equity was $2,549,472.
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.
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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
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. All other exhibits are incorporated by reference, as
described.
(b) Reports on Form 8-K.
The following Reports on Form 8-K were filed in the quarter ended April 30, 2004
and thereafter:
o On February 6, 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.
o On March 22, 2004 we filed a Current Report on Form 8-K announcing the
appointment of Brian McGee to the Board of Directors, under Item 5 of
Form 8-K - "Other Events."
o On March 24, 2004 we filed an amendment to our Current Report on Form
8-K, reporting certain private placements under Item 5 of Form 8-K -
"Other Events." The amendment included as Exhibits under Item 7 forms
of the documents relating to the private placements.
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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: June 14, 2004
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Rose C. Perri By: /s/ Anna Gluskin
- --------------------------- -----------------------
Principal Financial Officer Chief Executive Officer
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