Item 1. Business.
Preliminary Note
As of October 2015, (the first quarter of fiscal 2016), we laid off all of our employees, and ceased compensating our officers, and suspended substantially all of our operations due to lack of funds. On January 18, 2017, we acquired a majority of the equity interests in Hema Diagnostic Systems, LLC (“Hema” or “HDS”). We have the right to acquire the remainder of the Hema equity interests for nominal consideration provided that the Generex stock and warrants issued to the Hema equity owners in connection with the initial acquisition have a specified value and we have registered for resale the Company’s shares issued to the Hema equity owners. We intend to focus on Hema’s business and are identifying other areas for expansion, but do not intend to discontinue our pre-Acquisition activities.
Corporate History and Structure
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 development 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., an 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.
Subsidiaries
Following our reorganization in 1999, Generex Pharmaceuticals Inc., which is incorporated in Ontario, Canada, remained as our wholly-owned subsidiary. All of our Canadian operations are performed by Generex Pharmaceuticals. Generex Pharmaceuticals is the 100% owner of 1097346 Ontario Inc., which is also incorporated in Ontario, Canada. In August 2003, we acquired Antigen Express, Inc., a Delaware incorporated company. Antigen is engaged in the research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Antigen also does business under the names Generex Oncology and Generex Infectious Diseases.
On January 18, 2017, we acquired a majority of the equity interests in Hema Diagnostic Systems, LLC (“Hema”). We have the right to acquire the remainder of the Hema equity interests for nominal consideration provided that the Generex stock and warrants issued to the Hema equity owners in connection with the initial acquisition have a specified value and we have registered for resale the Company’s shares issued to the Hema equity owners. Hema is a Florida limited liability company Organized in December 2000. Hema began operations in 2002. Hema is in the business of developing, manufacturing, and distributing of in-vitro medical diagnostics for infectious diseases administered at the point of care level.
We formed Generex (Bermuda), Inc., which is organized in Bermuda, in January 2001 in connection with a joint venture with Elan International Services, Ltd., a wholly-owned subsidiary of Elan Corporation, plc, 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. In December 2004, we and Elan agreed to terminate the joint venture. Under the termination agreement, we retained all of our intellectual property rights and obtained full ownership of Generex (Bermuda). Generex (Bermuda) does not currently conduct any business activities. We have additional subsidiaries incorporated in the U.S. and Canada which are dormant and do not carry on any business activities.
Overview of Business
Generex Historical Business
Generex has been engaged primarily in the research and development of drug delivery systems and 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. Through our wholly-owned subsidiary, Antigen, we have expanded our focus to include immunomedicines incorporating proprietary vaccine formulations.
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, including estrogen, heparin, monoclonal antibodies, human growth hormone and fertility hormones, but to date have focused our development efforts primarily on one pharmaceutical product, Generex Oral-lyn™, an insulin formulation administered as a fine spray into the oral cavity using our proprietary hand-held aerosol spray applicator known as RapidMist™.
Our wholly-owned subsidiary, Antigen, concentrates on developing proprietary vaccine formulations that 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 and are in the early stages of development. We continue clinical development of Antigen’s synthetic peptide vaccines designed to stimulate a potent and specific immune response against tumors expressing the HER-2/neu oncogene for patients with HER-2/neu positive breast cancer in a Phase II clinical trial and patients with prostate cancer and against avian influenza in two Phase I clinical trials. We also initiated an additional Phase I clinical trial in patients with either breast or ovarian cancer. The synthetic vaccine technology has certain advantages for pandemic or potentially pandemic viruses, such as the H5N1 avian and H1N1 swine flu. In addition to developing vaccines for pandemic influenza viruses, we have vaccine development efforts underway for seasonal influenza virus, HIV, HPV, melanoma, ovarian cancer, allergy and Type I diabetes mellitus. We have established collaborations with clinical investigators at academic centers to advance these technologies.
To date, we have received regulatory approval in Ecuador, India (subject to regulatory approval of a 2012 in-country study), Lebanon and Algeria for the commercial marketing and sale of Generex Oral-lyn™. We have previously submitted regulatory dossiers for Generex Oral-lyn™ in a number of other countries, including Bangladesh, Kenya, Jordan and Armenia. While we believe these countries will ultimately approve our product for commercial sale, we do not anticipate recognizing revenues in any of these jurisdictions in the next twelve months. No dossier related activities or product shipments have taken place during fiscal 2016 or 2017, nor are any expected to these countries during the remainder of calendar year 2017. In March 2008, we initiated Phase III clinical trials for this product in the U.S. with the first patient screening for such trials at a clinical study site in Texas in April 2008. Approximately 450 patients were enrolled at approximately 70 clinical sites around the world, including sites in the United States, Canada, Bulgaria, Poland, Romania, Russia, Ukraine and Ecuador. The final subjects completed the trial in August 2011. After appropriate validation, the data from approximately 450 patients was tabulated, reviewed and analyzed. Those results from the Phase III trial along with a comprehensive review and supplemental analyses of approximately 40 prior Oral-lyn clinical studies were compiled and submitted to the FDA in late December 2011 in a comprehensive package including a composite metanalysis of all safety data. We do not currently plan to expend significant resources on additional clinical trials of Oral-lyn™ until after such time that we secure sufficient additional financing. However, we have initiated a project with the University Health Network of the University of Toronto, and the University of Guelph, Ontario to enhance the formulation of Generex Oral-lyn™ in order to reduce the number of puffs required for prandial use. Early results in an animal study have been encouraging and we expect to release the final results in the first quarter of 2018.
In November 2008 we, together with our marketing partner Shreya Life Sciences Pvt. Ltd., officially launched Generex Oral-lyn™ in India under marketing name of Oral Recosulin™. Each package of Oral Recosulin™ contains two canisters of our product along with one actuator. The product received regulatory price approval in India in January 2009. Per the requirements of the regulatory approval in India, an in-country clinical study must be completed in India with Oral Recosulin™ before commercial sales can commence. The field portion of the study was completed in the third calendar quarter of 2012. Shreya has advised Generex that the dossier was submitted in December of 2012 to the Drugs Controller General (India) (DCGI), Central Drugs Standard Control Organization, Director General of Health Services, Ministry of Health and Family Welfare, Government of India. Generex has provided additional, detailed scientific data to support the Shreya submission. We have not recognized any revenues from the sale of Generex Oral-lyn™ in India through fiscal year ended July 31, 2017 and do not expect any revenues to be recognized in India in the next twelve months.
In December 2008, we, together with our marketing partner Benta S.A., received an approval to market Generex Oral-lyn™ in Lebanon. The official product launch in Lebanon took place in May 2009. In May 2009, the Algerian health authorities granted us permission to import and sell Generex Oral-lyn™ for the treatment of diabetes in Algeria. The official product launch in Algeria took place in October 2009. To date, we have not recognized any revenue from the sales of Generex Oral-lyn™ in Algeria and very minimal revenues in Lebanon. We do not anticipate any revenues to be recognized from these jurisdictions in the next twelve months.
We face competition from other providers of alternate forms of insulin. Some of our most significant competitors, Pfizer, Eli Lilly, and Novo Nordisk, have discontinued development and/or sale of their inhalable forms of insulin. MannKind introduced a new pulmonary insulin which was approved by the FDA in 2014, and MannKind subsequently partnered with sanofi-aventis to market the product under the tradename of Afrezza.
Generex Oral-lyn™ is not an inhaled insulin; rather, it is a buccally absorbed formulation with no pulmonary deposition. We believe that our buccal delivery technology offers several advantages, including the ease of use, portability, avoidance of pulmonary inhalation and safety profile. Furthermore, insulin administered through the Generex Oral-lyn™ RapidMist™ technology is absorbed directly into the blood stream and not only acts rapidly, but returns to baseline quickly, thereby minimizing the chance of developing hypoglycemia.
Large pharmaceutical companies, such as Merck & Co., Inc., GlaxoSmithKline PLC, Novartis, Inc., MedImmune Inc. (a subsidiary of Astra-Zeneca, Inc.) and others, also compete against us in the oncology, immunomedicine and vaccine markets. These companies have competing experience and expertise in securing government contracts and grants to support research and development efforts, conducting testing and clinical trials, obtaining regulatory approvals to market products, as well as manufacturing and marketing approved products. As such, they are also considered significant competitors in these fields of pharmaceutical products and therapies. There are also many smaller companies which are pursuing similar technologies in these fields who are considered to be competitors of Generex.
We are a development stage company with a limited history of operations, and do not expect sufficient revenues to support our operation in the immediately foreseeable future. To date, we have not been profitable and our accumulated net loss available to shareholders was $445,720,566 at July 31, 2017. As of July 31, 2017, our current cash position is not sufficient to meet our working capital needs for the next twelve months. To continue operations, we will require additional funds to support our working capital requirements and any development activities, or will need to suspend operations. Management is seeking various alternatives to ensure that we can meet some of our operating cash flow requirements through financing activities, such as private placement of our common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. In addition, management is actively seeking strategic alternatives, including strategic investments and divestitures. We have sold non-essential real estate assets which were classified as Assets Held for Investment to augment our cash position. We cannot provide any assurance that we will obtain the required funding. Our inability to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and our strategic development plan for future growth. If we cannot successfully raise additional capital and implement our strategic development plan, our liquidity, financial condition and business prospects will be materially and adversely affected and we may have to cease operations.
We operate in only one segment: the research and development of drug delivery systems and technologies for metabolic and immunological diseases.
HDS Diagnostics Business
Our majority-owned subsidiary, Hema Diagnostic Systems LLC (HDS) is in the business of developing, manufacturing, and distributing rapid point-of-care in-vitro medical diagnostics for infectious diseases. These are commonly referred as rapid diagnostic tests (RDTs). We manufacture and sell RDTs based upon our own proprietary EXPRESS platforms as well as standard “cassette” devices. As a result of its acquisition by Generex Biotechnologies, HDS is currently undergoing a name change and will become NuGenerex Diagnostics.
Since its founding, HDS has been developing and continues to develop an expanding line of RDTs for infectious disease diagnosis. These include products for human immunodeficiency virus (HIV), tuberculosis, malaria, hepatitis B, hepatitis C, syphilis, and others. These assays are all qualitative in nature and provide a simple positive or negative result directly at the clinical site. They can be used for definitive diagnosis, triage or in combination with other assays depending on which disease is being considered.
Each device incorporates a test strip containing reagent lines (stripes) that have been impregnated with specific antigens or antibodies that detect the target molecules specific to an infectious disease. The test strips are incorporated into our proprietary EXPRESS platforms which are easy-to-use and user-friendly diagnostic devices. There are two EXPRESS platforms; the EXPRESS and the EXPRESS II. The EXPRESS II is an upgraded version of the original EXPRESS and its use involves fewer operator steps, making it of higher clinical utility value.
Each system delivers its own advantages which enhance the use, application and performance of each diagnostic. This ease of use in the EXPRESS delivery systems ensure that our RDTs perform efficiently and effectively providing the most accurate and repeatable test results available while, at the same time, minimizing the transference of a potentially infected blood sample.
HDS has just begun a new initiative which revolves around the development of quantitative rapid diagnostic assays. These assays allow laboratory personnel and clinicians to assess the absolute amount of specific target molecules in blood or serum samples as opposed to “yes” or “no” results of qualitative RDTs. The first assay to be developed is a multiplex biomarker test for the diagnosis of sepsis and the potential differentiation of infectious sepsis from systemic immune response syndrome (SIRS).
The Company maintains a Federal Drug Administration (FDA) registered facility in Miramar, Florida and is certified under both ISO9001 and ISO13485 for the Design, Development, Production and Distribution of the in-vitro devices. Approval of our HIV rapid test has been issued by the United States Agency for International Development (USAID). Additionally, some of our products qualified for and carry the European Union “CE” Mark, which allows us to enter into CE Member countries subject to individual country requirements. Currently, we have two malaria rapid tests approved under World Health Organization (WHO) guidelines. This process allows expedited approval of rapid tests, reducing the current 24-30 month process down to approximately 6-9 months. WHO approval is necessary for our products to be used in those countries which rely upon the expertise of the WHO, as well as for NGO funding for the purchase of diagnostic products.
We maintain current U.S. Certificates of Exportability that are issued by two FDA divisions-CBER and CDRH. CBER (Center for Biologicals Evaluation and Research) is the FDA regulatory division that oversees biological devices and which include our HIV, Hepatitis B and Hepatitis C. The other division, Center for Devices and Radiological Health (CDRH), is responsible for the oversight of other HDS devices which include Tuberculosis, Syphilis, and the remaining product line. Our HDS facility maintains FDA Establishment Registration status and is in accord with GMP (Good Manufacturing Practice) as confirmed by the FDA.
We do not currently have FDA clearance to sell our products in the United States. We intend on submitting selected devices to the FDA under a Pre-Market Approval Application (PMA) or through the 510K process. The 510K would require the appropriate regulatory administrative submissions as well as a limited scientific review by the FDA to determine completeness (acceptance and filing reviews); in-depth scientific, regulatory, and Quality System review by appropriate FDA personnel (substantive review); review and recommendation by the appropriate advisory committee (panel review); and final deliberations, documentation, and notification of the FDA decision. The PMA process is more extensive, requiring clinical trials to support the application. We expect to apply to FDA for clearance of our first RDT (The Hema Rapid 123 Syphilis EXPRESS II)) for FDA 510K approval within the next few months. We anticipate the FDA process will be completed within 9 months after submission. During this timeline, we will be preparing documentation for additional rapid tests to undergo either the FDA PMA or 510k process.
Our Business Strategy
Generex Historical Business
Our business model focuses on the research and development of diabetes, oncology and infectious diseases drugs. This business model leverages the expertise of our management team, scientific advisory board and the history of our company. Our goal is to develop next generation drugs for diabetes, oncology and infectious disease by leveraging our buccal delivery technology to administer large and small molecule drugs, including insulin, and proprietary vaccine formulations based upon two Antigen platform technologies to provide innovative biopharmaceutical products that offer the potential for superior efficacy and safety over existing products. To achieve these goals, the key elements of our strategy include:
• Completing any additional studies or clinical trials of Generex Oral-lyn™, which may be required in order to obtain regulatory approval in major and other jurisdictions;
• Enhancing the formulation for Generex Oral-lyn™ to increase effectiveness and to improve the potential for new financing for additional clinical trials.
• Developing a proprietary portfolio of products for the treatment of diabetes through strategic partnerships licensing and acquisitions;
• A keystone of Generex’s strategy, announced at the annual meeting of stockholders in June 2011 is the proposed spin-out of Antigen Express as a separate company from Generex. Management believes that this action would allow Antigen to establish value for its immunotherapeutic vaccine technologies separate from the Generex buccal drug delivery platform technologies. The spin-out would be accomplished by the issuance of one or more dividends of Antigen Express stock to Generex stockholders;
• Completing the ongoing Phase II clinical trials of Antigen’s synthetic peptide vaccines designed to stimulate a potent and specific immune response against tumors expressing the HER-2/neu oncogene for patients with HER-2/neu positive breast cancer, conducting a Phase II prostate cancer trial and a Phase I trial in patients with breast or ovarian cancer;
• Conducting further clinical trials of Antigen’s synthetic peptide vaccines against avian (H5N1) influenza and initiating clinical trial of such vaccines against swine (H1N1) influenza; and
• Exploring other applications for our RapidMist platform buccal technology; morphine, LWH, fentanyl (all of which have undergone Phase I clinical studies), as well as cell therapy for late stage diabetes.
HDS Business Strategy
HDS’ business strategy is three-pronged and designed to enhance company value.
First, HDS will continue to market and sell its current product line of low cost qualitative infectious disease RDTs into international markets, especially resource poor countries, through country distributors, international GMOs and governmental bodies and agencies, for the purpose of providing a continuing revenue stream.
Second, we will register selected assays such as the Rapid 123 Hema EXPRESS Syphilis and the Rapid 1-2-3 Hema EXPRESS II HIV 1/2 w/p24Ab in the United States through the FDA, and in the European Union through the CE mark process, to allow access to more affluent US and European markets.
And, third, we are embarking on a program to develop high quality and medically critical quantitative assays, in the field of infectious diseases and immunology, beginning with a multiplex sepsis biomarker assay which will facilitate the building of a significant body of intellectual property and products.
HDS has just begun the initiative of developing the quantitative rapid diagnostic assays. These assays allow laboratory personnel and clinicians to assess the absolute amount of specific target molecules in blood or serum samples as opposed to “yes” or “no” results of qualitative RDTs. The first assay to be developed is a multiplex biomarker test for the diagnosis of sepsis and the potential differentiation of infectious sepsis from systemic immune response syndrome (SIRS).
The multiplex biomarker assay will be a rapid triage or screening tool to diagnose and differentiate between SIRS and sepsis, but will also allow the physician to monitor the progress of the patient after a definitive diagnosis of either has been made. As such, it is a multi-purpose diagnostic and monitoring assay. It will be able to be used in both preliminary screening diagnosis and as an aid in following prognosis. The market for diagnostic sepsis tests in the United States alone is $3 billion annually and rising.
The quantitative detection of some of the critical biomarker molecules that arise in SIRS and sepsis provides a unique opportunity for the development of an assay that can be used directly at bedside with results available to the physician in minutes instead of hours.
We believe that the execution of this three-pronged strategy, revolving around maximizing the sales of existing products and the development of quantitative rapid point-of-care assays can substantially increase the value of HDS and its parent company, Genera Biotechnology.
PRODUCTS
Buccal Delivery Technology and Products
Our buccal delivery technology involves the preparation of proprietary formulations in which an active pharmaceutical agent is placed in a solution with a combination of absorption enhancers and other excipients classified “generally recognized as safe” ("GRAS") by the United States Food and Drug Administration (the "FDA") when used in accordance with specified quantities and other limitations. The resulting formulations are aerosolized with a pharmaceutical grade chemical propellant and are administered to patients using our proprietary RapidMist™ brand metered dose inhaler. The device is a small, lightweight, hand-held, easy-to-use aerosol applicator comprised of a container for the formulation, a metered dose valve, an actuator and dust cap. Using the device, patients self-administer the formulations by spraying them into the mouth. The device contains multiple applications, the number being dependent, among other things, on the concentration of the formulation. Absorption of the pharmaceutical agent occurs in the buccal cavity, principally through the inner cheek walls. In clinical studies of our flagship oral insulin product Generex Oral-lyn™, insulin absorption in the buccal cavity has been shown to be efficacious and safe.
Buccal Insulin Product - Generex Oral-Lyn™
Insulin is a hormone that is naturally secreted by the pancreas to regulate the level of glucose, a type of sugar, in the bloodstream. The term “diabetes” refers to a group of disorders that are characterized by the inability of the body to properly regulate blood glucose levels. When glucose is abundant, it is converted into fat and stored for use when food is not available. When glucose is not available from food, these fats are broken down into free fatty acids that stimulate glucose production. Insulin acts by stimulating the use of glucose as fuel and by inhibiting the production of glucose. In a healthy individual, a balance is maintained between insulin secretion and glucose metabolism.
There are two major types of diabetes. Type 1 diabetes (juvenile onset diabetes or insulin dependent diabetes) refers to the condition where the pancreas produces little or no insulin. Type 1 diabetes accounts for 5-10 percent of diabetes cases. It often occurs in children and young adults. Type 1 diabetics must take daily insulin injections, typically three to five times per day, to regulate blood glucose levels. Generex Oral-lyn™ provides a needle-free means of delivering insulin for these patients.
In Type 2 diabetes (adult onset or non-insulin dependent diabetes mellitus), the body does not produce enough insulin, or cannot properly use the insulin produced. Type 2 diabetes is the most common form of the disease and accounts for 90-95 percent of diabetes cases. In addition to insulin therapy, Type 2 diabetics may take oral drugs that stimulate the production of insulin by the pancreas or that help the body to more effectively use insulin. Generex Oral-lyn™ provides a simple means of delivering needed insulin to this major cohort of individuals.
Studies in diabetes have identified a condition closely related to and preceding diabetes, called impaired glucose tolerance (IGT). People with IGT do not usually meet the criteria for the diagnosis of diabetes mellitus. They have normal fasting glucose levels but two hours after a meal their blood glucose level is far above normal. With the increase use of glucose tolerance tests the number of people diagnosed with this pre-diabetic condition is expanding exponentially. Per the 2013 Diabetes Atlas Update, published by the International Diabetes Federation (IDF), approximately 40 million people in the United States and more than 316 million people world-wide suffer from IGT. Generex Oral-lyn™ is an ideal solution to providing meal-time insulin to the millions of IGT sufferers. This therapeutic area is currently being investigated.
If not treated, diabetes can lead to blindness, kidney disease, nerve disease, amputations, heart disease and stroke. Each year, between 12,000 and 24,000 people suffer vision impairment or complete blindness because of diabetes. Diabetes is also the leading cause of end-stage renal disease (kidney failure), accounting for about 40 percent of new cases.
In addition, about 60-70 percent of people with diabetes have mild to severe forms of diabetic nerve damage, which, in severe forms, can lead to lower limb amputations. Diabetics are also two to four times more likely to have heart disease, which is present in 75 percent of diabetes-related deaths, and are two to four times more likely to suffer a stroke.
There is no known cure for diabetes. The IDF estimates that there are currently approximately 382 million diabetics worldwide per their 2013 Diabetes Atlas Update and is expected to affect over 592 million people by the year 2035. There are estimated to be over 37 million people suffering from diabetes in North America alone and diabetes is the second largest cause of death by disease in North America.
A substantial number of large molecule drugs (i.e., drugs composed of molecules with a high molecular weight and fairly complex and large spatial orientation) 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 inefficient or ineffective. The RapidMist technology provides a recognized and proved drug delivery system for the delivery of large molecules directly into the blood stream with the attendant advantages.
In May 2005, we received approval from the Ecuadorian Ministry of Public Health for the commercial marketing and sale of Generex Oral-lyn™ for treatment of Type 1 and Type 2 diabetes. We have successfully completed the delivery and installation of a turnkey Generex Oral-lyn™ production operation at the facilities of PharmaBrand in Quito, Ecuador. The first commercial production run of Generex Oral-lyn™ in Ecuador was completed in May 2006. While Ecuador production capability may be sufficient to meet the needs of South America, it is believed to be insufficient for worldwide production for future commercial sales and clinical trials.
On the basis of the test results in Ecuador and other pre-clinical data, we made an IND submission to Health Canada (Canada's equivalent to the FDA) in July 1998, and received permission from the Canadian regulators to proceed with clinical trials in September 1998. We filed an Investigational New Drug application with the FDA in October 1998, and received FDA approval to proceed with human trials in November 1998.
We began our clinical trial programs in Canada and the United States in January 1999. Between January 1999 and September 2000, we conducted clinical trials of our insulin formulation involving approximately 200 subjects with Type 1 and Type 2 diabetes and healthy volunteers. The study protocols in most trials involved administration of two different doses of our insulin formulation following either a liquid Sustacal meal or a standard meal challenge. The objective of these studies was to evaluate our insulin formulation's efficacy in controlling post-prandial (meal related) glucose levels. These trials demonstrated that our insulin formulation controlled post-prandial hyperglycemia in a manner comparable to injected insulin. In April 2003, a Phase II-B clinical trial protocol was approved in Canada. In September 2006, a Clinical Trial Application relating to our Generex Oral-lyn™ protocol for late-stage trials was approved by Health Canada. The FDA’s review period for the protocol lapsed without objection in July 2007.
In late April 2008, we initiated Phase III clinical trials in North America for Generex Oral-lyn™ with the first subject screening in Texas. Other clinical sites participating in the study were located in the United States (Texas, Maryland, Minnesota and California), Canada (Alberta), European Union (Romania, Poland and Bulgaria), Eastern Europe (Russia and Ukraine),) and Ecuador. Approximately 450 subjects were enrolled in the program at approximately 70 clinical sites around the world. The Phase III protocol called for a six-month trial with a six-month follow-up with the primary objective to compare the efficacy of Generex Oral-lyn™ and the RapidMist™ Diabetes Management System with that of standard regular injectable human insulin therapy as measured by HbA1c, in patients with Type-1 diabetes mellitus. The final subjects completed the trial in August 2011. After appropriate validation, the data from approximately 450 patients was tabulated, reviewed and analyzed. Those results from the Phase III trial along with a comprehensive review and supplemental analyses of approximately 40 prior Oral-lyn clinical studies were compiled and submitted to the FDA in late December 2011 in a comprehensive package including a composite metanalysis of all safety data. We do not currently plan to expend significant resources on additional clinical trials of Oral-lyn™ until after such time that we secure additional financing. However, we have undertaken a formulation enhancement project with the University Health Network at the University of Toronto and the University of Guelph, Ontario to increase the amount of insulin reaching the blood stream. Preliminary results from an animal study are encouraging,
In the past, we engaged a global clinical research organization to provide many study related site services, including initiation, communication with sites, project management and documentation; a global central lab service company to arrange for the logistics of kits and blood samples shipment and testing; an Internet-based clinical electronic data management company to assist us with global data entry, project management and data storage/processing of the Phase III clinical trial and regulatory processes. In the past, we have contracted with third-party manufacturers to produce sufficient quantities of the RapidMist™ components, the insulin, and the raw material excipients required for the production of clinical trial batches of Generex Oral-lyn™.
As described above, we have obtained regulatory approval for the commercial marketing and sale of Generex Oral-lyn™ in Ecuador, India (subject to regulatory approval of a 2012 in-country study), Lebanon and Algeria.
Other Potential Buccal Products
We have currently ongoing discussions regarding possible research collaborations with various pharmaceutical companies concerning use of our large molecule drug delivery technology with other compounds Memorandums of Understanding have been signed with two companies for the testing of RapidMist technology with both Leuprolide and medical marijuana and clinical work is expected to commence in the latter half of 2018.
Diagnostic Products
Although we sell “cassette” based diagnostic tests based on standard designs, we predict our future success will be tied to the manufacture and sale of products based on our proprietary EXPRESS device platform systems (Fig. 1) and on the quantitative rapid assays, such as the Sepsis Multiplex Biomarker assay that we are currently developing, as described above.
Figure
Current EXPRESS PLATFORM PRODUCTS
HEMA EXPRESS HEMA EXPRESS II
Rapid 1-2-3 Hema EXPRESS HIV 1/2 w/p24Ab Rapid 1-2-3 Hema EXPRESS II HIV 1/2 w/p24Ab
Rapid 1-2-3 Hema EXPRESS Tuberculosis-XT Rapid 1-2-3 Hema EXPRESS II Tuberculosis-XT
Rapid 1-2-3 Hema EXPRESS Syphilis Rapid 1-2-3 Hema EXPRESS II Malaria pF
Rapid 1-2-3 Hema EXPRESS II Malaria pF/pV
Rapid 1-2-3 Hema EXPRESS II Malaria pF/Pan
Rapid 1-2-3 Hema EXPRESS II Syphilis
The EXPRESS Platforms:
The Rapid 1-2-3 Hema® EXPRESS platforms are designed to ensure ease of use, accuracy of performance, and cost-effectiveness of production. Test results of each Rapid 1-2-3 Hema EXPRESS test devices are easy to read under all conditions even while conducting testing in the field. Additionally, the Rapid 1-2-3 Hema EXPRESS platforms do not require the use of water or electricity.
Both the EXPRESS and the EXPRESS II allow rapid point-of- care testing of whole blood from a simple finger stick and both can also be used with serum or plasma samples in laboratory settings.
The degree of difficulty in using a rapid test is generally determined by the delivery system/housing design itself. One of the most common reasons for rapid test failure is due to user-error which is most commonly attributed to the misuse of a rapid test or of the test sample. The greater the degree of difficulty in performing the RDT, the greater the chance for user error. The EXPRESS series of devices substantially reduces the difficulty factor through its user-friendly test process and careful control of the test sample
The EXPRESS and the EXPRESS II both incorporate into their design, a sample take-up system that adsorbs the whole blood, serum or plasma sample directly onto the device test strip. When the test sample meets a predetermined line, sufficient sample size has been achieved. The EXPRESS or EXPRESS II is then inserted directly into a pre-filled diluent pod which contains the exact amount of diluent, creating a water tight seal. Due to the potential infectious character of a whole blood test sample, both the EXPRESS and the EXPRESS II RDTs have been designed as self-contained assays. Both EXPRESS housings are sealed preventing cross contamination and reducing the potential for surrounding environmental contamination or transferring contaminated blood samples to the operating personnel. Once the test procedure is finished, the device remains sealed and can be disposed of through incineration or other means. This is an important feature, especially in on-site field testing where operating personnel are not as highly-trained as in dedicated laboratories.
The EXPRESS II has the additional advantages of fewer operating components which reduces manufacturing costs, faster reaction time and increased analytical sensitivity.
To expedite the training in the use of the HDS rapid tests, we have designed each EXPRESS series device to operate in the same manner thereby reducing the amount of training needed in the use of other EXPRESS series RDTs. Once trained in the use of one EXPRESS series RDT, the operator will know and understand how to run each additional EXPRESS device regardless of the diseases being tested.
Cassettes
Over the past 30 years, most users of RDTs have been trained on the use of cassettes. For this reason, we have maintained a line of rapid cassette tests for a number of diseases. All of our products listed in Figure 1 are available in cassette format and additionally two more malaria product variations are produced for sale. The cassette is a semi-complicated and low cost delivery system that has been used in the worldwide markets. The cassette is not user-friendly and substantial time is required to train the test operator in its use
The process of using a cassette device is prone to misuse -which is the core reason for most cassette test failures. Additionally, cassette test procedure offers a substantial opportunity for cross-contamination. While accepted out of tradition, the cassette is a design that requires substantial care while performing the testing procedure.
Due to the historical nature of the cassette design, we continue to offer our cassette presentation, two of which have already been approved under the World Health Organization (WHO) List of Approved Malaria Devices, and offered o those markets which require WHO approval.
Immunomedicine Technology and Products
Our wholly-owned subsidiary Antigen Express is developing proprietary vaccine formulations based upon two platform technologies that were discovered by its founder, the Ii-Key hybrid peptides and Ii-Suppression. These technologies are applicable for either antigen-specific immune stimulation or suppression, depending upon the dosing and formulation of its products. Using active stimulation, we are focusing on major diseases such as breast, prostate and ovarian cancer, melanoma, influenza (including H5N1 avian and H1N1 swine flu) and HIV. Autoimmune diseases such as diabetes and multiple sclerosis are the focus of our antigen-specific immune suppression work.
Antigen’s immunotherapeutic vaccine was in Phase II clinical trials for patients with HER-2/neu positive breast cancer when we had financial resources. The trial is being conducted with the United States Military Cancer Institute's (USMCI) Clinical Trials Group and will examine the rate of relapse in patients with node-positive or high-risk node-negative breast cancer after two years. The study is randomized and will compare patients treated with AE37 plus the adjuvant GM-CSF versus GM-CSF alone. The Phase II trial follows a Phase I trial that demonstrated safety, tolerability, and immune stimulation of the AE37 vaccine in breast cancer patients.
Based on positive results in trials of the AE37 vaccine in breast cancer patients, we entered into an agreement in August 2006 with the Euroclinic, a private center in Athens, Greece, to commence clinical trials with the same compound as an immunotherapeutic vaccine for prostate cancer. A Phase I trial involving 29 patients was completed in August 2009, which similarly showed safety, tolerability and induction of a specific immune response. Agreements, as well as a protocol, are in place for initiation of a Phase II clinical trial once additional funding is available.
The same technology used to enhance immunogenicity is being applied in the development of a synthetic peptide vaccine for H5N1 avian influenza and the 2009 H1N1 swine flu. In April 2007, a Phase I clinical trial of Antigen’s proprietary peptides derived from the hemagglutinin protein of the H5N1 avian influenza virus was initiated in healthy volunteers in the Lebanese-Canadian Hospital in Beirut, Lebanon. We have completed the first portion of the Phase I trial. Modified peptide vaccines for avian influenza offer several advantages over traditional egg-based or cell-culture based vaccines. Modified peptide vaccines can be manufactured by an entirely synthetic process which reduces cost and increases both the speed and quantity of vaccine relative to egg- or cell-culture based vaccines. Another advantage is that the peptides are derived from regions of the virus that are similar enough in all H5N1 and H1N1 virus strains such that they would not have to be newly designed for the specific strain to emerge in a pandemic.
A Physician’s Investigational New Drug (“IND”) application for the Phase I and Phase II trials in patients with stage II HER-2/neu positive breast cancer has been filed with the FDA. The Phase I trial was completed at the Walter Reed Army Medical Center in Washington, D.C., and the Phase II trial were taking place before our resources were exhausted. A Physician’s Investigational New Drug application for a Phase I trial in patients with breast or ovarian cancer also has been filed with the FDA and this Phase I trial is being conducted in Dallas, Texas at the Mary Crowley Cancer Center. Applications were filed and approvals obtained for a Phase I prostate cancer trial using AE37 in Athens, Greece from the Hellenic Organization of Drugs, and this Phase I trial was completed in August 2009. The Ministry of Health in Lebanon gave approval for Phase I trial of our experimental H5N1 prophylactic vaccine in Beirut, Lebanon following submission of an application. All other immunomedicine products are in the pre-clinical stage of development.
GOVERNMENT REGULATION
Generex Historical Business
Our research and development activities and the manufacturing and marketing of our pharmaceutical products are subject to extensive regulation by the FDA in the United States, Health Canada in Canada and comparable designated regulatory authorities in other countries. Among other things, extensive regulations require us to satisfy numerous conditions before we can bring products to market. While these regulations apply to all competitors in our industry, having a technology that is unique and novel extends the requisite review period by the various divisions within the FDA and other regulators. Also, other companies in our industry are not limited primarily to products which still need to be approved by government regulators, as we are now.
If requisite regulatory approvals are not obtained and maintained, our business will be substantially harmed. In many cases, we expect that extant and prospective development partners will participate in the regulatory approval process. The following discussion summarizes the principal features of food and drug regulation in the United States and other countries as they affect our business.
United States
All aspects of our research, development and foreseeable commercial activities relating to pharmaceutical products are subject to extensive regulation by the FDA and other regulatory authorities in the United States. United States federal and state statutes and regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of pharmaceutical products. The regulatory approval process, including clinical trials, usually takes several years and requires the expenditure of substantial resources. If regulatory approval of a product is granted, the approval may include significant limitations on the uses for which the product may be marketed.
The steps required before a pharmaceutical product may be marketed in the United States include:
Conducting appropriate pre-clinical laboratory evaluations, including animal studies, in compliance with the FDA’s Good Laboratory Practice (“GLP”) requirements, to assess the potential safety and efficacy of the product, and to characterize and document the product’s chemistry, manufacturing controls, formulation and stability;
Submitting the results of these evaluations and tests to the FDA, along with manufacturing information, analytical data, and protocols for clinical studies, in an IND Application, and receiving approval from the FDA that the clinical studies proposed under the IND are allowed to proceed;
Obtaining approval of Institutional Review Boards (“IRBs”) to administer the product to humans in clinical studies; conducting adequate and well-controlled human clinical trials in compliance with the FDA’s Good Clinical Practice (“GCP”) requirements that establish the safety and efficacy of the product candidate for the intended use;
Developing manufacturing processes which conform to the FDA’s current Good Manufacturing Practices, or cGMPs, as confirmed by FDA inspection;
Submitting to the FDA the results of pre-clinical studies, clinical studies, and adequate data on chemistry, manufacturing and control information to ensure reproducible product quality batch after batch, in an NDA or Biologics License Application (“BLA”); and
Obtaining FDA approval of the NDA, including inspection and approval of the product manufacturing facility as compliant with cGMP requirements, prior to any commercial sale or shipment of the pharmaceutical agent.
Quality and pre-clinical tests and studies include: laboratory evaluation of Drug Substance and Drug Product chemistry, formulation/manufacturing, and stability profiling, as well as a large number of animal studies to assess the potential safety and efficacy of each product. Typically, the pre-clinical studies consist of the following:
Pharmacology
•Primary and Secondary Pharmacodynamics
•Safety Pharmacology
•Other Pharmacodynamics
Pharmacokinetics (“PK”)
•Single and Multiple Dose Kinetics
•Tissue Distribution
•Metabolism
•PK Drug Interactions
•Other PK studies
Toxicology
•Single and Multiple Dose Toxicity
•Genotoxicity
•Carcinogenicity
•Reproduction Toxicity
•Other Toxicity
The results of the quality and pre-clinical tests/studies, in addition to any non-clinical pharmacology, are submitted to the FDA along with the initial clinical study protocol (see descriptive of process below) as part of the initial IND and are reviewed by the FDA before the commencement of human clinical trials. Unless the FDA objects to it, the IND becomes effective 30 days following its receipt by the FDA. The FDA reviews all protocols, protocol amendments, adverse event reports, study reports, and annual reports in connection with a new pharmacological product.
The IND for our oral insulin formulation became effective in November 1998. Amendments are also subsequently filed as new Clinical Studies and their corresponding Study Protocols are proposed. In July 2007, we received a no objection clearance to initiate our Phase III study protocol for our oral insulin product. The Physician’s Investigational New Drug Application for the Phase 1 and Phase II trial of AE37, Antigen’s synthetic peptide vaccine designed to stimulate a potent and specific immune response against tumors expressing the HER-2/neu oncogene, in patients with stage II HER-2/neu positive breast cancer became effective in March 2006.
Clinical trials involve the administration of a new drug to humans under the supervision of qualified investigators. The protocols for the trials must be submitted to the FDA as part of the IND. Also, each clinical trial must be approved and conducted under the auspices of an IRB, which considers, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution conducting the clinical trials.
Clinical trials are typically conducted in three sequential phases (Phase I, Phase II, and Phase III), but the phases may overlap. Phase I clinical trials test the drug on healthy human subjects for safety and other aspects, but usually not effectiveness. Phase II clinical trials are conducted in a limited patient population to gather evidence about the efficacy of the drug for specific purposes, to determine dosage tolerance and optimal dosages, and to identify possible adverse effects and safety risks. When a compound has shown evidence of efficacy and acceptable safety in Phase II evaluations, Phase III clinical trials are undertaken to evaluate and confirm clinical efficacy and to test for safety in an expanded patient population at clinical trial sites in different geographical locations. The FDA and other regulatory authorities require that the safety and efficacy of therapeutic product candidates be supported through at least two adequate and well-controlled Phase III clinical trials (known as “Pivotal Trials”). The successful completion of Phase III clinical trials is a mandatory step in the approval process for the manufacturing, marketing, and sale of products.
In the United States, the results of quality, pre-clinical studies and clinical trials, if successful, are submitted to the FDA in an NDA to seek approval to market and commercialize the drug product for a specified use. The NDA is far more specific than the IND and must also include proposed labeling and detailed technical sections based on the data collected. The FDA is governed by the Prescription Drug User Fee Act (“PDUFA”) regarding response time to the application, which is generally 12 months (and shorter for a priority application). It may deny a NDA if it believes that applicable regulatory criteria are not satisfied. The FDA also may require additional clarifications on the existing application or even additional testing for safety and efficacy of the drug. We cannot be sure that any of our proposed products will receive FDA approval. The multi-tiered approval process means that our products could fail to advance to subsequent steps without the requisite data, studies, and FDA approval along the way. Even if approved by the FDA, our products and the facilities used to manufacture our products will remain subject to review and periodic inspection by the FDA.
To supply drug products for use in the United States, foreign and domestic manufacturing facilities must be registered with, and approved by, the FDA. Manufacturing facilities must also comply with the FDA's cGMPs, and such facilities are subject to periodic inspection by the FDA. Products manufactured outside the United States are inspected by regulatory authorities in those countries under agreements with the FDA. To comply with cGMPs, manufacturers must expend substantial funds, time and effort in the area of production and quality control. The FDA stringently applies its regulatory standards for manufacturing. Discovery of previously unknown problems with respect to a product, manufacturer or facility may result in consequences with commercial significance. These include restrictions on the product, manufacturer or facility, suspensions of regulatory approvals, operating restrictions, delays in obtaining new product approvals, withdrawals of the product from the market, product recalls, fines, injunctions and criminal prosecution.
One final hurdle that is closely associated with the cGMP inspections is the pre-approval inspection that the FDA carries out prior to the issuance of a marketing license. FDA inspectors combine cGMP compliance with a review of research and development documents that were used in the formal NDA. A close inspection of historic data is reviewed to confirm data and to demonstrate that a company has carried out the activities as presented in the NDA. This is generally a long inspection and requires a team of individuals from the company to “host” the FDA inspector(s).
Foreign Countries
Before we are permitted to market any of our products outside of the United States, those products will be subject to regulatory approval by foreign government agencies similar to the FDA. These requirements vary widely from country to country. Generally, however, no action can be taken to market any drug product in a country until an appropriate application has been submitted by a sponsor and approved by the regulatory authorities in that country. Again, similar to the FDA, each country will mandate a specific financial consideration for the Marketing Application dossiers being submitted. Although an important consideration, FDA approval does not assure approval by other regulatory authorities. The current approval process varies from country to country, and the time spent in gaining approval varies from that required for FDA approval. The Canadian regulatory process is substantially similar to that of the United States. To date, we have received the following foreign regulatory approval for our product candidates:
•We obtained regulatory approval to begin clinical trials of our oral insulin formulation in Canada in November 1998. In April 2003, we received approval of an Oral-lyn™ Phase II-B clinical trial protocol in Canada. In September 2006 Health Canada approved our Clinical Trial Application in respect of our proposed Generex Oral-lyn™ protocol for late-stage trials.
•We obtained regulatory approval in Canada to begin clinical trials of our buccal morphine product in March 2002 and our fentanyl product in October 2002.
•In May 2005, we received approval from the Ecuadorian Ministry of Public Health for the commercial marketing and sale of Generex Oral-lyn™ for treatment of Type 1 and Type 2 diabetes. To date we have not recognized any revenue from the sale of Generex Oral-lyn™ in Ecuador and we are not currently expending any resources to further commercialization in this country.
•In November 2007, we obtained approval for the importation and commercial marketing and sale in India of Generex Oral-lyn™ under the marketing name of Oral Recosulin™ from the Central Drugs Standard Control Organization (CDSCO), Directorate General of Health Services, Government of India, which is responsible for authorizing marketing approval of all new pharmaceutical products in India. Per the requirements of the approval, an in-country clinical study must be completed in India with Oral Recosulin™ before commercial sales can commence. The field portion of the study was completed in the third calendar quarter of 2012. Shreya has advised Generex that the dossier was submitted in December of 2012 to the Drugs Controller General (India) (DCGI), Central Drugs Standard Control Organization, Director General of Health Services, Ministry of Health and Family Welfare, Government of India. Generex has provided additional, detailed scientific data to support the Shreya submission. • Applications were filed and approvals obtained in May 2007 for a Phase I prostate cancer trial using AE37 in Athens, Greece from the Hellenic Organization of Drugs. This Phase I trial was completed in August 2009.
•Applications were filed and approvals obtained in May 2007 for a Phase I prostate cancer trial using AE37 in Athens, Greece from the Hellenic Organization of Drugs. This Phase I trial was completed in August 2009.
•The Ministry of Health in Lebanon gave approval for the Phase I trial of our experimental H5N1 prophylactic vaccine in Beirut, Lebanon following submission of an application. In December 2008, we, together with our marketing partner Benta SA., received an approval to market Generex Oral-lyn™ in Lebanon. The official product launch in Lebanon took place in May 2009. We are not currently expending any resources to further commercialization in this country.
•In May 2009, the Algerian health authorities granted us permission to import and sell Generex Oral-lyn™ for the treatment of diabetes in Algeria. To date we have not recognized any revenue from the sale of Generex Oral-lyn™ in Algeria and we are not currently expending any resources to further commercialization in this country.
HDS Diagnostic Business Regulatory Considerations
The manufacturing and marketing of our existing and proposed diagnostic products are regulated by the United States Food and Drug Administration (“FDA”) and comparable regulatory bodies in other countries. Our products are also regulated by, subject to approval by, or must meet standards set by, of certain non-governmental organizations involved in the purchase and distribution of products like ours. These regulations and standards govern almost all aspects of development, production and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing and record keeping.
The Company's FDA regulated products require some form of action by that agency before they can be marketed in the United States, and, after approval or clearance, the Company must continue to comply with other FDA requirements applicable to marketed products, e.g. Quality Systems (for medical devices). Failure to comply with the FDA’s requirements can lead to significant penalties, both before and after approval or clearance.
There are two review procedures by which medical devices can receive FDA clearance or approval. Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, in which the manufacturer provides a pre-market notification that it intends to begin marketing the product, and shows that the product is substantially equivalent to another legally marketed product (i.e., that it has the same intended use and is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness). In some cases, the submission must include data from human clinical studies. Marketing may commence when the FDA issues a clearance letter finding such substantial equivalence.
If the medical device does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed device or because it is required by statute and the FDA’s implementing regulations have an approved application), the FDA must approve a Pre-Marketing Application (“PMA") before marketing can begin. PMA’s must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness. A PMA application is typically a complex submission, including the results of non-clinical and clinical studies. Preparing a PMA application is a much more expensive, detailed and time-consuming process as compared with a 510(K) pre-market notification.
In addition, the FDA regulates the export of medical devices that have not been cleared for marketing in the United States. The Federal Food, Drug and Cosmetic Act contains general requirements for any medical device that may not be sold in the United States and is intended for export. Specifically, a medical device intended for export is not deemed to be adulterated or misbranded if the product: (1) complies with the specifications of the foreign purchaser; (2) is not in conflict with the laws of the country to which it is intended for export; (3) is prominently labeled on the outside of the shipping package that it is intended for export; and (4) is not sold or offered for sale in the United States. However, the Federal Food, Drug and Cosmetic Act does permit the export of devices to any country in the world, if the device complies with the laws of the importing country and has valid marketing authorization in one of several " listed " countries under the theory that these listed countries have sophisticated mechanisms for the review of medical devices for safety and effectiveness.
The Company is also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval or evaluations by international public health agencies, such as the World Health Organization, in order to sell diagnostic products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for United States governmental approvals. On the other hand, the fact that our HIV diagnostic tests are of value in the AIDS epidemic may lead to some government process being expedited. The extent of potentially adverse governmental regulation affecting HDS that might arise from future legislative or administrative action cannot be predicted.
Our products rely on international regulatory approvals for sale into markets outside of the USA, and, domestically, our devices would require US FDA clearance and in some cases, WHO approvals. These approvals allow for passage to the Global Fund funding process.
It is our intent to focus on both the domestic and international regulatory approvals.
Domestically, we intend on submitting our devices to the FDA under a Pre-Market Approval Application (PMA) or through the 510K process. The 510K would require the appropriate regulatory administrative submissions as well as a limited scientific review by the FDA to determine completeness (acceptance and filing reviews); in-depth scientific, regulatory, and Quality System review by appropriate FDA personnel (substantive review); review and recommendation by the appropriate advisory committee (panel review); and final deliberations, documentation, and notification of the FDA decision. The PMA process is more extensive, requiring clinical trials to support the application. We expect to apply to FDA for approval of our first RDT to be submitted to the FDA for 510K approval within the next 3 months. We anticipate the FDA process will be completed within 9-12 months after submission. During this timeline we will be preparing documentation for additional rapid tests to undergo either the FDA PMA or 510kprocess. We have not yet completed an assessment of whether our products will qualify for approval under the 5010K process or we will be required to engage in the more cumbersome Pre-Market Approval Application.
Internationally, we intend on submitting our EXPRESS devices and cassettes to the World Health Organization (WHO) process which requires a full regulatory and quality documentation dossier, produced and compiled by the Company. WHO process requires laboratory testing and evaluation and then clinical trials for public deployment and documentation throughout the whole process.
Once the WHO process is complete and documented, there is a submission into the Global Fund, which is a partnership between governments, civil society, the private sector and people affected by infectious diseases specifically HIV/AIDs, tuberculosis, and malaria.
The Global Fund raises and invests nearly $4 billion a year to support programs run by local experts in countries that are most in need.
It is our intent to submit all of our RTDs and cassettes and EXPRESS to the FDA, WHO and the Global Fund for regulatory review and approval for HIV, TB and malaria.
Currently, both our cassette malaria pF and malaria pF/pV have been approved under the WHO process. The cassette malaria pF/Pan was submitted to the WHO in February 2015, and we anticipate final review and approval before the end of the year. In the past WHO has approved only traditional cassette platform devices on the theory that end-point users, in resource-poor countries, should not have to be retrained on a new device. However, that attitude is now changing and we are working with WHO collaborating organizations using the Express with the view to move it eventually into the WHO system.
MARKETING AND DISTRIBUTION
Generex Historical Business
Our strategy is to market our products through collaborative arrangements with companies that have well-established pharmaceutical marketing and distribution capabilities, including expertise in the regulatory approval processes in their respective jurisdictions.
We have entered into licensing and distribution agreements with a number of multinational distributors to assist us with the process of gaining regulatory approval for the registration and subsequent marketing, distribution, and sale of Generex Oral-lyn™ in countries throughout the world, including:
•Shreya Life Sciences Pvt. Ltd. for India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka, and Myanmar;
•Adcock Ingram Limited and Adcock Ingram Healthcare (Pty) Ltd. for South Africa, Lesotho, Swaziland, Botswana; Namibia, Mozambique and Zimbabwe;
•E&V Alca Distribution Corp. for Albania, Montenegro, and Kosovo;
•SciGen, Ltd. for China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam;
•Pharmaris Perus S.A.C. for Peru;
•MediPharma SA for Argentina;
•PMG S.A. for Chile;
•Dong Sung Pharm. Co. Ltd. for South Korea; and
•Benta S.A. for Lebanon.
Under these licensing and distribution agreements excluding the one with Dong Sung Pharm Co., we will not receive an upfront license fee, but the distributor will bear any and all costs associated with the procurement of governmental approvals for the sale of Generex Oral-Lyn™, including any clinical and regulatory costs. We possess the worldwide marketing rights to our oral insulin product. We do not currently plan to expend significant resources on additional clinical trials or to further the commercialization of Generex Oral-lyn™ until after such time that we secure additional financing.
HDS Diagnostic Business-Current Associations and Agreements with Organizations and Companies
Our sales will be dependent on regulatory approvals issued by such agencies as the World Health Organization (“WHO”), US Food and Drug Administration (“FDA”) and registration with the Global Fund. These approvals are a key element in the sales and marketing effort on an international basis. We will work with these organizations as well as governmental agencies in target countries and commercial companies.
WHO Approved
Following the successful fulfillment of previous PFSCM (Partnership for Supply Chain Management) and WHO shipments, HDS continues to participate in requests for proposals from PFSCM for our currently WHO-approved HDS Malaria test. All of the HDS Malaria RDT’s are on the WHO procurement list.
The Company will also participate in the newly designed and recently announced WHO Pre-Qualification Program for Malaria RDTs. It is our intention to present the new Malaria EXPRESS II devices for Pf, Pf/Pv and Pf/Pan for this Pre-Qualification Program. The WHO will also extend the expedited approval process to include other diseases including HIV.
Long Term WHO Agreement
In February 2016, HDS signed a Long Term Two Year Agreement with the WHO for the supply of the first HDS Malaria tests.
Offering a highly competitive rate in close cooperation with our subcontractor, we expect to see increased sales for these products during the life of that agreement. However, the agreement with WHO allows us to compete for WHO funded projects, but does not guarantee any specific sales.
USAID
USAID has submitted to the Company a request for participation in a Long Term Agreement for the HDS Malaria Tests. The prerequisite will be the same as those requirements satisfied during the WHO evaluation process and which qualified our tests for purchase by the WHO. In the fiscal year 2015, USAID purchased $24.5 million in malaria tests. USAID is the lead U.S. Government agency that works to end extreme global poverty and enable resilient, democratic societies to realize their potential and which supports the sale of RDTs to those same countries.
Chile
We have received an initial order for our Rapid 1-2-3® Hema HIV EXPRESS® from Diagnostic of Santigo, Chile (www.diagnostiko.cl).
Diagnostiko is a clinical testing laboratory serving the residents of Santigo, and surrounding areas in the country of Chile. As recently reported by the Latin American Congress of HIV there is a 50% increase in the number of cases of HIV in that country and, more significantly, 60% of those cases are diagnosed very late in the course of the disease, many after AIDS has already developed. Another aspect that was highlighted in the Congress is the lack of availability of rapid tests to detect HIV.
In addition to procuring the t Rapid 1-2-3® Hema HIV EXPRESS®,Dianostiko has agreed to officially register the Rapid 1-2-3® Hema Hepatitis B EXPRESS®, and the Rapid 1-2-3® Hema Syphilis EXPRESS®, with the government of Chile and to become the exclusive distributor for those two assays in Chile for future sales. This agreement is being completed.
In addition to the purchase of the Rapid 1-2-3® Hema HIV EXPRESS® by Diagnostiko of Santiago, Chile as described in the preceding paragraph, we have recently executed and signed an exclusive agreement with Imerlab Sociedad Comercial Limitada (http://www.imerlab.com) for the exclusive distribution of our HIV products in that country. Imerlab is a distributor of medical supplies, diagnostic tests and other products for laboratories and medical institutions. The Rapid 1-2-3® Hema HIV EXPRESS® has been approve and registered by the government of Chile as an in-vitro diagnostic test for that country.
Tuberculosis Clinical Trial:
Hema Diagnostic Systems is participating in a diagnostic clinical trial for tuberculosis in the country of Mozambique. This trial is being conducted by a number of international collaborating institutions and the results of the trial will determine the accuracy and clinical utility of the Rapid 1-2-3® Hema Tuberculosis EXPRESS® TB-XT, and the Rapid 1-2-3® Hema Tuberculosis EXPRESS® TB-XT 3 point-of-care tests as primary triage assays for the presence of active tuberculosis, or as part of a combination of tests used for that purpose.
The Mozambique clinical is conducted as part of a long term project for the control of HIV and related diseases initiated by the Italian Non-Governmental Organization, “S. Edigo (http://dream.santegidio.org/?lang=en) and sponsored by the Italian National Institute of Health. The scientific direction and the in-country clinic trial is being conducted specifically by The Department of Biomedicine and Prevention, University of Rome “Tor Vergata” and is headed by Dr. Massimo Amicosante Ph.D. Additional trials are planned for other countries in Sub-saharan Africa, Mexico and Peru. Also participating in this large international project is the World Health Organization Collaborating Center for TB and Lung Diseases, Fondazione S.Maugeri, Care And Research Institute Tradate, Italy, under the direction of Dr. G.B. Migliori.
Manufacturing
Generex Historical Business
In December 2000, we completed a pilot manufacturing facility for Generex Oral-lyn™ in Toronto, Canada in the same commercial complex in which our laboratories were located. In the first quarter of fiscal year 2006, we initiated a scale-up commercial production run of several thousand canisters of Generex Oral-lyn™ at this facility. In July 2012, we sold the property which housed the manufacturing and laboratory facility. We would engage contract manufacturers in order to manufacture any product in significant quantities for any future commercial sales and clinical trials.
In March 2006, we successfully completed the delivery and installation of a turnkey Generex Oral-lyn™ filling operation at the facilities of PharmaBrand, in Quito, Ecuador for the purposes of commercial supply and sales in Ecuador and potentially other countries. We do not currently have a manufacturing agreement with PharmaBrand and are not currently manufacturing product at this facility.
In anticipation of undertaking late-stage clinical trials of Generex Oral-lyn™ in Canada, we entered into an agreement with Cardinal Health PTS, LLC, now known as Catalent Pharma Solutions (Catalent), in June 2006, pursuant to which Catalent manufactured clinical trial batches of Generex Oral-lyn™. Pursuant to pre-extant supply arrangements, our third-party suppliers had been manufacturing the quantities of the RapidMist™ brand metered dose inhaler components (valves, canisters, actuators, and dust caps), the insulin, and the formulary excipients that were required for the Catalent production. In addition, our Regulatory Affairs, Quality Control and R&D personnel have worked with Catalent to prepare and validate the Catalent production processes. We are not currently manufacturing product under this agreement and we expect that any agreements regarding the manufacturing of Generex Oral-lyn™ for any future trials or commercial sales will need to be renegotiated at such time.
Our subsidiary Antigen leases office space in Worcester, Massachusetts, which is sufficient for its present needs.
HDS Diagnostic Business
HDS manufactures it RTD devices in it Miramar, Florida facility. Based on order size, delivery requirements and current orders in HDS manufactures its RTD devices in it Miramar, Florida facility. Based on order size, delivery requirements and current orders in process, the Miramar facility can manufacture up to 1 million RTD devices, all of which are currently hand assembled. We have long-standing relationships with subcontractors to handle additional production requirements. Currently, shipments have been made to agencies for regulatory approvals and for initial market entry and we are in process to apply for a US. FDA, and newly announced WHO approvals which will reduce the WHO process form 24-30 months down to approximately 6-9 months.
Cassette production is conducted through subcontractors in India and China. Each site operates under GMP (Good Manufacturing Practice) as well as being compliant with ISO 9001 and ISO13485. All HDS cassettes are included in our U.S. Certificate of Exportability and European Union CE Mark registrations. All of our cassette malaria tests are approved by the WHO.
We have established Quality and Assembly Agreements as well as Confidentiality Agreements with our subcontractors. All are subject to our inspection at a moment’s notice.
The quality of final assembly of each of our products is maintained under the strict guidelines of our internal Quality System, which forms the basis for the Company’s ISO13485 rating.
Full quality oversight is mandatory and final batch release testing is conducted on each lot of products assembled prior to shipment release.
With full automation, the Company anticipates producing up to 10 million EXPRESS devices annually. Expanded production would allow for additional expansion beyond this volume. Additionally, subcontractors would provide approximately 60 million cassette tests per year.
RAW MATERIAL SUPPLIES
Generex Historical Business
The excipients used in our formulation are available from numerous sources in sufficient quantities for clinical purposes, and we believe that they will be available in sufficient quantities for commercial purposes when required, although we have not yet attempted to secure a guaranteed commercial supply of any such products. Components suitable for our RapidMist™ brand metered dose inhaler are available from a limited number of potential suppliers, as is the chemical propellant used in the device. The components which now comprise the device are expected to be used in the commercial version of our insulin product in countries where the product has been approved. We do not currently have supply arrangements for commercial quantities with manufacturers for the components and the propellant that we presently use in our RapidMist™ brand metered dose. Reputable and reliable suppliers for these components exist and we believe that we can enter into arrangements for commercial supply with these suppliers when we are ready to commence commercial production.
Insulin is available worldwide from multiple sources. We do not currently have any agreements for the long-term supply of insulin, but we expect that we will be readily able to negotiate such an agreement before further clinical trials or commercial sales commence.
HDS Diagnostics Business
A number of our components and critical raw materials are provided by third-party suppliers. Some of our supplies, including antigens and antibodies may be available from only one or a limited number of sources. This may impact our ability to manufacture or sell product if our suppliers cannot or will not deliver those materials in a timely fashion, or at all, due to an interruption in their supply, quality or technical issues, or any other reason. The absence of any one or more of these supplies could prevent us from being able to commercially produce and market the affected product or products.
Intellectual Property
Generex Historical Business
We hold a number of patents in the United States and foreign countries covering our buccal and other delivery technologies. We also have developed brand names and trademarks for products in appropriate areas. We consider the overall protection of our patent, trademark and other intellectual property rights to be of material value and acts to protect these rights from infringement.
Patents are a key determinant of market exclusivity for most branded pharmaceutical products. Protection for individual products or technologies extends for varying periods, in accordance with the expiration dates of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent, its scope of coverage and the availability of meaningful legal remedies in the country.
We currently have five issued U.S. patents and one pending U.S. patent applications pertaining to various aspects of drug delivery technology, including oral administration of macromolecular formulations (such as insulin) as well as pain relief medications such as morphine and fentanyl. We currently hold eleven issued Canadian patents and one pending Canadian patent applications also relating to various aspects of drug delivery technology. We also hold eleven issued patents and one pending patent applications covering our drug delivery technology in jurisdictions other than the U.S. and Canada, including Brazil, Argentina, Israel, Australia and Europe.
The expiration dates of the U.S. issued patents range from 2017 to 2022. The expiration dates of the patents issued in Canada range from 2017 to 2021. The expiration dates of the patents issued in other jurisdictions range from 2017 to 2028.
Our subsidiary Antigen Express currently holds nine issued U.S. patents and twenty-two other foreign patents. There are also four pending patent applications worldwide concerning technology for modulating the immune system via activation of antigen-specific helper T lymphocytes. Dr. Robert Humphreys, a retired officer of Antigen, is the listed inventor or co-inventor on many of these patents and patent applications.
The expiration dates of the Antigen U.S. issued patents range from 2017 to 2031. The expiration dates of the patents issued in other jurisdictions range from 2017 to 2023.
We possess the worldwide manufacturing and marketing rights to our oral insulin product.
Our long-term success will substantially depend upon our ability to obtain patent protection for our technology and our ability to protect our technology from infringement, misappropriation, discovery and duplication. We cannot be sure that any of our pending patent applications will be granted, or that any patents which we own or obtain in the future will fully protect our position. Our patent rights and the patent rights of biotechnology and pharmaceutical companies in general, are highly uncertain and include complex legal and factual issues. We believe that our existing technology and the patents which we hold or for which we have applied do not infringe anyone else's patent rights. We believe our patent rights will provide meaningful protection against others duplicating our proprietary technologies. We cannot be sure of this, however, because of the complexity of the legal and scientific issues that could arise in litigation over these issues. See the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Legal Proceedings” in this annual report on Form 10-K.
We also rely on trade secrets and other unpatented proprietary information. We seek to protect this information, in part, by confidentiality agreements with our employees, consultants, advisors and collaborators.
HDS Diagnostic Business
HDS hold a U.S. Patent for its sample delivery system which expires in 2026, US Patent # 7,749,771, titled “Device and methods for detecting analyte in a sample.” This is the basis for our EXPRESS system platform.
We also have applied for patent protection in Brazil.
HDS holds two US registered trademarks, for the names Rapid 1-2-3 Hema EXPRESS® and Rapid 1-2-3®.
We believe HDS’ long-term success will substantially depend upon our ability to obtain patent protection for our technology and our ability to protect our technology from infringement, misappropriation, discovery and duplication. We cannot be sure that any future patents will be granted, or that any patents which we now own or obtain in the future will fully protect our position. Our patent rights and the patent rights of medical device companies in general, are uncertain and con include complex legal and factual issues. We believe that our existing technology and the patents which we hold or for which we have applied do not infringe anyone else's patent rights. We believe our patent rights will provide meaningful protection against others duplicating our proprietary technologies. We cannot be sure of this, however, because of the complexity of the legal and scientific issues that could arise in litigation over these issues.
Competition
Generex Historical Business
We expect that products based upon our buccal delivery technology and any other products that we may develop will compete directly with products developed by other pharmaceutical and biotechnology companies, universities, government agencies and public and private research organizations.
Products developed by our competitors may use a different active pharmaceutical agent or treatment to treat the same medical condition or indication as our product or may provide for the delivery of substantially the same active pharmaceutical ingredient as our products using different methods of administration. For example, a number of pharmaceutical and biotechnology companies are engaged in various stages of research, development and testing of alternatives to insulin therapy for the treatment of diabetes, as well as new methods of delivering insulin. These methods, including nasal, transdermal, needle-free (high pressure) injection and pulmonary, may ultimately successfully deliver insulin to diabetic patients. Some biotechnology companies also have developed different technologies to enhance the presentation of peptide antigens. Some of our competitors and potential competitors have substantially greater scientific research and product development capabilities, as well as financial, marketing and human resources, than we do.
Where the same or substantially the same active ingredient is available using alternative delivery means or the same or substantially the same result is achievable with a different treatment or technology, we expect that competition among products will be based, among other things, on product safety, efficacy, ease of use, availability, price, marketing and distribution. When different active pharmaceutical ingredients are involved, these same competitive factors will apply to both the active agent and the delivery method.
We consider other drug delivery and biotechnology companies to be direct competitors for the cooperation and support of major drug and biotechnology companies that own or market proprietary pharmaceutical compounds and technologies, as well as for the ultimate patient market. Of primary concern to us are the competitor companies that are known to be developing delivery systems for insulin and other pharmaceutical agents that we have identified as product candidates and technologies to enhance the presentation of peptide antigens.
Large pharmaceutical companies, such as Merck & Co., Inc., GlaxoSmithKline PLC, Novartis, Inc., MedImmune Inc. (a subsidiary of Astra-Zeneca, Inc.) and others, also compete in the oncology, immunomedicine and vaccine markets. These companies have greater experience and expertise in securing government contracts and grants to support research and development efforts, conducting testing and clinical trials, obtaining regulatory approvals to market products, as well as manufacturing and marketing approved products. As such, they are also considered significant competitors in these fields of pharmaceutical products and therapies. There are also many smaller companies which are pursuing similar technologies in these fields and are considered to be competitors of Generex.
The following descriptions of our competitors and their products were obtained from their filings with the Securities and Exchange Commission, information available on their web sites and industry research reports.
Buccal Insulin Product
•MannKind Corporation’s product candidates include AFREZZA®, a mealtime insulin therapy being studied for use in adult patients with type 1 and type 2 diabetes. It is a drug-device combination product which administers insulin through inhalation to the lungs. MannKind submitted an NDA to the FDA requesting approval to market AFREZZA® in May 2009. In January 2011, MannKind announced that it had received a complete response letter from the FDA for AFREZZA®. In August 2011, MannKind announced that it has confirmed with the FDA the design of the two additional Phase III studies which are required for AFREZZA®. In August 2013, MannKind announced positive late-stage data on its inhaled insulin AFREZZA® from the two additional Phase III studies on Type 1 and Type 2diabetes and has resubmitted a new drug application to the FDA in October 2013 seeking approval for the marketing of AFREZZA®. MannKind received FDA approval in June 2014 and the product is now commercially available in the United States.
•Amylin Pharmaceuticals, Inc. received FDA approval in January 2012 for Bydureon, an extended-release injectable formulation, which is the first once-a-week therapy for the treatment of type 2 diabetes.
•There are several companies that are working on developing products which involve the oral delivery of analogs of insulin. Oramed Pharmaceuticals is developing an orally ingestible insulin capsule which is currently in Phase II clinical trials. Biocon Limited has developed IN-105, a tablet for the oral delivery of insulin, which is currently in phase II trials. Diabetology has developed Capsulin IR, an insulin capsule which is currently in Phase II clinical trials. Access Pharmaceuticals has developed Cobalamin, an oral insulin which is currently in pre-clinical trials. Dance Pharmaceuticals is developing an inhaled insulin product based on Aerogen’s proprietary OnQ Aerosol Generator technology.
There are also a number of companies developing alternative means of delivering insulin in the form of oral pills, transdermal patches, and intranasal methods, which are at early stages of development. In addition to other delivery systems for insulin, there are numerous products, such as sulfonylureas (Amaryl®and Glynase®), biguanides (branded and generic metformin products), thiazolidinediones (Avandia®and Actos®), glucagon-like peptide 1 (Byetta®and Victoza®), and dipeptidyl peptidase IV inhibitors (Januvia® and Onglyza™), which have been approved for use in the treatment of Type 2 diabetics in substitution of, or in addition to, insulin therapy. These products may also be considered to compete with insulin products.
Immunomedicine Technology and Products
•Bavarian Nordic, Inc. employs a DNA vector-based technology platform to design and develop immunotherapeutic vaccines for different cancers. Their most advanced compound, PROSTVAC, is in a pivotal Phase III trial in patients with prostate cancer. Additionally, they have a HER2 vaccine in a Phase I/II trial in patients with breast cancer. They have recently presented data on studies combining their MVA-BN-HER2 cancer vaccine with different immune checkpoint inhibitors.
•Advaxis, Inc. uses a proprietary technique to bioengineer Listeria bacteria to create a specific antigen that can stimulate an immune response after recognition by the recipient’s immune system. Advaxis’ most advanced product candidate is ADXS-HPV, which is in Phase II trials for HPV-associated CIN (cervical intraepithelial neoplasia) and recurrent cervical cancer. The company has recently partnered with MedImmune to initiate combination studies utilizing their most advanced ADXS-HPV with MedImmune’s anti-PD-L1 immune checkpoint inhibitor in patients with advanced, recurrent or refractory human papillomavirus (HPV)-associated cervical or head and neck cancer.
•Amgen Inc.’s BiTE® technology uses the body’s cell destroying T cells to attack tumor cells. Amgen’s lead product candidate blinatumomab (MT103) has completed a Phase II clinical trial in patients with minimal residual disease positive acute lymphoblastic leukemia.
•Sanofi Pasteur Inc., the vaccine division of sanofi-aventis and one of the largest vaccines companies in the world, has product candidates including inoculations against 20 varieties of infectious diseases. It received FDA approval for an H5N1 avian influenza vaccine in April 2007 and for an H1N1 vaccine in September 2009.
•Galena Biopharma’s (formerly Rxi Pharmaceuticals Corporation) NeuVax™, is currently in Phase III clinical trials to evaluate NeuVax™ for the treatment of early stage, HER2-positive breast cancer. Clinical trials are currently underway to test NeuVax™ as a treatment for prostate cancer, and to use NeuVax™ in combination with Herceptin® to target breast cancer.
•Cell Genesys, Inc. was developing products for the treatment of prostate cancer using the GVAX™ cancer treatments, which are composed of tumor cells that are genetically modified to secrete an immune-stimulating cytokine and are irradiated for safety. Cell Genesys and Takeda Pharmaceutical Co. entered into an exclusive licensing agreement for GVAX in March 2008. In late 2008, Cell Genesys announced it was terminating the Phase III trials for the GVAX™ prostate cancer products. In May 2010, BioSante Pharmaceuticals, Inc. announced that development of the GVAX vaccine for the treatment of prostate cancer has been reinitiated and is in Phase II human clinical trials. In addition to GVAX prostate product, BioSante has several other cancer vaccines which are in Phase II clinical development including vaccines for leukemia, breast cancer and pancreatic cancer and has vaccines in Phase I clinical development including vaccines for colorectal cancer and melanoma.
•CEL-SCI Corporation’s main product is Multikine® an immunotherapeutic agent being developed as a cancer treatment. Multikine®’s goal is to harness the body's natural ability to fight tumors. Multikine® has been cleared in the U.S. and Canada for study in a global Phase III clinical trial in advanced primary (not yet treated) head and neck cancer patients.
In addition to the companies listed above, there are a number of companies which are pursuing cancer treatments using immunotherapy technologies which have products in various clinical trial stages. Some of these companies are Argos Therapeutics Inc., Celldex Therapeutics Inc., Northwest Therapeutics Inc., Immatics Biotechnology GmbH, Immunocellular Therapeutics Ltd., TVAX Biomedical Inc. and Newlink Genetics Corporation. These companies can also be considered to be competitors.
HDS Diagnostics Business
The diagnostics industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger and have greater financial, research, manufacturing and marketing resources. Industry competition in general is based on the following:
Scientific and technological Capability
Proprietary know-how and intellectual protection
The ability to develop and market products and processes
The ability to obtain FDA or other regulatory clearances
The ability to manufacture products that meet applicable governmental and NGO requirements
The ability to manufacture products cost-effectively
Access to adequate capital
The ability to find and retain qualified personnel.
We believe our scientific and technological capabilities as well as our proprietary technology and know-how relating to our rapid tests, particularly for the development and manufacture of tests for the detection of antibodies to infectious diseases are, indeed, very strong and will allow us to compete in this market.
Competitors
Alere Inc.
Alere is our main competitor and one of the major player in RTDs for infectious diseases. Alere markets the Alere HIV Combo Ag/Ab test, which uses the lateral flow technology patent. Alere acquired the patent from Abbott over a decade ago. Alere subsequently acquired Standard Diagnostics of Korea and Accon of China.
In early 2016, Abbott Laboratories agreed to acquire Alere for $5.8 billion. However, Abbott recently started litigation to terminate the agreement. In the event Abbott does acquire Alere, Alere would lose the potential marketing strength and international positioning of Abbott.
Standard Diagnostics
Standard Diagnostics was a state funded entity in South Korea established to build and expand into the international markets under its own brand until it was acquired by Inverness, the predecessor to Alere, in 2006.
With funding from Inverness for regulatory registrations and a previously established cassette product line, Standard was able to capture a strong market share of purchased for use in Africa with funding from WHO and the Global Fund. Currently, Standard is a strong competitor on an international basis, incorporating a cassette design into each of their products.
Chembio Diagnostic Systems, Inc.
Chembio Diagnostic Systems is a publicly traded diagnostic company that develops, manufactures and commercializes diagnostic solutions. Chembio uses its patented Next Generation DPP (Dual Path Platform) technology that makes claims of significant advantages over the Alere’s lateral-flow technology.
It has continued building its product line and entered into US FDA approval for a rapid HIV test approved for professional use only in the United States.
Other Competition
There are a number of point-of-care strip manufacturer in China which serve the market in that country. As of yet most of these companies have not made a significant impact on the overall global market but could be considered as a future source of competition. As infectious diseases are epidemic and in the minds of the public, there will be more competitors coming into the market place. However, competition will be based upon the implementation of a cassette or a “dipstick” format.
Competitive Advantage
We believe our unique and simple EXPRESS product design delivers significant advantages over our competition.
Due to the potential infectious character of the whole blood test sample, our EXPRESS series of RDTs are designed to perform and deliver test results while sealed within the EXPRESS housing, carefully controlling the potentially infectious test sample. This design helps to increase our ability to control the possibility of cross-contamination. Most of our competitors’ products, while inexpensive, are not as user-friendly, require substantially more training and have greater risk of cross- contamination. And, the simplicity of use of our EXPRESS platforms fits directly into the necessities of World Health Organization Rapid Disease Testing Algorithms and individual country disease reduction goals and priorities.
Our products are more intuitive and self-explanatory than our competitors making it easier and safer to use. Our products require less training and education. Each EXPRESS is configured to operate in the same way regardless of the type of disease being tested.
With ease of use, simple design and faster results, our products allow for more tests administered at the patient point of care level.
We will compete on the basis these advantages. Most of our competitors’ products, while inexpensive, are not as user-friendly, require substantially more training and have greater risk of cross- contamination.
ENVIRONMENTAL COMPLIANCE
Our research and development activities have involved the controlled use of hazardous materials and chemicals. We believe that our procedures for handling and disposing of these materials comply with all applicable government regulations. However, we cannot eliminate the risk of accidental contamination or injury from these materials. If an accident occurred, we could be held liable for damages, and these damages could severely impact our financial condition. We are also subject to many environmental, health and workplace safety laws and regulations, particularly those governing laboratory procedures, exposure to blood-borne pathogens, and the handling of hazardous biological materials. Violations and the cost of compliance with these laws and regulations could adversely affect us. However, we do not believe that compliance with applicable environmental laws will have a material effect on us in the foreseeable future.
Research and Development Expenditures
A substantial portion of our activities to date have been in research and development. Generex expended $467,382 in the fiscal year ended July 31, 2016 and $422,294 in the fiscal year ended July 31, 2017 on research and development related to its Buccal delivery products and Antigen’s immunotherapy products. Due to lack of funding, we have not conducted any material research and development since October 2015.
HDS research and development expenditures were $617,000 in the 12 months ended July 31, 2017. HDS research and development is primarily related to development of the EXPRESS II and testing of existing products for stability and accuracy and development of new test parameters.
Financial Information About Geographic Areas
The regions in which we had identifiable assets and revenues and the amounts of such identifiable assets and revenues for each of the last two fiscal years are presented in Note 15 in the Notes to Consolidated Financial Statements in this annual report on Form 10-K. Identifiable assets are those that can be directly associated with a geographic area.
Employees
Other than HDS employees, at July 31, 2017, we had no employees other than 6 officers. All of our previous employees have been laid off due to our inability to pay. We engage consultants from time to time to assist with financial recordkeeping and other tasks. As of July 31, 2017, HDS had 6 full time employees and 1 full time consultant. Of these, 4 were engaged in development, regulatory compliance, laboratory validation and manufacturing, 1 in sales and 2 in professional or administrative activities.
We will continue to need qualified scientific personnel and personnel with experience in clinical testing and government regulation. We may have difficulty in obtaining qualified scientific and technical personnel as there is strong competition for such personnel from other pharmaceutical and biotechnology companies, as well as universities and research institutions. Our business could be materially harmed if we are unable to recruit and retain qualified scientific, administrative and executive personnel to support our expanding activities, or if one or more members of our limited scientific and management staff were unable or unwilling to continue their association with us. We currently have no agreements in effect with any of our officers or other employees.
We use non-employee consultants to assist us in formulating research and development strategy, in preparing regulatory submissions, and in developing protocols for clinical trials. We also use non-employee consultants to assist us in business development. These consultants and advisors usually have the right to terminate their relationship with us on short notice. Loss of some of these key advisors could interrupt or delay development of one or more of our products or otherwise adversely affect our business plans.
Available Information
We were incorporated in the State of Delaware in 1997. Our principal executive offices are located at 4145 North Service Road, Suite 200, Burlington, Ontario, Canada, and our telephone number at that address is (416) 364-2551. We maintain an Internet website at www.generex.com. However, information found on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K. We make available free of charge on or through our website our filings with the Securities and Exchange Commission, or SEC, including this annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Further, a copy of this annual report is located at the SEC’s Public Reference Room at 100 F Street N. E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding our filings at www.sec.gov.
Item 1A.
Item 1A. Risk Factors
Our business and results of operations are subject to numerous risks, uncertainties and other factors that you should be aware of, some of which are described below. The risks, uncertainties and other factors described below are not the only ones facing our company. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations.
Any of the risks, uncertainties and other factors could have a materially adverse effect on our business, financial condition or results of operations and could cause the trading price of our common stock to decline substantially.
Risks Related to Our Financial Condition
We will require additional financing to continue our operations after the current fiscal year and to carry out our strategic plans.
As of July 31, 2017, we believe our current cash position is sufficient to meet our working capital needs for the next twelve months, although we may not have sufficient reserves for contingencies. We do not, however, expect to generate significant cash flow from operations during that period and therefore expect to require additional funds after the end of the fiscal year ending July 31, 2018. In addition, we do not have sufficient funds to carry out our strategic development plans Management is seeking various alternatives to ensure that we can meet our operating cash flow requirements and strategic development plans, through financing activities, such as private placement of our common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. In addition, management is actively seeking strategic alternatives, including strategic investments and divestitures.
We cannot provide any assurance that we will obtain the required funding. Our inability to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and our strategic development plan for future growth. If we cannot successfully raise additional capital and implement our strategic development plan, our liquidity, financial condition and business prospects will be materially and adversely affected.
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 sufficient revenues to support our operation in the immediately foreseeable future. We do not expect to receive significant revenues in Ecuador, Algeria and Lebanon where we have been approved for commercial sale in the next twelve months. While we have entered into a licensing and distribution agreement with a leading Indian-based pharmaceutical company and insulin distributor, we do not anticipate recognizing revenue from sales of Generex Oral-lyn™ in India in 2017, as our partner has to receive approval from the Indian regulatory authority before the product can be offered for commercial sale in India.
To date, we have not been profitable and our accumulated net loss available to shareholders was $445,720,566, at July 31, 2017. 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.
With the exception of Generex Oral-lyn™, which has received regulatory approval in Ecuador, India (subject to regulatory approval of a 2012 in-country study), Lebanon and Algeria, the product candidates from Generex’s historical business 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 must also complete further clinical trials and seek regulatory approvals for Generex Oral-lyn™ in countries outside of Ecuador, India, Lebanon and Algeria. 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.
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern as of July 31, 2017.
To date, we have not been profitable and our accumulated net loss available to shareholders was $445,720,566 at July 31, 2017, and our consolidated balance sheet reflected a stockholders’ deficiency of $79,876,231 at that date. We received a report from our independent auditors for the year ended July 31, 2017 that includes an explanatory paragraph describing an uncertainty as to Generex’s ability to continue as a going concern. We must secure financing to continue our operations.
Our disclosure controls and procedures and internal controls over financial reporting may not be effective in future periods as a result of existing or newly identified material weaknesses in internal controls.
Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Pursuant to the Sarbanes-Oxley Act of 2002, we are required to furnish a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be adversely impacted, we could fail to meet our reporting obligations, and our business and stock price could be adversely affected.
At July 31, 2012, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) and concluded that, subject to the inherent limitations identified in Item 9A of Part II of the Form 10-K filed on October 15, 2012, our disclosure controls and procedures were not effective due to the existence of material weaknesses in our internal control over financial reporting because of inadequate segregation of duties over authorization, review and recording of transactions, as well as the financial reporting of such transactions. Our independent auditors issued an adverse attestation report regarding the effectiveness of the Company’s internal control over financial reporting at July 31, 2012. We have not made a formal determination that our disclosure control and procedures are effective since that date.
We believe we have taken appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, however we cannot be certain that our remediation efforts will ensure that our management designs, implements and maintains adequate controls over our financial processes and reporting in the future or that the changes made will be sufficient to address and eliminate the material weaknesses previously identified. Our inability to remedy any additional deficiencies or material weaknesses that may be identified in the future could, among other things, have a material adverse effect on our business, results of operations and financial condition, as well as impair our ability to meet our quarterly, annual and other reporting requirements under the Securities Exchange Act of 1934 in a timely manner, and require us to incur additional costs or to divert management resources.
Our research and development and commercialization efforts may depend on entering into agreements with corporate collaborators.
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. We may be unable to achieve commercialization of any of our products until we obtain a large pharmaceutical partner to assist us in such commercialization efforts. To date, we have not entered into any such collaborative arrangements. 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 Generex Technologies
With the exception of Generex Oral-lyn™, our technologies and products are at an early stage of development and we cannot expect significant revenues in respect thereof in the foreseeable future.
We have no products approved for commercial sale at the present time with the exception of Generex Oral-lyn™ in Ecuador, Lebanon, Algeria and India (subject to regulatory approval of a 2012 in-country study). To be profitable, we must not only successfully research, develop and obtain regulatory approval for our products under development, but also manufacture, introduce, market and distribute them once development is completed or find a partner that can perform these activities on our behalf. We have yet to manufacture, market and distribute these products on a large-scale commercial basis, and we do not expect to receive revenues from product sales in the next twelve months. We may not be successful in one or more of these stages of the development or commercialization of our products, and/or any of the products we develop may not be commercially viable. Until we can establish that they are commercially viable products, we will not receive significant revenues from ongoing operations.
Until we receive regulatory approval to sell our pharmaceutical products in additional countries, our ability to generate revenues from operations may be limited and those revenues may be insufficient to sustain operations. Many factors impact our ability to obtain approvals for commercially viable products.
Our only pharmaceutical product that has been approved for commercial sale by drug regulatory authorities is our oral insulin spray formulation, and that approval was obtained in Ecuador, Lebanon, Algeria and India (subject to regulatory approval of a 2012 in-country study). We have initiated late stage clinical trials of Generex Oral-lyn™ at clinical trial sites in North America and other countries according to the initial Phase III clinical plan. The final subjects completed the trial in August 2011. After appropriate validation, the data from approximately 450 patients was tabulated, reviewed and analyzed. Those results from the Phase III trial along with a comprehensive review and supplemental analyses of approximately 40 prior Oral-lyn clinical studies were compiled and submitted to the FDA in late December 2011 in a comprehensive package including a composite metanalysis of all safety data. We do not currently plan to expend significant resources on additional clinical trials of Oral-lyn™ until after such time that we secure additional financing.
Our immunomedicine products are in the pre-clinical stage of development, with the exception of a Phase II trial in human patients with stage II HER-2/neu positive breast cancer (U.S.), a Phase I trial in human patients with prostate cancer (Athens, Greece) completed in August 2009, a Phase I trial in human patients with breast or ovarian cancer (U.S.) and a Phase I trial in human volunteers of a peptide vaccine for use against the H5N1 avian influenza virus (Beirut, Lebanon). Preliminary results from the Phase II breast cancer trial suggest a 46% reduction in breast cancer recurrence in low HER2 expressing tumors, together with an excellent safety profile. While preliminary results are promising, they are not statistically significant and final results could deviate.
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 not receive regulatory approval for any prescription pharmaceutical product candidate in any countries other than Ecuador, Lebanon, Algeria and India.
In addition, we cannot be sure when or if we will be permitted by regulatory agencies to undertake additional clinical trials or to commence any particular phase of clinical trials. Because of this, statements in this Annual Report on Form 10-K or our reports filed with the SEC regarding the expected timing of clinical trials cannot be regarded as actual predictions of when we will obtain regulatory approval for any "phase" of clinical trials.
Delays in obtaining United States or other foreign approvals for our oral insulin product could result in substantial additional costs to us, and, therefore, could adversely affect our ability to continue operations. If regulatory approval is ultimately granted in any countries other than Ecuador, Lebanon, Algeria and India, 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. Several of our currently issued patents have expired or will expire in the next twelve months.
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 our intellectual property 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 Generex’s Potential Products
We may not become, or stay, profitable even if our pharmaceutical products are approved for sale.
Even if we obtain regulatory approval to market our oral insulin product outside of Ecuador, India, Lebanon and Algeria or to market any other prescription pharmaceutical 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:
• acceptance of the formulation or treatment by health care professionals and diabetic patients;
• the availability, effectiveness and relative cost of alternative diabetes or immunomedicine treatments that may be developed by competitors; and
• the availability of third-party (i.e. insurer and governmental agency) reimbursements.
We will not receive significant revenues from Generex Oral-lyn™ or any of our other pharmaceuticals products that may receive regulatory approval until we can successfully manufacture, market and distribute them in the relevant markets.
We 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.
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 some of these diseases.
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. Some of these companies have greater research and development capabilities, experience, manufacturing, marketing, financial and managerial resources than we do. Collaborations or mergers between large pharmaceutical or biotechnology companies with competing drug delivery technologies could enhance our competitors’ financial, marketing and other resources. Developments by other drug delivery companies could make our products or technologies uncompetitive or obsolete. Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more rapidly than we can.
Some of our most significant competitors, Pfizer, Eli Lilly, and Novo Nordisk, have discontinued development and/or sale of their inhalable forms of insulin. Unlike inhaled insulin formulations, Generex Oral-lyn™ is a buccally absorbed formulation with no residual pulmonary deposition.
If government programs and insurance companies do not agree to pay for or reimburse patients for our pharmaceutical products, our success will be impacted.
Sales of our oral insulin formulation in Ecuador, Lebanon, Algeria and India and our other potential pharmaceutical products in other markets will depend in part on the availability of reimbursement by third-party payers such as government health administration authorities, private health insurers and other organizations. Third-party payers often challenge the price and cost-effectiveness of medical products and services. Governmental approval of health care products does not guarantee that these third-party payers will pay for the products. Even if third-party payers 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 pharmaceutical 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 previously maintained product liability insurance in amounts we believe to be commercially reasonable for our levels of activity and exposure. We no longer carry this insurance due to lack of activities and funds.
Risks Related to the Market for Our Common Stock
Our stock price is below $5.00 per share and is treated as a “penny stock”, which places restrictions on broker-dealers recommending the stock for purchase.
Our common stock is defined as “penny stock” under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and the rules promulgated thereunder. The SEC has adopted regulations that define “penny stock” to include common stock that has a market price of less than $5.00 per share, subject to certain exceptions. These rules include the following requirements:
•broker-dealers must deliver, prior to the transaction a disclosure schedule prepared by the SEC relating to the penny stock market;
•broker-dealers must disclose the commissions payable to the broker-dealer and its registered representative;
•broker-dealers must disclose current quotations for the securities;
•if a broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealers presumed control over the market; and
•a broker-dealer must furnish its customers with monthly statements disclosing recent price information for all penny stocks held in the customer’s account and information on the limited market in penny stocks.
Additional sales practice requirements are imposed on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser’s written consent to the transaction prior to sale. If our common stock remains subject to these penny stock rules these disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. As a result, fewer broker-dealers may be willing to make a market in our stock, which could affect a shareholder’s ability to sell their shares.
Because we were delinquent in our SEC filings, we have been removed from the OTCQB.
We did not timely file our Annual Report for the year ended July 31, 2016 or our Quarterly Report for the quarter ended October 31, 2016, and therefore our common stock is no longer quoted on the OTCQB. Since being removed from the OTCQB, quotes for our common stock have only appeared on the OTCPINK. As a result, fewer broker-dealers may be willing to make a market in our stock, which could affect a shareholder’s ability to sell their shares, and the liquidity of the market for our shares may be greatly reduced.
The price of our common stock may be affected by a limited trading volume, may fluctuate significantly and may not reflect the actual value of our business.
There may be a limited public market for our common stock on the OTCPINK, which may continue even if we are able to again have our common stock quoted on the OTCQB market, and there can be no assurance that an active trading market will continue. An absence of an active trading market could adversely affect our stockholders’ ability to sell our common stock in short time periods, or at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors, such as our sale of securities in connection with capital raising activities, could cause the price of our common stock to fluctuate substantially. Thus, the price at which shares of our common stock may trade from time to time may not reflect the actual value of our business or the actual value of our common stock.
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.
Risks Related to Ownership of Our Common Stock
If an exemption under state securities laws is not available for resales of shares of common stock, state securities regulators have the authority to seek rescission of such resales and, in some instances, may seek restitution or disgorgement of amounts received on such resales.
Because the shares of common stock registered under our S-1 registration statements have not been registered or qualified for resale under the securities laws of any state, an exemption from registration or qualification under state law is necessary for compliance with state securities laws. Generex has taken no steps to register or qualify, nor seek an exemption for, the resale of the shares of common stock under the securities laws of any state. The availability of exemptions will depend on the laws of the particular state in which a holder of the shares resides and the circumstances under which such holder seeks to sell the shares. If an exemption is not available but a resale of the shares is affected, state securities laws give state securities regulators authority to seek rescission (or cancellation) of transactions involving sales of securities that are not registered, qualified or exempted and, in some instances, authority to require restitution or disgorgement of profits from the sales of such securities and to impose statutory interest or penalties on disgorged amounts. While we are not aware of any state securities regulator taking action with respect to the resales of shares of our common stock, we cannot provide any assurance that regulators will refrain from taking such action in the future.
Provisions of our Restated Certificate of Incorporation could delay or prevent the acquisition or sale of our business.
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.
Our prior and future equity financing may dilute current stockholders and could prevent the acquisition or sale of our business.
On February 9, 2017, we entered into a Right to Shares Agreement with the holder of our Series G Convertible Preferred Stock pursuant to which that holder agreed convert 100% of those preferred shares into an aggregate of 33,939 shares of Generex common stock. The conversion was at effective price of $10.31 per share. The Company initially delivered 1,000 shares (on a post reverse split basis) pursuant to The Right to Shares Agreement. At the same time, the holder exercised Warrants through cashless exercise for an aggregate of 103,809 shares of Generex common stock. Pursuant to a Right to Shares Agreement, the remaining 33,939 shares of the Company’s common stock issued upon conversion of the preferred stock, together with the 103,809 Warrant shares issuable to that holder, will be delivered to that holder from time to time based on draw down notices submitted to the Company by that holder.
Under the Right to Shares Agreement, the may not request issuance of shares holder, to the extent that after giving effect to such issuance after exercise, the holder (together with the holder’s Affiliates, and any other Persons acting as a group together with the holder or any of the holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation. The Beneficial Ownership Limitation is initially 4.99%. From and after sixty-one (61) days after the date of the Right to Shares Agreement, the Beneficial Ownership Limitation shall be increased from 4.99% to 9.99%.
The delivery of the shares of common stock described above could have an anti-takeover effect because such issuance will make it more difficult for, or discourage an attempt by, a party to obtain control of Generex by tender offer or other means. The delivery of those shares will increase the number of shares entitled to vote, increase the number of votes required to approve a change of control of the company, and dilute the interest of a party attempting to obtain control of the company.
If we raise funds through one or more additional equity financings in the future, it will have a further 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 are in need of 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. Most of our outstanding warrants have price protection provisions, which decrease the exercise price of the warrant and increase the number of shares which may be purchased upon exercise of the warrants, if we sell additional equity at an effective price per common share less than the current exercise price of the warrant. Therefore, equity financings at a low price per share will result in even more dilution to existing shareholders.
Risks Related to HDS’ Business
Risks related to our industry, business and strategy
Because we may not be able to obtain or maintain the necessary regulatory approvals for some of our products, we may not generate revenues in the amounts we expect, or in the amounts necessary to continue our business. Our existing products as well as our manufacturing facility must meet quality standards and are subject to inspection by a number of domestic regulatory and other governmental and non-governmental agencies.
All of HDS’ proposed and existing products are subject to regulation in the U.S. by the U.S. Food and Drug Administration, the U.S. Department of Agriculture and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular, we are subject to strict governmental controls on the development, manufacturing, labeling, distribution and marketing of our products. The process of obtaining required approvals or clearances varies according to the nature of, and uses for, a specific product. These processes can involve lengthy and detailed laboratory testing, human or animal clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for that product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country.
The time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may determine to devote our resources to different products.
Changes in government regulations could increase our costs and could require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.
Changes in government regulations may adversely affect our financial condition and results of operations because we may have to incur additional expenses if we are required to change or implement new testing, manufacturing and control procedures. If we are required to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development, marketing, or other activities that are critical to our business.
We can manufacture and sell our products only if we comply with regulations and quality standards established by government agencies such as the FDA and the U.S. Department of Agriculture (“USDA”) as well as by non-governmental organizations such as the International Organization for Standardization (“ISO”) and WHO. We have implemented a quality control system that is intended to comply with applicable regulations. Although FDA approval is not required for the export of our products, there are export regulations promulgated by the FDA that specifically relate to the export of our products that require compliance with FDA quality system regulation and that also require meeting certain documentary requirements regarding the approval of the product in export markets. Although we believe that we meet the regulatory standards required for the export of our products, these regulations could change in a manner that could adversely impact our ability to export our products.
Our products may not be able to compete with new diagnostic products or existing products developed by well-established competitors, which would negatively affect our business.
The diagnostic industry is focused on the testing of biological specimens in a laboratory or at the point-of-care and is highly competitive and rapidly changing. Some of our principal competitors may have considerably greater financial, technical and marketing resources than we do. Several companies produce diagnostic tests that compete directly with our testing product line, including but not limited to, Chembio Diagnostics and Abbot Laboratories. Furthermore, these and/or other companies have or may have products incorporating molecular and/or other advanced technologies that over time could directly compete with our testing product line. As new products incorporating new technologies enter the market, our products may become obsolete or a competitor's products may be more effective or more effectively marketed and sold.
There are competing products that could significantly reduce our U.S. sales of rapid HIV tests.
In 2006 Alere, Inc. acquired a division from Abbott Diagnostic located in Japan that manufactured and marketed a rapid HIV test product line called Determine®. The Determine® format was developed for the developing world and remote settings and, central to the needs of that market. The format is essentially a test strip that is integrated into a thin foil wrapper. When opened, the underside of the wrapper serves as the test surface for applying the blood sample and performing the test. This design reduces costs and shipping weights and volumes and provides an advantage for the developing world markets it serves. Some of the disadvantages of the platform are the amount of blood sample that is needed (50 microliters versus 2.5, 5 and 10 for our lateral flow barrel, lateral flow cassette, and DPP® products respectively), the open nature of the test surface, and the absence of a true control that differentiates biological from other kinds of samples.
The so-called "3rd generation" version of this product has been marketed for many years and is the leading rapid HIV test that is used in a large majority of the national algorithms of countries funded by PEPFAR and the Global Fund, as well as many other countries in the world. That product is not FDA-approved though it is CE marked. The newest Determine® HIV version, which was developed and manufactured by Alere's subsidiary in Israel, Orgenics, is the so-called "4th Generation" version Determine® test. According to its claims, this product detects HIV antibodies and P24 HIV antigens. Because the P24 antigen is known to occur in HIV-positive individuals' blood samples before antibodies do, the 4th generation Determine® test is designed to detect HIV infection earlier than tests that solely rely on antibody detection. HDS’ tests, as well as all of the other currently FDA-approved rapid HIV tests, only detect antibodies.
The initial "4th generation" Alere Determine® rapid test product that was also CE marked and that Alere launched internationally some years ago has not been successfully commercialized to the best of our knowledge and at least certain published studies were not favorable for this product. However, the 4th generation product that is now FDA-approved was apparently modified as compared to the initial international version, and it may perform more satisfactorily. Alere received FDA approval of this modified product in August 2013 and CLIA waiver for it in December 2014. Alere is also aggressively pursuing development of the market for this product. Moreover, there is support by a number of key opinion leaders for the public health value of such 4th generation tests, and this product represents a significant competitive threat to Chembio as well as to each of the other rapid HIV test manufacturers (OraSure and Trinity primarily).
During 2011, Biolytical, Inc. of Vancouver, Canada received FDA approval and in 2012 received CLIA waiver of a flow-through rapid HIV test called "INSTI". The flow-through technology used in the INSTI test is older than lateral flow, and requires handling of multiple components (3 vials of solution) to perform the test in multiple steps. However, these steps can be accomplished in less than ten minutes, and the actual test results occur in only one minute after those steps are completed. Therefore sample-to-result time is shorter than any of the competitive products. The product also has good performance claims. There are settings where that reduced total test time, despite the multiple steps required, may be a distinct advantage, and we believe Biolytical has made some progress in penetrating certain public health markets.
Therefore, even though our lateral flow products currently enjoy a substantial market share in the U.S. rapid HIV test market, and we have an additional rapid HIV test, the DPP® HIV 1/2 Assay, there a number of risks and uncertainties concerning current and anticipated developments in this market. Although we have no specific knowledge of any other new product that is a significant competitive threat to our products, or that will render our products obsolete, if we fail to maintain and enhance our competitive position or fail to introduce new products and product features, our customers may decide to use products developed by our competitors, which could result in a loss of revenues and cash flow.
More generally, the point-of-care diagnostics industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. As new technologies become introduced into the point-of-care diagnostic testing market, we may be required to commit considerable additional efforts, time and resources to enhance our current product portfolio or develop new products. We may not have the available time and resources to accomplish this, and many of our competitors have substantially greater financial and other resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, which would materially harm our operating results.
Our use of third-party suppliers, some of which may constitute our sole supply source, for certain important product components presents a risk that could have negative consequences for other business.
A number of our components and critical raw materials are provided by third-party suppliers, some of which may be sole-source suppliers, which impacts our ability to manufacture or sell product if our suppliers cannot or will not deliver those materials in a timely fashion, or at all, due to an interruption in their supply, quality or technical issues, or any other reason. If this occurs, we could incur substantial expense and time to be able to reestablish the appropriate quality, cost, regulatory and market-acceptance circumstances needed for commercial success. Even with the needed expense and time, we may not be able to reestablish any or all of these factors. The absence of any one or more of these factors could prevent us from being able to commercially produce and market the affected product or products.
New developments in health treatments or new non-diagnostic products may reduce or eliminate the demand for our products.
The development and commercialization of products outside of the diagnostics industry could adversely affect sales of our products. For example, the development of a safe and effective vaccine to HIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the demand for our HIV or other diagnostic products and result in a loss of revenues.
We may not have sufficient resources to effectively introduce and market our products, which could materially harm our operating results.
Introducing and achieving market acceptance for our products will require substantial marketing efforts and will require us and/or our contract partners, sales agents, and/or distributors to make significant expenditures of time and money. In some instances, we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, sales agents, and/or distributors. If they do not have or commit the expertise and resources to effectively market the products that we manufacture, our operating results will be materially harmed.
The success of our business depends on, in addition to the market success of our products, our ability to raise additional capital through the sale of debt or equity or through borrowing, and we may not be able to raise capital or borrow funds on attractive terms and/or in amounts necessary to continue our business, or at all.
Our liquidity and cash requirements will depend on several factors. These factors include, among others, (1) the level of revenues; (2) the extent to which, if any, that revenue level improves operating cash flows; (3) our investments in research and development, facilities, marketing, regulatory approvals, and other investments we may determine to make; and (4) our investment in capital equipment and the extent to which it improves cash flow through operating efficiencies. We do not expect to generate positive cash flow in next twelve months, and we cannot be sure that we will be successful in raising sufficient capital to fund our needs. If we are not able to raise additional capital from another source, we will be required to substantially reduce our operating costs, including the possibilities of suspending our unfunded research and development activities, and quickly curtailing any cash flow negative product initiatives.
Our near term sales are difficult to predict in the uncertain status of pending orders and certain regulatory approvals, and the uncertain time until we have approval to sell in the US. We believe that underlying demand for HIV rapid testing in the United States remains strong, and that the restoration of some of the funding cutbacks from sequestration and the implementation of the Affordable Care Act and of the United States Preventive Services Task Force recommendations will have a positive impact on the development of the market.
However, development of new customers with this product is costly and time-consuming.
Currently, we are dependent on international sales of our products, since we have no products approved by the FDA for US sales. The nature of international business is such that it can be volatile from period to period, depending on ordering patterns of donor-funded programs.
A number of factors can slow or prevent international sales increases or cause sales decreases, or substantially increase the cost of achieving sales assuming they are achieved. These factors include:
• economic conditions and the absence of or reduction in available funding sources;
• regulatory requirements and customs regulations;
• cultural and political differences;
• foreign exchange rates, currency fluctuations and tariffs;
• dependence on and difficulties in managing international distributors or representatives;
• the creditworthiness of foreign entities;
• difficulties in foreign accounts receivable collection;
• competition;
• pricing; and
• any inability we may have in maintaining or increasing revenues.
If we are unable to increase our revenues from domestic and/or international customers, our operating results will be materially harmed.
Although we have an ethics and anti-corruption policy in place, and have no knowledge or reason to know of any practices by our employees, agents or distributors that could be construed as in violation of such policies, our business includes sales of products to countries where there is or may be widespread corruption.
HDS has a policy in place prohibiting its employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the United States Foreign Corrupt Practices Act (the “FCPA”). Nevertheless, because we work through independent sales agents and distributors outside the United States, we do not have control over the day-to-day activities of such independent agents and distributors. In addition, in the donor-funded markets in Africa where we sell our products, there is significant oversight from PEPFAR, the Global Fund, and advisory committees comprised of technical experts concerning the development and establishment of national testing protocols. This is a process that includes an overall assessment of a product which includes extensive product performance evaluations including five active collaborations and manufacturer’s quality systems, as well as price and delivery. In Brazil, where we have had a total of six product collaborations with FIOCRUZ, the programs through which our products may be deployed are all funded by the Brazilian Ministry of Health. Although FIOCRUZ is affiliated with the Brazilian Ministry of Health, and is its sole customer. We have no knowledge or reason to know of any activities by our employees, distributors or sales agents of any actions which could be in violation of the FCPA, although there can be no assurance of this.
To the extent that we are unable to collect our outstanding accounts receivable, our operating results could be materially harmed.
There may be circumstances and timing that require us to accept payment terms, including delayed payment terms, from distributors or customers, which, if not satisfied, could cause financial losses. We generally accept payment terms which require us to ship product before the contract price has been paid fully, and there also are circumstances pursuant to which we may accept further delayed payment terms pursuant to which we may continue to deliver product. To the extent that these circumstances result in significant accounts receivables and those accounts receivables are not paid on a timely basis, or are not paid at all, especially if concentrated in one or two customers, we could suffer financial losses.
Item 1B.
Item 1B. Unresolved Staff Comments.
Generex is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 2.
Item 2. Properties.
HDS’ corporate offices, product development facilities, regulatory affairs offices, and laboratory and assembly facilities are contained in a 5,627 square foot facility in Miramar, Florida. The facility is leased through June 30, 2017, with a current monthly base rent of $4,134 plus taxes and expenses. The lease agreement is in process of renewal for additional 36 months, meanwhile HDS is renting on a month-to-month basis. Our facility is an FDA Registered Facility. Based on order size, delivery requirements and current orders in process, our Miramar facility can handle up to 4 million RTD devices, all of which are currently hand assembled. We have relationships with subcontractors to handle additional production requirements.
Generex currently uses spaces in HDS’s facility as its principal executive office. We also use a small space in Burlington, Ontario, Canada for an executive office. The rent is immaterial.
We lease approximately 546 square feet of office space in Worcester, Massachusetts which we rent under a lease agreement which runs on a month-to-month basis, which Antigen uses for its research and development activities at an annual rent of approximately $18,000. This space is sufficient for Antigen’s present activities.
We do not expect to need manufacturing capabilities related to our insulin product, as it is likely that we will contract out the manufacturing of product requirements for any future clinical trials and commercial sales.
Item 3.
Item 3. Legal Proceedings.
Subash Chandarana et al. v. Generex Biotechnology Corporation. In February 2001, a former business associate of Pankaj Modi ("Modi") (a former officer of Generex) and an entity called Centrum Technologies Inc. ("CTI") commenced an action in the Ontario Superior Court of Justice against us and Modi seeking, among other things, damages for alleged breaches of contract and tortious acts related to a business relationship between this former associate and Modi that ceased in July 1996. The plaintiffs’ statement of claim also seeks to enjoin the use, if any, by us of three patents allegedly owned by CTI. The three patents are entitled Liquid Formulations for Proteinic Pharmaceuticals, Vaccine Delivery System for Immunization, Using Biodegradable Polymer Microspheres, and Controlled Releases of Drugs or Hormones in Biodegradable Polymer Microspheres. It is our position that the buccal drug delivery technologies which are the subject matter of our research, development, and commercialization efforts, including Generex Oral-lyn™ and the RapidMist™ Diabetes Management System, do not make use of, are not derivative of, do not infringe upon, and are entirely different from the intellectual property identified in the plaintiffs’ statement of claim. On July 20, 2001, we 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 us. Consequently, the shareholders of CBI are in a deadlock. The court granted our 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 Modi and us. We opposed the application. 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 us. A statement of claim was served in July 2004. Since that time, the plaintiffs have not taken any steps in furtherance of the proceeding. We are not able to predict the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss, if any, from this legal proceeding.
In December 2011, a vendor of the Company commenced an action against the Company and its subsidiary, Generex Pharmaceuticals, Inc., in the Ontario Superior Court of Justice claiming damages for unpaid invoices including interest in the amount of $429,000, in addition to costs and further interest. The Company responded to this statement of claim and also asserted a counterclaim in the proceeding for $200,000 arising from the vendor’s breach of contract and detinue, together with interest and costs. On November 16, 2012, the parties agreed to settle this action and the Company has agreed to pay the plaintiff $125,000, following the spinout of its subsidiary Antigen, from the proceeds of any public or private financing related to Antigen subsequent to such spinout. Each party agreed to execute mutual releases to the claim and counterclaim to be held in trust by each party’s counsel until payment of the settlement amount. Following payment to the plaintiff, the parties agree that a Consent Dismissal Order without costs will be filed with the court. If the Company fails to make the payment following completion of any post-spinout financing related to Antigen or any other subsidiaries, the plaintiffs may take out a judgment in the amount of the claim plus interest of 3% per annum and costs fixed at $25,000.
On August 22, 2017, Generex received a letter from counsel for Three Brothers Trading LLC, d/b/a Alternative Execution Group (“AEXG”), claiming breach of a Memorandum of Understanding (“MOU”) between Generex and AEXG. The MOU related to AEXG referring potential financing candidate to Generex. The letter from AEXG counsel claimed that Generex’s acceptance of $3,000,000 in financing form Pharma Trials, LLC, in March 2017, violated the provisions of the MOU prohibiting Generex from seeking other financing, with certain exceptions, for a period of 60 days after execution of the MOU. AEXG has demanded at least $210,000, 84,000 warrants for Generex stock convertible at $2.50 per share, attorney’s fees and costs. Generex management believes the Pharma Trials Financing is was not subject to the prohibitions because the representative of Pharma Trials was a director of Generex, and for other reasons.
Disputes with Former Officer
On May 20, 2011, our former Chief Financial Officer, Rose Perri filed a statement of claim (subsequently amended) in the Ontario Superior Court of Justice, naming as defendants the Company and certain directors of the Company, Mr. Barratt, Ms. Masterson, Mr. McGee, and Mr. Fletcher. In this action, Ms. Perri has alleged that defendants engaged in discrimination, harassment, bad faith and infliction of mental distress in connection with the termination of her employment with the Company. Ms. Perri is seeking damages in this action in excess of $7,000,000 for, among other things, breach of contract, breach of fiduciary duty, violations of the Ontario Human Rights Code and aggravated and punitive damages. On September 20, 2011, the defendants filed a statement of defense and counterclaim, also naming Time Release Corp., Khazak Group Consulting Corp., and David Khazak, C.A. as defendants by counterclaim, and seeking damages of approximately $2.3 million in funds that the defendants allege Ms. Perri wrongly caused the Company to pay to third parties in varying amounts over several years and an accounting of certain third-party payments, plus interests and costs. The factual basis for the counterclaim involves payments made by the Company to third parties believed to be related to Ms. Perri. The Company intends to defend this action and pursue its counterclaim vigorously and 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.
On June 1, 2011, Golden Bull Estates Ltd. filed a claim (subsequently amended) in the Ontario Superior Court of Justice, naming the Company, 1097346 Ontario, Inc. and Generex Pharmaceuticals, Inc. as defendants. The plaintiff, Golden Bull Estates, is controlled by Ms. Perri. The plaintiff alleges damages in the amount of $550,000 for breach of contract, $50,000 for punitive damages, plus interest and costs. The plaintiff’s claims relate to an alleged contract between the plaintiff and the Company for property management services for certain Ontario properties owned by the Company. The Company terminated the plaintiff’s property management services in April 2011. Following the close of pleadings, the Company served a motion for summary judgment. The plaintiff responded by amending its statement of claim to include a claim to the Company’s interest in certain of its real estate holdings. The plaintiff moved for leave to issue and register a Certificate of Pending Litigation in respect of this real estate. The motion was not successful in respect of any current real estate holdings of the Company. The Company is not able to predict the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss, if any, from this legal proceeding.
We are involved in certain other legal proceedings in addition to those specifically described herein. Subject to the uncertainty inherent in all litigation, we do not believe at the present time that the resolution of any of these legal proceedings is likely to have a material adverse effect on our financial position, operations or cash flows.
With respect to all litigation matters, as additional information concerning the estimates used by us becomes known, we reassess each matter’s position both with respect to accrued liabilities and other potential exposures.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock has been quoted on the OTC Pink market, a tiered marketplace of the OTC Markets Group under the symbol "GNBT". Previously, our common stock was quoted on a higher tier of the OTC Markets Group, the OTCQB. Our common stock was removed from the OTCQB due to our failure to file SEC reports. Our common stock was listed on the NASDAQ Capital Market (formerly the NASDAQ SmallCap Market) on June 5, 2003. On October 21, 2010, our common stock was delisted due to our failure to regain compliance with the $1.00 bid price requirement for continued listing set forth in NASDAQ Listing Rule 5550(a)(2). From May 5, 2000 to June 4, 2003, our common stock was listed on the NASDAQ National Market. From February 1998 to May 2000, the "bid" and "asked" prices for our common stock were quoted on the OTC Bulletin Board operated by the National Association of Securities Dealers. Prior to February 1998, there was no public market for our common stock.
The table below sets forth prices for our common stock for the last eight fiscal quarters. The prices below reflect the high and low bid information. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. The table below sets forth prices for our common stock for each fiscal quarter in the prior two years ended July 31, 2016. The prices below reflect the high and low bid information. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
As of September 25, 2017, there were approximately 327 holders of record of our common stock. Record holders do not include owners whose shares are held in street name by a broker or other nominee.
Dividends
We have not paid dividends on our common stock in the past and have no present intention of paying dividends on our common stock in the foreseeable future. Our outstanding Series I and Series H convertible preferred stock is not entitled to any special dividends. Each share of these two series of preferred stock is entitles to share in any dividends paid to the common stock holders, on an as-converted basis.
Sales of Unregistered Securities
We did not issue any securities in reliance upon Section 4(2) of the Securities Act in the fiscal quarter ended July 31, 2017.
Issuer Purchases of Equity Securities
Neither we nor any affiliated purchaser (as defined in Rule 10 b-18(a)(3) promulgated under the Exchange Act) purchased any of our equity securities during the fourth quarter of the fiscal year ending July 31, 2017.
Item 6.
Item 6. Selected Financial Data.
Generex is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis by management provides information with respect to our financial condition and results of operations for the fiscal years ended July 31, 2017 and 2016. This discussion should be read in conjunction with the information in the consolidated financial statements and the notes pertaining thereto contained in Item 8
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Generex Biotechnology Corporation
We have audited the accompanying consolidated balance sheets of Generex Biotechnology Corporation (“Generex”) and subsidiaries as of July 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, change in stockholders’ deficiency, and cash flows for the years then ended. Generex’s management is responsible for these consolidated financial statements and the financial statements schedule listing in the index under Item 15. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Generex as of July 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1, the Company’s experience of negative cash flows from operations since inception and its dependency upon future financing, which is uncertain due to the limitations imposed by previous financings on future financings, raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MNP LLP
Chartered Professional Accountants
Licensed Public Accountants
Mississauga, Canada
October 25, 2017
Generex Biotechnology Corporation
Notes to the Consolidated Financial Statements
July 31, 2017 and 2016
Note 1 -Organization of Business and Going Concern:
Generex Biotechnology Corporation (“Generex” or the “Company”), was formed in the State of Delaware on September 4, 1997 and its year-end is July 31. It is engaged primarily in the research and development of drug delivery systems and the use of the Company’s proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal) cavity using a hand-held aerosol applicator; and through the Company’s wholly-owned subsidiary, Antigen Express, Inc. (“Antigen”), has undertaken work on immunomedicines incorporating proprietary vaccine formulations.
On January 18, 2017, the Company closed an Acquisition Agreement pursuant to which the Company acquired a 51% interest in Hema Diagnostic Systems, LLC (“HDS”), a Florida limited liability company established in December 2000 to market and distribute rapid test devices including infectious diseases. Since 2002, HDS has been developing an expanding line of rapid diagnostic tests (RDTs) including such diseases as Human Immunodeficiency Virus (HIV) - 1/2, tuberculosis, malaria, hepatitis, syphilis, typhoid and dengue as well as other infectious diseases.
On March 14, 2017, the Company effected a one-for-one thousand (1:1,000) reverse stock split whereby the Company (i) decreased the number of authorized shares of Common Stock by a ratio equal to one-for-one thousand (1:1,000) (the “Reverse Split Ratio”), and (ii) correspondingly and proportionately decreased, by a ratio equal to the Reverse Split Ratio, the number of issued and outstanding shares of Common Stock (the “Reverse Stock Split”). Proportional adjustments for the reverse stock split were made to the Company's outstanding stock options, warrants and equity incentive plans for all periods presented.
Going Concern
The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplate continuation of the Company as a going concern. The Company has experienced negative cash flows from operations since inception and has an accumulated deficit of approximately $446 million and a working capital deficiency of approximately $21 million at July 31, 2017. The Company has funded its activities to date almost exclusively from debt and equity financings.
The Company will continue to require substantial funds to implement its new investment acquisition plans. Management’s plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common stock, preferred stock offerings, and issuances of debt and convertible debt instruments. Management is also actively pursuing financial and strategic alternatives, including strategic investments and divestitures, industry collaboration activities and strategic partners.
It is management’s opinion that these conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the balance sheet date. There are no assurances that such additional funding will be achieved and that the Company will succeed in its future operations. The consolidated 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 as a going concern. The Company’s inability to obtain required funding in the near future or its inability to obtain funding on favorable terms will have a material adverse effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations.
Note 2 - Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The subsidiaries included in the Company’s consolidated financial statements are: Generex Pharmaceuticals, Inc.; Generex (Bermuda), Inc.; Antigen Express, Inc.; 1097346 Ontario, Inc.; Hema Diagnostics Systems, LLC; Hema Diagnostics Systems Panama S.A.; Rapid Medical Diagnostics Corporation.
Provided, however, that in the event that the Purchasers fail to purchase 100% of the shares of Preferred Stock at any given Closing (other than the Closing Series H Tranche One) notwithstanding that the Company is ready, willing, and able to effect such Closing in accordance with the terms and conditions of this Agreement (a “Failure to Purchase Event”), then: (i) the Purchasers’ entitlement to purchase any Preferred Stock in respect of that Closing and any and all subsequent Closings under this Agreement is forfeit in total, (ii) the Company shall have no obligation to issue any further Securities to the Purchasers under this Agreement, and (iii) the Company shall have no recourse against the Purchasers, at law or in equity, in respect of such Failure to Purchase Event. For greater certainty, any securities that would otherwise have been issuable by the Company to the Purchasers but for the Failure to Purchase Event shall not be Securities (as that term is defined in this Agreement) and the Company shall have no registration obligation in respect thereof under the Registration Rights Agreement.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Acquisition cost is measured as the aggregate of the fair value at the date of acquisition of the assets given, equity instruments issued or liabilities incurred or assumed. Acquisition related costs are expensed as incurred (except for those costs arising on the issue of equity instruments which are recognized directly in equity). Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is measured as the excess of the acquisition cost and the amount of any non-controlling interest, over the fair value of the identifiable net assets acquired.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined using the Weighted Average method. The Company periodically evaluates its inventory for any obsolete or slow moving items based on production lot number and advances in production design or technology. Any inventory determined to be obsolete or slow moving inventory is written down to its net realizable value.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Gains and losses on depreciable assets retired or sold are recognized in the consolidated statement of operations and comprehensive loss in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.
Patents
Capitalized patent costs represent legal costs incurred to establish patents and a portion of the acquisition price paid attributed to patents upon the acquisition of Antigen in August 2003 and the acquisition of HDS in January 2017. When patents reach a mature stage, any associated legal costs are comprised mostly of maintenance fees and costs of national applications and are expensed as incurred. Capitalized patent costs are amortized on a straight line basis over the remaining life of the patent. As patents are abandoned, the net book value of the patent is written off. In the fiscal year ended July 31, 2016, the Company recorded a write down of $1,165,864 on the Company’s patents.
In-process Research & Development:
The costs of in-process research and development (“IPR&D”), related to the Company’s business combination with HDS, were recorded at fair value on the acquisition date. IPR&D intangible assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. IPR&D is not amortized but is reviewed for impairment at least annually, or when events or changes in the business environment indicate the carrying value may be impaired.
Impairment or Disposal of Long-Lived Assets and Intangibles
The Company assesses the impairment of long-lived assets under FASB ASC Topic 360 whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable and exceeds its fair value. The carrying amount of the long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the asset.
Derivative Warrant Liability
The Company’s derivative warrant instruments are measured at fair value using the binomial valuation model which takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the warrant. The liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative liabilities.”
Research and Development Costs
Expenditures for research and development are expensed as incurred and include, among other costs, those related to the production of experimental drugs, including payroll costs, and amounts incurred for conducting clinical trials. Amounts expected to be received from governments under research and development tax credit arrangements are offset against current research and development expense.
Income Taxes
Income taxes are accounted for under the asset and liability method prescribed by FASB ASC Topic 740. These standards require a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely than not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized. At July 31, 2017 and 2016, the Company had a full valuation allowance equal to the amount of the net deferred tax asset.
The Company adopted the FASB guidance concerning accounting for uncertainty in income taxes, which clarifies the accounting and disclosure for uncertainty in tax positions, as of August 1, 2007. The guidance requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement. Based on the Company’s evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements.
Stock-Based Compensation
The Company follows FASB ASC Topic 718 which requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model and restricted stock based on the quoted market price or the value of the services provided, whichever is more readily determinable. The Company also follows the guidance in FASB ASC Topic 505 for equity based payments to non-employees for equity instruments issued to consultants and other non-employees.
Net Loss per Common Share
Basic earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.
Comprehensive Income/(Loss)
Other comprehensive income/(loss), which includes only foreign currency translation adjustments, is shown in the consolidated statements of operations and comprehensive loss and in the consolidated statements of changes in stockholders’ deficiency.
Foreign Currency Translation
The functional and reporting currency of the Company and most of its subsidiaries is the United States Dollar. One subsidiary, Generex Pharmaceuticals, Inc., has a functional currency of the Canadian Dollar. Foreign denominated assets and liabilities of the Company are translated into U.S. dollars at the prevailing exchange rates in effect at the end of the reporting period. Income statement accounts are translated at an average of exchange rates which were in effect during the period. Translation adjustments that arise from translating the foreign subsidiary’s financial statements from its functional currency to the Company’s functional currency are recorded in the other comprehensive loss component of stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in the statement of operations and comprehensive loss.
Fair Value of Financial Instruments
Fair value is defined under FASB ASC Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for an asset or liability in an orderly transaction between participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The levels are as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities
•Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities
•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities
The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses, call option, warrants to be issued, derivative warrant liability, derivative additional investment right liability, loans payable and loans from related parties. All of these items, except of the call option, derivative warrant liability, derivative additional investment right liability and warrants to be issued, were determined to be Level 1 fair value measurements. The carrying amounts of cash and cash equivalents, other current assets, accounts payable and accrued expenses and the loans from related parties approximate their respective fair values because of the short maturities of these instruments. The call option, derivative warrant liability, derivative additional investment right liability and warrants to be issued, were determined to be Level 2 fair value measurements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
The Company evaluates its estimates, including those related to long lived assets (including patents) impairment valuations, derivatives and contingencies and litigation, on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting estimates are reviewed and discussed with the Board of Directors. The Company considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, if changes in the estimate or if different estimates that could have been selected would have a material impact on our results of operations or financial condition.
Effects of Recent Accounting Pronouncements:
Recently Issued Accounting Pronouncements
We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effective dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that an entity classify deferred tax assets and liabilities as noncurrent on the balance sheet. Prior to the issuance of the standard, deferred tax assets and liabilities were required to be separated into current and noncurrent amounts on the basis of the classification of the related asset or liability. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016. The adoption of ASU No. 2015-17 did not have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of adoption of ASU 2016-15 and does not expect any material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows should include the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The Company is evaluating the effect that ASU 2016-18 will have on its consolidated financial statements and is considering early adoption of the standard. The update is effective for fiscal years beginning after December 15, 2017. The adoption is not expected to have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company will adopt the standard effective October 1, 2020. The Company is evaluating the effect that ASU 2017-04 will have on its consolidated financial statements and is considering early adoption of the standard.
Note 3 - Property and Equipment:
The costs and accumulated depreciation of property and equipment are summarized as follows:
Depreciation expense related to property and equipment amounted to $3,675 and $1,517 for the years ended July 31, 2017 and 2016, respectively.
Note 4 - Patents:
The costs and accumulated amortization of patents are summarized as follows:
Amortization expense amounted to $1,370 and $281,894 for the years ended July 31, 2017 and 2016, respectively. During the year ended July 31, 2016, the Company wrote off patents with a net book value of $1,165,864 as the patents had been abandoned or were no longer being used.
Note 5 - Income Taxes:
The Company has incurred losses since inception, which have generated net operating loss (“NOL”) carryforwards. The NOL carryforwards arise from both United States and Canadian sources. Pre-tax (losses) arising from domestic operations (United States) were $(76,823,599) and $(1,374,725) for the years ended July 31, 2017 and 2016, respectively. Pre-tax (losses) arising from foreign operations (Canada) were $(869,116) and $(504,101) for the years ended July 31, 2017 and 2016, respectively. As of July 31, 2016, the Company has NOL carryforwards in Generex Biotechnology Corporation of approximately $200 million, which expire in 2018 through 2036, in Generex Pharmaceuticals Inc. of approximately $34.7 million, which expire in 2018 through 2036, and in Antigen Express, Inc. of approximately $31.3 million, which expire in 2018 through 2036. These loss carryforwards are subject to limitation due to the acquisition of Antigen and may be limited in future years due to certain structural ownership changes which have occurred over the last several years related to the Company’s equity and convertible debenture financing transactions.
For the years ended July 31, 2017 and 2016, the Company’s effective tax rate differs from the federal statutory rate principally due to net operating losses and other temporary differences for which no benefit was recorded.
Deferred income taxes consist of the following:
A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended July 31, 2017 and 2016 is as follows:
As of July 31, 2017, the Company had no tax benefits which have not been fully allowed for, and no adjustment to its financial position, results of operations or cash flows was required. The Company does not expect that unrecognized tax benefits will increase within the next twelve months. The Company records interest and penalties related to tax matters within other expense on the accompanying consolidated statement of operations. These amounts are not material to the consolidated financial statements for the years presented. Generally, tax years 2014 to 2017 remain open to examination by the Internal Revenue Agency or other tax jurisdictions to which the Company is subject. The Company’s Canadian tax returns are subject to examination by federal and provincial taxing authorities in Canada. Generally, tax years 2009 to 2017 remain open to examination by the Canada Revenue Agency or other tax jurisdictions to which the Company is subject.
Note 6 - Loans from Related Parties
On January 16, 2017, Joseph Moscato, Chief Executive Officer and director (“Moscato”), and Lawrence Salvo, Senior Vice President and director (“Salvo”), each made an unsecured $250,000, non-interest bearing, advances to the Company, $500,000 in the aggregate, which the Company paid to Emmaus Life Sciences, Inc. pursuant to the Emmaus Letter of Intent (“Emmaus LOI”) (see Note 9). Both Moscato and Salvo made other advances ($75,820 and $82,803, respectively) to permit the Company to pay certain third party expenses in connection with the implementation of the Company’s repurposed business plan, including legal, accounting, transfer agent, Edgarization, and press release fees. On April 27, 2017, the Company converted 100% of such advances, $658,622 in the aggregate (the “Moscato - Salvo Advances”) into 790 shares of Series I preferred stock (see Note 11).
HDS received substantially all of its funding from a shareholder, who owned 98.9% of HDS prior to the acquisition of HDS by the company. The loan is unsecured, matures on December 31, 2019 and accrued interest at 0.75% per annum through January 19, 2017, and bearing no interest thereafter. Upon acquisition of HDS by the Company (see Note 14), the outstanding principal balance was $13,239,837 and total accrued interest of $191,869. This loan is subject to a call option (Note 14) which, if exercised, the principal and accrued interest through January 18, 2017 would be eliminated. From January 19, 2017 through July 31, 2017, the loan principal increased by $498,303. As of July 31, 2017, the outstanding principal balance was $13,738,140.
Note 7 - Loan Payable
In May 2016, the Company borrowed $50,000 from a lender (“Demand Note”). This unsecured note bore interest at 9% per annum and was due on demand. In March 2017, this note was cancelled upon issuance of a new convertible note payable (See Note 8).
Note 8 - Convertible Note Payable
On March 6, 2017, Generex entered into a Securities Purchase Agreement with Alpha Capital Anstalt (“Alpha”), pursuant to which the Company agreed to issue a Convertible Note due March 6, 2018 (“Convertible Note”) in the principal amount of $674,855. This Convertible Note bore no interest, except in the event of a default, in which the default interest rate was 15% per annum. Consideration received for the Convertible Note was $562,379, comprised of $500,000 in cash (paid directly to Emmaus Life Sciences, Inc. pursuant to the Emmaus LOI (see Note 9)), the cancellation of a $50,000 Demand Note the Company had issued to the investor in May 2016 (See Note 7), $3,879 in accrued interest on the Demand Note and $8,500 in legal fees for the investor’s counsel, which the Company was obligated to pay pursuant to the Securities Purchase Agreement. This Convertible Note was convertible, at the option of the holder, at any time, into shares of common stock at a conversion rate of $10.00 per share. Upon issuance, the Company recorded a debt discount of $120,976, consisting of $112,476 original issue discount and $8,500 of legal fees, to be amortized over the term of the Convertible Note. The Convertible Note included a provision stating that if the Company failed to timely consummate the transaction with Emmaus Life Sciences, Inc. pursuant to the Letter of Intent, the Note would become immediately due and payable, On May 30, 2017, the Company received notice from the investor’s counsel declaring the Note due and payable due to the termination of the Letter of Intent. In July 2017, the principal balance of the Convertible Note was fully repaid. In addition, the Company agreed to pay a late fee of $75,000 to Alpha, of which $27,000 remains due as of July 31, 2017 and is included in accounts payable and accrued expenses. For the year ended July 31, 2017, amortization of debt discount was $120,976 utilizing effective interest rate of 19.91%.
Note 9 - Commitments and Contingencies:
Emmaus LOI
On January 16, 2017, the Company and Emmaus Life Sciences, Inc. (“Emmaus”) entered into a letter of intent (“LOI”) contemplating that the Company will acquire a controlling interest in the outstanding capital stock of Emmaus for a total consideration of $225,000,000 in cash and Generex stock. The purchase price for shares of stock of the Emmaus Shares will consist of $10,000,000 in cash and $215,000,000 worth of shares of the Company’s common stock (“Company Shares”). The Company paid an aggregate $4,000,000 in cash deposits to Emmaus under the LOI. On May 16, 2017, the LOI was terminated and Emmaus repaid the $4,000,000.
Pending Litigation
In February 2001, a former business associate of the former Vice President of Research and Development (“VP”) of the Company and an entity known as Centrum Technologies Inc. (“CTI”) commenced an action in the Ontario Superior Court of Justice against the Company and the VP seeking, among other things, damages for alleged breaches of contract and tortious acts related to a business relationship between this former associate and the VP that ceased in July 1996. The plaintiffs’ statement of claim also seeks to enjoin the use, if any, by the Company of three patents allegedly owned by CTI. The three patents are entitled Liquid Formulations for Proteinic Pharmaceuticals, Vaccine Delivery System for Immunization, Using Biodegradable Polymer Microspheres, and Controlled Releases of Drugs or Hormones in Biodegradable Polymer Microspheres. It is the Company’s position that the buccal drug delivery technologies which are the subject matter of the Company’s research, development, and commercialization efforts, including Generex Oral-lyn and the RapidMist Diabetes Management System, do not make use of, are not derivative of, do not infringe upon, and are entirely different from the intellectual property identified in the plaintiffs’ statement of claim. 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 opposed the application. In September 2003, the Ontario Superior Court of Justice granted the request and issued an order giving the former business associate leave to file an action in the name of and on behalf of CBI against the VP and the Company. 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.
On May 20, 2011, Rose Perri, a former officer of the Company, filed a statement of claim (subsequently amended) in the Ontario Superior Court of Justice, naming as defendants the Company and certain directors of the Company, John Barratt, Brian Masterson, Mark McGee, and Mr. Fletcher. In this action, Ms. Perri has alleged that defendants engaged in discrimination, harassment, bad faith and infliction of mental distress in connection with the termination of her employment with the Company. Ms. Perri is seeking damages in this action in excess of $7,000,000 for, among other things, breach of contract, breach of fiduciary duty, violations of the Ontario Human Rights Code and aggravated and punitive damages. On September 20, 2011, the defendants filed a statement of defense and counterclaim, also naming Time Release Corp., Khazak Group Consulting Corp., and David Khazak, C.A. as defendants by counterclaim, and seeking damages of approximately $2.3 million in funds that the defendants allege Ms. Perri wrongly caused the Company to pay to third parties in varying amounts over several years and an accounting of certain third-party payments, plus interests and costs. The factual basis for the counterclaim involves payments made by the Company to third parties believed to be related to Ms. Perri. The Company intends to defend this action and pursue its counterclaim vigorously and 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.
On June 1, 2011, Golden Bull Estates Ltd. filed a claim (subsequently amended) in the Ontario Superior Court of Justice, naming the Company, 1097346 Ontario, Inc. and Generex Pharmaceuticals, Inc. as defendants. The plaintiff, Golden Bull Estates Ltd., is controlled by Ms. Perri. The plaintiff alleges damages in the amount of $550,000 for breach of contract, $50,000 for punitive damages, plus interest and costs. The plaintiff’s claims relate to an alleged contract between the plaintiff and the Company for property management services for certain Ontario properties owned by the Company. The Company terminated the plaintiff’s property management services in April 2011. Following the close of pleadings, the Company served a motion for summary judgment. The plaintiff responded by amending its statement of claim to include a claim to the Company’s interest in certain of its real estate holdings. The plaintiff moved for leave to issue and register a Certificate of Pending Litigation in respect of this real estate. The motion was not successful in respect of any current real estate holdings of the Company. The Company is not able to predict the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss, if any, from this legal proceeding.
In December 2011, a vendor of the Company commenced an action against the Company and its subsidiary, Generex Pharmaceuticals, Inc., in the Ontario Superior Court of Justice claiming damages for unpaid invoices including interest in the amount of $429,000, in addition to costs and further interest. The Company responded to this statement of claim and also asserted a counterclaim in the proceeding for $200,000 arising from the vendor’s breach of contract and detinue, together with interest and costs. On November 16, 2012, the parties agreed to settle this action and the Company has agreed to pay the plaintiff $125,000, following the spinout of its subsidiary Antigen, from the proceeds of any public or private financing related to Antigen subsequent to such spinout. Each party agreed to execute mutual releases to the claim and counterclaim to be held in trust by each party’s counsel until payment of the settlement amount. Following payment to the plaintiff, the parties agree that a Consent Dismissal Order without costs will be filed with the court. If the Company fails to make the payment following completion of any post-spinout financing related to Antigen or any other subsidiaries, the Plaintiffs may take out a judgment in the amount of the claim plus interest of 3% per annum and costs fixed at $25,000.
On August 22, 2017, Generex received a letter from counsel for Three Brothers Trading LLC, d/b/a Alternative Execution Group (“AEXG”), claiming breach of a Memorandum of Understanding (“MOU”) between Generex and AEXG. The MOU related to AEXG referring potential financing candidate to Generex. The letter from AEXG counsel claimed that Generex’s acceptance of $3,000,000 in financing from Pharma Trials, LLC, in March 2017, violated the provisions of the MOU prohibiting Generex from seeking other financing, with certain exceptions, for a period of 60 days after execution of the MOU. AEXG has demanded at least $210,000 in cash and 84,000 warrants for Generex stock convertible at $2.50 per share, for attorney’s fees and costs. Generex management believes the Pharma Trials, LLC Financing was not subject to the prohibitions because the representative of Pharma Trials, LLC was a director of Generex, and for other reasons.
The Company is involved in certain other legal proceedings in addition to those specifically described herein. Subject to the uncertainty inherent in all litigation, the Company does not believe at the present time that the resolution of any of these legal proceedings is likely to have a material adverse effect on the Company’s consolidated financial position, 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.
Note 10 - Net (Loss) / Income Per Share (“EPS”):
Basic EPS and diluted EPS for the years ended July 31, 2017 and 2016 have been computed by dividing the net loss available to common stockholders for the period by the weighted average shares outstanding during the period. All outstanding stock options, non-vested restricted stock, warrants and common stock underlying convertible preferred stock, representing 1,534,095 and 456,010 incremental shares, have been excluded from the respective 2017 and 2016 computation of diluted EPS as they are anti-dilutive.
Note 11 - Stockholders’ Deficiency:
Common Stock
On January 18, 2017, the Company issued 53,211 shares of common stock for the acquisition of 51% of HDS and is obligated to issue 230,000 shares of common stock upon the conclusion of the Company’s reverse stock split. As at year end the shares have yet to be issued.
During January 2017, the Company issued 8,000 shares of common stock for the conversion of 120 shares of Series F convertible preferred stock, plus 4,235 shares for the related make-whole payments issued to convert the accumulated dividend payable.
During January 2017, the Company issued 10,000 shares of common stock for the conversion of 150 shares of Series G convertible preferred stock, plus 4,688 shares for the related make-whole payments issued to convert the accumulated dividend payable.
During February 2017, the Company issued 23,333 shares of common stock for the conversion of 350 shares of Series G convertible preferred stock, plus 10,606 shares for the related make-whole payments issued to convert the accumulated dividend payable.
On February 9, 2017, the Company offered all current warrant holders an option to exercise immediately all outstanding common stock purchase warrants on a cashless basis at a reduced exercise price of $7.40 per share from $15.00 per share. The Company agreed to issue a total of 103,809 shares of common stock in connection with the exercise of 314,649 warrants in connection with the following outstanding warrants:
As of the date of this filing, 31,195 shares have been issued and 72,614 shares remain to be issued resulting in additional common stock payable $1,071,851 as of July 31, 2017.
Warrants
As of July 31, 2016, the Company had 383,877 warrants with a current exercise price of $15 which have price protection provisions that allow for the reduction in the current exercise price upon the occurrence of certain events, including the Company’s issuance of common stock or securities convertible into or exercisable for common stock, such as options and warrants, at a price per share less than the exercise price then in effect. For instance, if the Company issues shares of its common stock or options exercisable for or securities convertible into common stock at an effective price per share of common stock less than the exercise price then in effect, the exercise price will be reduced to the effective price of the new issuance. Simultaneously with any reduction to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall be increased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. There are a limited number of permitted types of stock and equity instrument issuances for each series of warrants which will not invoke the price protection provisions of these warrants. The conversion price for all previously outstanding warrants was adjusted from $30.00 to $15.00 in conjunction with the Series G Convertible Preferred Stock financing on June 24, 2015 and the total number of previously outstanding warrants increased from 239,788 to 479,577, in addition to the 33,333 warrants issued in the financing.
During the year ended July 31, 2016, 129,033 warrants, which had an exercise price of $15 per warrant, expired. There were no warrants exercised for the fiscal year ended July 31, 2016. The outstanding warrants at July 31, 2016 have a weighted average exercise price of $15 per share and have a weighted average remaining life of 2.1 years.
As of July 31, 2016, there were a total of 383,877 warrants with an estimated fair value of $2,048,846, which were identified on the consolidated balance sheets under the caption “Derivative Warrant Liability”.
During the year ended July 31, 2017, 65,896 warrants expired. There were 3,333 warrants exercised at an exercise price of $15.00 per share with proceeds of $50,000 for the year ended July 31, 2017 and 314,649 warrants were exercised on a cashless basis at a reduced exercise price of $7.40 issuing 103,809 shares of common stock. As of July 31, 2017, there are no warrants issued or outstanding.
The Company accounts for the warrants with price protection provisions in accordance with FASB ASC Topic 815 as described in Note 12 - Derivative Liabilities.
Series A, B, C, D, E, F, and G 9% Convertible Preferred Stock
All of the Company’s Series A, B, C, D and E 9% Convertible Preferred Stocks were converted prior to the beginning of the Company’s 2017 fiscal year.
Series F and G 9% Convertible Preferred Stock
The Company has authorized 4,150 shares of Series F 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per share. Pursuant to a securities purchase agreement dated March 27, 2014, the Company sold an aggregate of 2,075 shares of Series F convertible preferred stock, as well as accompanying warrants to purchase 69,167 shares of common stock. An aggregate of 69,167 shares of the Company’s common stock were issuable upon conversion of the Series F convertible preferred stock which was issued at the closing on March 27, 2014.
The Company has authorized 1,000 shares of Series G 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per share. Pursuant to a securities purchase agreement dated June 24, 2015, the Company sold an aggregate of 500 shares of Series G convertible preferred stock, as well as accompanying warrants to purchase 33,333 shares of common stock. An aggregate of 33,333 shares of the Company’s common stock are issuable upon conversion of the Series G convertible preferred stock which was issued at the closing on June 24, 2015.
Subject to certain ownership limitations, the convertible preferred stock is convertible at the option of the holder at any time into shares of the Company’s common stock at an effective conversion price of $15.00 per share (Note: The conversion price for the Series F Convertible Preferred Stock was adjusted from $30.00 to $15.00 in conjunction with the Series G Convertible Preferred Stock financing on June 24, 2015 and in February 2017, the Company adjusted exercise further to $7.40 and all remaining outstanding warrants were exercised). Prior to conversion, the warrants, were entitled to accrue a 9% dividend until the third-year anniversary of the issuances. On each one-year anniversary thereafter, such dividend rate increased by an additional 3%. The dividend is payable quarterly on September 30, December 31, March 31 and June 30, beginning on June 30, 2014 and June 30, 2015, respectively, and on each conversion date in cash, or at the Company’s option, in shares of common stock. In the event that the Series F and G convertible preferred stock was converted prior to March 27, 2017 and June 24, 2018, respectively, the Company will pay the holder of the converted preferred stock an amount equal to $270 per $1,000 of stated value of the convertible preferred stock, less the amount of all prior quarterly dividends paid on such converted preferred stock before the relevant conversion date. Such “make-whole payment” may be made in cash or, at the Company’s option, in shares of its common stock. In addition, beginning on the third anniversary date of the issuances, the Company will pay dividends on shares of preferred stock equal to (on an as-if-converted-to-common-stock basis) and in the same form as dividends (other than dividends in the form of common stock) actually paid on shares of the common stock when, and if such dividends are paid. The Company will incur a late fee of 18% per annum on unpaid dividends.
The conversion price of the convertible preferred stock was subject to adjustment in the case of stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. The conversion price was also to be adjusted if the Company sells or grants any shares of common stock or securities convertible into, or rights to acquire, common stock at an effective price per share that is lower than the then conversion price, except in the event of certain exempt issuances. In addition, the holders of convertible preferred stock were entitled to receive any securities or rights to acquire securities or property granted or issued by the Company pro rata to the holders of its common stock to the same extent as if such holders had converted all of their shares of convertible preferred stock. In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the holders of convertible preferred stock were entitled to receive, upon conversion of their shares, any securities or other consideration received by the holders of the Company’s common stock pursuant to the fundamental transaction. The conversion price for the Series F Convertible Preferred Stock was adjusted from $30.00 to $15.00 in conjunction with the Series G Convertible Preferred Stock on June 24, 2015 and the number of common shares underlying the 838 Series F Convertible Preferred Stock outstanding at that date increased from 27,942 to 55,883 and the exercise price further adjusted from $15.00 to $7.40 during February 2017.
In conjunction with the issuance of the Series F convertible preferred stock in March 2014 and the issuance of the Series G convertible preferred stock in June 2015, the Company also issued 69,167 and 33,333 warrants, respectively to the investors. Subject to certain ownership limitations, the warrants are exercisable at any time after their respective dates of issuance and on or before the fifth-year anniversary thereafter at an exercise price of $15.00 per share of common stock (Note: The conversion price for the warrants issued in the Series F Convertible Preferred Stock financing was adjusted from $30.00 to $15.00 in conjunction with the Series G Convertible Preferred Stock financing on June 24, 2015 and the number of warrants increased from 69,167 to 138,333; and in February 2017, the Company adjusted exercise further to $7.40 and all remaining outstanding warrants were exercised). Prior to conversion, the exercise price of the warrants and, in some cases, the number of shares issuable upon exercise, was subject to adjustment in the case of stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. The exercise price and number of shares of common stock issuable upon exercise could have been also be adjusted if the Company sells or grants any shares of common stock or securities convertible into, or rights to acquire, common stock at an effective price per share that is lower than the then exercise price, except in the event of certain exempt issuances. In addition, the warrant holders had been entitled to receive any securities or rights to acquire securities or property granted or issued by the Company pro rata to the holders of its common stock to the same extent as if such holders had exercised all of their warrants. In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the warrant holders could have been entitled to receive, upon exercise of their warrants, any securities or other consideration received by the holders of the Company’s common stock pursuant to the fundamental transaction. Until such time that these warrants were exercised, these warrants had been classified as derivative liabilities and are described further in Note 12 - Derivative Liabilities.
In addition, until the first anniversary date of the March 2014 securities purchase agreement and the first anniversary of the August 19, 2015 shareholder approval of the increase in authorized stock, respectively, each investor had the right, in its sole determination, to purchase, severally and not jointly with the other investors, in one or more purchases, in the ratio of such investor's original subscription amount to the original aggregate subscription amount of all investors, additional units consisting of convertible preferred stock and warrants at a purchase price of $1,000 per unit with an aggregate subscription amount thereof of up to $2,075,000 and $500,000, respectively, which units would have had terms identical to the units of convertible preferred stock and warrants issued in connection with the March 2014 and June 2015 closings. These additional investment rights of the investors had been classified as derivative liabilities and are described further in Note 12 - Derivative Liabilities. The March 2014 additional investment rights expired on March 27, 2015 and none have been exercised. The June 2015 additional investment rights expired on August 19, 2016 and none had been exercised up to that date.
As of July 31, 2017, 2,075 of the Series F convertible preferred stock had been converted to common stock. There were 97,108 shares of common stock issued upon the conversion of the Series F convertible preferred stock and 40,769 shares of common stock issued as “make-whole payments” on such conversions. As of July 31, 2017, 500 of the Series G convertible preferred stock had been converted to common stock. There were 33,333 shares of common stock issued upon the conversion of the Series G convertible preferred stock and 15,294 shares of common stock issued as “make-whole payments” on such conversions. As of July 31, 2017, there were no shares of Series F and Series G convertible preferred stock outstanding.
Accounting for proceeds from the Series F convertible preferred stock financing
The initial cash proceeds, net of issuance costs of $55,000, from the Series F convertible preferred stock financing in March 2014 were $2,020,000. The proceeds from the financing were allocated first to the warrants that were issued in the financing, second to the additional investment rights associated with the financing and then to the make whole payments and subsequent issuance costs. As the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a “deemed dividend” for accounting purposes and was reported on the Company’s consolidated statement of comprehensive (loss) / income for the fiscal year ended July 31, 2014 under the caption “Preferred Stock Dividend”. The calculation methodologies for the fair values of the derivative warrant liability and the derivative additional investment rights liability are described in Note 12 - Derivative Liabilities below. The fair values assigned to each component and the calculation of the amount of the deemed dividend are as follows:
The initial “make-whole payments” of $560,250 on the Series F convertible preferred stock were accrued as of the date of the financing. The remaining balance as of July 31, 2017 and July 31, 2016, after all conversions, are $-0- and $32,400, respectively, and is included in Accounts Payable and Accrued Expenses.
Accounting for proceeds from the Series G convertible preferred stock financing
The initial cash proceeds, net of issuance costs of $25,000, from the Series G convertible preferred stock financing in June 2015 were $475,000. The proceeds from the financing were allocated first to the warrants that were issued in the financing, second to the additional investment rights associated with the financing and then to the make whole payments and subsequent issuance costs. As the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a “deemed dividend” for accounting purposes and was reported on the Company’s consolidated statement of operations and comprehensive loss for the fiscal year ended July 31, 2015 under the caption “Preferred Stock Dividend”. The calculation methodologies for the fair values of the derivative warrant liability and the derivative additional investment rights liability are described in Note 12 - Derivative Liabilities below. The fair values assigned to each component and the calculation of the amount of the deemed dividend are as follows:
The initial “make-whole payments” of $135,000 on the Series G convertible preferred stock were accrued as of the date of the financing. The remaining balance as of July 31, 2017 and 2016, after all conversions, are $-0- and $135,000, respectively, and is in Accounts Payable and Accrued Expenses.
Series H and Series I Convertible Preferred Stock
The Company has authorized 109,000 shares of designated non-voting Series H Convertible Preferred Stock with a stated value of one thousand ($1,000) per share and authorized 6,000 shares of designated non-voting Series I Convertible Preferred Stock with a stated value of one thousand ($1,000) per share pursuant to the Purchase Agreement dated March 27, 2017. The Series H Preferred Stock was scheduled to be sold in four tranches to the Purchaser. Under the Securities Purchase Agreement, in the event the Purchaser failed to purchase 100% of the shares of Preferred Stock at any given Closing, the Company can decline to sell any further securities to the Purchaser (the Purchase Agreement”).
The Series H and Series I Convertible Preferred Stock are convertible at the option of the holder at any time into shares of the Company’s common stock at an effective conversion price of $2.50 per share. An aggregate of 46,000,000 shares of the Company’s common stock would be issuable upon conversion of both the Series H and Series I Preferred Stock if all shares of such preferred stock contemplated by the securities purchase agreement are issued.
Neither Series H nor Series I Convertible Preferred Stock have special dividend rights. If the Company pays dividends on its common stock, the holders of the preferred stock will receive dividends in the amount they would have received had they converted the preferred stock to common stock.
The Series I Preferred Stock have a special one-time voting rights that provide at the first meeting of the Company’s stockholders following the initial issuance of the Preferred Stock, and all adjournments of such meeting, the Preferred Stock shall be entitled to vote on (i) the election of individuals to serve as members of the Board of Directors, and (ii) any proposal to increase the authorized number of shares of Common Stock. The Preferred Stock, as a class, shall be entitled to cast a number of votes on such proposal equal to fifty percent (50%) of the total number of votes entitled to be cast at such meeting (determined as of the record date for such meeting) by all other outstanding shares of the Company’s capital stock. Each share of Preferred Stock shall be entitled to cast a number of votes equal to the aggregate number determined pursuant to the last sentence divided by one thousand (1,000).
At closing of the first tranche on March 28, 2017, the Company issued 3,000 shares of Series H Preferred Stock for a purchase price of $3,000,000. The proceeds of this sale were paid directly on the Company’s behalf to Emmaus as an additional deposit under the Company’s Emmaus LOI. An aggregate of 1,200,000 shares of the Company’s common stock are issuable upon conversion of the Series H Preferred Stock sold as of July 31, 2017.
On April 17, 2017, the Purchaser failed to close the sale of Series I Preferred Stock despite the Company being ready, willing and able to proceed and the Company terminated the Purchaser’s rights on April 23, 2017. Under the Securities Purchase Agreement, in the event the Purchaser fails to purchase 100% of the shares of Preferred Stock, the Company can decline to sell any further securities to the Purchaser. On April 23, 2017 the Company notified the Purchaser in writing that its rights to purchase additional shares were forfeit.
Conversion of Debt to Officers into Series I Preferred Stock
On April 27, 2017, the Company converted the “Moscato - Salvo Advances” (Note 6) after applying a 20% original issue discount, the same as the original issue discount negotiated at arm’s length with Alpha on March 6, 2017. Moscato converted $390,984 (including $65,164 original issue discount) into 391 shares of Series I Convertible Preferred Stock. Salvo converted $399,363 (including $66,560 original issue discount) into 399 shares of Series I Convertible Preferred Stock. The total original issue discount was $131,724 and was recorded as amortization of debt discount.
Note 12 - Derivative Liabilities:
Derivative warrant liability
As of July 31, 2016, the Company had warrants outstanding with price protection provisions that allow for the reduction in the exercise price of the warrants in the event the Company subsequently issues stock or securities convertible into stock at a price lower than the exercise price of the warrants. Simultaneously with any reduction to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment.
Accounting for Derivative Warrant Liability
The Company’s derivative instruments have been measured at fair value at July 31, 2017 and July 31, 2016 using the binomial lattice model. The Company recognizes all of its warrants with price protection in its consolidated balance sheets as a liability. The liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations and comprehensive loss. The initial recognition and subsequent changes in fair value of the derivative warrant liability have no effect on the Company’s consolidated cash flows.
There are no derivative warrants outstanding at July 31, 2017.
The revaluation of the warrants at the end of the respective reporting periods resulted in the recognition of a gain of $516,509 within the Company’s consolidated statements of operations for the year ended July 31, 2017 and a gain of $314,569 within the Company’s consolidated statements of operations and comprehensive loss for the year ended July 31, 2016, which are included in the consolidated statement of operations and comprehensive loss under the caption “Change in fair value of derivative liabilities”. The fair values of the warrants at July 31, 2017 and July 31, 2016 were $0 and $2,048,846, respectively, which are reported on the consolidated balance sheets under the caption “Derivative Warrant Liability”. The following summarizes the changes in the value of the derivative warrant liability from July 31, 2016 until July 31, 2017:
Fair Value Assumptions Used in Accounting for Derivative Warrant Liability
The Company has determined its derivative warrant liability to be a Level 2 fair value measurement and has used the binominal lattice pricing model to calculate the fair value as of July 31, 2016. The binomial lattice model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Because the warrants contain the price protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations. The key inputs used in the July 31, 2016 fair value calculations were as follows:
Fair Value Assumptions Used in Accounting for Derivative Additional Investment Rights Liability
The Company has determined the derivative additional investment rights liability derived from the issuance of Preferred stock financing Series G shares (Note 11) to be a Level 2 fair value measurement and has used the binominal lattice pricing model to measure the fair value. The series F additional investment rights expired in March 2015. The series G additional investment rights expired in August 2016. As all additional investment rights have expired, their value at July 31, 2017 was $nil (July 31, 2016 - $193,408).
The key inputs used in the fair value calculation at July 31, 2016 were as follows:
The revaluation of the additional investment rights in the year ended July 31, 2017 and 2016, resulted in the recognition of a gain of $193,408 and a loss of $50,746, respectively. The respective gains are recorded within the Company’s consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative liabilities”.
Note 13 - Stock-Based Compensation:
Stock Option Plans
As of July 31, 2017, the Company had two stockholder-approved stock incentive plans under which shares and options exercisable for shares of common stock have been or may be granted to employees, directors, consultants and advisors. A total of 12,000 shares of common stock are reserved for issuance under the 2001 Stock Option Plan (the 2001 Plan) and 135,000 shares of common stock are reserved for issuance under the 2006 Stock Plan as amended (the 2006 Plan). At July 31, 2017, there were 4,139 and 64,485 shares of common stock reserved for future awards under the 2001 Plan and 2006 Plan, respectively. The Company issues new shares of common stock from the shares reserved under the respective Plans upon conversion or exercise of options and issuance of restricted shares.
The 2001 and 2006 Plans (the Plans) are administered by the Board of Directors (the Board). The Board is authorized to select from among eligible employees, directors, advisors and consultants those individuals to whom options are to be granted and to determine the number of shares to be subject to, and the terms and conditions of the options. The Board is also authorized to prescribe, amend and rescind terms relating to options granted under the Plans. Generally, the interpretation and construction of any provision of the Plans or any options granted hereunder is within the discretion of the Board.
The Plans provide that options may or may not be Incentive Stock Options (ISOs) within the meaning of Section 422 of the Internal Revenue Code. Only employees of the Company are eligible to receive ISOs, while employees and non-employee directors, advisors and consultants are eligible to receive options which are not ISOs, i.e. “Non-Qualified Options.” The options granted by the Board in connection with its adoption of the Plans were Non-Qualified Options. In addition, the 2006 Plan also provides for restricted stock grants.
Share-based employee compensation related to stock options for the years ended July 31, 2017 and 2016 amounted to $-0- and $30,297 respectively, and were charged to the consolidated statements of operations and comprehensive loss. In addition, during 2016 the Company issued 15,393 stock options in satisfaction of deferred compensation amounts totaling $123,147 owing to executives at that time. Share-based employee compensation related to common stock grants for the years ended July 31, 2017 and 2016 amounted to $-0- for both fiscal years.
The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model or the value of the services provided, whichever is more readily determinable. The Black-Scholes option pricing model takes into account, as of the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option. The Black-Scholes option pricing model was not used to estimate the fair value of any option grants in the fiscal years ended July 31, 2017 and 2016. Instead, the grants were valued at the amount of deferred compensation owed to each such individual.
The following is a summary of the common stock options granted, forfeited or expired and exercised under the Plan:
The 18,095 outstanding options at July 31, 2017 had a weighted average remaining contractual term of 1.11 years.
There were no non-vested common stock options granted, vested or forfeited under the Plan for the fiscal year ended July 31, 2017. As of July 31, 2017, the Company did not have any unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.
During the year ended July 31, 2016, the Company granted 18,345 options to executives, employees and directors in full and final payment of obligations to pay such individuals deferred salary or director fees. The options were issued in lieu of cash payment of deferred compensation amounts due to such individuals. The stock options had an exercise price equal to $1 per share and were made pursuant to the terms of the Company's 2006 Stock Plan. The options were fully vested at the dates of the grants and expire on the fifth anniversary of the respective dates of grant. The grants were valued at the amount of deferred compensation owed to each such individual. The Company did not grant any options during the twelve months ended July 31, 2017.
The following table summarizes information on stock options outstanding at July 31, 2017:
The intrinsic value is calculated as the difference between the market value as of July 31, 2017 and 2016 and the exercise price of the shares on the respective dates. The market values as of July 31, 2017 and 2016 were $5.05 and $79.00, respectively, based on the high and low bid information for July 31, 2017 and 2016.
Note 14 - Acquisition of Hema Diagnostics Systems, LLC
On January 18, 2017, the Company acquired a 51% interest in Hema Diagnostic Systems, LLC (“HDS”), pursuant to the Acquisition Agreement. At closing, the Company acquired 4,950 of HDS’s 10,000 previously outstanding limited liability company units in exchange for 53,191 shares of Generex common stock valued at $253,721, plus 20 shares of Generex common stock issued to HDS in exchange for 300 new limited liability company units. The Acquisition Agreement also provides the Company with a call option to acquire the remaining 49% of HDS and a retirement of HDS shareholder loans in the amount of $13,431,706 (including interest) (the “Call Option”) for the aggregate purchase price of $1.
Following the closing and the completion of Company’s reverse stock split, the Company is required to issue a further 230,000 shares of common stock and issue a warrant to a former shareholder of HDS to acquire 15,000,000 additional shares of Generex common stock for $2.50 per share. The issue of this warrant is contingent upon the Company obtaining approval from its shareholders for an increase in its authorized share capital. The total consideration was valued at $1,350,916 on the date of the acquisition.
Fair Value of the HDS Assets
The intangibles assets acquired include In-Process Research & Development (“IPR&D”). The Fair Value of the IPR&D intangible asset using an Asset Cost Accumulation methodology as of January 18, 2017 (the “Valuation Date”) was determined to be $2,911,377.
The net purchase price of HDS was determined to be as follows:
As of January 18, 2017, the issue of the warrant to acquire 15,000,000 additional common shares of Generex was contingent upon shareholder approval of an increase in the Company’s authorized capital stock. No warrant has been issued by the Company until such time that an increase in authorized capital has been approved. At the time of closing, Management was not of the opinion that it is more likely than not that the warrant will be issued and the Call Option will be exercised, accordingly no values have been attributed to the warrant and Call Option at closing. During the current year, management made a redetermination and estimated that it was more likely than not that the shareholder approval to increase authorized share capital would be obtained and the Call Option will be exercised. Accordingly, management recorded the fair value of the warrant of $66,060,026 as a liability and the Call Option of $4,237,829 as an asset as of July 31, 2017. The change in the fair value of the contingent purchase consideration of $61,822,197 is recorded in the consolidated statements of operations and comprehensive loss.
Fair Value Assumptions Used in Accounting for Warrants
The Company used the Black-Scholes option-pricing model to calculate the fair value of the warrants as of July 31, 2017. The Black-Scholes option-pricing model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. The key inputs used in the fair value calculations were as follows:
Fair Value Assumptions Used in Accounting for Call Option
The Company used the Monte Carlo model to calculate the fair value of the call option as of July 31, 2017. The valuations are based on assumptions as of the valuation date with regard to the value of the asset acquired net of impairment, the risk-free interest rate, the estimated volatility of the stock price in the future, the time to expiration and the stock price at the date of valuation.
The following assumptions were used in estimating the value of the Call Option:
The preliminary purchase price allocation of HDS was determined to be as follows:
Unaudited Pro Forma Information
The following unaudited pro forma financial information presents the results of our operations for the years ended July 31, 2017 and 2016 as if HDS was acquired on August 1, 2015. The unaudited pro forma results reflect certain adjustments for items that are not expected to have a continuing impact, such as adjustments for transaction costs incurred and purchase accounting. The information presented below has been prepared for comparative purposes only and does not purport to be indicative of either future results of operations or the results of operations that would have actually occurred had the acquisitions been consummated on August 1, 2015.
Goodwill and Intangible Assets
The change in the carrying amount of goodwill and other intangible assets for the year ended July 31, 2017, is as follows:
Intangible assets are generally amortized on a straight-line basis over the useful lives of the assets. The Company is currently not amortizing the in-process research and development until it becomes commercially viable and placed in service. At the time when the intangible assets are placed in service the Company will determine a useful life.
Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. Goodwill for HDS was $13.4 million as of the date of the acquisition. The Company conducted an impairment assessment of goodwill and determined that the goodwill was fully impaired.
Note 15 - Segment Information:
The Company follows FASB ASC Topic 815 which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports. This Topic also establishes standards for related disclosures about products and services, geographic areas, and major customers.
This Topic uses a management approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. The Company’s management reporting structure provides for only one segment: the research, development and commercialization of drug delivery systems and technologies for metabolic and immunological diseases.
The countries in which the Company had identifiable assets are presented in the following table. Identifiable assets are those that can be directly associated with a geographic area.
Note 16 - Subsequent Events:
The Company has evaluated subsequent events occurring after the balance sheet date through the date the consolidated financial statements were issued and identified the following for disclosure:
Since July 31, 2017, the former majority shareholder of HDS has made further advances and/or loans to HDS totaling $94,000 as of the date of this filing.
On August 24, 2017, the Company and Core Tech Solutions, Inc. (“Core Tech”) entered into a letter of intent (“LOI”) contemplating Company’s acquisition of a controlling interest of the outstanding capital stock of Core Tech for a total consideration of $15,000,000 in accordance with the terms and conditions therein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A
Item 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Prior to the filing of this Annual Report on Form 10-K, an evaluation was performed under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer who is performing the functions of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Chief Executive Officer has concluded that, as of July 31, 2017, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the fiscal year ended July 31, 2017, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Generex Biotechnology Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management did not evaluate the effectiveness of the Company’s internal control over financial reporting as of July 31, 2017.
As of July 31, 2015, the Company became eligible to report as a smaller reporting company. As a smaller reporting company under the SEC rules and regulations, we are currently not subject to the requirements of independent auditor attestation of management’s assessment of our internal controls over financial reporting set forth in Section 404(b) of the Sarbanes Oxley Act of 2002 because the Dodd Frank Wall Street Reform and Consumer Protection Act signed into law on July 21, 2010 permanently exempted companies that are not “accelerated filers” or “large accelerated filers” under the SEC rules from Section 404(b) requirements; therefore, this Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Item 9B
Item 9B - Other Information.
Reference is made to the disclosure set forth under the caption Sales of Unregistered Securities in Item 5 of this Annual Report on Form 10-K, which is incorporated by reference herein.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
EXECUTIVE OFFICERS AND DIRECTORS OF GENEREX
Joseph Moscato. Mr. Moscato serves as the Company’s Chief Executive Officer, President, and Chairman of the Board.
Mr. Moscato has over 30 years of experience in healthcare, sales and marketing, distribution management, and finance. Mr. Moscato brings his marketing and advertising acumen to drug discovery and diagnostic & treatment development and commercialization. Since 2009, Mr. Moscato has been working as an exclusive consultant to the Company. Mr. Moscato has originated and negotiated several licensing deals with the top biopharmaceutical companies; has advised on equity financings totaling over $300 million, and has implemented the broad strategic vision for the Company. Mr. Moscato has worked and consulted for Pfizer in several capacities from sales and marketing to new drug discovery & development for licensing. He has worked with other biopharmaceutical companies such as GlaxoSmithKline, Johnson & Johnson, Parke-Davis, Amgen and others. Mr. Moscato has consulted for several healthcare focused private equity, hedge funds and family offices.
Mr. Moscato also owned several advertising and marketing agencies focused on media, entertainment, and healthcare with clients ranging from Motorola, Chadmoore Wireless, Nextel, Cannon, Sharp, GlaxoSmithKline, Pfizer, and other biopharmaceutical companies. Mr. Moscato’s agency was acquired by William Douglas McAdams, one of the largest independent healthcare advertising and marketing agencies.
Andrew Ro. Mr. Ro serves as the Company’s Chief Investment Officer and a Director.
Mr. Ro has over 20 years’ experience in the financial markets ranging from trading global futures and equity markets, senior secured debt, convertible securities, private investments in public equities (PIPEs) and investing. Mr. Ro was a Consultant and Registered Representative with boutique investment and merchant banks where he consulted and advised US and international companies on capital markets, operational, and regulatory issues as well as being involved in capital raising, mergers & acquisitions, and strategic implementation. Mr. Ro was a Partner with an active Investment Fund where he was involved in originating, structuring, negotiating and closing financing transactions providing growth capital, acquisition financing, recapitalization, restructuring and general working capital to late-stage venture, distressed and middle market companies across all industries and sectors. Mr. Ro originated and structured over $2 billion in total commitments and managed a portfolio of over $650 million in investments. Mr. Ro graduated from George Mason University with a Bachelor in Science in Economics. He also held Series 3, Series 7, and Series 63 licenses.
Dr. Gary H. Lyman, MD, MPH, FASCO, FRCP (Edin). Dr. Lyman serves as an independent Director.
Dr. Lyman is Co-Director of the Hutchinson Institute for Cancer Outcomes Research and Member of the Public Health Sciences and Clinical Research Divisions at the Fred Hutchinson Cancer Research Center. He is also Professor of Medicine as well as Adjunct Professor in the Schools of Public Health and Pharmacy at the University of Washington.
Dr. Lyman received his undergraduate and medical degree from the State University of New York in Buffalo and completed his Internal Medicine Residency at the University of North Carolina in Chapel Hill and Hematology/Oncology Fellowship at the Roswell Park Memorial Institute. Dr Lyman subsequently pursued a Postdoctoral Fellowship in Biostatistics at the Harvard School of Public Health and the Dana Farber Cancer Center. After joining the faculty of the University Of South Florida College Of Medicine, Dr Lyman served as Assistant, Associate and then full Professor of Medicine and Director of Medical Oncology. Shortly after his arrival, Dr Lyman began working with Lee Moffitt and leadership of the University to develop plans for the eventual H Lee Moffitt Cancer Center and Research Institute where he served as the founding Chief of Medicine and Director of the Division of Medical Oncology as well as Associate Chairman of the Department of Medicine at USF. During this period, he also served as Professor of Medicine and Professor of Epidemiology and Biostatistics at the University of South Florida. Upon leaving the Moffitt in 2000,
Dr. Lyman has held positions as Thomas Ordway Endowed Professor of Medicine and Cancer Center Director at the Albany Medical College and subsequently Professor of Medicine, Associate Cancer Center Director and Director of Health Services and Outcomes Research at the University of Rochester and Strong Memorial Hospital. Prior to relocating to his present position, Dr Lyman served as Professor of Medicine and Director of Comparative Effectiveness and Outcomes Research-Oncology at Duke University and the Duke Cancer Institute and a Senior Fellow at the Duke Center for Clinical Health Policy Research.
Dr. Lyman is active with the American Society of Clinical Oncology serving recently on the ASCO Board of Directors chairing the Guideline Methodology Committee and several individual guidelines including those related to Prevention and Treatment of Venous Thromboembolism in Cancer, Sentinel Node Biopsy in Early-Stage Breast Cancer and Melanoma, Use of Antiemetics in Patients Receiving Cancer Chemotherapy and Appropriate Chemotherapy Dosing in Obese Patients with Cancer. Dr Lyman is also a member of the Value of Cancer Care Task Force and Cancer Research Committee along with several additional roles within the Society. In 2010 Dr Lyman received the ASCO Statesman Award. He is also active in the American Association for Cancer Research and the Institute of Medicine as well as the American Society of Hematology where he serves on the Quality and Guideline Oversight Committees and Chairs the forthcoming guideline on cancer and thrombosis. Finally, Dr Lyman is active with SWOG serving as Executive Office for the SWOG NCORP and Symptom Management and Quality of Life Committee.
Dr Lyman is Editor-In-Chief of Cancer Investigation and on the Editorial Board of the Journal of Clinical Oncology, the Journal of Global Oncology and several other specialty journals. In addition to serving as a Fellow of ASCO, Dr Lyman is a Fellow of the Royal College of Physicians (Edinburgh), the American College of Physicians, and the American College of Preventive Medicine. His research interests include precision medicine based on personalized cancer treatment and supportive care, comparative effectiveness and outcomes research related to biomarkers and targeted therapies, mathematical and statistical prognostic and predictive models, advanced methods of evidence synthesis in support of clinical practice guidelines and population studies of patterns of cancer treatment and the impact of health disparities on the quality of cancer care. Dr Lyman has authored or edited more than 15 books and nearly 600 articles in the scientific literature.
Dr. Craig Eagle, MD. Dr. Eagle serves as an independent Director.
Dr. Eagle serves as Vice President of Strategic Alliances and Partnerships for the Oncology business unit at Pfizer Inc. In 2003, Dr. Eagle led the worldwide development of Celecoxib in oncology to oversee the global research program. He was responsible for the global research plans and teams for Irinotecan and Dalteparin. Since 2007, he served as Head of the Oncology Therapeutic Area Global Medical Group for Pfizer, including the US oncology business. Dr. Eagle led, or been directly involved with, teams that resulted in eight new products or indications. He has led integration of the Pfizer/Wyeth oncology businesses and portfolio.
Dr. Eagle has a wealth of oncology experience. He joined Pfizer Australia in 2001 as part of the medical group. In Australia, his role involved leading and participating in scientific research, regulatory and pricing & re-imbursement negotiations for compounds in therapeutic areas including oncology, anti-infectives, respiratory, arthritis and pain management.
Dr. Eagle has been a Member of Scientific Advisory Board at Generex Biotechnology Corp. since August 2010. He has been a Member of Strategic Advisory Board at Provectus Pharmaceuticals, Inc. since August 2011. He has been a Director of Regenicin, Inc. since September 7, 2010. He has been a Director at Assured Pharmacy Inc. since June 2009.
Dr. Eagle attended Medical School at the University of New South Wales, Sydney, Australia and received his general internist training at Royal North Shore Hospital in Sydney. He completed his hemato-oncology and laboratory hematology training at Royal Prince Alfred Hospital in Sydney. He was granted Fellowship in the Royal Australasian College of Physicians (FRACP) and the Royal College of Pathologists Australasia (FRCPA). After his training, Dr. Eagle performed basic research at the Royal Prince of Wales hospital to develop a new monoclonal antibody to inhibit platelets.
Dr. James H. Anderson, Jr., MD. Dr. Anderson serves as an independent Director.
Dr. Anderson has served as Director of the Company since June 2011. Dr. Anderson has previously served as Chairman of the Corporate Governance and Nominating Committee and a member of the Generex Compensation and Audit Committees, and has served on the Generex Scientific Advisory Board since October 2010. Dr. Anderson is a diabetologist and endocrinologist who has been in the pharmaceutical industry for over 25 years. He is currently CEO and President of Symcopeia, a private drug discovery and development company focused on new mechanisms of action for the treatment of diabetes mellitus, and diabetes related obesity and cardiovascular diseases. Dr. Anderson also serves as medical director of PTS Diagnostics, a cardiometabolic medical device company. From 2005 to 2009, Dr. Anderson served as Senior Medical Director for Diabetes and Cardiometabolic Medicine with Eli Lilly and Company and had medical responsibility for diabetes and cardiometabolic drug development, and drove the clinical development, registration and launch of two families of diabetes care products, Humulin® and Humalog. At Eli Lilly, Dr. Anderson contributed to the inventions of the first recombinant DNA produced human insulin analog products, led multiple clinical drug development projects, was responsible for 6 US NDAs and had clinical responsibility for all insulin products worldwide. Dr. Anderson is an elected Fellow of the Faculty of Pharmaceutical Medicine of the Royal Colleges of Physicians of the UK, was a founding board member of the American Association of Pharmaceutical Physicians and is a Fellow of the American College of Endocrinology. Dr. Anderson has been active in the American Diabetes Association and is a member of the International Diabetes Federation, the European Association for the Study of Diabetes, and the Endocrine Society. Dr. Anderson is a founding editorial board member of two journals for diabetes, and serves on the editorial boards or as a reviewer for 5 other diabetes/endocrine journals. Dr. Anderson is a Clinical Associate Professor of Medicine for the Division of Endocrinology and Metabolism at the Indiana University School of Medicine and was awarded an M.D. from the LSU School of Medicine. Dr. Anderson attained the rank of Lieutenant Colonel in the US Army Medical Corps and during his military career, he served as the Chairman, Department of Clinical Investigation at the Army’s largest healthcare center, and Chief of the Medical Division of the US Army Medical Research Institute for Infectious Diseases. The Board believes that Dr. Anderson’s extensive experience in the pharmaceutical industry, his experience in the diabetes and endocrinology fields, combined with his business experience and judgment, provide our Board with valuable scientific and operational expertise.
Brian T. McGee. Mr. McGee serves as an independent Director.
Mr. McGee has served as director of Generex since 2004. Mr. McGee has served as Chairman of the Generex Audit Committee and a member of the Generex Compensation and Corporate Governance and Nominating Committees. Mr. McGee has been a partner of Zeifmans LLP ("Zeifmans") since 1995. Mr. McGee began working at Zeifmans shortly after receiving a B.A. degree in Commerce from the University of Toronto in 1985. Zeifmans is a Chartered Accounting firm based in Toronto, Ontario. A significant element of Zeifmans’ business is public corporation accounting and auditing. Mr. McGee is a Chartered Accountant. Throughout his career, Mr. McGee has focused on, among other areas, public corporation accounting and auditing. In 1992, Mr. McGee completed courses focused on International Taxation and Corporation Reorganizations at the Canadian Institute of Chartered Accountants and in 2003, Mr. McGee completed corporate governance courses on compensation and audit committees at Harvard Business School. In April 2004 Mr. McGee received his CPA designation from The American Institute of Certified Public Accountants. Mr. McGee has received a certificate in International Financial Reporting Standards issued by The Institute of Chartered Accountants in England and Wales in 2010. The Board believes that Mr. McGee’s knowledge and understanding of accounting and finance, his education and training in accounting and corporate governance, and his extensive experience in the accounting industry.
Lawrence Salvo. Mr. Salve served as Generex Executive VP of Diagnostics and President of Hema Diagnostic Systems until March 2017, and therefore is not independent.
Mr. Salvo has over 20 years of experience in the design and development of rapid medical diagnostic tests for infectious diseases and over 30 years has successfully been directly involved in the management of international distribution and sales including high technology areas in electro-optics and other technical design applications. During that time, Mr. Salvo has developed and maintained substantial and long-term relationships within the People’s Republic of China as well as throughout South and Central America and into the African Continent. His experience includes direct interaction with such international organizations as the WHO, the Global Fund, USAID, the European Union and with multiple supply-chain management groups and multiple NGO’s. Mr. Salvo has been the primary force behind the concept of the design and development of the patented delivery systems of Hema Diagnostic Systems, which are incorporated into many of the current and future RDT’s for various infectious diseases as well as detection applications. These delivery systems continue to evolve and expand the application of rapid testing and are configured for human and veterinary uses.
Mr. Salvo is the founder of Hema Diagnostic Systems which grew out of the predecessor company, International Diagnostics and Medical Supply and has also been directly responsible for all international negotiations. Since leaving Hema Diagnostic Systems, Mr. Salvo has engaged in consulting activities. Mr. Salvo brings the full weight of his international experience, development and design expertise along with his substantial knowledge of the international RDT markets acquired from throughout the world. He is a graduate from St. Vincent de Paul Major Seminary, Boynton Beach, Florida
Dr. Jason B. Terrell, MD. Dr. Terrell serves as the Company’s Chief Scientific Officer and Chief Medical Officer.
Dr. Terrell has extensive expertise in the pharmaceutical and medical diagnostic device industry in the areas of business development, clinical trial organization, regulatory affairs and commercialization strategies. Dr. Terrell has served as medical director and chief medical officer for several public and private companies like VolitionRx, a NYSE traded international medical diagnostic company. Dr. Terrell previously served as a Corporate Medical Director for Any Lab Test Now, the nation’s largest direct to consumer medical testing franchise, where he supervised clinical operations for over 70 locations throughout the United States. Dr. Terrell is a summa cum laude graduate from Hardin-Simmons University with a degree in Biochemistry. He graduated as recipient of the Holland Medal of Honor for the top graduate in the School of Science and Mathematics. Dr. Terrell was honored with the Hardin-Simmons University Outstanding Young Alumni Award and currently serves on the University’s Board of Development. Dr. Terrell attended The University of Texas School of Medicine in Houston and received General Medicine Internship and Pathology Residency training at the Texas Tech University Health Sciences Center.
Dr. Jacob Dagan, Ph.D. Dr. Dagan serves as the Company’s Executive Vice President, Business Development.
Dr. Dagan is a senior executive, with more than 25 years of proven success, in: healthcare management, corporate and product development, in the US. Combining extensive experience, in operations, marketing, sales and hospital management, with strong bio medical scientific skills. In 2005 founded with partners ProMed Capital, LLC, an investment organization investing in Israeli medical device startups. Since 2006 invest in eight companies, and six more are in the pipe line. In each company, hands on involvement as active manager, board member or chairman of the board. Continues to own and operate Medical Service Options (MSO-Israel). Member on the Board of Governors of the Technion-Israel Institute of Technology.
In 2013 founded three startups and applied for patent protection for each, covering the fields of New Laser printer, Orthodental brace for bone stimulation and an oral drug delivery device. In 2015 moved back to the USA and started MSO-USA, involved as CEO of two Israeli startups, Meditemp and AlfaRhythm. In 2016 started a corporation for contract development and manufacturing of medical and health related lasers. Currently acts as CEO of a multi-specialty surgical corporation in the City of New York.
Past Director of BioMedical Engineering at Sheeba Medical Center and Associate Professor of Bio-Medical Engineering at Tel Aviv University. Held senior management positions with Sharplan Lasers, developing the field of applications of Lasers in Medicine. Has been involved in fund raising and strategy consulting to Bio-Medical, Bio-Technology companies and on the Board or in operating responsibilities of several start-ups in Israel and the USA.
Received Doctorate from Columbia University focusing on Nuclear Medicine applications in Cardiology B.Sc in Mechanical and Nuclear Engineering and an MSc in Nuclear Sciences from the Technion, Israel Inst. of Technology.
Richard Purcell. Mr. Purcell serves as the Company’s Senior Vice-President of Research & Drug Development.
Mr. Purcell has over 30 years of experience in consulting and advising emerging biopharmaceutical and technology companies on new business strategy, operations management, clinical development of novel compounds, data solutions for clinical and medical applications, patient engagement & communication, medical education for professionals and consumers, and data analytics for outcomes research. Mr. Purcell oversaw strategic planning, clinical operations, data management, regulatory filings, and R&D and was involved with business development and out-licensing activities for the company’s technology platform.
He started his career as a molecular biologist, where he developed and patented a second generation TPA with increased half-life. He also worked at a major pharmaceutical company where he conducted primary research and published several manuscripts on the topics of AIDS and immunomodulators. Mr. Purcell also headed the Life Sciences Consulting Group for Kline and Company, where he conducted market, technology and business analysis for the commercial development of pharmaceutical and biotechnology products for therapeutic and diagnostic applications.
Rich graduated with a degree in Biochemical Sciences from Princeton University, and attended Rutgers Graduate School of Management majoring in marketing and finance. He is a member of NJTC, HIMSS, the Patient-Centered Primary Care Collaborative, the Drug Information Association and the Licensing Executives Society. He is also an Adjunct Professor of Biology at Monmouth University where he developed and teaches The Business of Biotechnology.
Mark Corrao. Mr. Corrao serves as the Company’s Chief Financial Officer, Treasurer.
Mr. Corrao has experience in financial management with a proven track record of raising capital and extraordinary bottom line management. He has been involved in the initial registration of numerous public companies and subsequent SEC quarterly and annual reporting and has developed, authored and presented numerous business plans and models inclusive of budgets, forecasts, cash flow, cash management and investment strategies. From 2012 to present he has been a Managing Director and CFO of The Mariner Group LLC, which has merged with the CFO Squad, creating a much larger and diverse multi-talented organization. The CFO Squad is a financial and business advisory firm providing outsourced and part-time CFO services for emerging to midsized companies (both private and public) in a wide range of businesses and industries. He has been the Chief Financial Officer and a director for a pharmaceutical company specializing in the research and development of novel and new therapeutic agents designed to reduce oxidative stress and act as immune modulators and Neuroprotectants. From 2010-12, he served as Chief Financial Officer of New York Business Efficiency Experts, Inc. which provides professional services in the financial areas of accounting, taxation, auditing, venture capital and SEC registrations (reporting). He served as a Director and Chief Financial Officer for a manufacturer of proprietary software for the prevention of identity theft and the protection of computer systems from unauthorized access. Additionally, Mr. Corrao is currently the CFO for a software company.
Mark A. Fletcher, Esq. Mr. Fletcher serves as the Company’s Executive Vice President & General Counsel, Secretary.
Mr. Fletcher served as our President and Chief Executive Officer from September 2010 through January 17, 2017. Mr. Fletcher served as a member of the Board of Directors from March 2011 through January 17, 2017. Mr. Fletcher was our Executive Vice-President and General Counsel from April 2003 until September 2010, and he resumed those roles as of January 17, 2017. Prior to joining Generex, Mr. Fletcher was engaged in the private practice of law as a partner at Goodman and Carr LLP, a leading Toronto law firm. Mr. Fletcher was previously a partner at Brans, Lehun, Baldwin LLP, a law firm in Toronto. Mr. Fletcher received his LL.B. from the University of Western Ontario in 1989 and was admitted to the Ontario Bar in 1991.
Non-Employee Directors' Compensation
No cash fees, stock awards, stock options or other compensation was paid or awarded to any Generex director in Fiscal 2017.
Following the Company’s Annual Meeting to be held in November 2017, the Board of Directors will repopulate its Compensation Committee which will review and approve a compensation program for the Company’s non-employee directors in respect of the fiscal year ending July 31, 2018, which compensation program will be disclosed in a Form 8-K Current Report filed by the Company with the SEC.
Our policy for compensation of non-employee directors in the past was as follows.
• Non-employee directors (other than the non-executive chairman of the board) receive an annual cash based retainer of $40,000.
• The non-executive chairman of the board receives an annual cash based retainer of $100,000 per year.
• At the discretion of the full Board of Directors, nonemployee directors may receive stock options to purchase shares of our common stock or shares of restricted stock each fiscal year. The number and terms of such options or shares is within the discretion of the full Board of Directors.
• Nonemployee directors serving on committees of the Board of Directors receive additional cash compensation as follows:
Directors who are officers or employees of Generex or its subsidiaries do not receive separate consideration for their service on the Board of Directors.
CORPORATE GOVERNANCE
Code of Ethics
Generex has adopted a code of ethics that applies to its directors and the following executive officers: the President, Chief Executive Officer, Chief Financial Officer (principal financial/accounting officer), Chief Operating Officer, any Vice-President, Controller, Secretary, Treasurer and any other personnel performing similar functions. We also expect any consultants or advisors whom we retain to abide by this code of ethics. The Generex Code of Ethics has been posted on Generex's Internet web site - www.generex.com.
Board Structure; Risk Oversight; Risk Assessment of Compensation Policies and Practices
The business affairs of Generex are managed under the direction of our Board of Directors. The Board is actively involved in oversight of risks that could affect Generex. In the past, this oversight was conducted primarily through the separate standing committees of the Board. In fiscal 2016, due to the Company’s then exceptional circumstances, including the attrition of directors over the last two fiscal years and the Company’s limited operations and diminished financial condition, the Board’s established standing Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee ceased functioning. Thus, the full Board has retained responsibility for oversight of risks. The Board satisfies this responsibility through regular reports directly from officers responsible for oversight of particular risks within Generex. The Board believes its administration of its risk oversight function has not affected the Board's leadership structure. We have not re-constituted our Compensation Committee or Corporate Governance and Nominating Committee since the changes in our management and addition of directors on January 17, 2017. We anticipate reconstituting these committees shortly after the Special Meeting. Our Audit Committee consists of Mr. McGee and Mr. Ro. Mr. Ro is not independent, and therefore the Company is non-compliant with NASDAQ the audit committee rules at his time. The Company expects to appoint other independent directors to the Audit Committee and remove Mr. Ro from the Audit Committee shortly after the Special Meeting, to enable the Audit Committee to comply with the NASDAQ audit committee independence rules.
Board Meetings; Board Committees
During the fiscal year ended July 31, 2017, the Board of Directors met on four occasions and took action by consent on one occasion. Other than Dr. Lyman, no director participated in less than 75% of the meetings. There were no committee meetings during fiscal 2017.
Audit Committee
During fiscal 2016 and the first half of fiscal 2017, the full Board acted as the Audit Committee. We have recently re-constituted the Audit Committee with Mr. McGee as Chairman, and Mr. Ro.
The Audit Committee reviews and discusses with Generex's management and its independent auditors the audited and unaudited financial statements contained in Generex's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Although Generex's management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls and disclosure controls and procedures, the Audit Committee reviews and discusses the reporting process with management on a regular basis. The Audit Committee also discusses with the independent auditors their judgments as to the quality of Generex's accounting principles, the reasonableness of significant judgments reflected in the financial statements and the clarity of disclosures in the financial statements, as well as such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards. Our Board of Directors has determined that at least one person, Mr. McGee, serving on the Audit Committee is an "audit committee financial expert" as defined under Item 407(d)(5)(ii) of Regulation S-K. The Audit Committee has adopted a written charter, a copy of the Audit Committee Charter is attached as Appendix A to this proxy statement.
Compensation Committee
In fiscal 2017, the full Board assumed the responsibilities of the Compensation Committee except that Mr. Fletcher did not participate in determinations regarding the compensation to be paid to him in his role as a named executive officer of the Company.
The Compensation Committee had responsibility for reviewing and recommending to the Board of Directors compensation programs and policies for our President and Chief Executive Officer, our Chief Operating Officer and Secretary, and our Chief Financial Officer and Treasurer, who comprised Generex’s executive management team during the first half of 2017, and will have responsibility for reviewing and recommending compensation programs and policies for officers appointed in January 2017.
The Compensation Committee does not delegate its authority. Executive officers (other than Mr. Fletcher) do not attend meetings of the Compensation Committee. The Compensation Committee does not have a charter. It has the authority to use a compensation consultant to assist the Compensation Committee in the evaluation of the compensation of our executive management team and other executive officers and to consult with other outside advisors to assist in its duties to the Company, but in fiscal 2016 it did not engage any compensation consultants or engage in benchmarking activities. The Compensation Committee does not have a written charter.
Corporate Governance and Nominating Committee
In fiscal 2017, we did not have a separate standing Corporate Governance and Nominating Committee, and no action was taken by the full Board functioning as the Committee.
The Corporate Governance and Nominating Committee will consider candidates whom the stockholders of Generex put forward. The name, together with the business experience and other relevant background information of a candidate, should be sent to Mark Fletcher, Secretary of Generex, at Generex’s offices located at 4145 North Service Road, Suite 200, Burlington, Ontario, Canada L7L 6A3. Mr. Fletcher will then submit such information to the chair of the Corporate Governance and Nominating Committee for the Committee’s review and consideration. The process for determining whether to nominate a director candidate put forth by a stockholder is the same as that used for reviewing candidates submitted by directors. After full consideration, the stockholder proponent will be notified of the decision of the committee.
The Corporate Governance and Nominating Committee is responsible for seeking to identify director candidates with the highest personal and professional ethics, integrity and value and diverse experience in business, finance, pharmaceutical and regulatory matters, and other matters relevant to a company such as Generex and who have sufficient time to devote to the company’s affairs. The charter of the Corporate Governance and Nominating Committee sets forth the policy with regard to the consideration of diversity in identifying director nominees and calls for periodic review of director recruitment and selection protocols so that diversity remains a component of any director search. The Corporate Governance and Nominating Committee is charged with developing a formal list of qualifications for members of the Board of Directors as mandated by its charter and criteria to assist the Board in attaining diversity of background and skills in director candidates, but the Committee has yet to develop such a list or criteria. To date, the Corporate Governance and Nominating Committee has not engaged any third party to assist it in identifying director candidates.
In accordance with our bylaws, the Board of Directors is permitted to increase the number of directors and to fill the vacancies created by the increase until the next annual meeting of stockholders.
Item 11.
Item 11. Executive Compensation.
Compensation, Discussion & Analysis
Compensation Philosophy
We did not have sufficient resources to pay any cash compensation to our named executive officers in fiscal 2017 or subsequently through the date of this Proxy Statement, and did not pay compensation of any kind to our executive officers in fiscal 2017 or 2016 other than salaries for the period from August 1, 2015 through October 23, 2015 and certain options issued in October 2015, in satisfaction of accrued and unpaid salary, as discussed in detail below. The following discussion of our philosophy assumes we have the resources to follow that philosophy.
We are a development stage company focused on research, development, and commercialization of our proprietary drug delivery platform for administration of large molecule drugs to the oral cavity through a hand-held aerosol spray applicator. We are in the process of developing proprietary formulations of drugs that can be delivered through an oral spray thereby eliminating the need for injections and have focused on our Oral-lyn™ insulin formulation, which is administered as a spray into the oral cavity. Our majority owned subsidiary, Hema Diagnostic Systems, LLC, markets and distributes rapid test devices for infectious diseases. We also have a subsidiary, Antigen Express, which focuses on developing proprietary immuno-medicines.
In addition to our existing businesses, our strategic plan is to acquire full ownership, or controlling interests, in companies with promising pharmaceutical and related products in development.
As a development stage company, our future depends on the ability of our executives to obtain necessary regulatory approvals to launch products in key markets such as the United States, Canada, and Europe, as well as furthering the development of products in our pipeline through the clinical trial and regulatory processes. Attracting, retaining, and motivating key executives who can lead Generex through these processes is critical to our success. We have a small executive team that works together closely. Our executives perform multiple roles and need to be able to respond to changing market dynamics quickly.
For these reasons, we seek to ensure that our compensation programs are competitive with similarly sized companies with which we compete for executive talent. The goals of our executive compensation program are to attract and retain top executives, to motivate executives to achieve our business objectives, to align executive and shareholder interests, and to recognize individual contributions and overall business success.
The Compensation Committee of the Board of Directors evaluates the types and amounts of compensation that it believes are appropriate for our policy making executives. We refer herein to these executives as the “named executives.” In prior years, before our recent change in management, we identified our President and Chief Executive Officer, Chief Operating Officer and Chief Financial Officer as our named executives. We have also included Dr. von Hofe, the President of our subsidiary, Antigen Express. We expect to reassess this when our Compensation Committee is re-formed.
In addition to the compensation of our named executives, the Compensation Committee also reviews and approves the compensation of members of our senior management.
Historically, the key components of our executive compensation have been base salary, cash bonuses, and equity incentives, including stock bonuses, restricted stock, and stock options awarded at the discretion of our Compensation Committee and Board of Directors. As a development stage company, we have reviewed compensation of our named executives annually and at the discretion of the Compensation Committee as warranted by our financial condition and achievement of our business goals. While the elements of compensation are considered separately, the Compensation Committee ultimately considers the value of the total compensation package provided to the individual named executive.
The Compensation Committee believes the company’s compensation program must take into account the following factors:
• past levels of compensation adjustments;
• the expected transition of the company from a development stage company to an operating company;
• the nature of the regulatory approval process for the Company’s products; and
• the potential for growth of the company in the event that regulatory approvals are obtained.
In fiscal 2016, the Compensation Committee did not implement any changes to base salaries for any of the named executives and did not award any equity incentive awards or cash bonuses to the named executives during fiscal 2016 for fiscal 2015 performance and contributions. The Compensation Committee has not made any determinations as to compensation or equity awards for the named executives with respect to performance or contributions for the fiscal year ended July 31, 2016.
In administering the executive compensation program, our Compensation Committee has relied upon market data provided on a periodic basis by external consultants, as well as its own understanding and assessment of executive compensation trends. In its consideration of compensation for the named executives, the Compensation Committee has reviewed compensation data for pharmaceutical and biotechnology companies in the past, market data provided by external compensation consultants, compensation data compiled by a third-party compensation data firm and publicly available executive compensation data for publicly traded companies.
Use of Compensation Consultant and Benchmarking
In the fiscal year ended July 31, 2017, the Compensation Committee did not engage any compensation consultants or engage in benchmarking activities. The Compensation Committee last undertook a comprehensive review of compensation and engaged a compensation consultant in November 2009.
Determination of Compensation
In prior years, the Compensation Committee typically made compensation determinations, including any increases in base salary for the next calendar year and any bonuses in respect of the prior fiscal year, before or during the first calendar quarter of each year. The Compensation Committee followed such a schedule in order to eliminate the need to award retroactive salary increases. In addition, the Compensation Committee has typically reviewed compensation arrangements in the first calendar quarter to ensure that compensation levels are appropriate in light of Generex’s financial position and performance at that time. Due to the financial position of the Company, the Committee did not follow such a schedule in fiscal 2016, as there were no salary changes or bonus awards made. The company last made changes and awarded bonuses prior to the end of fiscal 2013. Because of the Company’s financial position, no increases were made to base salary, nor were any cash bonuses or stock incentive awards granted to the named executives during fiscal 2016 or 2017.
Components of Compensation
Base Salary
Base salary provides a fixed amount of compensation necessary to retain key executives. It is guaranteed compensation to the named executives for performance of core duties. Historically, base salaries for the named executives may be adjusted upon recommendation by the Compensation Committee and ratification by the Board of Directors, and annual base salaries for the named executives have been reviewed periodically relative to the base pay levels for each executive’s position based on the peer group. The Compensation Committee last undertook such a review in November 2009. Levels of base salary were generally targeted at the market’s second quartile (51% - 75%), but also reflect the compensation goals adopted by the Compensation Committee, operational goals determined by management, the named executive’s individual performance, contribution of the named executive to overall corporate performance, and the level of responsibility of the named executive with respect to his or her specific position. The level of base salary also reflects multiple titles and additional responsibilities of the named executives driven by the operational needs of the company.
Cash Bonuses
Historically, performance-based compensation has been a key component of our compensation philosophy. In the past, cash bonuses have been provided to attract, motivate, and retain highly qualified executives on a competitive basis and provide financial incentives that promote company success. From time to time in the past, the Compensation Committee has granted bonuses to reward achievement relative to specific performance objectives. In awarding bonuses, the Compensation Committee considers various factors, including the named executive’s position within Generex, attainment of specific business objectives and performance milestones, and the named executive’s individual contributions thereto. The Committee exercises discretion with respect to the weight that it gives to these and other factors in determining bonuses. The Compensation Committee also retains discretion with respect to whether any bonuses are paid to the named executives, the amounts of any such bonuses, and the form of any such bonuses.
The Compensation Committee did not grant or accrue any bonuses in fiscal 2017, in consideration of the financial position of the Company.
Long-Term Incentives and Equity Awards
Historically, our compensation program has included long-term incentive compensation in the form of equity grants subject to a vesting schedule. We believe such incentive compensation further aligns the interests of management with those of stockholders and enhances shareholder value. Currently, we do not have any long-term cash incentive programs in place for the named executives.
Long-term equity incentive grants have been discretionary. In determining whether such grants are warranted, the Compensation Committee has considered our compensation strategy, market practice concerning long-term incentives provided to executives at peer companies and within the broader market, and the named executive’s specific roles within Generex. Typically, equity incentive awards were granted subject to vesting over a period of time and were not tied to specific performance measures.
Equity grants have historically been made through stock options under our various plans, including Generex’s 2001 Stock Option Plan, as amended, and the Amended and Restated 2006 Stock Plan, which also allows grants of restricted stock. We consider the costs to the Company of granting stock options under Statement of Financial Accounting Standard (SFAS) 123(R) as compared to the costs to named executives of higher income tax liabilities associated with the granting of restricted stock.
There were no discretionary awards of options to purchase shares of our common stock to our named executives in fiscal 2016, with the exception of the following. The Company granted options to purchase, in the aggregate, 15,393,363 shares of our common stock to the named executives and Dr. von Hofe in full and final payment of obligations to pay such individuals deferred salary accrued during up to October 15, 2015. The options were issued in lieu of cash payment of compensation amounts due to such individuals. The number of options granted to each individual was equal to the dollar amount of deferred salary or fees due to such individual divided by $0.015. The stock options had an exercise price equal to $0.001 per share and were made pursuant to the terms of the Company's 2006 Stock Plan. The options were fully vested at on October 26, 2015 and will expire on the fifth anniversary of the date of grant. The grants were valued at the amount of deferred compensation owed to each such individual.
The number of options that the Compensation Committee recommended, and the Board of Directors approved, in respect of the above salary deferrals to the named executives described above were as follows:
Benefits and Perquisites
Named executives may participate in benefit plans that are offered generally to salaried employees such as short and long term disability, health and welfare benefits, and paid time off.
We provide very limited perquisites. During fiscal 2016, we did not provide any material perquisites.
We do not offer deferred compensation plans, defined benefit plans, supplemental executive retirement plans, supplemental life insurance, benefit restoration plans, or tax gross-ups on change-in-control benefits.
Employment and Severance Agreements
We do not have employment agreements, plans or arrangements, with any of our named executives whether written or unwritten, relating to compensation, termination of employment or a change in control. There are no benefits currently made available to our named executives which are in addition to benefits available generally to salaried employees.
We anticipate entering into employment agreements with all of our officers following the Special Meeting. We expect the employment agreements to provide for cash compensation as well as significant equity awards and incentives.
Other Benefit Plans
We have no defined benefit or actuarial pension plans.
As of the end of fiscal 2017, Mark Fletcher held stock options or restricted stock granted pursuant to either the 2001 Stock Option Plan or the 2006 Stock Plan. No other executive officers held options at the end of 2017. Plan provides that outstanding options will become immediately exercisable and vested upon a change in control, unless the Board of Directors or its designee determines otherwise. In the event that Generex will not be the surviving corporation, the Board or its designee has flexibility under the 2001 Plan to determine how to treat stock options. The 2001 Plan does not condition the acceleration and vesting of stock options in such an event upon an option holder’s termination of employment; however, the terms of the 2001 Plan provide that, unless otherwise provided by the Board or its designee, an option holder can exercise outstanding options after the date of his or her termination of employment only if the option holder voluntarily terminated employment with Generex or was terminated without cause by Generex. Under the terms of the 2006 Plan, unvested stock options and restricted stock will become exercisable or unrestricted, as applicable, thirty days prior to the change-in-control event and such acceleration is not conditioned upon the termination of a participant’s employment with Generex. The 2006 Plan further provides that if Generex is not the surviving corporation as a result of a change in control, all outstanding options that are not exercised will be assumed by, or replaced with comparable options or rights by, the surviving corporation, and outstanding grants of restricted stock will be converted to similar grants of equity in the surviving corporation.
Tax and Accounting Considerations
Historically, the Compensation Committee has considered implications of tax and accounting requirements impacting compensation programs from the perspective of the Company and the individual named executives. The Compensation Committee may also consider sections of the tax code which impact Generex or individual taxpayers. For U.S. taxpayers, the Committee structures its programs to comply with Section 409A of the Internal Revenue Code.
Given the high individual income tax liabilities which result from the awarding of restricted stock to our executives who are all tax residents of Canada, the Compensation Committee expects to grant future equity awards in the form of stock options for the foreseeable future.
Compensation Committee Report
The full Board of Directors of Generex Biotechnology Corporation performing the functions of the Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the full Board of Directors recommended and determined that the Compensation Discussion and Analysis be included in Generex’s Annual Report on Form 10-K for the year ended July 31, 2017 and in the proxy statement for the 2017 annual meeting.
THE BOARD OF DIRECTORS
Brian T. McGee
James H. Anderson, Jr.
Mark A. Fletcher
Executive Compensation Tables
The following executive compensation tables pertain to the fiscal year ended July 31, 2016. Therefore, the tables contain information relating to the named executives who served as of the fiscal year end and refer to the positions held by such named executives as of July 31, 2016.
Summary Compensation Table
The following table provides information concerning compensation of Generex’s named executives for Generex’s last completed fiscal year ending July 31, 2017. In respect of that fiscal year, the named executives did not receive compensation in the form of non-equity incentive plan compensation or changes in pension value or non-qualified deferred compensation earnings. Therefore, the table below does not include columns for these types of compensation. The salaries indicated below represent the actual cash amounts paid. The Company did not have sufficient funds to pay the previously agreed upon base salaries. Option exercisable at $$1.00 per share (adjusted for the subsequent 1 for 1,000 reverse stock split) were issued in lieu of cash compensation.
The cash compensation listed under “Bonus” for each officer in 2017 represents a one-time payment made in June, 2017. No other compensation was paid to any executive officer in the fiscal year ended July 31, 2017.
*Cash compensation is stated in the table in U.S. dollars. To the extent any cash compensation was paid in Canadian dollars, it has been converted into U.S. dollars based on the average Canadian/U.S. dollar exchange rate for the year ended July 31, 2016.
All officers other than Mr. Fletcher assumed office in January 2017.
(1) This amount reflects an annualized base salary of $285,848.
No executive officer or key employee received compensation in Fiscal 2017.
No stock options were awarded in the fiscal year ended July 31, 2017.
Compensation Elements; Employment Agreements and Agreements Providing Payments Upon Retirement, Termination or Change in Control for Named Executives
Historically, the key components of our executive compensation have been base salary, cash bonuses, and equity incentives, including stock bonuses, restricted stock, and stock options awarded at the discretion of our Compensation Committee and Board of Directors. As a development stage company, we have reviewed compensation of our executive management team from time to time and at the discretion of the Compensation Committee when warranted by our financial condition and achievement of our business goals.
Set forth below are the material terms of employment for the President and Chief Executive Officer as of the end of fiscal 2016. The terms of employment provide for certain payments upon retirement, termination or change in control. Such benefits are in addition to benefits available generally to salaried employees who joined the company prior to 2013, such as distributions under the 401(k) savings plan, disability and death benefits and accrued vacation pay.
Other Benefit Plans
We have no defined benefit or actuarial pension plans.
Outstanding Equity Awards at 2017 Fiscal Year-End
The following table provides information on the current holdings of stock options by the named executives. This table includes unexercised and unvested option awards as of July 31, 2017. Each equity grant is shown separately for each named executive. The vesting schedule for each outstanding award is set forth in the footnotes to the table. We do not have any current “stock awards” or “equity incentive plans” referred to in Regulation S-K Item 402(p)(2); thus, the columns relating to stock awards and equity incentive awards are not included in the table below.
(1) These options were granted on March 8, 2010. The grants were made pursuant to the terms of our 2006 Stock Plan. The exercise price per share is equal to the closing price of Generex common stock on March 8, 2010. The options vested as follows: 33% of the options were exercisable on the date of grant; 33% of the options became exercisable on August 1, 2010, and the remaining 33% of the options became exercisable on August 1, 2011.
No other executive officers held options as of July 31, 2017.
Compensation Elements; Employment Agreements and Agreements Providing Payments Upon Retirement, Termination or Change in Control for Named Executives
Historically, the key components of our executive compensation have been base salary, cash bonuses, and equity incentives, including stock bonuses, restricted stock, and stock options awarded at the discretion of our Compensation Committee and Board of Directors. As a development stage company, we have reviewed compensation of our executive management team from time to time and at the discretion of the Compensation Committee when warranted by our financial condition and achievement of our business goals.
Set forth below are the material terms of employment for the President and Chief Executive Officer as of the end of fiscal 2016. The terms of employment provide for certain payments upon retirement, termination or change in control. Such benefits are in addition to benefits available generally to salaried employees who joined the company prior to 2013, such as distributions under the 401(k) savings plan, disability and death benefits and accrued vacation pay.
Other Benefit Plans
We have no defined benefit or actuarial pension plans.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners and Management
The table on the following pages sets forth information regarding the beneficial ownership of the common stock by our directors and named executive officers (including persons who served as principal executive officer and principal financial officer during a portion of the fiscal year ended July 31, 2017) and all the named executives and directors as a group. We are not aware of any person or group that beneficially owns more than five percent of our outstanding shares of common stock.
The information contained in this table is as of September 28, 2017. At that date, we had 1,065,093 shares of common stock outstanding.
A person is deemed to be a beneficial owner of shares if he has the power to vote or dispose of the shares. This power can be exclusive or shared, direct or indirect. In addition, a person is considered by SEC rules to beneficially own shares underlying options or warrants that are presently exercisable or that will become exercisable within sixty (60) days.
Beneficial Ownership
* Less than 1%.
(1)Consists of 156,400 shares of common stock issuable upon the conversion of 391 shares of Series I Preferred Stock
(2)Includes 15,606 shares and 300 options which were granted on March 8, 2010 under 2006 Plan.
(3)Includes 286 shares, 100 options which were granted on March 8, 2010 under the 2006 Plan, 200 options issued March 25, 2011 under the 2001 Stock Option Plan, 508 options issued June 19, 2012 under the 2006 Plan, 1,413 options issued April 1, 2013 under the 2006 Plan, 328 options issued June 6, 2013 under the 2006 Plan and 891 options issued October 31, 2013 under the 2001 (400) and 2006 Plans (491).
(4)Consists of shares of common stock issuable upon the conversation of Series H Preferred Stock held by Pharma Trials, LLC. Pharma Trials, LLC owns 3,000 shares of Series H Preferred Stock, which are convertible into an aggregate 1,200,000 shares of Common Stock. Mr. Greene owns an indirect 20% interest in Pharma Trials, LLC.
(5)Consists of 3,726 options issued under stock option plans.
(6)Consists of 1,200,000 shares of common stock issuable upon the conversion of 3,000 shares of Series H Preferred Stock.
(7)Incudes 1,000,000 shares of common stock and shares issuable under a Right to Shares Agreement with the between the Company and Alpha Capital Anstalt pursuant to which that holder converted 100% of preferred shares held by it and exercise 100% of the common stock purchase warrants held by it. The Company initially delivered 1,000,000 shares pursuant to The Right to Shares Agreement Those remaining shares will be delivered to the holder from time to time based on draw down notices submitted to the Company by that holder.
(8)Includes 53,191 shares of common stock (on a post-reverse split basis) issued to Mr. Berkman and 230,000 shares to which he is entitled pursuant to the agreement for the acquisition of the controlling interest in Hema Diagnostic Systems. Does not include warrants exercisable for 15,000,000 shares of common stock, which have not been issued but to which he is entitled.
(9)Consists of 159,745 shares of common stock issuable upon the conversion of 399 shares of Series I Preferred Stock
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
Related Transactions
Brooks, Houghton & Company Engagement
In May 2017, the Company entered into a letter agreement with Brooks, Houghton & Company, Inc. for Brooks, Houghton to serve as the Company’s exclusive financial advisor in connection with acquisitions by the Company as well as joint ventures, partnerships, strategic alliances and similar transactions. Kevin Centofanti, a nominee for election as a director of Generex at the special meeting, is the President of Brooks, Houghton.
Under the letter agreement, the Company will pay a monthly fee of $15,000, as well as a fee on completion of any acquisition, joint venture, partnership, strategic alliance or similar transaction based on the “transaction amount,” defined as the enterprise value attributed to the Company in the transaction, as follows:
•3% of the transaction amount below $50 million
•2.5% of the transaction amount above $50 million up to $100 million
•2% of the transaction amount over $100 million.
The letter agreement can be terminated on 180 days’ notice.
CFO Squad
The CFO Squad, LLC, provides accounting and financial services to the Company. Our CFO, Mark Corrao, is a managing director of CFO Squad. CFO Squad was paid $37,500 for accounting and financial services provided to the Company in Fiscal 2017.
Pharma Trials Investment
An aggregate of 1,2000,000 shares of the Company’s common stock are issuable upon conversion of the Series H Preferred Stock sold at the initial closing.
The following describes a Securities Purchase Agreement between Pharm Trails, LLC and the Company, as well as the initial issuance of 3,000 shares of Series H Preferred Stock to that investor.
On March 28, 2017, the Company entered into a securities purchase agreement with Pharma Trials, LLC pursuant to which the Company agreed to sell an aggregate of 109,000 shares of its newly designated non-voting Series H Preferred Stock (“Series H Preferred Stock”) and 6,000 shares of its newly designated Series I Preferred Stock (“Series I Preferred Stock”). Andrew Greene, a director of the Company and formerly its Chief Operating Officer, holds a 20% interest in Pharma Trails, LLC. Mr. Greene did not participate in the deliberations of the Company’s Board of Directors with respect to approval of the transactions contemplated by the securities purchase agreement.
The Series H Preferred Stock was scheduled to be sold in four tranches. At closing of the first tranche, the Company issued 3,000 shares of Series H Preferred Stock for a purchase price of $3,000,000. The proceeds of this sale were paid directly on the Company’s behalf to Emmaus Life Sciences, Inc., as an additional deposit under the Company’s letter of intent with Emmaus. The letter of intent with Emmaus was later terminated.
The closing of the sale of 6,000 shares of Series I Preferred Stock ($6,000,000) was to occur on April 17, 2017. Pharma Trials failed to close that sale, despite the Company being ready, willing and able to proceed. Under the securities purchase agreement, in the event Pharma Trails failed to purchase 100% of the shares of preferred stock at any given Closing, it lost its rights to purchase any other preferred stock. Our management made the determination that it was in the Company’s best interest to terminate Pharma Trial’s rights and on April 23, 2017 the Company notified Pharma Trials in writing that its rights to purchase additional shares were forfeit
Issuance of Series I Preferred Stock Exchange for Debt owed to Officers
As previous reported, Joseph Moscato, the Company’s President & CEO and a Director, and Lawrence Salvo, a Director, made personal unsecured cash advances to Company to permit it to pay the initial $500,000 deposit to Emmaus Life Sciences, Inc. under our Letter of Intent with Emmaus. Mr. Salvo and Mr. Moscato have made other advances to permit the Company to pay certain third party expenses in connection with the implementation of the Company’s repurposed business plan, including legal, accounting, transfer agent, Edgarization, and press release fees.
On April 26, 2017, our Board of Directors determined it appropriate to retire the Company’s indebtedness to Messrs. Moscato and Salvo by applying a 20% original issue discount to the aggregate amounts thereof and issuing shares of our Series I Convertible Preferred Stock in full and final satisfaction thereof. The Board considered the 20% original issue discount a reasonable term as it is the same as original issue discount negotiated at arm’s length with an independent investor in March 2017. The 20% original issue discount means that the actual funds advanced by Messrs. Moscato and Salvo were 80% of the debt recognized and converted into Series I Preferred Stock. Following the Board’s decision, we issued the following shares:
a. 391 shares of Series I Preferred Stock to Mr. Moscato to retire indebtedness of $390,983.52; and
b. 399 shares of Series I Preferred Stock to Mr. Salvo to retire indebtedness of $399,363.22.
The $1,000 per share conversion ratio was based on the $1,000 per share cash price under the securities purchase agreement with Pharma Trails.
The Series I Preferred Stock issued to Mr. Salvo and Mr. Moscato will have a special one-time voting right exercisable at the next meeting of the Company’s stockholders. The Series I Preferred Stock, as a class, will be entitled to cast a number of votes on such proposal equal to fifty percent (50%) of the total number of votes entitled to be cast at such meeting (determined as of the record date for such meeting) by all other outstanding shares of the Company’s capital stock
Conversion and other Terms of the Series H and Series I Preferred Stock
The Series H and Series I Preferred Stock are convertible at the option of the holder at any time into shares of the Company’s common stock at an effective conversion price of $2.50 per share. An aggregate of 1,2000,000 shares of the Company’s common stock are issuable upon conversion of the Series H Preferred Stock sold to Pharma Trials. An aggregate 316,000 shares of the Company’s common stock would be issuable upon conversion of the Series I and Preferred Stock issued to Mr. Moscato and Mr. Salvo.
Neither the Series H Preferred Stock nor the Series I Preferred Stock have special dividend rights. If the Company pays dividends on its common stock, the holders of the preferred stock will receive dividends in the amount they would have received had they converted the preferred stock to common stock.
The conversion price of the preferred stock will be subject to adjustment in the case of stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the holders of convertible preferred stock will be entitled to receive, upon conversion of their shares, any securities or other consideration received by the holders of the Company’s common stock pursuant to the fundamental transaction.
The securities purchase agreement and the certificates of designation authorizing the Series H and Series I Preferred Stock include certain agreements and covenants for the benefit of the holders of the convertible preferred stock, including restrictions on the Company’s ability to amend its certificate of incorporation and bylaws in any manner that materially and adversely affects any rights of a preferred holder, prohibition on the Company’s authorizing or issuing any class of capital stock senior to the Series H or Series I Preferred Stock in liquidation, and prohibition on the Company repurchasing more than a de minimis number of shares of its common stock or other junior securities.
The Series I Preferred Stock, when issued, shall have a special one-time voting right. At the first meeting of the Company’s stockholders following the initial issuance of the Series I Preferred Stock, the Series I Preferred Stock shall be entitled to vote on (i) the election of individuals to serve as members of the Board of Directors, and (ii) any proposal to increase the authorized number of shares of the Company’s common stock. The Series I Preferred Stock, as a class, shall be entitled to cast a number of votes on such proposal equal to fifty percent (50%) of the total number of votes entitled to be cast at such meeting (determined as of the record date for such meeting) by all other outstanding shares of the Company’s capital stock.
The investor has agreed in the securities purchase agreement to exercise the above rights in favor of (a) the election of Company management’s slate of directors, and (b) the Company’s proposal to increase the authorized number of shares of common stock, both as set forth in Company management’s proxy statement in respect of the first meeting of the Company’s stockholders to be held after the date hereof.
During the period commencing on the date upon which the Company’s stockholders have approved an increase in the authorized number of shares of common stock and ending on December 31, 2018, the holders of any shares issued upon conversion of the preferred stock have agreed to vote such shares in favor of Company management’s slate of directors.
The securities purchase agreement contains representations and warranties and covenants for each party, which must be true and have been performed at each closing. The Company has agreed to indemnify and hold the investor harmless against certain liabilities in connection with the issuance and sale of the convertible preferred stock and warrants under the securities purchase agreement.
Director Independence
The Board of Directors currently consists of three members, two of whom are “independent” as defined under applicable rules of the SEC and The NASDAQ Stock Market LLC. The two independent members of the Board of Directors are Brian T. McGee and Dr. James Anderson, Jr. During the fiscal year ended July 31, 2015, the board consisted of four members, including the two independent directors identified in the preceding sentence, Mark Fletcher and Dr. Eric von Hofe. Dr. Von Hofe resigned from the Board on August 19, 2015, but remains President of Antigen Express. Mr. Fletcher and Dr. von Hofe were not independent under applicable SEC and NASDAQ rules.
For a director to be considered independent, the Board must determine that the director has no relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Under NASDAQ rules, all members of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee must be independent directors. Members of the Audit Committee also must satisfy a separate SEC independence requirement, which provides that they may not accept directly or indirectly any consulting, advisory or other compensatory fee from the Company or any of its subsidiaries other than their directors’ compensation. In addition, under SEC rules, an Audit Committee member who is an affiliate of the issuer (other than through service as a director) cannot be deemed to be independent. Due to the Company’s current exceptional circumstances, including the attrition of directors over the last two fiscal years and the Company’s limited operations and diminished financial condition, the Board’s established standing Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee have ceased functioning as such, and during fiscal year 2016, the full Board acted in the capacity of these committees as necessary, except to the extent that Mr. Fletcher abstained from determinations regarding executive compensation for the principal executive officer.
Item 14.
Item 14. Principal Accounting Fees and Services.
MNP LLP ("MNP") has served as our independent auditors since June 1, 2013. The appointment of MNP as our independent public accountants was unanimously approved by the Audit Committee of our Board of Directors. MNP is the successor to our former independent auditors, MSCM LLP ("MSCM"), following MNP’s merger with MSCM in June 2013. MSCM served as our independent auditors from September 5, 2008 until June 1, 2013.
The following table sets forth the aggregate fees paid by Generex for the fiscal years ended July 31, 2016 and 2015 to our independent auditors:
(1) Includes fees associated with quarterly reviews of financial statements included in Generex’s Form 10-Q filings.
(2) MNP LLP did not provide or bill for any tax services.
(3) Represents fees associated with review of the Company’s registration statements on Form S-1 and Form S-8.
PART IV
Item. 15 Exhibits and Financial Statements and Schedules.
1.Financial Statements - See Part II - Item 8. Financial Statements and Supplementary Data hereof on page 46.
The Consolidated financial statements include the following:
Consolidated Balance Sheets as of July 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended July 31, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Deficiency for the for the Years Ended July 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended July 31, 2017 and 2016
2.Financial Statement Schedule and Auditors’ Report
Schedule I - Condensed financial information of registrant
This schedule is not applicable.
Schedule II - Valuation and qualifying accounts
The auditors’ report of MNP LLP with respect to the Financial Statement Schedule information for the years ended July 31, 2017 and 2016 is included with its report on our financial statements located at page 46.
3.Exhibits
Exhibits are incorporated herein by reference or are filed with this Annual Report as set forth in the Exhibit Index beginning on page 89 hereof.
All other schedules and exhibits are omitted because they are not applicable, not required, or because the information required has been given as part of this report.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 this 26th day of October 2017.
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Joseph Moscato
Name: Joseph Moscato
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Capacity in Which Signed
Date
/s/ Joseph Moscato
President and Chief Executive Officer
October 26, 2017
Joseph Moscato
(Principal Executive Officer)
/s/ Brian T. McGee
Director
October 26, 2017
Brian T. McGee
/s/ Andrew Ro
Chief Investment Officer, Senior VP of Investments, Director
October 26, 2017
Andrew Ro
/s/ Lawrence Salvo
Director
October 26, 2017
Lawrence Salvo
/s/ James T Anderson
Director
October 26, 2017
James T. Anderson
EXHIBIT INDEX
* Management contract or management compensatory plan or arrangement.
(1) In the case of incorporation by reference to documents filed by the Registrant under the Exchange Act, the Registrant’s file number under the Exchange Act is 000-25169.