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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2005
[ ] 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 36,264,099 as of March 16, 2005.
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -- unaudited
Consolidated Balance Sheets --
January 31, 2005 and July 31, 2004 ....................................
Consolidated Statements of Operations -- for the three and six month
periods ended January 31, 2005 and 2004, and cumulative from
November 2, 1995 to January 31, 2005...................................
Consolidated Statements of Cash Flows -- For the six month periods
ended January 31, 2005 and 2004, and cumulative from November 2,
1995 to January 31, 2005...............................................
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...............................................................
Signatures......................................................................
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
January 31, July 31,
2005 2004
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,992,168 $ 4,950,419
Restricted cash 226,398 206,421
Other current assets 190,583 870,934
-------------- --------------
Total Current Assets 2,409,149 6,027,774
Property and Equipment, Net 4,252,562 4,291,622
Assets Held for Investment, Net 2,378,161 2,250,506
Patents, Net 5,654,239 5,696,905
Deferred Debt Issuance Costs 311,976 --
Deposits -- 395,889
Due From Related Party 374,784 349,294
-------------- --------------
TOTAL ASSETS $ 15,380,871 $ 19,011,990
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,626,468 $ 1,947,399
Current maturities of long-term debt 1,620,659 1,366,122
-------------- --------------
Total Current Liabilities 6,247,127 3,313,521
Long-Term Debt, Less Current Maturities 726,480 858,661
Convertible Debenture, Net of Debt Discount of $2,756,554 and
$-0- at January 31, 2005 and July 31, 2004, respectively 1,243,446 --
Commitments and Contingencies
Series A, Preferred stock, $.001 par value; authorized 1,000,000 shares, stated
at redemption value, -0- and 1,191 shares issued and outstanding at
January 31, 2005 and July 31, 2004 -- 14,310,057
Stockholders' Equity:
Special Voting Rights Preferred stock, $.001 par value; authorized, issued
and outstanding 1,000 shares at January 31, 2005 and July 31, 2004 1 1
Common stock, $.001 par value; authorized 150,000,000 shares
at January 31, 2005 and July 31, 2004, issued 35,447,533 and 34,262,448
shares at January 31, 2005 and July 31, 2004, and outstanding 35,447,533 and
34,262,448 shares at January 31, 2005 and July 31, 2004, respectively 35,449 34,264
Additional paid-in capital 116,061,287 97,110,291
Notes receivable - common stock -- (384,803)
Deficit accumulated during the development stage (109,482,583) (96,526,373)
Accumulated other comprehensive income 549,664 296,371
-------------- --------------
Total Stockholders' Equity 7,163,818 529,751
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,380,871 $ 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 For the Six Months Ended November 2, 1995
January 31, January 31, (Date of Inception)
--------------------------- ----------------------------- to January 31,
2005 2004 2005 2004 2005
------------ ------------ ------------- ------------- -------------------
Revenues $ 76,750 $ 117,503 $ 219,500 $ 185,564 $ 1,846,684
Operating Expenses:
Research and development 2,181,835 1,956,588 5,576,965 2,985,117 52,744,679
Research and development - related party -- -- -- -- 220,218
General and administrative 3,450,556 2,907,443 6,872,794 5,737,759 61,124,106
General and administrative - related party -- -- -- -- 314,328
------------ ------------ ------------- ------------- -------------------
Total Operating Expenses 5,632,391 4,864,031 12,449,759 8,722,876 114,403,331
------------ ------------ ------------- ------------- -------------------
Operating Loss (5,555,641) (4,746,528) (12,230,259) (8,537,312) (112,556,647)
Other Income (Expense):
Miscellaneous income (expense) -- (164) -- (3,862) 125,348
Income from Rental Operations, net 27,723 33,052 74,789 37,133 169,139
Interest income 3,338 (19,704) 18,776 176,613 3,390,388
Interest expense (773,602) (41,276) (819,516) (59,462) (1,353,939)
------------ ------------ ------------- ------------- -------------------
Net Loss Before Undernoted (6,298,182) (4,774,620) (12,956,210) (8,386,890) (110,225,711)
Minority Interest Share of Loss -- -- -- -- 3,038,185
------------ ------------ ------------- ------------- -------------------
Net Loss (6,298,182) (4,774,620) (12,956,210) (8,386,890) (107,187,526)
Preferred Stock Dividend -- 810,003 -- 810,003 2,295,057
------------ ------------ ------------- ------------- -------------------
Net Loss Available to Common Shareholders $ (6,298,182) $ (5,584,623) $ (12,956,210) $ (9,196,893) $ (109,482,583)
============ ============ ============= ============= ===================
Basic and Diluted Net Loss Per Common Share $ (.18) $ (.19) $ (.37) $ (.32)
============ ============ ============= =============
Weighted Average Number of Shares of Common
Stock Outstanding 35,108,460 29,167,180 34,958,009 28,534,124
============ ============ ============= =============
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 Six Months Ended November 2, 1995
January 31, (Date of Inception)
-------------------------------- January 31,
2005 2004 2005
-------------- -------------- --------------------
Cash Flows From Operating Activities:
Net loss $ (12,956,210) $ (8,386,890) $ (107,187,527)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 550,521 497,959 3,027,753
Minority interest share of loss -- -- (3,038,185)
Reduction of notes receivable - common stock in exchange
for services rendered -- -- 423,882
Write-off of uncollectible notes receivable - common stock 391,103 -- 391,103
Write-off of deferred offering costs -- -- 3,406,196
Write-off of abandoned patents -- -- 9,134
Common stock issued for services rendered 755,180 918,000 4,409,992
Non-cash compensation expense -- 75,390 45,390
Stock options and warrants issued for services rendered 490,600 178,433 6,776,718
Preferred stock issued for services rendered -- -- 100
Treasury stock redeemed for non-performance of services (138,000) -- (138,000)
Amortization of deferred debt issuance costs 77,994 -- 77,994
Amortization of discount on convertible debentures 687,890 -- 687,890
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 704,564 (578,104) (139,333)
Accounts payable and accrued expenses 2,620,395 415,774 5,239,643
Other, net -- -- 110,317
-------------- -------------- --------------------
Net Cash Used in Operating Activities (6,815,963) (6,879,438) (85,499,615)
Cash Flows From Investing Activities:
Purchase of property and equipment (61,939) (246,419) (4,290,920)
Costs incurred for patents (139,039) (200,688) (1,440,596)
Change in restricted cash (4,885) (2,982) (195,214)
Proceeds from maturity of short term investments -- 4,270,942 126,687,046
Purchases of short-term investments -- (4,638,783) (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 (495,000) (477,194)
Change in notes receivable - common stock (6,300) (12,436) (91,103)
Change in due from related parties -- -- (2,222,390)
Other, net -- -- 89,683
-------------- -------------- --------------------
Net Cash Provided by (Used in) Investing Activities 183,726 (1,275,134) (9,703,659)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 1,154,316
Repayment of long-term debt (39,770) (37,264) (1,148,261)
Change in due to related parties -- -- 154,541
Proceeds from exercise of warrants -- -- 4,552,984
Proceeds from exercise of stock options -- 126,640 1,010,440
Proceeds from minority interest investment -- -- 3,038,185
Proceeds from issuance of preferred stock -- -- 12,015,000
Proceeds from issuance of convertible debentures, net 3,699,930 -- 3,699,930
Purchase of treasury stock -- -- (483,869)
Proceeds from issuance of common stock, net -- 2,931,988 73,283,715
Purchase and retirement of common stock -- -- (119,066)
-------------- -------------- --------------------
Net Cash Provided by Financing Activities 3,660,160 3,021,364 97,157,915
Effect of Exchange Rates on Cash 13,826 54,414 37,527
-------------- -------------- --------------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,958,251) (5,078,794) 1,992,168
Cash and Cash Equivalents, Beginning of Period 4,950,419 12,356,578 --
-------------- -------------- --------------------
Cash and Cash Equivalents, End of Period $ 1,992,168 $ 7,277,784 $ 1,992,168
============== ============== ====================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations for reporting
on Form 10-Q. Accordingly, certain information and disclosures required
by generally accepted accounting principles for complete financial
statements are not included herein. The interim statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's latest Annual Report on Form 10-K. The results
for the three and six months may not be indicative of the results for
the entire year.
Interim statements are subject to possible adjustments in connection
with the annual audit of the Company's accounts for the fiscal year
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.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. The Company has experienced negative cash flows from
operations since inception and had an accumulated deficit at January 31,
2005 of approximately $109.5 million. The Company has funded its
activities to date almost exclusively from debt and equity financings.
The Company is in the development stage and has realized minimal
revenues to date. The Company will continue to require substantial funds
to continue research and development, including preclinical studies and
clinical trials of its product candidates, and to commence sales and
marketing efforts, if the FDA or other regulatory approvals are
obtained. Management's plans in order to meet its operating cash flow
requirements include financing activities such as private placement of
its common stock, preferred stock offerings, debt and convertible debt
instruments. Management is also actively pursuing industry collaboration
activities including product licensing and specific project financing.
While the Company believes that it will be successful in obtaining the
necessary financing to fund its operations, there are no assurances that
such additional funding will be achieved and that it will succeed in its
future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or amounts of liabilities that might be necessary
should the Company be unable to continue in existence.
2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R "Share Based Payment." This statement is a revision
to SFAS 123 and supersedes Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and amends FASB
Statement No. 95, "Statement of Cash Flows". This statement requires a
public entity to expense the cost of employee services received in
exchange for an award of equity instruments using the fair-value-based
method. This statement also provides guidance on valuing and expensing
these awards, as well as disclosure requirements of these equity
arrangements. This statement is effective for the first interim
reporting period that begins after June 15, 2005.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS 123R permits public companies to choose between the following two
adoption methods:
1. A "modified prospective" method in which compensation
cost is recognized beginning with the effective date (a)
based on the requirements of SFAS 123R for all
share-based payments granted after the effective date
and (b) based on the requirements of Statement 123 for
all awards granted to employees prior to the effective
date of SFAS 123R that remain unvested on the effective
date, or
2. A "modified retrospective" method which includes the
requirements of the modified prospective method
described above, but also permits entities to restate
based on the amounts previously recognized under SFAS
123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of
the year of adoption.
As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB Opinion 25's intrinsic value method and,
as such, the Company generally recognizes no compensation cost for
employee stock options. The impact of the adoption of SFAS 123R cannot
be predicted at this time because it will be depend on levels of
share-based payments granted in the future. However, valuation of
employee stock options under SFAS 123R is similar to SFAS 123, with
minor exceptions. The impact on the results of operations and earnings
per share had the Company adopted SFAS 123, is described in stock based
compensation section of Note 3 below. Accordingly, the adoption of SFAS
123R's fair value method will have a significant impact on the Company's
results of operations, although it will have no impact on the Company's
overall financial position. SFAS 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required
under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after
adoption. Due to timing of the release of SFAS 123R, the Company has not
yet completed the analysis of the ultimate impact that this new
pronouncement will have on the results of operations, nor the method of
adoption for this new standard.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." The statement
addresses the measurement of exchanges of nonmonetary assets and
eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company is currently evaluating the
impact of adopting this statement.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 January 31, 2005 and 2004, the
Company recaptured/recognized $-0- of compensation expense in connection
with these options. During the six months ended January 31, 2005 and
2004, the Company recaptured/recognized $-0- and $75,390, 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 Six Months Ended
January 31, January 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Loss Available to Common
Stockholders, as Reported $ (6,298,182) $ (5,584,623) $(12,956,210) $ (9,196,893)
Add: Total Stock-Based Employee
Compensation Included in Reported
Net Loss -- (75,390) -- (75,390)
Deduct: Total Stock-Based Employee
Compensation Income Determined
Under Fair Value Based Method,
Net of Related Tax Effect -- 1,183,720 1,430,640 1,359,220
------------ ------------ ------------ ------------
Pro Forma Net Loss Available
to Common Stockholders $ (6,298,182) $ (6,692,953) $(14,386,850) $(10,480,723)
============ ============ ============ ============
Loss Per Share:
Basic and diluted, as reported $ (0.18) $ (0.19) $ (0.37) $ (0.32)
============ ============ ============ ============
Basic and diluted, pro forma $ (0.18) $ (0.23) $ (0.41) $ (0.37)
============ ============ ============ ============
4. COMPREHENSIVE INCOME/(LOSS)
Comprehensive loss, which includes net loss and the change in the
foreign currency translation account during the period, for the three
months ended January 31, 2005 and 2004, was $6,363,814 and $4,782,455,
respectively, and for the six months ended January 31, 2005 and 2004,
was $12,702,918 and $8,135,101, respectively.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
January 31, July 31,
2005 2004
------------ ------------
Accounts Payable $ 2,363,820 $ 1,113,127
Accounting and Auditing 320,674 44,775
Accrued Legal Fees and Settlement 416,682 368,244
Officer Compensation 1,162,052 9,801
Termination Agreements and Severance Pay 363,240 411,452
------------ ------------
Total $ 4,626,468 $ 1,947,399
============ ============
6. CONVERTIBLE DEBENTURES
On November 8, 2004, the Company entered into definitive agreements with
four accredited investors, pursuant to which the Company would issue
convertible promissory notes for aggregate gross proceeds of $4,000,000.
The notes carry a 6% coupon and a 15 month term and amortize in 13 equal
monthly installments commencing in the third month of the term. The
notes are convertible into registered common stock of the Company at a
per share price equal to the 10-day Volume Weighted Average Price (VWAP)
on the closing date ($0.82). The coupon and amortization payments are
payable in cash or, at the Company's option, in registered stock valued
at a 10% discount to the 20-day VWAP at as the payment date, subject to
certain restrictions. The transaction terms include 100% five-year
warrant coverage at a per share exercise price equal to a 10% premium to
the 10-day VWAP on the closing date and a 100% additional investment
right exercisable for up to twelve months following the effective date
of the registration statement in respect of the transaction.
During December 2004, the Company issued the aforementioned convertible
debentures. Proceeds related to the issuance, net of issuance costs of
$389,970, amounted to $3,699,930. Included in the issuance costs were
warrants issued to a third party to purchase 145,000 shares of common
stock at $0.91 per share. The fair value of the warrant was determined
to be $89,900 using the Black Scholes pricing model assuming a risk-free
rate of 1.79 percent, an expected volatility of 1.0463 and a five year
life. The fair value of the warrant, which has been allocated to
additional paid in capital, and together with the $300,070 of issuance
costs is being amortized over the life of the debt as a deferred debt
issuance cost. As of January 31, 2004, $77,994 has been amortized as
expense and the remaining $311,976 is included in deferred debt issuance
costs.
The holders of the convertible debentures also received warrants to
purchase 4,878,048 of common stock at $0.91 per share. The relative fair
value assignment of the fair value of the warrants, as determined by the
Black Scholes pricing model (using the same assumptions as above), to
the debt's total proceeds resulted in a debt discount of $1,722,222 and
a beneficial conversion feature of $1,722,222 which has been allocated
to additional paid in capital. These resulting debt discounts, totaling
$3,444,444, are being amortized using the effective yield method over
the life of the debenture. As of January 31, 2005, $687,890 has been
recorded as interest expense and the remaining $2,756,554 is included as
a debt discount which is net with the balance of the convertible
debenture.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. 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.
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.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. PENDING LITIGATION (CONTINUED)
On October 29, 2002, the Appellate Division issued a decision and order
unanimously modifying the lower court's order by remanding the issue of
damages to a new panel of arbitrators and otherwise affirming the lower
court's order. The Appellate Division's decision and order limits the
issue of damages before the new panel of arbitrators to reliance damages
which is not to include an award of lost profits. Reliance damages are
out-of-pocket damages incurred by Sands. The Appellate Division stated
that the lower court properly determined that the arbitration award,
which had granted Sands warrants for 1,530,020 shares of the
registrant's stock, was 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. the Company, awarding
Sands $150,000 in reliance damages. A motion to confirm this award has
been filed by Sands and was granted on February 1, 2005. Sands has not
sought leave to appeal the vacaturs of the prior panel's warrant award
to the New York Court of Appeals but advised the Company intentions of
doing so. As such, the award may be subject to further legal
proceedings. 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 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 the company called CTI. On July 20, 2001, the Company
filed a preliminary motion to dismiss the action of CTI as a nonexistent
entity or, alternatively, to stay such action on the grounds of want of
authority of such entity to commence the action. The plaintiffs brought
a cross motion to amend the statement of claim to substitute Centrum
Biotechnologies, Inc. ("CBI") for CTI. CBI is a corporation of which 50
percent of the shares are owned by the former business associate and the
remaining 50 percent are owned by the Company. Consequently, the
shareholders of CBI are in a deadlock. The court granted the Company's
motion to dismiss the action of CTI and denied the plaintiffs' cross
motion without prejudice to the former business associate to seek leave
to bring a derivative action in the name of or on behalf of CBI. The
former business associate subsequently filed an application with the
Ontario Superior Court of Justice for an order granting him leave to
file an action in the name of and on behalf of CBI against the VP and
the Company. The Company has opposed the application which is now
pending before the Court. In September 2003, the Ontario Superior Court
of Justice granted the request and issued an order giving the former
business associate leave to file an action in the name of and on behalf
of CBI against Modi and the Company. 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.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. PENDING LITIGATION (CONTINUED)
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.
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.
8. NET LOSS PER SHARE
Basic EPS and Diluted EPS for the three and six months ended January 31,
2005 and 2004 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
22,095,502 and 14,024,396 incremental shares at January 31, 2005 and
2004, respectively, have been excluded from the computation of Diluted
EPS as they are antidilutive.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Six Months Ended
January 31,
---------------------------
2005 2004
------------ ------------
Cash paid during the period for:
Interest $ 76,220 $ 53,546
Income taxes $ -- $ --
Disclosure of non-cash investing and financing activities:
Value of warrants issued in conjunction with capitalized
services upon issuance of convertible debentures $ 89,900 $ --
Sale of Series A Preferred Stock and mandatorily converted
to common shares $ 14,310,057 $ --
Value of warrants issued in conjunction with issuance of
convertible debentures $ 3,444,444 $ --
Issuance of Series A Preferred Stock as a preferred stock
dividend $ -- $ 810,003
Application of deposit to advances to Antigen Express, Inc. $ -- $ 25,000
Acquisition of Antigen Express, Inc through the issuance
of common stock and the assumption of stock options $ -- $ 4,797,409
Retirement of treasury stock $ -- $ 1,610,026
10. TRANSACTIONS WITH RELATED PARTY
The Company's change in "Due from Related Party" for the six months
ended January 31, 2005 represents only the effect of change in exchange
rate for the six months ended versus that in effect at July 31, 2004.
11. STOCKHOLDERS' EQUITY
In August 2004, the Company issued 620,000 shares of 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).
In December 2004, the holder of the Series A Preferred Stock sold its
holdings to a third party. In conjunction with sale, all of the
Company's outstanding Series A Preferred Stock was automatically
converted to common stock. As a result, the buyer received 534,085
shares of common stock and the Company no longer has any outstanding
shares of Series A Preferred Stock.
In December 2004, the Company issued convertible debentures. In
conjunction with the issuance of the debentures, the Company issued
4,878,048 warrants with the debentures and 145,000 warrants for
financial services rendered. The warrants were fully vested on date of
issuance and exercisable at $0.91 each for the purchase of one share of
the Company's common stock (see Note 6).
In December 2004, the Company issued 48,000 shares of common stock to
consultants for services rendered, which resulted in charges to the
statement of operations of $34,080 based on the quoted market price of
the Company stock on the date of issuance.
In January 2005, the Company issued 58,000 shares of common stock to
consultants for services rendered, which resulted in charges to the
statement of operations of $45,300 based on the quoted market price of
the Company stock on the date of issuance.
In January 2005, the Company deemed its notes receivable - common stock
in the amount of $391,103 to be uncollectible and, therefore, has taken
a charge to operations for the said amount.
12. SUBSEQUENT EVENTS
The following events occurred subsequent to January 31, 2005:
In February 2005, a consultant commenced an action in the Ontario
Superior Court of Justice against the Company seeking approximately
$600,000 in damages for alleged contract breaches in respect of unpaid
remuneration and other compensation allegedly owed to him. The Company
is of the view that the claims are wholly without merit and intends to
defend this action vigorously. The Company is not able to predict the
ultimate outcome of this legal proceeding at the present time or
estimate an amount or range of potential loss, if any, from this legal
proceeding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used herein, the terms the "Company," "we," "us," or "our" refer to Generex
Biotechnology Corporation, a Delaware corporation.
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
January 31, 2005 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 below under
the caption "Risk Factors". 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 GB 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 retained 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,
which EIS transferred, shortly thereafter, to Elan Pharmaceuticals Investment
III, an affiliate of Elan ("EPIL III"). 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. In accordance with
the terms of the Series A Preferred Stock, if any shares of Series A Preferred
Stock were to be outstanding on January 16, 2007, we would have been required to
redeem the shares of Series A Preferred Stock at a redemption price equal to the
aggregate Series A Preferred Stock liquidation preference, either in cash, or in
shares of common stock with a fair market value equal to the redemption price.
Alternatively, the Series A Preferred Stock could have been converted, under
certain conditions, into shares of our common 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.
On December 27, 2004, we entered into an agreement (the "Termination Agreement")
with Elan, whereby we and Elan agreed to terminate the joint venture through
Generex (Bermuda) Ltd. Pursuant to the terms of the Termination Agreement, (i)
except for a common stock purchase warrant that was issued by us to Elan, which
was amended to permit Elan or any other holder thereof to transfer the warrant
without our consent, the parties agreed to terminate all agreements entered into
in connection with the joint venture, and (ii) Elan agreed to transfer all
shares of capital stock of Generex (Bermuda) owned by it to us. Accordingly, all
rights granted by each party to the other terminated, including, without
limitation, Elan's right to appoint a member to our Board of Directors, all
other rights granted under the terms of the joint venture terminated, each party
retained its intellectual property rights, we obtained full ownership of Generex
(Bermuda), and all representatives of Elan who were officers and/or directors of
Generex (Bermuda) resigned.
In connection with negotiating the Termination Agreement, EPIL III approached us
for consent to transfer the Series A Preferred Stock by way of an auction
process. Although we provided our consent to the
transfer, it was contingent upon EPIL III agreeing to satisfy the following
conditions: (i) the auction process could conclude no later than December 15,
2004 and EPIL III's disposition of the shares could conclude no later than
December 31, 2004 (the "Closing Date"), (ii) the buyer had to immediately
convert the Series A Preferred Stock at the voluntary conversion price of $25.77
(calculated pursuant to the terms of the certificate of designation for the
Series A Preferred Stock resulting in the issuance of 534,085 shares of common
stock), (iii) EPIL III's registration rights could not be transferred, and (iv)
for a period of two (2) years after the Closing Date, the purchaser of the
Series A Preferred Stock may not transfer the shares of common stock issuable
upon conversion thereof and we will have the right to redeem the shares of
common stock at a per share price of 150% of the average closing price of the
common stock on The Nasdaq SmallCap Market for the twenty (20) days immediately
preceding the Closing Date. On or around December 15, 2004, EPIL III conducted
the auction and received an offer to by the shares of Series A Preferred Stock.
On or around December 31, 2004, EPIL III sold the shares of Series A Preferred
Stock and the purchaser thereof immediately converted the Series A Preferred
Stock into shares of our common stock.
The conversion of the Series A Preferred Stock was particularly critical because
the mandatory redemption feature required us to classify the Series A Preferred
Stock as approximately $14,300,000 of mezzanine equity. Upon conversion of the
Series A Preferred Stock, however, we were able to reclassify the approximately
$14,300,000 of mezzanine equity as common equity on our balance sheet. This, in
turn, allowed us to regain compliance with NASDAQ's Market Place Rule
4310(c)(2)(B). (See "Developments in Fiscal Quarter ended January 31, 2005").
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. During the
three-month period ended January 31, 2005, we received a total of $76,750 in
such research grants and during the six-month period ended January 31, 2005, and
we received a total of $219,500 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
quarter January 31, 2005 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 first six months of fiscal 2005, approximately 87% of our
$5,576,965 in research expenses was attributable to insulin and platform
technology development, and approximately 1% was attributable to morphine and
fentanyl projects. As morphine and fentanyl are both narcotic painkillers, the
research is related. In the same period of fiscal 2004, approximately 90% of our
$2,985,117 of research and development was expended for insulin and platform
technology, and approximately 1% for morphine and fentanyl.
Approximately 12%, or $690,718 of our research and development expenses for the
six month period ended January 31, 2005 were related to Antigen's immunomedicine
products compared to approximately 9% or $273,030 for the same period ended
January 31, 2004. Because these products are in a very early, pre-clinical stage
of development, all of the expenses were accounted for as basic research and no
distinctions were made as to particular products. Because of the early stage of
development, we cannot predict the timing of completion of any products arising
from this technology, or when products from this technology might begin
producing revenues. However, we can predict that we do not expect to begin
clinical trials during the current fiscal year.
Developments in Fiscal Quarter ended January 31, 2005
On November 12, 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 the lesser of (i) $0.82 and (ii) 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 an anti-dilution 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 were required to register for resale the shares of common stock
issuable upon conversion of the Debentures and upon exercise of the warrants.
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 January 24, 2006, 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 paid to a placement agent (i) a cash
fee equal to seven percent (7%) of the gross proceeds received by us and (ii)
warrants exercisable into approximately 145,000 shares of our common stock at
the same exercise price as the investors' warrants.
The aggregate number of shares of common stock issuable pursuant to this
transaction exceeds 19.99% of the outstanding shares of our common stock prior
to such issuance. Because the rules and regulations of The Nasdaq Stock Market
prohibit, under certain circumstances, the issuance, without prior stockholder
approval, of shares of common stock in excess of 19.99% of an issuer's
outstanding common stock prior to such issuance, certain insiders entered into a
voting agreement with the investors, whereby such insiders agreed to vote at the
next meeting of our stockholders all shares of our common stock held by them in
favor of authorizing the issuance of an amount of shares of our common stock in
excess of 19.99% of the outstanding common stock prior to consummating the
transaction.
We expect to utilize the proceeds from the transaction to accelerate clinical
development activities and for working capital and other general corporate
purposes. 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.
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. However, upon consummation in December 2004 of the
transactions contemplated by a Termination Agreement we entered into with Elan
Corporation, plc and its affiliates, as more fully described below, we regained
compliance with Market Place Rule 4310(c)(2)(B).
On November 24, 2004, we received notice from The Nasdaq Stock Market informing
us that we do not comply with Market Place 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. In accordance with Marketplace Rule 4310(c)(8)(D), we have 180
calendar days from the date of the notice, or until May 23, 2005, to regain
compliance with the Rule. If, at anytime prior to May 23, 2005, the bid price of
our common stock closes at $1.00 per share or more for a minimum period of ten
(10) consecutive business days, we will regain compliance with the Rule.
In the event compliance with Market Place Rule 4310(c)(4) cannot be demonstrated
by May 23, 2005, the Staff will determine whether we meet the Nasdaq SmallCap
Market initial listing criteria as set forth in Market Place Rule 4310(c),
except for the bid price requirement. If we meet the initial listing criteria,
the Staff will grant an additional 180 calendar day period for us to regain
compliance. If we cannot regain compliance and are not eligible for an
additional compliance period, the Staff will notify us that our securities will
be delisted, at which time we may appeal the Staff's determination to a Listing
Qualifications Panel.
On December 27, 2004, we entered into an agreement (the "Termination Agreement")
with Elan, whereby we and Elan agreed to terminate the joint venture through
Generex (Bermuda) Ltd. Pursuant to the terms of the Termination Agreement, (i)
we agreed with Elan to terminate all agreements entered into by the parties in
connection with the joint venture, except for a common stock purchase warrant
that was issued by us to Elan, which was amended to permit Elan or any other
holder thereof to transfer the warrant without our consent, and (ii) Elan agreed
to transfer all shares of capital stock of Generex (Bermuda) owned by it to us.
Accordingly, all rights granted by each party to the other terminated, including
without limitation, Elan's right to appoint a member to our Board of Directors,
all other rights granted under the terms of the joint venture terminated, each
party retained its intellectual property rights, we obtained full ownership of
Generex (Bermuda), and all representatives of Elan who were officers and/or
directors of Generex (Bermuda) resigned.
In connection with negotiating the Termination Agreement, Elan Pharmaceuticals
Investment III, an affiliate of Elan ("EPIL III"), which was the ultimate
recipient of 1,000 shares of Series A Preferred Stock issued by us in connection
with the joint venture, approached us for consent to transfer the Series A
Preferred Stock by way of an auction process. Although we provided our consent
to the transfer, it was contingent upon EPIL III agreeing to satisfy the
following conditions: (i) the auction process could conclude no later than
December 15, 2004 and EPIL III's disposition of the shares could conclude no
later than December 31, 2004 (the "Closing Date"), (ii) the buyer had to
immediately convert the Series A Preferred Stock at the voluntary conversion
price of $25.77 (calculated pursuant to the terms of the certificate of
designation for the Series A Preferred Stock resulting in the issuance of
534,085 shares of common stock), (iii) EPIL III's registration rights could not
be transferred, and (iv) for a period of two (2) years after the Closing Date,
the purchaser of the Series A Preferred Stock may not transfer the shares of
common stock issuable upon conversion thereof and we will have the right to
redeem the shares of common stock at a per share price of 150% of the average
closing price of the common stock on The Nasdaq SmallCap Market for the twenty
(20) days immediately preceding the Closing Date. On or around December 15,
2004, EPIL III conducted the auction and received an offer to by the shares of
Series A Preferred Stock. On or around December 31, 2004, EPIL III sold the
shares of Series A Preferred Stock and the purchaser thereof immediately
converted the Series A Preferred Stock into shares of our common stock.
The conversion of the Series A Preferred Stock was particularly critical because
the mandatory redemption feature required us to classify the Series A Preferred
Stock as approximately $14,300,000 of mezzanine equity. Upon conversion of the
Series A Preferred Stock, however, we were able to reclassify the approximately
$14,300,000 of mezzanine equity as common equity on our balance sheet. This, in
turn, allowed us to regain compliance with NASDAQ's Market Place Rule
4310(c)(2)(B). (See "Developments in Fiscal Quarter ended January 31, 2005").
Developments Subsequent to Fiscal Quarter Ended January 31, 2005.
In February 2005, a consultant commenced an action in the Ontario Superior Court
of Justice against the Company seeking approximately $600,000 in damages for
alleged contract breaches in respect of unpaid remuneration and other
compensation allegedly owed to him. The Company is of the view that the claims
are wholly without merit and intends to defend this action vigorously. The
Company is not able to predict the ultimate outcome of this legal proceeding at
the present time or estimate an amount or range of potential loss, if any, from
this legal proceeding.
RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the year
ended July 31, 2001, management determined that its Series A Preferred stock
should be reclassified from stockholders' equity to mezzanine equity on our
balance sheet, 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. The Series A Preferred Stock has been converted into shares of our
common stock. Accordingly, the Series A Preferred Stock has been removed as
mezzanine equity from our balance and the common stock has been classified as
stockholders' equity.
Results of Operations - Three and six months ended January 31, 2005 and 2004
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. To date, we have received a total of $846,684 in
research grants of which $219,500 was received during the six months ended
January 31, 2005.
Our net loss for the quarter ended January 31, 2005 was $6,298,182 versus
$4,774,620 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 due to an increase of $732,326 in interest expense a increase in
research and development expenses of $225,247, and an increase in general and
administrative expenses of $543,113. The increase in the interest expense
reflects additional interest paid in connection with convertible debentures
entered on November 12, 2004.
The increase in general and administrative expenses in the quarter ended January
31, 2005, compared to the quarter ended January 31, 2004, was the result of
increased legal and audit and accounting expenses, write off of notes
receivable, increased executive compensation and a slight increase in financial
and consulting services incurred this year that were paid by the issuance of
common stock. The increase in general and administrative expenses was partially
offset by reduction of advertising and travel expenses incurred this year
compared to the same period of last year.
The moderate increase in research and development expenses in the three-month
period ending January 31, 2005 compared to the corresponding period of the prior
fiscal year reflects the additional research and development activities by
Antigen and increased activities of regulatory consultants.
Our net loss for the six months ended January 31, 2005 increased to $12,956,210
versus $8,386,890 for the corresponding period of the prior fiscal year. The
increase in net loss was due primarily to an increase in operating expenses of
$3,726,883 and additional interest expense related to convertible debenture of
$760,054. This increase in operating expenses was due to research and
development expenses of $5,576,965, versus $2,985,117 for the corresponding
period of the prior fiscal year and general and administrative expenses of
$6,872,794, versus $5,737,759 for the corresponding period of the prior fiscal
year. The increase in operating expenses was related to the activities of
Antigen, bulk insulin purchases, increased activities of regulatory consultants
and higher clinical activity compared to the first six month of 2004. The
increase also reflects an accrual of the severance paid to an employee and
executive compensation and write-off of the notes receivable.
Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have a material effect in the foreseeable
future.
Financial Condition, Liquidity and Resources
To date we have financed our development stage activities primarily through
private placements of common stock.
At January 31, 2005, we had cash and short-term investments (primarily notes of
United States corporations) of approximately $2 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 January 31, 2005, we believed that our anticipated cash
position was sufficient to meet our working capital needs for the next 3 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 are unable to raise additional capital as needed, we could be
required to "scale back" or otherwise revise our business plan. Any significant
scale back of operations or modification of our business plan due to a lack of
funding could be expected to affect our prospects materially and adversely.
In the past, we have funded most of our development and other costs with equity
financing. 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 have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on the Company's financial condition, changes in
financial condition, revenue or expenses, results of operations, liquidity
capital expenditures or capital resources that is material to investors, and the
Company does not have any non-consolidated special purpose entities.
CONTRACTUAL OBLIGATIONS
Payments Due by Period
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- -------------------------------------------- ---------- ---------- ---------- ---------- ----------
Long-Term Debt Obligations 2,347,139 1,620,659 726,480 0 0
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 96,721 39,839 44,811 12,070 0
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities Reflected on the
Registrant's Balance Sheet under GAAP 0 0 0 0 0
Total 2,443,860 1,660,498 771,291 12,070 0
At January 31, 2005, we had Convertible Debenture on our Balance Sheet valued,
net of debt discount of $2,756,554, at $1,243,446.
RELATED PARTY TRANSACTIONS
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 December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share Based Payment." This statement is a revision to SFAS 123 and
supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and amends FASB Statement No. 95, "Statement of Cash
Flows". This statement requires a public entity to expense the cost of employee
services received in exchange for an award of equity instruments using the
fair-value-based method. This statement also provides guidance on valuing and
expensing these awards, as well as disclosure requirements of these equity
arrangements. This statement is effective for the first interim reporting period
that begins after June 15, 2005.
SFAS 123R permits public companies to choose between the following two adoption
methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS 123R for all share-based payments granted
after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the
effective date, or
2. A "modified retrospective" method which includes the
requirements of the modified prospective method described above,
but also permits entities to restate based on the amounts
previously recognized under SFAS 123 for purposes of pro forma
disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB Opinion 25's intrinsic value method and, as
such, the Company generally recognizes no compensation cost for employee stock
options. The impact of the adoption of SFAS 123R cannot be predicted at this
time because it will be depend on levels of share-based payments granted in the
future. However, valuation of employee stock options under SFAS 123R is similar
to SFAS 123, with minor exceptions. The impact on the results of operations and
earnings per share had the Company adopted SFAS 123, is described in stock based
compensation section of Notes to the Financial Statements. Accordingly, the
adoption of SFAS 123R's fair value method will have a significant impact on the
Company's results of operations, although it will have no impact on the
Company's overall financial position. SFAS 123R also requires the benefits of
tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. Due to timing of
the release of SFAS 123R, the Company has not yet completed the analysis of the
ultimate impact that this new pronouncement will have on the results of
operations, nor the method of adoption for this new standard.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29." The statement addresses the measurement
of exchanges of nonmonetary assets and eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets and replaces
it with an exception for exchanges that do not have commercial substance. SFAS
No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company is currently evaluating the impact of
adopting this statement.
RISK FACTORS
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
Quarterly Report on Form 10-Q.
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 $107,187,526 at January 31, 2005. 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 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 three 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 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 awarded to Sands.
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
Our common stock may be delisted from The Nasdaq SmallCap Market. .
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. On December 22, 2004, all outstanding shares of our Series A
Convertible Preferred Stock were converted to common stock,
resulting in the elimination of approximately $14,300,000 of mezzanine equity
and an equal amount was added to additional paid-in capital attributable to the
common stock, increasing stockholders' equity by that amount. Based on this, the
delisting proceeding relating to failure to meet stockholders' equity standards
was terminated. Because we are still in the development stage, there is no
guarantee that we will sustain compliance with this standard. In the event we
cannot 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 SmallCap Market, it may become subject to
Penny Stock Regulations and 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, a former officer and director of
Generex, 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated with changes in the exchange rates
between U.S. and Canadian currencies and with changes in the interest rates
related to our fixed rate debt. We do not believe that any of these risks will
have a material impact on our financial condition, results of operations and
cash flows.
At the present time, we maintain our cash in short term government or government
guaranteed instruments, short term commercial paper, interest bearing bank
deposits or demand bank deposits which do not earn interest. A substantial
majority of these instruments and deposits are denominated in U.S. dollars, with
the exception of funds denominated in Canadian dollars on deposit in Canadian
banks to meet short term operating needs in Canada. At the present time, with
the exception of professional fees and costs associated with the conduct of
clinical trials in the United States and Europe, substantially all of our
operating expense obligations are denominated in Canadian dollars. We do not
presently employ any hedging or similar strategy intended to mitigate against
losses that could be incurred as a result of fluctuations in the exchange rates
between U.S. and Canadian currencies.
As of January 31, 2005, we have fixed rate debt totaling $2,347,139. This amount
is comprised of $812,574 at a fixed interest rate of 5.8%, $322,880 at 8.5%,
$610,200 at 9.7%, $197,885 at 10%, and $403,600 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
Subsequent to the fiscal quarter ended January 31, 2005, a consultant filed a
Statement of Claim in the Ontario Superior Court of Justice, File No.,
05-CV-284560 PD1 approximately $600,000 in damages for alleged contract breaches
in respect of unpaid remuneration and other compensation allegedly owed to him.
The Company is of the view that it has no liability in this matter and intends
to defend this action vigorously. Due to the early stage of this action, the
Company is not able to predict the ultimate outcome of this legal proceeding at
the present time or estimate an amount or range of potential loss, if any, from
this legal proceeding.
For a full description of all legal proceedings against us, see our 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 January 31, 2005
and was previously reported in our quarterly report on Form 10-Q for the fiscal
quarter ended October 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. Generex may pay
principal and accrued interest in cash or, at Generex's option,
in shares of its common stock. If Generex elects to pay
principal and interest in shares of its common stock, the value
of each share of common stock will be equal to the lesser of (i)
$0.82 and (ii) 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 Generex'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 Generex'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 Generex'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 Generex 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, Generex is 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.
o In our Annual Report on Form 10-K for the fiscal year ended July
31, 2004 and in our Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 2004 we reported an unregistered
sale of securities pursuant to a Securities Agreement dated
October 18, 2004 to sell 800,000 shares of our common stock at
$2.50 per share for gross proceeds of $2,000,000. As of the date
of filing, the closing conditions under this Securities Purchase
Agreement were not satisfied, and we do not expect that we will
receive this investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
DIRECTOR NOMINATIONS
The following material change to the procedures by which a certain security
holder may recommend a nominee and appoint such nominee to the Board of
Directors occurred during the last fiscal quarter ended January 31, 2005:
pursuant to the terms and conditions of the Termination Agreement, Elan no
longer has a right to appoint a member of the Company's Board of Directors. This
right had been granted to Elan in connection with the Joint Venture Agreement we
entered into with Elan in January 2001 although Elan has not recently exercised
this right.
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.*
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* 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: March 16, 2005
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Rose C. Perri By: /s/ Anna Gluskin
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Principal Financial Officer Chief Executive Officer