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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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 34,807,448 as of October 31, 2004.
485501V3
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -- unaudited
Consolidated Balance Sheets --
October 31, 2004 and July 31, 2004 ....................................
Consolidated Statements of Operations -- for the three month
periods ended October 31, 2004 and 2003, and cumulative from
November 2, 1995 to October 31, 2004...................................
Consolidated Statements of Cash Flows -- For the three month
periods ended October 31, 2004 and 2003, and cumulative from
November 2, 1995 to October 31, 2004...................................
Notes to Consolidated Financial Statements.............................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................
Item 3. Quantitative and Qualitative Disclosures
About Market Risk......................................................
Item 4. Controls and Procedures................................................
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................................
Item 2. Changes in Securities and Use of Proceeds..............................
Item 3. Defaults Upon Senior Securities........................................
Item 4. Submission of Matters to a Vote of Security Holders....................
Item 5. Other Information......................................................
Item 6. Exhibits and Reports on Form 8-K.......................................
Signatures......................................................................
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
October 31, July 31,
2004 2004
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,528,506 $ 4,950,419
Restricted cash 227,851 206,421
Other current assets 291,377 870,934
------------- ------------
Total Current Assets 2,047,734 6,027,774
Property and Equipment, Net 4,444,521 4,291,622
Assets Held for Investment, Net 2,437,124 2,250,506
Patents, Net 5,678,008 5,696,905
Deposits -- 395,889
Due From Related Party 381,145 349,294
------------- ------------
TOTAL ASSETS $ 14,988,532 $ 19,011,990
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,058,366 $ 1,947,399
Current maturities of long-term debt 1,472,006 1,366,122
------------- ------------
Total Current Liabilities 4,530,372 3,313,521
Long-Term Debt, Less Current Maturities 935,356 858,661
Commitments and Contingencies
Series A, Preferred stock, $.001 par value; authorized
1,000,000 shares, stated at redemption value, 1,191
shares issued and outstanding at October 31, 2004
and July 31, 2004 14,310,057 14,310,057
Stockholders' Equity:
Special Voting Rights Preferred stock, $.001 par value;
authorized, issued and outstanding 1,000 shares at
October 31, 2004 and July 31, 2004 1 1
Common stock, $.001 par value; authorized 150,000,000 shares
at October 31, 2004 and July 31, 2004, issued 34,882,448 and
34,262,448 shares at October 31, 2004 and July 31, 2004,
and outstanding 34,882,448 and 34,262,448 shares at
October 31, 2004 and July 31, 2004, respectively 34,809 34,264
Additional paid-in capital 98,138,146 97,110,291
Notes receivable - common stock (391,103) (384,803)
Deficit accumulated during the development stage (103,184,401) (96,526,373)
Accumulated other comprehensive income 615,295 296,371
------------- ------------
Total Stockholders' Equity (4,787,253) 529,751
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,988,532 $ 19,011,990
============= ============
The Notes to Consolidated Financial Statements are
an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative From
For the Three Months Ended November 2, 1995
October 31, (Date of Inception)
----------------------------- to October 31,
2004 2003 2004
----------- ----------- -------------
Revenues $ 142,750 $ 68,061 $ 1,769,934
Operating Expenses:
Research and development 3,395,130 1,028,529 50,562,844
Research and development - related party -- -- 220,218
General and administrative 3,422,238 2,830,316 57,673,550
General and administrative - related party -- -- 314,328
----------- ----------- -------------
Total Operating Expenses 6,817,368 3,858,845 108,770,940
----------- ----------- -------------
Operating Loss (6,674,618) (3,790,784) (107,001,006)
Other Income (Expense):
Miscellaneous income (expense) -- (3,698) 125,348
Income from Rental Operations, net 47,066 4,081 141,416
Interest income 15,438 196,317 3,387,050
Interest expense (45,914) (18,186) (580,337)
----------- ----------- -------------
Net Loss Before Undernoted (6,658,028) (3,612,270) (103,927,529)
Minority Interest Share of Loss -- -- 3,038,185
----------- ----------- -------------
Net Loss (6,658,028) (3,612,270) (100,889,344)
Preferred Stock Dividend -- -- 2,295,057
----------- ----------- -------------
Net Loss Available to Common Shareholders $(6,658,028) $(3,612,270) $(103,184,401)
=========== =========== =============
Basic and Diluted Net Loss Per Common Share $ (.19) $ (.13)
=========== ===========
Weighted Average Number of Shares of Common
Stock Outstanding 34,810,981 27,900,591
=========== ===========
The Notes to Consolidated Financial Statements are
an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative From
For the Three Months Ended November 2, 1995
October 31, (Date of Inception)
--------------------------- October 31,
2004 2003 2004
----------- ----------- -------------
Cash Flows From Operating Activities:
Net loss $(6,658,028) $(3,612,270) $(100,889,344)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 271,738 234,458 2,748,970
Minority interest share of loss -- -- (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
Common stock issued for services rendered 675,800 918,000 4,330,612
Non-cash compensation expense -- -- 45,390
Stock options and warrants issued for services rendered 490,600 27,000 6,776,718
Preferred stock issued for services rendered -- -- 100
Treasury stock redeemed for non-performance of services (138,000) -- (138,000)
Founders' shares transferred for services rendered -- -- 353,506
Changes in operating assets and liabilities
(excluding the effects of acquisition):
Miscellaneous receivables -- -- 43,812
Other current assets 604,905 82,520 (238,992)
Accounts payable and accrued expenses 1,048,260 (517,524) 3,667,508
Other, net -- -- 110,317
----------- ----------- -------------
Net Cash Used in Operating Activities (3,704,725) (2,867,816) (82,388,376)
Cash Flows From Investing Activities:
Purchase of property and equipment (42,140) (120,742) (4,271,121)
Costs incurred for patents (58,983) (78,303) (1,360,540)
Change in restricted cash (2,476) (1,476) (192,805)
Proceeds from maturity of short term investments -- 141,846 126,687,046
Purchases of short-term investments -- (3,200,345) (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 -- -- (1,126,157)
Change in deposits 395,889 -- (477,194)
Change in notes receivable - common stock (6,300) (6,218) (91,103)
Change in due from related parties -- -- (2,222,390)
Other, net -- -- 89,683
----------- ----------- -------------
Net Cash Provided by (Used in) Investing Activities 285,990 (3,215,006) (9,601,395)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 1,154,316
Repayment of long-term debt (19,269) (17,869) (1,127,760)
Change in due to related parties -- -- 154,541
Proceeds from exercise of warrants -- -- 4,552,984
Proceeds from exercise of stock options -- 104,590 1,010,440
Proceeds from minority interest investment -- -- 3,038,185
Proceeds from issuance of preferred stock -- -- 12,015,000
Purchase of treasury stock -- -- (483,869)
Proceeds from issuance of common stock, net -- -- 73,283,715
Purchase and retirement of common stock -- -- (119,066)
----------- ----------- -------------
Net Cash Provided by (Used in) Financing Activities (19,269) 86,721 93,478,486
Effect of Exchange Rates on Cash 16,091 28,578 39,791
----------- ----------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (3,421,913) (5,967,523) 1,528,506
Cash and Cash Equivalents, Beginning of Period 4,950,419 12,356,578 --
----------- ----------- -------------
Cash and Cash Equivalents, End of Period $ 1,528,506 $ 6,389,055 $ 1,528,506
=========== =========== =============
The Notes to Consolidated Financial Statements are
an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations for
reporting on Form 10-Q. Accordingly, certain information and
disclosures required by generally accepted accounting principles for
complete financial statements are not included herein. The interim
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's latest Annual
Report on Form 10-K. The results for the three 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
2005, in the Company's opinion all adjustments necessary for a fair
presentation of these interim statements have been included and are
of a normal and recurring nature.
2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". The primary objectives
of this interpretation are to provide guidance on the identification
of entities for which control is achieved through means other than
through voting rights ("variable interest entities") and how to
determine when and which business enterprise (the "primary
beneficiary") should consolidate the variable interest entity. This
new model for consolidation applies to an entity in which either (i)
the equity investors (if any) do not have a controlling financial
interest; or (ii) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN
46 requires that the primary beneficiary, as well as all other
enterprises with a significant variable interest entity, make
additional disclosures. Certain disclosure requirements of FIN 46
were effective for financial statements issued after January 31,
2003. In December 2003, the FASB issued FIN 46 (revised December
2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to
address certain FIN 46 implementation issues. The effective dates and
impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose
entities ("SPEs") created prior to February 1, 2003. The Company must
apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting
period ending after December 15, 2003. (ii) Non-SPEs created prior to
February 1, 2003. The Company is required to adopt FIN 46-R at the
end of the first interim or annual reporting period ending after
March 15, 2004. (iii) All entities, regardless of whether an SPE,
that were created subsequent to January 31, 2003. The provisions of
FIN 46 were applicable for variable interests in entities obtained
after January 31, 2003. The Company does not have any arrangements
with variable interest entities that will require consolidation of
their financial information in the financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The changes are intended to improve financial reporting by requiring
that contracts with comparable characteristics be accounted for
similarly. Additionally, those changes are expected to result in more
consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts and hedging
relationships entered into or modified after June 30, 2003, and for
provisions that relate to SFAS No. 133 implementation issues that
have been effective for fiscal quarters that began prior to June 15,
2003, apply in accordance with their respective effective dates. The
adoption of this statement did not have a significant effect on the
Company's consolidated financial position or results of operations.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liability and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liability and equity. It also requires that
an issuer classify a financial instrument that is within its scope as
a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatorily redeemable noncontrolling interests. The adoption of this
statement did not have a significant effect on the Company's
consolidated financial position or results of operations.
3. EMPLOYEE STOCK PLANS
The Company has elected to continue to account for its stock
compensation plans under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees" and related interpretations. Under APB
25, no compensation cost is generally recognized for fixed stock
options in which the exercise price is greater than or equal to the
market price on the grant date. In connection with the termination of
certain employees, the company repriced 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 months
ended October 31, 2004 and 2003, the Company recaptured/recognized
$-0- of compensation expense in connection with these options,
respectively.
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
October 31,
2004 2003
----------- -----------
Net Loss Available to Common
Stockholders, as Reported $(6,658,028) $(3,612,270)
Add: Total Stock-Based Employee
Compensation Included in Reported
Net Loss -- --
Deduct: Total Stock-Based Employee
Compensation Income Determined
Under Fair Value Based Method,
Net of Related Tax Effect 1,430,640 175,500
----------- -----------
Pro Forma Net Loss Available
to Common Stockholders $(8,088,668) $(3,787,770)
=========== ===========
Loss Per Share:
Basic and diluted, as reported $(0.19) $(0.13)
====== ======
Basic and diluted, pro forma $(0.23) $(0.14)
====== ======
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 October 31, 2004 and 2003, was $6,339,104 and
$3,352,646, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
October 31, July 31,
2004 2004
---------- ----------
Accounts Payable $2,298,595 $1,283,410
Accrued Legal Fees and Settlement 361,199 252,537
Termination Agreements and Severance Pay 398,572 411,452
---------- ----------
Total $3,058,366 $1,947,399
========== ==========
6. PENDING LITIGATION
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based
investment banking and brokerage firm, initiated an arbitration
against the Company under New York Stock Exchange rules. Sands
alleged that it had the right to receive, for nominal consideration,
approximately 1.5 million shares of the Company's common stock. Sands
based its claim upon an October 1997 letter agreement that was
purported by Sands to confirm an agreement appointing Sands as the
exclusive financial advisor to Generex Pharmaceuticals, Inc., a
subsidiary of the Company that was acquired in late 1997. In
exchange, the letter agreement purported to grant Sands the right to
acquire 17 percent of Generex Pharmaceuticals' common stock for
nominal consideration. Sands claimed that its right to receive shares
of Generex Pharmaceuticals' common stock applies to the Company's
common stock since outstanding shares of Generex Pharmaceuticals'
common stock were converted into shares of the Company's common stock
in the acquisition. Sands' claims also included additional shares
allegedly due as a fee related to that acquisition, and $144,000 in
monthly fees allegedly due under the terms of the purported
agreement.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. PENDING LITIGATION (CONTINUED)
Pursuant to an arbitration award dated September 22, 1999, the
arbitration panel that heard this case awarded Sands $14,070 and
issued a declaratory judgment requiring the Company to issue to Sands
a warrant to purchase 1,530,020 shares of the Company's common stock
pursuant to and in accordance with the terms of the purported October
1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of
the State of New York, County of New York (the "New York Supreme
Court"). On November 10, 1999, the Company moved to vacate the
arbitration award. On March 20, 2000, the New York Supreme Court
granted Sands' petition to confirm the award and denied the Company's
motion to vacate the award. The Company appealed and on January 23,
2001, the New York State Appellate Division, First Department (the
"Appellate Division"), modified the judgment of the New York Supreme
Court that had confirmed the arbitration award against the Company.
The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of
$14,070 to Sands but modified the judgment to vacate the portion of
the arbitration award directing the issuance to Sands of a warrant to
purchase 1,530,020 shares of the Company's common stock. The
Appellate Division held that the portion of the award directing the
Company to issue warrants to Sands is too indefinite to be
enforceable and remanded the matter to the arbitration panel for a
final and definite award with respect to such relief or its
equivalent (including possibly an award of monetary damages). The
arbitration panel commenced hearings on the matters remanded by the
Appellate Division in June 2001. On November 7, 2001, the arbitration
panel issued an award again requiring the Company to issue to Sands a
warrant to purchase 1,530,020 shares of the Company's common stock
purportedly pursuant to and in accordance with the terms of the
October 1997 letter agreement. Thereafter, Sands submitted a motion
to the New York Supreme Court to modify and confirm the arbitration
panel's award while the Company filed a motion with the court to
vacate the arbitration award. On February 25, 2002, the New York
Supreme Court vacated the arbitration panel's award. The Supreme
Court concluded that the arbitration panel had "disregarded the plain
meaning" of the directive given by the Appellate Division in the
Appellate Division's January 23, 2001 decision that remanded the
matter of the warrant for reconsideration by the panel. The Supreme
Court found that the arbitration panel's award "lacks a rational
basis". The Supreme Court also remanded the matter to the New York
Stock Exchange on the issue of whether the arbitration panel should
be disqualified. Sands has appealed the February 25, 2002 order of
the Supreme Court to the Appellate Division. The Company filed a
cross-appeal on issues relating to the disqualification of the
arbitration panel.
On October 29, 2002, the Appellate Division issued a decision and
order unanimously modifying the lower court's order by remanding the
issue of damages to a new panel of arbitrators and otherwise
affirming the lower court's order. The Appellate Division's decision
and order limits the issue of damages before the new panel of
arbitrators to reliance damages which is not to include an award of
lost profits. Reliance damages are out-of-pocket damages incurred by
Sands. The Appellate Division stated that the lower court properly
determined that the arbitration award, which had granted Sands
warrants for 1,530,020 shares of the registrant's stock, was
incorrect.
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.
On August 17, 2004, the Arbitration Panel of the New York Stock
Exchange issued a final award in the case of Sands vs. Generex,
awarding Sands $150,000 in reliance damages. A motion to confirm this
award has been filed by Sands. The Company will file responding
materials in the near future. The Company expects that the motion to
confirm will be heard in early 2005.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. PENDING LITIGATION (CONTINUED)
Sands has advised the Company that it intends to seek leave from the
New York Court of Appeals to appeal the prior orders of the Appellate
Division vacating the prior Arbitration Panel's warrant awards.
Consequently, it is likely that there will be further legal
proceedings with respect to this matter. At the present time, the
Company is not able to predict the ultimate outcome of this matter or
to estimate a range of possible loss. Accordingly, the Company has
accrued $150,000 and it is included in the balance sheet under the
caption accounts payable and accrued expenses.
In February 2001, a former business associate of the Company's former
Vice President of Research and Development ("VP"), and an entity
called Centrum Technologies Inc. ("CTI") commenced an action in the
Ontario Superior Court of Justice against the Company and the VP
seeking, among other things, damages for alleged breaches of contract
and tortious acts related to a business relationship between this
former associate and the VP that ceased in July 1996. The plaintiffs'
statement of claim also seeks to enjoin the use, if any, by the
Company of three patents allegedly owned by CTI. On July 20, 2001,
the Company filed a preliminary motion to dismiss the action of CTI
as a nonexistent entity or, alternatively, to stay such action on the
grounds of want of authority of such entity to commence the action.
The plaintiffs brought a cross motion to amend the statement of claim
to substitute Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a
corporation of which 50 percent of the shares are owned by the former
business associate and the remaining 50 percent are owned by the
Company. Consequently, the shareholders of CBI are in a deadlock. The
court granted the Company's motion to dismiss the action of CTI and
denied the plaintiffs' cross motion without prejudice to the former
business associate to seek leave to bring a derivative action in the
name of or on behalf of CBI. The former business associate
subsequently filed an application with the Ontario Superior Court of
Justice for an order granting him leave to file an action in the name
of and on behalf of CBI against the VP and the Company. The Company
has opposed the application which is now pending before the Court. In
September 2003, the Ontario Superior Court of Justice granted the
request and issued an order giving the former business associate
leave to file an action in the name of and on behalf of CBI against
VP and the Company. A statement of claim was served in July 2004. 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 $230,000 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.
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.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. PENDING LITIGATION (CONTINUED)
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.
7. NET LOSS PER SHARE
Basic EPS and Diluted EPS for the three months ended October 31, 2004
and 2003 have been computed by dividing the net loss for each
respective period by the weighted average number of shares
outstanding during that period. All outstanding warrants and options,
approximately 17,084,218 and 12,342,694 incremental shares at October
31, 2004 and 2003, respectively, have been excluded from the
computation of Diluted EPS as they are antidilutive.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Three Months Ended
October 31,
--------------------------
2004 2003
------- ----------
Cash paid during the period for:
Interest $45,914 $ 53,546
Income taxes $ -- $ --
Disclosure of non-cash investing and financing activities:
Acquisition of Antigen Express, Inc through the issuance
of common stock and the assumption of stock options $ -- $4,797,409
9. TRANSACTIONS WITH RELATED PARTY
The Company's change in "Due from Related Party" for the three months
ended October 31, 2004 represents only the effect of change in
quarter end exchange rate versus that in effect at July 31, 2004.
10. COMMITMENTS AND CONTINGENCIES
On October 18, 2004, the Company entered into a Securities Purchase
Agreement to sell 800,000 shares of common stock at $2.50 per share
for gross proceeds of $2,000,000. The closing date for this
transaction is to be agreed upon, but the parties anticipate that the
closing will occur in January 2005.
11. STOCKHOLDERS' EQUITY
In August 2004, the Company issued 620,000 shares of unrestricted
common stock to consultants for services rendered, which resulted in
charges to the statement of operations of $675,800 based on the
quoted market price of the Company stock on the date of issuance.
In August 2004, the Company issued 500,000 warrants in exchange for
services rendered. The warrants were fully vested on date of issuance
and exercisable at $1.09 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 charges to the statement of
operations of $415,000.
In October, 2004, the Company granted a total of 1,942,000 options to
purchase shares of common stock with an exercise price of $0.94,
which equaled the five trading day closing average of the Company
common stock on the date of issuance. All of the options, except for
105,000, 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
$75,600.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
In October, 2004, the Company granted a total of 150,000 options to
purchase shares of common stock with an exercise price of $1.10,
which equaled the five trading day closing average of the Company
common stock July 31, 2004. All of the options were issued to an
employee; accordingly no charge to operations was incurred as the
Company follows APB 25 (See Note 3).
In October, 2004, the Company redeemed 75,000 shares of common stock
as a result of non-performance of services. These shares were
originally exchanged in October 2003 for services the Company
believed to be rendered, which resulted in prior charges to the
statement of operations of $138,000. In conjunction with the
redemption of the shares, the Company reversed the prior charges to
the statement of operations in the amount of $138,000.
12. SUBSEQUENT EVENTS
On November 15, 2004, the Company completed a private placement of 6%
Secured Convertible Debentures and warrants with four accredited
investors for an aggregate purchase price of $4,000,000. The
Debentures have a term of fifteen (15) months and amortize over
thirteen (13) months in thirteen (13) equal monthly installments
beginning on the first day of the third month following their
issuance. Interest on the principal amount outstanding will accrue at
a rate of six percent (6%) per annum. The Company may pay principal
and accrued interest in cash or, at the Company's option, in shares
of its common stock. If the Company elects to pay principal and
interest in shares of its common stock, the value of each share of
common stock will be equal to ninety percent (90%) of the average of
the twenty (20) trading day volume weighted average price for the
common stock for the twenty (20) trading day period immediately
preceding the date of payment. At the option of the holder of each
Debenture, the principal amount outstanding under each Debenture is
initially convertible at any time after the closing of the private
placement into shares of the Company's common stock at a conversion
price of $0.82. The conversion price of each Debenture is based on
the average of the ten (10) trading day volume weighted average price
for Company's common stock for the ten (10) trading day period
immediately preceding the date definitive agreements were signed. The
warrants are initially exercisable into the same number of shares of
Company's common stock initially issuable upon conversion of the
Debentures. The initial exercise price of each warrant is equal to
110% of the conversion price of the Debentures, or $0.91. The
conversion price of the Debentures and the exercise price of the
warrants are each subject to a full-ratchet adjustment upon the
issuance by the Company of securities at a price per share less than
the then conversion price or exercise price, as applicable. In
accordance with the terms of the private placement, the Company is
required to register for resale the shares of common stock issuable
upon conversion of the Debentures and upon exercise of the warrants.
The Company expects to utilize the proceeds from the transaction to
accelerate clinical development activities and for working capital
and other general corporate purposes.
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 Quarterly Report on
Form 10-Q of Generex Biotechnology Corporation for the fiscal quarter ended
October 31, 2004 that may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). The
Act limits our liability in any lawsuit based on forward looking statements we
have made. All statements, other than statements of historical facts, included
in this quarterly report that address activities, events or developments that we
expect or anticipate will or may occur in the future, including such matters as
our projections, future capital expenditures, business strategy, competitive
strengths, goals, expansion, market and industry developments and the growth of
our businesses and operations, are forward-looking statements. 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 technologies;
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 our new and
as yet not fully proven technologies;
o the risks and uncertainties regarding the actual effect on humans of
seemingly safe and efficacious formulations and treatments when tested
clinically;
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 shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
In August 2003, we acquired Antigen Express, Inc. ("Antigen"). Antigen is
engaged in the research and development of technologies and immunomedicines for
the treatment of malignant, infectious, autoimmune and allergic diseases.
Business History. We are engaged primarily in the research and development of
drug delivery technologies. Our primary focus at the present time is our
proprietary technology for the administration of formulations of large molecule
drugs to the oral (buccal) cavity using a hand-held aerosol applicator.
A substantial number of large molecule drugs (i.e., drugs composed of molecules
with a higher than specified molecular weight) have been approved for sale in
the United States or are presently undergoing clinical trials as part of the
process to obtain such approval, including various proteins, peptides,
monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which
generally can be administered by various methods, large molecule drugs
historically have been administered predominately by injection. The principal
reasons for this have been the vulnerability of large molecule drugs to
digestion and the relatively large size of the molecule itself, which makes
absorption into the blood stream through the skin or mucosa inefficient or
ineffective.
All injection therapies involve varying degrees of discomfort and inconvenience.
With chronic and sub-chronic diseases, the discomfort and inconvenience
associated with injection therapies frequently results in less than optimal
patient acceptance of, and compliance with, the prescribed treatment plan. Poor
acceptance and compliance can lead to medical complications and higher disease
management costs. Also, elderly, infirm and pediatric patients with chronic or
sub-chronic conditions may not be able to self-inject their medications. In such
cases assistance is required which increases both the cost and inconvenience of
the therapy.
Our goal is to develop proprietary formulations of large molecule drugs that can
be administered through the buccal mucosa, primarily the inner cheek walls,
thereby eliminating or reducing the need for injections. We believe that our
buccal delivery technology is a platform technology that has application to many
large molecule drugs, and provides a convenient, non-invasive, accurate and cost
effective way to administer such drugs. We have identified several large
molecule drugs as possible candidates for development, but to date have focused
our development efforts on a buccal insulin product.
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 800 patients with diabetes have
been dosed with our oral insulin product at approved facilities in seven
countries. We conducted several clinical trials with insulin supplied by Lilly
under our Development and License Agreement. Lilly did not, however, authorize
or conduct any clinical trials or provide financial support for those trials. We
did receive a $1,000,000 up front payment from Lilly. On May 23, 2003, we
announced that we had agreed with Lilly to end the Development and License
Agreement for the development and commercialization of buccal delivery of
insulin. On November 5, 2003, we entered into a termination agreement with Lilly
terminating the Development and License Agreement, effective as of June 2, 2003.
In accordance with the termination agreement, we retain all of the intellectual
property and commercialization rights with respect to buccal spray drug delivery
technology, and we 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
subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS
paid in capital of $2,985,000 to subscribe for a 19.9% equity ownership interest
in the joint venture entity. While we presently own 80.1% of the joint venture
entity, 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. Alternatively, the
Series A Preferred Stock may be converted, under certain conditions, into shares
of our common stock. Subsequent to its purchase of the shares of Series A
Preferred Stock, EIS transferred the shares to an affiliate of Elan. In
accordance with the terms of the Series A Preferred Stock, if any shares of
Series A Preferred Stock are outstanding on January 16, 2007, we are required to
redeem the shares of Series A Preferred Stock at a redemption price equal to the
aggregate Series A Preferred Stock liquidation preference (which currently
equals the aggregate original purchase price of the Series A Preferred Stock),
either in cash, or in shares of common stock with a fair market value equal to
the redemption price. In January 2002, 2003 and 2004, pursuant to the terms of
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.
In August 2003, we acquired Antigen Express, Inc. Antigen is engaged in the
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 6
months. Development efforts are underway in melanoma, breast cancer, prostate
cancer, HIV, influenza virus, smallpox, SARS and Type I diabetes mellitus. We
are establishing collaborations with clinical investigators at 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. In the first
quarter of 2005, we received a total of $142,750 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.
We are a development stage company, and from inception through the end of fiscal
year 2004 had not received any revenues from operations other than the up-front
payment from Lilly. We have no products approved for commercial sale by drug
regulatory authorities. We have begun the regulatory approval process for only
three products, our oral insulin formulation, morphine and fentanyl. We believe
that our buccal delivery technology is a platform technology that has
application to a large number of large molecule drugs in addition to insulin.
Estrogen, heparin, monoclonal antibodies, human growth hormone, fertility
hormone, as well as a number of vaccines are among the compounds that we have
identified as possible candidates for product development.
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
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 fiscal quarter ended October 31, 2004, approximately 90% of our
$3,395,130 in research and development expenses was attributable to insulin and
platform technology development, and approximately 1% was attributable to
morphine and fentanyl projects. As morphine and fentanyl are both narcotic
painkillers, the research is related. In the fiscal quarter ended October 31,
2003, approximately 79% of our $1,028,529 of research and development was
expended for insulin and platform technology, and approximately 2% for morphine
and fentanyl.
Approximately 9%, or $291,078 of our research and development expenses for the
fiscal quarter ended October 31, 2004 were related to Antigen's immunomedicine
products compared to approximately 19% or $193,050 for the fiscal quarter ended
October 31, 2003. 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 October 31, 2004
- -----------------------------------------------------
On August 10, 2004 we issued an aggregate 620,000 shares of our common stock and
500,000 warrants to purchase our common stock to certain consultants in exchange
for financial services recognizing expense of $1,090,800 to financial services.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued
a final award in the case of Sands vs. Generex, awarding Sands $150,000 in
reliance damages. A motion to confirm this award has been filed by Sands. We
will file responding materials in the near future. We expect that the motion to
confirm will be heard in early 2005. Sands has advised us that it intends to
seek leave from the New York Court of Appeals to appeal the prior orders of the
Appellate Division vacating the prior Arbitration Panel's warrant awards.
Consequently, it is likely that there will be further legal proceedings with
respect to this matter.
On August 26, 2004, Dr. Pankaj Modi resigned from his position as an officer
with us (Vice-President, Research & Development). Also, on August 26, 2004 Dr.
Modi gave notice to us that the Consulting Agreement between Dr. Modi and us
will terminate effective August 25, 2005. We are obligated to pay Dr. Modi's
salary and any other compensation Dr. Modi is entitled to receive under his
Consulting Agreement until August 25, 2005. We do not believe that Dr. Modi's
resignation or the termination of his Consulting Agreement with us will
materially adversely affect us.
On October 18, 2004, we entered into a Securities Purchase Agreement to sell
800,000 shares of our common stock at $2.50 per share for gross proceeds of
$2,000,000. The closing date for this transaction is to be agreed upon, but the
parties anticipate that the closing will occur in January 2005.
On October 26, 2004, we granted a total of 1,942,000 options to purchase shares
of common stock to certain employees and consultants at $0.94 per share and
150,000 options to an employee to purchase shares of common stock at $1.10 per
share. The options issued to non employees resulted in $75,600 charge to
operations.
Developments Subsequent to Fiscal Quarter Ended October 31, 2004.
- ----------------------------------------------------------------
On November 15, 2004, we completed a private placement of 6% Secured Convertible
Debentures and warrants with four accredited investors for an aggregate purchase
price of $4,000,000. The Debentures have a term of fifteen (15) months and
amortize over thirteen (13) months in thirteen (13) equal monthly installments
beginning on the first day of the third month following their issuance. Interest
on the principal amount outstanding will accrue at a rate of six percent (6%)
per annum. We may pay principal and accrued interest in cash or, at our option,
in shares of our common stock. If we elect to pay principal and interest in
shares of our common stock, the value of each share of common stock will be
equal to ninety percent (90%) of the average of the twenty (20) trading day
volume weighted average price for the common stock for the twenty (20) trading
day period immediately preceding the date of payment. At the option of the
holder of each Debenture, the principal amount outstanding under each Debenture
is initially convertible at any time after the closing of the private placement
into shares of our common stock at a conversion price of $0.82. The conversion
price of each Debenture is based on the average of the ten (10) trading day
volume weighted average price for our common stock for the ten (10) trading day
period immediately preceding the date definitive agreements were signed. The
warrants are initially exercisable into the same number of shares of our common
stock initially issuable upon conversion of the Debentures. The initial exercise
price of each warrant is equal to 110% of the conversion price of the
Debentures, or $0.91. The conversion price of the Debentures and the exercise
price of the warrants are each subject to a full-ratchet adjustment upon the
issuance by us of securities at a price per share less than the then conversion
price or exercise price, as applicable. In accordance with the terms of the
private placement, we are required to register for resale the shares of common
stock issuable upon conversion of the Debentures and upon exercise of the
warrants. We expect to utilize the proceeds from the transaction to accelerate
clinical development activities and for working capital and other general
corporate purposes.
In connection with the transaction, we granted an Additional Investment Right to
each investor. Pursuant to the terms of each Additional Investment Right, each
investor has the right at any time after the 181st day following the date
definitive agreements were signed and on or prior to the earlier of (i) the
close of business on the one-year anniversary after the registration statement
for the shares underlying the Debentures and the warrants has gone effective and
(ii) the two (2) year anniversary of the closing of the private placement, to
purchase on the same terms and conditions as the private placement, up to the
same number of Debentures and warrants purchased by such investor at the closing
of the private placement. In addition, we will pay to a placement agent (i) a
cash fee equal to seven percent (7%) of the gross proceeds received by Generex
and (ii) warrants exercisable into approximately 145,000 shares of our common
stock at the same exercise price as the investors' warrants. We undertook this
offering in reliance upon Rule 506 of Regulation D and Section 18(b)(4)(D) of
the Securities Act of 1933, as amended.
RESTATEMENT
Subsequent to the issuance of our financial statements for the year ended July
31, 2001, management determined that its Series A Preferred stock should be
reclassified from stockholders' equity, in accordance with Emerging Issues Task
Force Topic D-98, "Classification and Measurement of Redeemable Securities,"
because the redemption feature of the Series A Preferred stock is beyond our
control. This restatement did not affect net loss for the year ended July 31,
2001, nor did it affect total assets. The Series A Preferred stock should have
been included outside the statement of stockholders' equity from the date of its
issuance in January 2001.
Results of Operations - Three months ended October 31, 2004 and 2003
- --------------------------------------------------------------------
We have been in the development stage since inception and have not generated any
operating revenues to date, other than $1,000,000 in revenues received in
connection with the Development and License Agreement with Lilly in the quarter
ended October 31, 2000. We received a total of $627,184 in research grants and
consulting revenue in fiscal 2004. In the fiscal quarter ended October 31, 2004
we received $142,750 in such grants.
Our net loss for the quarter ended October 31, 2004 was $6,658,028 versus
$3,612,270 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 an increase in research and development expenses
of $2,366,601 and an increase in general and administrative expenses of
$591,922.
The increase in research and development expenses in the three-month period
ending October 31, 2004 compared to the corresponding period of the prior fiscal
year reflects the additional research and development activities by Antigen,
bulk insulin purchases and increased activities of regulatory consultants. The
level of clinical activity in first quarter of 2004 was also higher, compared to
the same quarter last year.
The increase in general and administrative expenses in the quarter ended October
31, 2004, compared to the quarter ended October 31, 2003, was the result of
additional non-cash expenses incurred this year in connection with the issuance
of common stock to consultants for financial services, additional litigation
accrual in connection with Sands litigation and a small increase in expenses for
accounting and legal services. Increased level of activities of Antigen also
contributed to the increase in general and administrative expenses in this
quarter compared to the same quarter last year. The increase in general and
administrative expenses was lessened by a reduction in travel expenses.
Financial Condition, Liquidity and Resources
- --------------------------------------------
To date we have financed our development stage activities primarily through
private placements of common stock.
At October 31, 2004, we had cash and short-term investments (primarily notes of
United States corporations) of approximately $1.5 million. At July 31, 2004, our
cash and short term investments were approximately $5 million. The decrease was
attributable to the use of cash for ongoing operations. At October 31, 2004, we
believed that our anticipated cash position was sufficient to meet our working
capital needs for the next 12 months based on the pace of our planned
development activities. Beyond that, we will likely require additional funds to
support our working capital requirements or for other purposes. From time to
time as deemed appropriate by management, we may seek to raise funds through
private or public equity financing or from other sources. If we were unable to
raise additional capital as needed, we could be required to "scale back" or
otherwise revise our business plan. Any significant scale back of operations or
modification of our business plan due to a lack of funding could be expected to
affect our prospects materially and adversely.
In the past, we have funded most of our development and other costs with equity
financing. While we have been able to raise equity capital as required,
unforeseen problems with our clinical program or materially negative
developments in general economic conditions could interfere with our ability to
raise additional equity capital as needed, or materially adversely affect the
terms upon which such capital is available.
Critical Accounting Policies
- ----------------------------
Our discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. It requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
We consider certain accounting policies related to impairment of long-lived
assets, intangible assets and accrued liabilities to be critical to our business
operations and the understanding of our results of operations:
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
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Payments Due by Period
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LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- --------------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations 2,407,362 1,472,006 935,356 0 0
- --------------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 109,120 40,750 54,172 14,198 0
- --------------------------------------------------------------------------------------------------------------------------
Purchase Obligations 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on 0 0 0 0 0
the Registrant's Balance Sheet under
GAAP
- --------------------------------------------------------------------------------------------------------------------------
Total 2,516,482 1,512,756 989,528 14,198 0
- --------------------------------------------------------------------------------------------------------------------------
TRANSACTIONS WITH AFFILIATES
On May 3, 2001, we advanced $334,300 to each of three senior officers, who are
also our stockholders, in exchange for promissory notes. These notes bore
interest at 8.5 percent per annum and were payable in full on May 1, 2002. These
notes were guaranteed by a related company owned by these officers and secured
by a pledge of 2,500,000 shares of our common stock owned by this related
company. On June 3, 2002, our Board of Directors extended the maturity date of
the loans to October 1, 2002. The other terms and conditions of the loans and
guaranty remained unchanged and in full force and effect. As of July 31, 2002,
the balance outstanding on these notes, including accrued interest, was
$1,114,084. Pursuant to a decision made by the Compensation Committee as of
August 30, 2002, these loans were satisfied through the application of 592,716
shares of pledged stock, at a value of $1.90 per share, which represented the
lowest closing price during the sixty days prior to August 30, 2002.
Prior to January 1, 1999, a portion of our general and administrative expenses
resulted from transactions with affiliated persons, and a number of capital
transactions also involved affiliated persons. Although these transactions were
not the result of "arms-length" negotiations, we do not believe that this fact
had a material impact on our results of operations or financial position. Prior
to December 31, 1998, we classified certain payments to executive officers for
compensation and expense reimbursements as "Research and Development - related
party" and "General and Administrative - related party" because the executive
officers received such payments through personal services corporations rather
than directly. After December 31, 1998, these payments have been and will
continue to be accounted for as though the payments were made directly to the
officers, and not as a related party transaction. We do not foresee a need for,
and therefore do not anticipate, any related party transactions in the current
fiscal year.
On August 7, 2002, we purchased real estate with an aggregate purchase price of
approximately $1.6 million from an unaffiliated party. In connection with that
transaction, Angara Enterprises, Inc., a licensed real estate broker that is an
affiliate of Anna Gluskin, received a commission from the proceeds of the sale
to the seller in the amount of 3% of the purchase price, or $45,714. We believe
that this is less than the aggregate commission which would have been payable if
a commission had been negotiated with an unaffiliated broker on an arm's length
basis.
We utilize a management company to manage all of our real properties. The
property management company is owned by Rose Perri, Anna Gluskin and the estate
of Mark Perri, our former Chairman of the Board. In the fiscal years ended July
31, 2004 and 2003 we paid the management company approximately $40,180 and
$33,237, respectively, in management fees.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The primary objectives of this
interpretation are to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities") and how to determine when and which business
enterprise (the "primary beneficiary") should consolidate the variable interest
entity. This new model for consolidation applies to an entity in which either
(i) the equity investors (if any) do not have a controlling financial interest;
or (ii) the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support from
other parties. In addition, FIN 46 requires that the primary beneficiary, as
well as all other enterprises with a significant variable interest entity, make
additional disclosures. Certain disclosure requirements of FIN 46 were effective
for financial statements issued after January 31, 2003. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest
Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The
effective dates and impact of FIN 46 and FIN 46-R are as follows: (i)
Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company
must apply either the provisions of FIN 46 or early adopt the provisions of FIN
46-R at the end of the first interim or annual reporting period ending after
December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company
is required to adopt FIN 46-R at the end of the first interim or annual
reporting period ending after March 15, 2004. (iii) All entities, regardless of
whether an SPE, that were created subsequent to January 31, 2003. The provisions
of FIN 46 were applicable for variable interests in entities obtained after
January 31, 2003. The Company does not have any arrangements with variable
interest entities that will require consolidation of their financial information
in the financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The changes are intended to improve financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. Additionally, those changes are expected to result in more consistent
reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149
is effective for contracts and hedging relationships entered into or modified
after June 30, 2003, and for provisions that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, apply in accordance with their respective effective
dates. The adoption of this statement did not have a significant effect on the
Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. It also
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for 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 October 31, 2004, we have fixed rate debt totaling $2,407,362. This amount
is comprised of $842,784 at a fixed interest rate of 5.8%, $328,360 at 8.5%, $
623,033 at 9.7 %, $202,735 at 10%, and $410,450 at 11.5% per annum. These debt
instruments mature from May 2005 through August 2006. 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.
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
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On August 17,
2004, the Arbitration Panel of the New York Stock Exchange issued a final award
in the case of Sands vs. Generex, awarding Sands $150,000 in reliance damages. A
motion to confirm this award has been filed by Sands. We will file responding
materials in the near future. We expect that the motion to confirm will be heard
in early 2005. Sands has advised us that it intends to seek leave from the New
York Court of Appeals to appeal the prior orders of the Appellate Division
vacating the prior Arbitration Panel's warrant awards. Consequently, it is
likely that there will be further legal proceedings with respect to this matter.
At the present time, we are not able to predict the ultimate outcome of this
matter or to estimate a range of possible loss. Accordingly, only $150,000 has
been recorded in the accompanying financial statements.
There were no other legal proceedings which first became reportable or in which
there were material developments during the fiscal quarter ended October 31,
2004.
For a full description of the foregoing legal proceeding, and all other legal
proceedings against the Company, see the Company's Report on Form 10-K for the
year ended July 31, 2004, which is incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following transaction occurred during fiscal quarter ended October 31, 2004
and was previously reported in our annual report on Form 10-K for the fiscal
year ended July 31, 2004.
o On October 18, 2004, we entered into a Securities Agreement to sell
800,000 shares of our common stock at $2.50 per share for gross
proceeds of $2,000,000. The closing date for this transaction is to be
agreed upon, but the parties anticipate that the closing will occur in
January 2005.
The following transaction occurred subsequent to fiscal quarter ended October
31, 2004 and was previously reported on Form 8-K and on Form 10-K for the fiscal
year ended July 31, 2004.
o On November 15, 2004, we completed a private placement of 6% Secured
Convertible Debentures and warrants with four accredited investors for
an aggregate purchase price of $4,000,000. The Debentures have a term
of fifteen (15) months and amortize over thirteen (13) months in
thirteen (13) equal monthly installments beginning on the first day of
the third month following their issuance. Interest on the principal
amount outstanding will accrue at a rate of six percent (6%) per annum.
We may pay principal and accrued interest in cash or, at our option, in
shares of our common stock. If we elect to pay principal and interest
in shares of our common stock, the value of each share of common stock
will be equal to ninety percent (90%) of the average of the twenty (20)
trading day volume weighted average price for the common stock for the
twenty (20) trading day period immediately preceding the date of
payment. At the option of the holder of each Debenture, the principal
amount outstanding under each Debenture is initially convertible at any
time after the closing of the private placement into shares of our
common stock at a conversion price of $0.82. The conversion price of
each Debenture is based on the
average of the ten (10) trading day volume weighted average price for
our common stock for the ten (10) trading day period immediately
preceding the date definitive agreements were signed. The warrants are
initially exercisable into the same number of shares of our common
stock initially issuable upon conversion of the Debentures. The initial
exercise price of each warrant is equal to 110% of the conversion price
of the Debentures, or $0.91. The conversion price of the Debentures and
the exercise price of the warrants are each subject to a full-ratchet
adjustment upon the issuance by us of securities at a price per share
less than the then conversion price or exercise price, as applicable.
In accordance with the terms of the private placement, we are required
to register for resale the shares of common stock issuable upon
conversion of the Debentures and upon exercise of the warrants. We
expect to utilize the proceeds from the transaction to accelerate
clinical development activities and for working capital and other
general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
An investment in our stock is very speculative and involves a high degree of
risk. You should 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 Securities and Exchange
Commission, 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.
In addition to historical facts or statements of current condition, this Annual
Report on Form 10-K contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events.
The following discussion outlines certain factors that we think could cause our
actual outcomes and results to differ materially from our forward-looking
statements. These factors are in addition to those set forth elsewhere in this
Annual Report on Form 10-K.
Risks Related to Our Financial Condition
- ----------------------------------------
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 $100,889,344 at October 31, 2004. Our losses have
resulted principally from costs incurred in research and development, including
clinical trials, and from general and administrative costs associated with our
operations. While we seek to attain profitability, we cannot be sure that we
will ever achieve product and other revenue sufficient for us to attain this
objective.
Our product candidates are in research or early stages of pre-clinical and
clinical development. We will need to conduct substantial additional research,
development and clinical trials. We will also need to receive necessary
regulatory clearances both in the United States and foreign countries and obtain
meaningful patent protection for and establish freedom to commercialize each of
our product candidates. We cannot be sure that we will obtain required
regulatory approvals, or successfully research, develop, commercialize,
manufacture and market any other product candidates. We expect that these
activities, together with future general and administrative activities, will
result in significant expenses for the foreseeable future.
We need 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;
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.
In the past, we have funded most of our development and other costs through
equity financing. We anticipate that our existing capital resources will enable
us to maintain currently planned operations through the next twelve months.
However, this expectation is based on our current operating plan, which could
change as a result of many factors, and we may need additional funding sooner
than anticipated. 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.
While over 800 patients with diabetes have been dosed with our oral insulin
formulation at approved facilities in seven countries, our insulin product has
not been approved for marketing in any country. Until we have developed a
commercially viable product which receives regulatory approval, we will not
receive revenues from ongoing operations.
We will not receive revenues from operations until we receive regulatory
approval to sell our products. Many factors impact our ability to obtain
approvals for commercially viable products.
We have no products approved for commercial sale by drug regulatory authorities.
We have begun the regulatory approval process for our oral insulin formulation,
buccal morphine and fentanyl products. Our immunomedicine products are in the
pre-clinical stage of development.
Pre-clinical and clinical trials of our products, and the manufacturing and
marketing of our technologies, are subject to extensive, costly and rigorous
regulation by governmental authorities in the United States, Canada and other
countries. The process of obtaining required regulatory approvals from the FDA
and other regulatory authorities often takes many years, is expensive and can
vary significantly based on the type, complexity and novelty of the product
candidates. For these reasons, it is possible we will never receive approval for
one or more product candidates.
Delays in obtaining United States or foreign approvals for our products could
result in substantial additional costs to us, and, therefore, could adversely
affect our ability to compete with other companies. If regulatory approval is
ultimately granted, the approval may place limitations on the intended use of
the product we wish to commercialize, and may restrict the way in which we are
permitted to market the product.
Due to legal and factual uncertainties regarding the scope and protection
afforded by patents and other proprietary rights, we may not have meaningful
protection from competition.
Our long-term success will substantially depend upon our ability to protect our
proprietary technologies from infringement, misappropriation, discovery and
duplication and avoid infringing the proprietary rights of others. Our patent
rights, and the patent rights of biotechnology and pharmaceutical companies in
general, are highly uncertain and include complex legal and factual issues.
Because of this, our pending patent applications may not be granted. These
uncertainties also mean that any patents that we own or will obtain in the
future could be subject to challenge, and even if not challenged, may not
provide us with meaningful protection from competition. Due to our financial
uncertainties, we may not possess the financial resources necessary to enforce
our patents. Patents already issued to us or our pending applications may become
subject to dispute, and any dispute could be resolved against us.
Because a substantial number of patents have been issued in the field of
alternative drug delivery and because patent positions can be highly uncertain
and frequently involve complex legal and factual questions, the breadth of
claims obtained in any application or the enforceability of our patents cannot
be predicted. Consequently, we do not know whether any of our pending or future
patent applications will result in the issuance of patents or, to the extent
patents have been issued or will be issued, whether these patents will be
subject to further proceedings limiting their scope, will provide significant
proprietary protection or competitive advantage, or will be circumvented or
invalidated.
Also because of these legal and factual uncertainties, and because pending
patent applications are held in secrecy for varying periods in the United States
and other countries, even after reasonable investigation we may not know with
certainty whether any products that we (or a licensee) may develop will infringe
upon any patent or other intellectual property right of a third party. For
example, we are aware of certain patents owned by third parties that such
parties could attempt to use in the future in efforts to affect our freedom to
practice some of the patents that we own or have applied for. Based upon the
science and scope of these third party patents, we believe that the patents that
we own or have applied for do not infringe any such third party patents,
however, we cannot know for certain whether we could successfully defend our
position, if challenged. We may incur substantial costs if we are required to
defend ourselves in patent suits brought by third parties. These legal actions
could seek damages and seek to enjoin testing, manufacturing and marketing of
the accused product or process. In addition to potential liability for
significant damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process.
Risks Related to Marketing of Our Potential Products
- ----------------------------------------------------
We may not become, or stay, profitable even if our products are approved for
sale.
Even if we obtain regulatory approval to market our oral insulin product or any
other product candidate, many factors may prevent the product from ever being
sold in commercial quantities. Some of these factors are beyond our control,
such as:
o acceptance of the formulation or treatment by health care professionals
and diabetic patients;
o the availability, effectiveness and relative cost of alternative diabetes
or immunomedicine treatments that may be developed by competitors; and
o the availability of third-party (i.e., insurer and governmental agency)
reimbursements.
We may not be able to compete with treatments now being marketed and developed,
or which may be developed and marketed in the future by other companies.
Our products will compete with existing and new therapies and treatments. We are
aware of a number of companies currently seeking to develop alternative means of
delivering insulin, as well as new drugs intended to replace insulin therapy at
least in part. We are also aware of a number of companies currently seeking to
develop alternative means of enhancing and suppressing peptides. In the longer
term, we also face competition from companies that seek to develop cures for
diabetes and other malignant, infectious, autoimmune and allergic diseases
through techniques for correcting the genetic deficiencies that underlie such
diseases.
We will have to depend upon others for marketing and distribution of our
products, and we may be forced to enter into contracts limiting the benefits we
may receive and the control we have over our products. We intend to rely on
collaborative arrangements with one or more other companies that possess strong
marketing and distribution resources to perform these functions for us. We may
not be able to enter into beneficial contracts, and we may be forced to enter
into contracts for the marketing and distribution of our products that
substantially limit the potential benefits to us from commercializing these
products. In addition, we will not have the same control over marketing and
distribution that we would have if we conducted these functions ourselves.
Numerous pharmaceutical, biotechnology and drug delivery companies, hospitals,
research organizations, individual scientists and nonprofit organizations are
engaged in the development of alternatives to our technologies. Many of these
companies have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than we do.
Accordingly, our competitors may succeed in developing competing technologies,
obtaining FDA approval for products or gaining market acceptance more rapidly
than we can.
If government programs and insurance companies do not agree to pay for or
reimburse patients for our products, we will not be successful.
Sales of our potential products depend in part on the availability of
reimbursement by third-party payors such as government health administration
authorities, private health insurers and other organizations. Third-party payors
often challenge the price and cost-effectiveness of medical products and
services. FDA approval of health care products does not guarantee that these
third party payors will pay for the products. Even if third party payors do
accept our product, the amounts they pay may not be adequate to enable us to
realize a profit. Legislation and regulations affecting the pricing of
pharmaceuticals may change before our products are approved for marketing and
any such changes could further limit reimbursement.
Risks Related to Potential Liabilities
- --------------------------------------
We face significant product liability risks, which may have a negative effect on
our financial condition.
The administration of drugs or treatments to humans, whether in clinical trials
or commercially, can result in product liability claims whether or not the drugs
or treatments are actually at fault for causing an injury. Furthermore, our
products may cause, or may appear to have caused, serious adverse side effects
(including death) or potentially dangerous drug interactions that we may not
learn about or understand fully until the drug or treatment has been
administered to patients for some time. Product liability claims can be
expensive to defend and may result in large judgments or settlements against us,
which could have a severe negative effect on our financial condition. We
maintain product liability insurance in amounts we believe to be commercially
reasonable for our current level of activity and exposure, but claims could
exceed our coverage limits. Furthermore, due to factors in the insurance market
generally and our own experience, we may not always be able to purchase
sufficient insurance at an affordable price. Even if a product liability claim
is not successful, the adverse publicity and time and expense of defending such
a claim may interfere with our business.
Outcome of an Arbitration Proceeding with Sands Brothers may have an adverse
impact on us.
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment
banking and brokerage firm, initiated an arbitration against us under New York
Stock Exchange rules. Sands alleged that it had the right to receive, for
nominal consideration, approximately 1.5 million shares of our common stock.
Sands based its claim upon an October 1997 letter agreement that was purported
by Sands to confirm an agreement appointing Sands as the exclusive financial
advisor to Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late
1997. In exchange therefor, the letter agreement purported to grant Sands the
right to acquire 17% of Generex Pharmaceuticals' common stock for nominal
consideration. Sands claimed that its right to receive shares of Generex
Pharmaceuticals' common stock applies to our common stock since outstanding
shares of Generex Pharmaceuticals' common stock were converted into shares of
our common stock in the acquisition. Sands' claims also included additional
shares allegedly due as a fee related to that acquisition, and $144,000 in
monthly fees allegedly due under the terms of the purported agreement.
After several arbitration and court proceedings, on October 29, 2002, the
Appellate Division of the New York Supreme Court issued a decision remanding the
issue of damages to a new panel of arbitrators and limiting the issue of damages
before the new panel to reliance damages which is not to include an award of
lost profits. Reliance damages are out-of-pocket damages incurred by Sands.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued
a final award in the case of Sands vs. the Company, awarding Sands $150,000 in
reliance damages. A motion to confirm this award has been filed by Sands. The
Company will file responding materials in the near future. The Company expects
that the motion to confirm will be heard in early 2005. Sands has advised the
Company that it intends to seek leave from the New York Court of Appeals to
appeal the prior orders of the Appellate Division vacating the prior Arbitration
Panel's warrant awards. Consequently, it is likely that there will be further
legal proceedings with respect to this matter. Accordingly, only $150,000 has
been recorded in the accompanying financial statements.
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. Apart from $150,000 accrual, we are not able to estimate an amount
or range of potential loss from this legal proceeding at the present time.
Risks Related to the Market for Our Common Stock
- ------------------------------------------------
If our common stock is delisted from the NASDAQ SmallCap Market and/or becomes
subject to Penny Stock regulations, the market price for our stock may be
reduced and it may be more difficult for us to obtain financing.
On June 5, 2003, our common stock was delisted from the NASDAQ National Market
because of our failure to maintain a minimum of $10,000,000 in stockholders'
equity. On June 5, 2003, our stock began trading on the NASDAQ SmallCap Market.
The NASDAQ SmallCap Market has its own standards for continued listing,
including a minimum of $2.5 million stockholders' equity. As of July 31, 2004,
our stockholders' equity was $529,751. As a result, on November 19, 2004, we
received notice from The Nasdaq Stock Market informing us that we do not comply
with Market Place Rule 4310(c)(2)(B), which requires us to have a minimum of
$2,500,000 in stockholders' equity or $35,000,000 market value of listed
securities or $500,000 of net income from continuing operations for the most
recently completed fiscal year or two of the three most recently completed
fiscal years. Although we provided to the Nasdaq Stock Market specific elements
of a plan, including the proposed conversion of $14,300,000 of mezzanine equity
to common equity on our balance sheet, to achieve and sustain compliance with
all of The Nasdaq SmallCap Market listing requirements, there is no guarantee
that we will achieve compliance with The Nasdaq SmallCap Market listing
requirements, or sustain compliance with the requirements if achieved. In the
event we cannot achieve or sustain compliance, our shares of common stock may be
delisted from The Nasdaq SmallCap Market and begin trading on the
over-the-counter bulletin board.
In addition, for continued listing on both the Nasdaq National Market and
SmallCap Market, our stock price must be at least $1.00. During October and
November of 2004, our stock price traded below this minimum per share
requirement for thirty (30) consecutive business days. As a result, on November
24, 2004, we received notice from The Nasdaq Stock Market informing us that we
do not comply with Market Rule 4310(c)(4), which requires us to have a minimum
bid price per share of at least $1.00 for thirty (30) consecutive business days.
Although we have 180 calendar days, subject to extension by The Nasdaq Stock
Market under certain circumstances, to regain compliance with the Rule, there is
no guarantee that the bid price of our common stock will close at $1.00 per
share or more for a minimum period of ten (10) consecutive business days, which
is the minimum period of time The Nasdaq Stock Market requires to regain
compliance.
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 fluctuations in the price of our common stock. These
fluctuations may be caused by several factors including:
o announcements of research activities and technology innovations or new
products by us or our competitors;
o changes in market valuation of companies in our industry generally;
o variations in operating results;
o changes in governmental regulations;
o developments in patent and other proprietary rights;
o public concern as to the safety of drugs or treatments developed by us or
others;
o results of clinical trials of our products or our competitors' products;
and
o regulatory action or inaction on our products or our competitors'
products.
From time to time, we may hire companies to assist us in pursuing investor
relations strategies to generate increased volumes of investment in our common
stock. Such activities may result, among other things, in causing the price of
our common stock to increase on a short-term basis.
Furthermore, the stock market generally and the market for stocks of companies
with lower market capitalizations and small biopharmaceutical companies, like
us, have from time to time experienced, and likely will again experience
significant price and volume fluctuations that are unrelated to the operating
performance of a particular company.
Our outstanding Special Voting Rights Preferred Stock and provisions of our
Restated Certificate of Incorporation could delay or prevent the acquisition or
sale of our business.
Holders of our Special Voting Rights Preferred Stock have the ability to prevent
any change of control in us. 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
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.
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: December 15, 2004
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Rose C. Perri By: /s/ Anna Gluskin
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Principal Financial Officer Chief Executive Officer