ITEM 1. BUSINESS
OVERVIEW
Generex Biotechnology Corporation is engaged primarily in the research and development of drug delivery technologies. Our primary focus at the present time is our proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal) cavity using a hand-held aerosol applicator.
A substantial number of large molecule drugs (i.e., drugs composed of molecules with a higher than specified molecular weight) have been approved for sale in the United States or are presently undergoing clinical trials as part of the process to obtain such approval, including various proteins, peptides, monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which generally can be administered by various methods, large molecule drugs historically have been administered predominately by injection. The principal reasons for this have been the vulnerability of large molecule drugs to digestion and the relatively large size of the molecule itself, which makes absorption into the blood stream through the skin or mucosa inefficient or ineffective.
All injection therapies involve varying degrees of discomfort and inconvenience. With chronic and sub-chronic diseases, the discomfort and inconvenience associated with injection therapies frequently results in less than optimal patient acceptance of, and compliance with, the prescribed treatment plan. Poor acceptance and compliance can lead to medical complications and higher disease management costs. Also, elderly, infirm and pediatric patients with chronic or sub-chronic conditions may not be able to self-inject their medications. In such cases assistance is required which increases both the cost and inconvenience of the therapy.
Our goal is to develop proprietary formulations of large molecule drugs that can be administered through the buccal mucosa, primarily the inner cheek walls, thereby eliminating or reducing the need for injections. We believe that our buccal delivery technology is a platform technology that has application to many large molecule drugs, and provides a convenient, non-invasive, accurate and cost effective way to administer such drugs. We have identified several large molecule drugs as possible candidates for development, but to date have focused our development efforts on a buccal insulin product.
Our first product is an insulin formulation that is administered as a fine spray into the oral cavity using a hand-held aerosol spray applicator. Between January 1999 and September 2000, we conducted limited clinical trials on this product in the United States, Canada and Europe. In September 2000, we entered into an agreement (the "Development and License Agreement") to develop this product with Eli Lilly and Company ("Lilly"). To date, over 800 patients with diabetes have been dosed with our oral insulin product at approved facilities in seven countries. We conducted several clinical trials with insulin supplied by Lilly under our Development and License Agreement. Lilly did not, however, authorize or conduct any clinical trials or provide financial support for those trials. We did receive a $1,000,000 up front payment from Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end the Development and License Agreement for the development and commercialization of buccal delivery of insulin. On November 5, 2003, we entered into a termination agreement with Lilly terminating the Development and License Agreement, effective as of June 2, 2003. In accordance with the termination agreement, we retain all of the intellectual property and commercialization rights with respect to buccal spray drug delivery technology, and we have the continuing right to develop and commercialize the product. We also entered into a Bulk Supply Agreement (the "Bulk Supply Agreement") for the sale of human insulin crystals by Lilly to us over a three year period. The Bulk Supply Agreement establishes purchase prices, minimum purchase requirements, maximum amounts which may be purchased in each year and a non-refundable prepayment of $1,500,000 to be applied against amounts due for purchases.
In January 2001, we established a joint venture with Elan International Services, Ltd. ("EIS"), a wholly-owned subsidiary of Elan Corporation, plc (EIS and Elan Corporation, plc being collectively referred to as "Elan"), to pursue the application of certain of our and Elan's drug delivery technologies, including our platform technology for the buccal delivery of pharmaceutical products, for the treatment of prostate cancer, endometriosis and/or the suppression of testosterone and estrogen. In January 2002, we and Elan agreed to expand the joint venture to encompass the buccal delivery of morphine for the treatment of pain and agreed to pursue buccal morphine as the initial pharmaceutical product for development under Generex (Bermuda) Ltd., the entity through which the joint venture is being conducted. This expansion of the joint venture occurred after we successfully completed a proof of concept clinical study of morphine delivery using our proprietary buccal delivery technology.
In connection with the joint venture, EIS purchased 1,000 shares of a new series of our preferred stock, designated as Series A Preferred Stock, for $12,015,000. We applied the proceeds from the sale of the Series A Preferred Stock to subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS paid in capital of $2,985,000 to subscribe for a 19.9% equity ownership interest in the joint venture entity. Alternatively, the Series A Preferred Stock may be converted, under certain conditions, into shares of our common stock. Subsequent to its purchase of the shares of Series A Preferred Stock, EIS transferred the shares to an affiliate of Elan. While we presently own 80.1% of the joint venture entity, the Elan affiliate has the right, subject to certain conditions, to increase its ownership up to 50% by exchanging the Series A Preferred Stock for 30.1% of our equity ownership of the joint venture entity. In accordance with the terms of the Series A Preferred Stock, if any shares of Series A Preferred Stock are outstanding on January 16, 2007, we are required to redeem the shares of Series A Preferred Stock at a redemption price equal to the aggregate Series A Preferred Stock liquidation preference (which currently equals the aggregate original purchase price of the Series A Preferred Stock), either in cash, or in shares of common stock with a fair market value equal to the redemption price. In January 2002, 2003 and 2004, pursuant to the terms of the agreement with EIS, the Elan affiliate received a 6% stock dividend of Series A Preferred Stock.
EIS also purchased 344,116 shares of our common stock for $5,000,000. We were permitted to use the proceeds of this sale for any corporate purpose. If the joint venture achieves certain milestones, we may require EIS to purchase an additional $1,000,000 of our common stock at a 30% premium to the then prevailing fair market value of our common stock.
Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal delivery technology and certain Elan drug delivery technologies. Using the funds from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable license fee of $15,000,000 to Elan in consideration for being granted the rights to utilize the Elan drug delivery technologies.
To date we have not received any substantial economic support from Elan in connection with the joint venture or the development of the morphine product, other than its initial capital contribution. However, we have continued to conduct research and development activities with the morphine product.
In August 2003, we acquired Antigen Express, Inc. Antigen is engaged in the research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases.
Our immunomedicine products work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self proteins and allergens). Our immunomedicine products are based on two platform technologies that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. The immunomedicine products are in the pre-clinical stage of development, and trials in human patients are not expected for at least 6 months. Development efforts are underway in melanoma, breast cancer, prostate cancer, HIV, influenza virus, smallpox, SARS and Type I diabetes mellitus. We are establishing collaborations with clinical investigators at academic centers to advance the technology, with the ultimate goal of conducting human clinical testing.
We do not expect to receive any revenues from product sales in the current fiscal year. However, we have received and we expect to continue to receive some revenue from research grants for Antigen's immunomedicine products. To date, we have received a total of $627,184 in such research grants. We do not expect the research grants to fully fund Antigen's expenses. We expect to satisfy all of our cash needs during the current year from capital raised through equity financings.
We are a development stage company, and from inception through the end of fiscal year 2004 had not received any revenues from operations other than the up-front payment from Lilly. We have no products approved for commercial sale by drug regulatory authorities. We have begun the regulatory approval process for only three products, our oral insulin formulation, morphine and fentanyl. We believe that our buccal delivery technology is a platform technology that has application to a large number of large molecule drugs in addition to insulin. Estrogen, heparin, monoclonal antibodies, human growth hormone, fertility hormone, as well as a number of vaccines are among the compounds that we have identified as possible candidates for product development.
Buccal Delivery Technology
Our buccal delivery technology involves the preparation of a proprietary formulation 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 Food and Drug Administration ("FDA") when used in accordance with specified quantity and other limitations. The resulting formulation is aerosolized with a pharmaceutical grade chemical propellant and is administered to the patient using our proprietary RapidMist(TM) device. 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, the patient self-administers the formulation by spraying it 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 insulin product Oralin(TM), insulin absorption in the buccal cavity has been shown to be very efficacious. We are also evaluating the use of our RapidMist device for the delivery of both morphine and fentanyl.
Buccal Insulin Product
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.
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.
If not treated, diabetes can lead to blindness, kidney disease, nerve disease, amputation, heart disease and stroke. Each year, between 12,000 and 24,000 people lose their sight because of diabetes. Diabetes is also the leading cause of end-stage renal disease (kidney failure), accounting for about 40% 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 2 to 4 times more likely to have heart disease, which is present in 75 percent of diabetes-related deaths, and are 2 to 4 times more likely to suffer a stroke.
There is no known cure for diabetes. The World Health Organization estimates that there are currently over 1.5 billion diabetics worldwide. It is further estimated that this number will almost double by the year 2025. There are estimated to be 17 million people suffering from diabetes in North America alone, approximately 5 million of whom are undiagnosed, and diabetes is the second largest cause of death by disease in North America.
We conducted the first clinical trials of our buccal insulin formulation with human subjects in Ecuador in January 1998. We ultimately conducted a number of studies in Ecuador in 1998, each of which involved a selection of between 8 and 10 patients. The principal purpose of these studies was to evaluate the effectiveness of our oral insulin formulation in humans compared with injected insulin and placebos. In March 2004, we entered into a Letter of Intent for the establishment of a joint venture with Pharma Brand S.A., a distributor of pharmaceutical products in Central and Latin America. In furtherance of this joint venture, in August 2004, the Oralin(TM) dossier has been submitted to the Ecuador Ministry of Public Health seeking approval for the manufacturing, marketing, distribution and sale of Oralin(TM) and RapidMist(TM) Diabetes Management System.
On the basis of the test results in Ecuador and other pre-clinical data, we made an Investigatory New Drug submission to the Health Protection Branch in Canada (Canada's equivalent to the United States' Food and Drug Administration) 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 Food and Drug Administration 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 Type 1 and Type 2 diabetic patients and healthy volunteers. The study protocol 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, we were granted permission to commence Phase II-B clinical trials in Canada. In September 2003, we commenced a 90 day study in 80 Type 2 diabetic patients with poorly controlled blood glucose. The objective of the study is to determine the metabolic effect of our insulin product.
We continue to conduct limited clinical studies and seek additional collaborative partners in the United States, and other countries.
Other Large Molecule Drug Projects
We have identified numerous compounds, other than insulin, as candidates for product development.
Morphine and Fentanyl
The delivery of morphine and fentanyl by oral formulation (pills) and injection for the treatment of moderate to severe breakthrough and postoperative pain often fails to provide patients with adequate relief and control (breakthrough and postoperative pain are characterized as being moderate to severe in intensity, having a rapid onset of action and a short to medium duration). Not only does delivery by pills have a slow onset of action, it is often difficult for patients to adjust their doses, with the result that patients are either over or under medicated. Injections are invasive and require an attendant to administer the medication which reduces the patient's control over the pain and may cause increased anxiety. Often, patients must wait in pain until an attendant can medicate them.
We seek to develop a buccal delivery formulation for morphine and fentanyl that will have a critical series of attributes well suited for the treatment of breakthrough and post operative pain and which will be cost effective and will have a demonstrable improvement over current delivery methods. These include fast access to the circulatory system, precise dosing control and a simple, self-administration procedure.
We made an Investigatory New Drug submission for buccal morphine to the Health Protection Branch in Canada in January 2002, and received permission from the Canadian regulators to proceed with clinical trials in March 2002. We have commenced clinical trials in Ecuador and we are in the process of recruiting investigators to conduct clinical trials in Canada. In January 2002, we filed an Investigational New Drug Application for buccal morphine with the Food and Drug Administration. The buccal morphine product is being developed by Generex Bermuda under our joint venture with a subsidiary of Elan Corporation.
We made an Investigatory New Drug submission for fentanyl to the Health Protection Branch in Canada in August 2002, and received permission from the Canadian regulators to proceed with clinical trials in October 2002.
Other Products
We have had discussions of possible research collaborations with various pharmaceutical companies concerning use of our large molecule drug delivery technology with insulin, morphine, fentanyl and other compounds, including monoclonal antibodies, human growth hormone, fertility hormone, estrogen and heparin, and a number of vaccines.
Prior to September 2000, we had not aggressively pursued development opportunities apart from insulin because we believed it was more advantageous to concentrate our resources, particularly our financial resources, on developing the insulin product. While the insulin product remains our first priority, we continue developmental work for buccal delivery formulation for morphine and fentanyl.
Immunomedicine Technology and Products
Our new subsidiary, Antigen, is engaged in research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Our immunomedicine products work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self proteins and allergens). Our immunomedicine products are based on two platform technologies that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. These technologies are expected to greatly boost immune cell responses which treat the ailments and conditions.
We have not filed an Investigational New Drug application to begin clinical trials. Rather, our immunomedicine products are in the pre-clinical stage of development and trials in human patients are not expected for at least 6 months. For more details regarding our acquisition of Antigen, see "Management's Discussion and Analysis of Financial Conditions and Results of Operations" (Item 7) below.
CORPORATE HISTORY
We were incorporated in Delaware in September 1997 for the purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to engage in pharmaceutical and biotechnological research and other activities. Our acquisition of Generex Pharmaceuticals was completed in October 1997 in a transaction in which the holders of all outstanding shares of Generex Pharmaceuticals exchanged their shares for shares of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green Mt. P. S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of this transaction, our shareholders (the former shareholders of Generex Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt., Green Mt. changed its corporate name to Generex Biotechnology Corporation ("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc. Because the reverse acquisition resulted in our shareholders becoming the majority holders of Generex Idaho, we were treated as the acquiring corporation in the transaction for accounting purposes. Thus, our historical financial statements, which essentially represented the historical financial statements of Generex Pharmaceuticals, were deemed to be the historical financial statements of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex Idaho. In this transaction, all outstanding shares of Generex Idaho were converted into our shares, Generex Idaho ceased to exist as a separate entity, and we changed our corporate name back to "Generex Biotechnology Corporation". This reorganization did not result in any material change in our historical financial statements or current financial reporting.
In August 2003, subsequent to the end of fiscal 2003, we acquired all of the capital stock of Antigen in exchange for approximately 2,800,000 shares of our common stock, and Antigen became our wholly owned subsidiary.
GOVERNMENT REGULATION
Our research and development activities, and the eventual manufacturing and marketing of our products, are subject to extensive regulation by the Food and Drug Administration in the United States ("FDA") and comparable regulatory authorities in other countries. Among other things, extensive regulation puts a burden on our ability to bring products to market. While these regulations apply to all competitors in our industry, many of our competitors have extensive experience in dealing with the FDA and other regulators, while we do not. Also, other companies in our industry do not depend completely on products which still need to be approved by government regulators, as we now do.
If requisite regulatory approvals are not obtained and maintained, our business will be substantially harmed. In many if not all cases, we expect that our development partners will control or participate extensively in the regulatory approval process once a development agreement is in place. 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 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:
o preclinical tests; o the submission to the FDA of an Investigational New Drug application, which must become effective before human clinical trials commence; o human clinical trials to establish the safety and efficacy of the drug; o the submission of a New Drug Application to the FDA; and o FDA approval of the New Drug Application, including approval of all product labeling and advertising.
Pre-clinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of each product. The results of the pre-clinical tests are submitted to the FDA as part of the Investigational New Drug application and are reviewed by the FDA before the commencement of human clinical trials. Unless the FDA objects to the Investigational New Drug application, the Investigational New Drug application becomes effective 30 days following its receipt by the FDA. The Investigational New Drug application for our oral insulin formulation became effective in November 1998. We filed an Investigational New Drug application for buccal morphine in January 2002.
Clinical trials involve the administration of the new drug to humans under the supervision of a qualified investigator. The protocols for the trials must be submitted to the FDA as part of the Investigational New Drug application. Also, each clinical trial must be approved and conducted under the auspices of an Institutional Review Board, 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 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 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.
In the United States, the results of pre-clinical studies and clinical trials, if successful, are submitted to the FDA in a New Drug Application to seek approval to market and commercialize the drug product for a specified use. The FDA may deny a New Drug Application if it believes that applicable regulatory criteria are not satisfied. The FDA also may require additional testing for safety and efficacy of the drug. We cannot be sure that any of our proposed products will receive the FDA approval. 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 Good Manufacturing Practices, and domestic 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 Good Manufacturing Practices, 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.
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 approved by the regulatory authorities in that country. 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. We obtained regulatory approval to begin clinical trials of our oral insulin formulation in Canada in November 1998. In Ecuador, regulatory authorities approved the limited non-commercial distribution of our oral insulin formulation in September 1998. In August 2004, we submitted the Oralin(TM) dossier to the Ecuador Ministry of Public Health seeking approval for the manufacturing, marketing, distribution and sale of Oralin(TM) and RapidMist(TM) Diabetes Management System. We obtained regulatory approval to begin clinical trials of our buccal morphine product in Canada in March 2002 and received regulatory approval to begin clinical trials of our fentanyl product in Canada in October 2002. We are currently in the process of recruiting investigators to conduct clinical trials of our buccal morphine product.
MARKETING
We intend to rely on collaborative arrangements with one or more other companies that possess strong pharmaceutical marketing and distribution resources to perform these functions for us. Accordingly, we will not have the same control over marketing and distribution that we would have if we conducted these functions ourselves.
With respect to the Generex Bermuda joint venture, Elan may, at its option, choose to market morphine or any other product developed under the joint venture. With respect to the Pharma Brand joint venture, we will work closely with Pharma Brand to aggressively seek approval for the manufacture, production, packaging and distribution of Oralin(TM) in Central and Latin America. Except for these arrangements, we do not have any agreements with any other companies for marketing or distributing our products. With respect to our insulin product, we possess the worldwide marketing rights to this product after they reverted to us upon the termination in June 2003 of the development and license agreement with Lilly.
MANUFACTURING
To date, we have produced our oral insulin formulation only under laboratory conditions on a small scale. In December 2000, we completed our pilot manufacturing facility in Toronto in the same commercial complex in which our original laboratory is located, and we are in the process of obtaining regulatory approval for the facility. We believe that this facility will be capable of producing our insulin product at levels necessary to supply our needs for late stage human clinical trials of the product and for initial commercial sales outside the United States, even though we have not yet actually produced product at those levels. We will need to significantly increase our manufacturing capability in order to manufacture any product in commercial quantities.
We own facilities in Brampton and Mississauga, Ontario, all within 25 miles from downtown Toronto that were purchased with the intention of improving and equipping them for manufacturing. These facilities are currently leased to unrelated third parties, however, we believe we can place these facilities into production of our insulin product or other products within 12 to 18 months lead time if additional production capabilities are necessary.
Our new subsidiary Antigen leases office and laboratory space in Worcester, Massachusetts, which is sufficient for its present needs. The laboratory is approximately 820 square feet and has permission to store and use biohazardous (including recombinant DNA materials) and flammable chemicals.
RAW MATERIAL SUPPLIES
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 commercial supply of any such products.
Components suitable for our RapidMist(TM) device are available from a limited number of potential suppliers, as is the chemical propellant used in the device. We believe that the components which now comprise the device will be utilized with the commercial version of our insulin product. We also expect to use the RapidMist(TM) device in connection with our buccal morphine and fentanyl products. We have also secured supply arrangements with the manufacturers of all other components and the propellant that we presently use in our RapidMist(TM) device for commercial quantities of such components and the propellant. All such suppliers are prominent, reputable and reliable suppliers to the pharmaceutical industry. Because we now have a single supplier for each of these components and propellant, however, we are more vulnerable to supply interruptions than would be the case if we had multiple suppliers for each component. We do not believe that the risk of a single source of supply for proprietary raw materials or device components is unusual in the pharmaceutical industry.
Insulin is available worldwide from only a few sources. However, alternative supplies of insulin are under development in Europe. Upon termination in June 2003 of our license agreement with Lilly, we entered into a Bulk Supply Agreement with Lilly, pursuant to which Lilly is required to provide us with human insulin crystals over a three (3) year period. We also believe future development and marketing partners under licensing and development agreements, if any, will provide, or assist us to obtain, pharmaceutical compounds that are used in products covered under such agreements.
While morphine is a controlled substance, it is readily available for use in clinical trials. We currently have the appropriate licenses and facilities for acquiring and storing morphine in Canada. Various regulatory issues surround the import of morphine into the United States and we will need to address these issues prior to commencing clinical trials in the United States.
Raw materials for our pre-clinical development stage immunomedicine products include amino acids (for peptide therapeutics) and oligonucleotides (for genetic constructs). These materials are readily available from commercial suppliers. We utilize the services of several commercial laboratories for the manufacturing of our pre-clinical development stage immunomedicine products.
INTELLECTUAL PROPERTY
We currently have fifteen issued U.S. patents pertaining to aspects of buccal delivery technology and covering our oral insulin formulation. We have six U.S. patent applications and one Canadian patent application pending, which also relate to aspects of our buccal delivery technology, our oral insulin formulation and our oral morphine formulation. In addition, we hold one U.S. patent and two Canadian patents and have one U.S. application pending that pertains to delivery technologies other than our buccal delivery technology.
We also have an indirect interest in three drug delivery patents held by another company, Centrum Biotechnologies, Inc., which is 50% owned by us.
Our new subsidiary Antigen currently holds six issued U.S. patents, two Australian patents, and a number of pending U.S. and foreign patent applications concerning technology for modulating the immune system via activation of antigen-specific helper T lymphocytes. Some of these patents are held under exclusive licenses from the University of Massachusetts. Dr. Humphreys and Dr. Xu, officers of Antigen, are the listed inventors or co-inventors on all of these patents and patent applications, including those licensed from the University of Massachusetts.
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 any one 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 "Legal Proceedings" (Item 3) for discussion of certain legal proceedings involving intellectual property issues.)
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.
COMPETITION
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 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 have also developed different technologies to enhance the presentation of peptide antigens. Many 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.
Buccal Insulin Product
Nektar Therapeutics (formally Inhale Therapeutic Systems, Inc.) ("Nektar") is developing a customized insulin formulation that is processed into a fine, dry powder and administered to the deep lung using a proprietary inhalation device developed for this purpose. Nektar is developing its insulin product in collaboration with Pfizer, Inc., which in turn has announced agreements to co-develop and co-promote the use of inhaled insulin with Aventis, a leading pharmaceutical company which presently manufactures insulin for sale primarily in Europe. As reported in March 2004, the European Medicines Evaluation Agency (EMEA) has accepted the filing of a marketing authorization application for Exubera(R) (inhaled human insulin powder). Nektar is also developing pulmonary products with large molecule drugs other than insulin, and has stated that it is investigating the use of its inhalation technology with small molecule drugs.
Aradigm Corporation ("Aradigm"), which has announced a joint development agreement with Novo Nordisk A/S to jointly develop a pulmonary delivery system for insulin by inhalation, also may be considered a direct competitor of ours in the insulin area. Novo Nordisk is one of the two leading manufacturers of insulin in the world, the other being Lilly. Aradigm and Novo Nordisk initiated Phase III clinical trials in September 2002. In April 2004, Novo Nordisk announced results from a planned interim analysis of the initial Phase III trial and has decided to amend the current trial protocol. Novo Nordisk will make decisions concerning the structure and timing of additional clinical trials after these observations have been fully assessed.
Other companies have announced development efforts relating to alternative (to injection) methods of delivering insulin or other large molecule drugs, including Alkermes Pharmaceuticals, Inc., which announced a collaboration with Lilly in April 2000 to develop a pulmonary method of administering insulin and is currently undergoing Phase II clinical trials. 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 which have been approved for use in the treatment of Type 2 diabetics in place of or in addition to insulin therapy. These products may also be considered competitive with insulin products.
Buccal Morphine and Fentanyl Products
Cephalon, Inc. currently markets Actiq(R) in the United States and has recently acquired the rights to the product in Europe. Actiq(R) delivers buccal transmucosal fentanyl to the cheek walls through the use of a lollipop. On November 4, 1998 the FDA cleared Actiq(R) for marketing for use in the management of breakthrough cancer pain. The product was launched in March 1999 in the United States.
Aradigm is developing the hand-held AERx Pain Management System for the treatment of breakthrough cancer pain. The AERx Pain Management System is a pulmonary delivery system to deliver the drug through inhalation. AERx has distinct advantages over the administration by injection of morphine and similar opiate-derived pain control drugs. Aradigm is in progress to complete both Phase I and II clinical trials of these formulations.
Nastech Pharmaceuticals is developing an intranasal formulation of morphine that is in Phase II clinical trials. Results reported to date show the product to be safe and efficacious in the treatment of episodes of breakthrough pain. Nastech is currently seeking a licensing partner for this product.
Immunomedicine Technology and Products
A number of companies that are engaged in the development of immunomedicines employ technologies that are competitive to our new subsidiary, Antigen. Zycos Inc. has developed the Biotope(R) technology, Cel-Sci Corporation has developed the LEAPS delivery technology and Epimmune Inc. has developed the PADRE(R) technology. These companies have initiated early stage clinical trials for several products for the treatment of cancer, autoimmune, and allergic diseases. These companies also have established collaborations with academic centers and other companies for the development of certain products. We have not initiated clinical trials with any of our immunomedicine products, nor have we established commercial collaborations to date.
ENVIRONMENTAL COMPLIANCE
Our manufacturing, research and development activities involve 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 the United States, Canadian or other 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. In the period from inception to July 31, 2004, our expenditures on research and development were $47,387,932. These included $8,522,984 in the year ended July 31, 2004, $5,150,075 in the year ended July 31, 2003 and $6,618,820 in the year ended July 31, 2002. The increase in our research and development expenses in 2004 compared to 2003 is due principally to activities of Antigen and our increased development of oral insulin formulation compared to last year, including the purchase of bulk insulin. The decrease in our research and development expenses in 2003 compared to 2002 is due principally to contraction of our ongoing research and development activities under our collaboration with Elan and the collaboration with Lilly, which ended in May 2003.
EMPLOYEES
At September 30, 2004, we had twenty-five full-time employees, including our executive officers and other individuals who work for us full time but are employed by management companies that provide their services and including eight employees of our new subsidiary Antigen. Fourteen of our employees are executive and administrative, nine are scientific and technical personnel who engage primarily in development activities and in preparing formulations for testing and clinical trials, and two are engaged in corporate and product promotion, public relations and investor relations. We believe our employee relations are good. None of our employees are covered by a collective bargaining agreement.
We will continue to need qualified scientific personnel and personnel with experience in clinical testing, government regulation and manufacturing. We may have difficulty in obtaining qualified scientific and technical personnel as there is strong competition for these people 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 do not have fixed term agreements with any of our key management or scientific staff, other than Dr. Pankaj Modi who, on August 26, 2004, resigned from his position as Vice President, Research and Development and terminated his Consulting Agreement with us, see "Developments in Fiscal 2004" under Management's Discussion and Analysis. While Dr. Modi's resignation was effective immediately, pursuant to the terms of the Consulting Agreement, the effective date of termination of the Consulting Agreement is August 25, 2005.
We also use non-employee consultants to assist us in formulating research and development strategy, in preparing regulatory submissions, in developing protocols for clinical trials, and in designing, equipping and staffing our manufacturing facilities. 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.
EXECUTIVE OFFICERS AND DIRECTORS
All directors are elected to hold office until the next annual meeting of stockholders following election and until their successors are duly elected and qualified. Executive officers are appointed by the Board of Directors and serve at the discretion of the Board.
Anna E. Gluskin -- Director since September 1997. Ms. Gluskin has served as the President and Chief Executive Officer of Generex since October 1997 and the Chairman since November 2002. She held comparable positions with Generex Pharmaceuticals, Inc. from its formation in 1995 until its acquisition by Generex in October 1997.
Rose C. Perri -- Director since September 1997. Ms. Rose Perri has served as Treasurer and Secretary of Generex since October 1997, and as Chief Operating Officer since August 1998. She was an officer of Generex Pharmaceuticals, Inc. from its formation in 1995 until its acquisition by Generex in October 1997. Effective November 2002, Ms. Perri became acting Chief Financial Officer.
Gerald Bernstein, M.D. -- Director since October 2002. Dr. Gerald Bernstein has served as Vice President of Generex since October 1, 2001. Dr. Bernstein acts as a key liaison for Generex on medical and scientific affairs to the medical, scientific and financial communities and consults with Generex under a consulting agreement on research and medical affairs and on development activities. Dr. Bernstein has been an associate clinical professor at the Albert Einstein College of Medicine in New York and an attending physician at Beth Israel Medical Center, Lenox Hill Hospital and Montefore Medical Center, all in New York since 1999. He was president of the American Diabetes Association from 1997 to 1998.
Mark Fletcher, Esq. -- Mr. Fletcher has served as our Executive Vice President and General Counsel since April 2003. From October 2001 to March 2003, Mr. Fletcher was engaged in the private practice of law as a partner at Goodman and Carr LLP, a leading Toronto law firm. From March 1993 to September 2001, Mr. Fletcher was 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.
J. Michael Rosen -- Director since August 2000. Mr. Rosen has been a principal in a number of related travel management and hotel marketing businesses since 1978. The principal companies in this group, all of which are headquartered in Ontario, are Uniworld Travel & Tours, Inc., Nevada Vacations, Inc., Casino Vacations, Inc. and Casino Tours, Inc. Mr. Rosen presently serves as the President or a Vice President, and the Chief Financial Officer, of each of these companies. Mr. Rosen is an accountant by training, and was engaged in the private practice of accounting prior to 1978.
John P. Barratt -- Director since March 2003. Mr. Barratt is Court appointed Responsible Person and Liquidation Manager of Beyond.com Corporation, Debtor-in-Possession, A US Chapter 11 Bankruptcy Case. Prior to his appointment in 2002, he served as Chief Operating Officer of Beyond.com, since 2000. From January 1996 to September 2000, Mr. Barratt served as partner-in-residence for the Quorum Group of Companies, an international investment partnership specializing in providing debt and equity capital to the emerging high growth technology sector. From 1988 to December 1995, Mr. Barratt was Executive Vice President and Chief Operating Officer of Coscan Development Corporation. He previously held a number of senior-level management positions, including Deputy Chief Executive of Lloyds Bank Canada. Mr. Barratt also currently serves on the Board of Directors and is Chairman of the Credit Committee and member of the Audit Committee for the Bank of China (Canada), as a director and a member of the Audit Committee of GLP NT Corporation and BNN Split Corporation. Mr. Barratt also serves on the Advisory Board of Brascan SoundVest Diversified Income Fund and Brascan SoundVest Total Return Fund.
Mindy J. Allport-Settle - Director since February 2004. Ms. Allport-Settle has been President and Chief Executive Officer of Integrated Development, LLC ("Integrated") since 1998. Integrated is an independent consulting firm to the pharmaceutical industry, providing informed guidance in operational, project and contract management, new business development and regulatory compliance. In addition to her position with Integrated, Ms. Allport-Settle has been a Vice-President of Impact Management Services, Inc. ("IMS") since 2003, which also provides consulting services to the pharmaceutical industry. In her current positions at Integrated and IMS, Ms. Allport-Settle has worked with several major pharmaceutical companies. From 2001 to 2002, Ms. Allport-Settle was Director of Client Services for Scriptorium Publishing Service. From 1992 to 1994, Ms. Allport-Settle was an Eye Bank Technician/Organ Procurement Surgeon for NC Eye & Human Tissue Bank; and from 1991 to 1998, Ms. Allport-Settle was a Freelance Writer and Photographer. Ms. Allport-Settle is currently working on her M.B.A. in Global Management at the University of Phoenix and expects to receive her degree in 2005.
Brian T. McGee - Director since March 2004. Mr. McGee has been a partner of Zeifman & Company, LLP ("Zeifman") since 1995. Mr. McGee began working at Zeifman shortly after receiving a B.A. degree in Commerce from the University of Toronto in 1985. Zeifman is a Chartered Accounting firm based in Toronto, Ontario. A significant element of Zeifman's business is public corporation accounting and auditing. Mr. McGee is a Chartered Accountant. 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.
OTHER KEY EMPLOYEES AND CONSULTANTS
Slava Jarnitskii is our Financial Controller. He began his employment with Generex Pharmaceuticals in September 1996 and has been in the employment of Generex since its acquisition of Generex Pharmaceuticals in October 1997. Before his employment with Generex Pharmaceuticals, Mr. Jarnitskii received a Masters of Business Administration degree from York University in September 1996.
Dr. Robert E. Humphreys, M.D., Ph.D., is currently Executive Vice-President and Chief Operating Officer of our subsidiary, Antigen Express, Inc. Dr. Humphreys founded Antigen in 1996 and was its President. He has extensive experience in the National Institute of Health, arthritis, cancer and diabetes study sections. Dr. Humphreys is an inventor on (six) 6 awarded US patents and has over 150 peer-reviewed publications. Prior to founding Antigen, Dr. Humphreys was Professor of Medicine and Pharmacology at University of Massachusetts Medical School. He received his M.D. and Ph.D. degrees from Yale University and was a post-doctoral fellow in biochemistry at Harvard University. He also received his clinical training at Bethesda Naval Hospital and was an Officer at the Naval Medical Research Institute.
Eric von Hofe, PhD, is currently a Vice President of Technology Development of our subsidiary, Antigen Express, Inc. He has extensive experience with technology development projects, including his previous position at Millennium Pharmaceuticals as Director of Programs & Operations, Discovery Research. Prior to that, Dr. von Hofe was Director, New Targets at Hybridon, Inc., where he coordinated in-house and collaborative research that critically validated gene targets for novel antisense medicines. He received his Ph.D. from the University of Southern California in Experimental Pathology and was a postdoctoral fellow at both the University of Zurich and Harvard School of Public Health. His work has been published in twenty-eight articles in peer- reviewed journals and he has been an inventor on four patents. Dr. von Hofe was Assistant Professor of Pharmacology at the University of Massachusetts Medical School, where he received a National Cancer Institute Career Development Award for defining mechanisms by which alkylating carcinogens create cancers.
Dr. Minzhen Xu is Vice President - Biology of Antigen. Dr. Xu received an M.D. from Shanghai Medical University in China and a Ph.D. in immunology from University of Massachusetts Medical School. He has been with Antigen since its inception and is the company's chief experimentalist.
CERTAIN ADDITIONAL RISK FACTORS
In addition to historical facts or statements of current condition, this Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events.
The following discussion outlines certain factors that we think could cause our actual outcomes and results to differ materially from our forward-looking statements. These factors are in addition to those set forth elsewhere in this Annual Report on Form 10-K.
Risks Related to Our Financial Condition
We have a history of losses, and will incur additional losses.
We are a development stage company with a limited history of operations, and do not expect ongoing revenues from operation in the immediately foreseeable future. To date, we have not been profitable and our accumulated net loss before preferred stock dividend was $ 94,231,316 at July 31, 2004. Our losses have resulted principally from costs incurred in research and development, including clinical trials, and from general and administrative costs associated with our operations. While we seek to attain profitability, we cannot be sure that we will ever achieve product and other revenue sufficient for us to attain this objective.
Our product candidates are in research or early stages of pre-clinical and clinical development. We will need to conduct substantial additional research, development and clinical trials. We will also need to receive necessary regulatory clearances both in the United States and foreign countries and obtain meaningful patent protection for and establish freedom to commercialize each of our product candidates. We cannot be sure that we will obtain required regulatory approvals, or successfully research, develop, commercialize, manufacture and market any other product candidates. We expect that these activities, together with future general and administrative activities, will result in significant expenses for the foreseeable future.
We need additional capital
To progress in product development or marketing, we will need additional capital which may not be available to us. This may delay our progress in product development or market.
We will require funds in excess of our existing cash resources:
o to proceed with the development of our buccal insulin product; o to proceed under our joint venture with Elan, which requires us to fund 80.1% of initial product development costs; o to develop other buccal and immunomedicine products; o to develop new products based on our buccal delivery and immunomedicine technologies, including clinical testing relating to new products; o to develop or acquire other technologies or other lines of business; o to establish and expand our manufacturing capabilities; o to finance general and administrative and research activities that are not related to specific products under development; and o to finance the research and development activities of our new subsidiary Antigen.
In the past, we have funded most of our development and other costs through equity financing. We anticipate that our existing capital resources will enable us to maintain currently planned operations through the next twelve months. However, this expectation is based on our current operating plan, which could change as a result of many factors, and we may need additional funding sooner than anticipated. Because our operating and capital resources are insufficient to meet future requirements, we will have to raise additional funds in the near future to continue the development and commercialization of our products. Unforeseen problems, including materially negative developments in our joint venture with Elan, in our clinical trials or in general economic conditions, could interfere with our ability to raise additional equity capital or materially adversely affect the terms upon which such funding is available. Recent changes in the application of the rules of the NASDAQ Stock Market may also make it more difficult for us to raise private equity capital.
It is possible that we will be unable to obtain additional funding as and when we need it. If we were unable to obtain additional funding as and when needed, we could be forced to delay the progress of certain development efforts. Such a scenario poses risks. For example, our ability to bring a product to market and obtain revenues could be delayed, our competitors could develop products ahead of us, and/or we could be forced to relinquish rights to technologies, products or potential products.
New equity financing could dilute current stockholders.
If we raise funds through equity financing to meet the needs discussed above, it will have a dilutive effect on existing holders of our shares by reducing their percentage ownership. The shares may be sold at a time when the market price is low because we need the funds. This will dilute existing holders more than if our stock price was higher. In addition, equity financings normally involve shares sold at a discount to the current market price.
Our research and development and marketing efforts are likely to be highly dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, which may limit our efforts to successfully develop and market potential products.
Because we have limited resources, we have sought to enter into collaboration agreements with other pharmaceutical companies that will assist us in developing, testing, obtaining governmental approval for and commercializing products using our buccal delivery and immunomedicine technologies. Any collaborator with whom we may enter into such collaboration agreements may not support fully our research and commercial interests since our program may compete for time, attention and resources with such collaborator's internal programs. Therefore, these collaborators may not commit sufficient resources to our program to move it forward effectively, or that the program will advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions.
Risks Related to Our Technologies
Because our technologies and products are at an early stage of development, we cannot expect revenues in the foreseeable future.
We have no products approved for commercial sale at the present time. To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products under development. We may not be successful in one or more of these stages of the development of our products, and/or any of the products we develop may not be commercially viable.
While over 800 patients with diabetes have been dosed with our oral insulin formulation at approved facilities in seven countries, our insulin product has not been approved for marketing in any country. Until we have developed a commercially viable product which receives regulatory approval, we will not receive revenues from ongoing operations.
We will not receive revenues from operations until we receive regulatory approval to sell our products. Many factors impact our ability to obtain approvals for commercially viable products.
We have no products approved for commercial sale by drug regulatory authorities. We have begun the regulatory approval process for our oral insulin formulation, buccal morphine and fentanyl products. Our immunomedicine products are in the pre-clinical stage of development.
Pre-clinical and clinical trials of our products, and the manufacturing and marketing of our technologies, are subject to extensive, costly and rigorous regulation by governmental authorities in the United States, Canada and other countries. The process of obtaining required regulatory approvals from the FDA and other regulatory authorities often takes many years, is expensive and can vary significantly based on the type, complexity and novelty of the product candidates. For these reasons, it is possible we will never receive approval for one or more product candidates.
Delays in obtaining United States or foreign approvals for our products could result in substantial additional costs to us, and, therefore, could adversely affect our ability to compete with other companies. If regulatory approval is ultimately granted, the approval may place limitations on the intended use of the product we wish to commercialize, and may restrict the way in which we are permitted to market the product.
Due to legal and factual uncertainties regarding the scope and protection afforded by patents and other proprietary rights, we may not have meaningful protection from competition.
Our long-term success will substantially depend upon our ability to protect our proprietary technologies from infringement, misappropriation, discovery and duplication and avoid infringing the proprietary rights of others. Our patent rights, and the patent rights of biotechnology and pharmaceutical companies in general, are highly uncertain and include complex legal and factual issues. Because of this, our pending patent applications may not be granted. These uncertainties also mean that any patents that we own or will obtain in the future could be subject to challenge, and even if not challenged, may not provide us with meaningful protection from competition. Due to our financial uncertainties, we may not possess the financial resources necessary to enforce our patents. Patents already issued to us or our pending applications may become subject to dispute, and any dispute could be resolved against us.
Because a substantial number of patents have been issued in the field of alternative drug delivery and because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims obtained in any application or the enforceability of our patents cannot be predicted. Consequently, we do not know whether any of our pending or future patent applications will result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subject to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated.
Also because of these legal and factual uncertainties, and because pending patent applications are held in secrecy for varying periods in the United States and other countries, even after reasonable investigation we may not know with certainty whether any products that we (or a licensee) may develop will infringe upon any patent or other intellectual property right of a third party. For example, we are aware of certain patents owned by third parties that such parties could attempt to use in the future in efforts to affect our freedom to practice some of the patents that we own or have applied for. Based upon the science and scope of these third party patents, we believe that the patents that we own or have applied for do not infringe any such third party patents, however, we cannot know for certain whether we could successfully defend our position, if challenged. We may incur substantial costs if we are required to defend ourselves in patent suits brought by third parties. These legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the accused product or process. In addition to potential liability for significant damages, we could be required to obtain a license to continue to manufacture or market the accused product or process.
Risks Related to Marketing of Our Potential Products
We may not become, or stay, profitable even if our products are approved for sale.
Even if we obtain regulatory approval to market our oral insulin product or any other product candidate, many factors may prevent the product from ever being sold in commercial quantities. Some of these factors are beyond our control, such as:
o acceptance of the formulation or treatment by health care professionals and diabetic patients; o the availability, effectiveness and relative cost of alternative diabetes or immunomedicine treatments that may be developed by competitors; and o the availability of third-party (i.e., insurer and governmental agency) reimbursements.
We may not be able to compete with treatments now being marketed and developed, or which may be developed and marketed in the future by other companies.
Our products will compete with existing and new therapies and treatments. We are aware of a number of companies currently seeking to develop alternative means of delivering insulin, as well as new drugs intended to replace insulin therapy at least in part. We are also aware of a number of companies currently seeking to develop alternative means of enhancing and suppressing peptides. In the longer term, we also face competition from companies that seek to develop cures for diabetes and other malignant, infectious, autoimmune and allergic diseases through techniques for correcting the genetic deficiencies that underlie such diseases.
We will have to depend upon others for marketing and distribution of our products, and we may be forced to enter into contracts limiting the benefits we may receive and the control we have over our products. We intend to rely on collaborative arrangements with one or more other companies that possess strong marketing and distribution resources to perform these functions for us. We may not be able to enter into beneficial contracts, and we may be forced to enter into contracts for the marketing and distribution of our products that substantially limit the potential benefits to us from commercializing these products. In addition, we will not have the same control over marketing and distribution that we would have if we conducted these functions ourselves.
Numerous pharmaceutical, biotechnology and drug delivery companies, hospitals, research organizations, individual scientists and nonprofit organizations are engaged in the development of alternatives to our technologies. Many of these companies have greater research and development capabilities, experience, manufacturing, marketing, financial and managerial resources than we do. Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more rapidly than we can.
If government programs and insurance companies do not agree to pay for or reimburse patients for our products, we will not be successful.
Sales of our potential products depend in part on the availability of reimbursement by third-party payors such as government health administration authorities, private health insurers and other organizations. Third-party payors often challenge the price and cost-effectiveness of medical products and services. FDA approval of health care products does not guarantee that these third party payors will pay for the products. Even if third party payors do accept our product, the amounts they pay may not be adequate to enable us to realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change before our products are approved for marketing and any such changes could further limit reimbursement.
Risks Related to Potential Liabilities
We face significant product liability risks, which may have a negative effect on our financial condition.
The administration of drugs or treatments to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs or treatments are actually at fault for causing an injury. Furthermore, our products may cause, or may appear to have caused, serious adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug or treatment has been administered to patients for some time. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a severe negative effect on our financial condition. We maintain product liability insurance in amounts we believe to be commercially reasonable for our current level of activity and exposure, but claims could exceed our coverage limits. Furthermore, due to factors in the insurance market generally and our own experience, we may not always be able to purchase sufficient insurance at an affordable price. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business.
Outcome of an Arbitration Proceeding with Sands Brothers may have an adverse impact on us.
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against us under New York Stock Exchange rules. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.5 million shares of our common stock. Sands based its claim upon an October 1997 letter agreement that was purported by Sands to confirm an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late 1997. In exchange therefor, the letter agreement purported to grant Sands the right to acquire 17% of Generex Pharmaceuticals' common stock for nominal consideration. Sands claimed that its right to receive shares of Generex Pharmaceuticals' common stock applies to our common stock since outstanding shares of Generex Pharmaceuticals' common stock were converted into shares of our common stock in the acquisition. Sands' claims also included additional shares allegedly due as a fee related to that acquisition, and $144,000 in monthly fees allegedly due under the terms of the purported agreement.
After several arbitration and court proceedings, on October 29, 2002, the Appellate Division of the New York Supreme Court issued a decision remanding the issue of damages to a new panel of arbitrators and limiting the issue of damages before the new panel to reliance damages which is not to include an award of lost profits. Reliance damages are out-of-pocket damages incurred by Sands.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. the Company, awarding Sands $150,000 in reliance damages. No motion to confirm this award has been filed by Sands as of the date of this report. Sands has not sought leave to appeal the vacaturs of the prior panel's warrant award to the New York Court of Appeals. As such, the award is subject to further legal proceedings.
The case is still ongoing and our ultimate liability cannot yet be determined with certainty. Our financial condition would be materially adversely affected to the extent that Sands receives shares of our common stock for little or no consideration or substantial monetary damages as a result of this legal proceeding. We are not able to estimate an amount or range of potential loss from this legal proceeding at the present time.
Risks Related to the Market for Our Common Stock
If our common stock is delisted from the NASDAQ SmallCap Market and/or becomes subject to Penny Stock regulations, the market price for our stock may be reduced and it may be more difficult for us to obtain financing.
On June 5, 2003, our common stock was delisted from the NASDAQ National Market because of our failure to maintain a minimum of $10,000,000 in stockholders' equity. On June 5, 2003, our stock began trading on the NASDAQ SmallCap Market. The NASDAQ SmallCap Market has its own standards for continued listing, including a minimum of $2.5 million stockholders' equity. As of July 31, 2004, our stockholders' equity was $529,751 which makes us noncompliant with their standard for continued listing.
In addition, for continued listing on both the NASDAQ National Market and SmallCap Market, our stock price must be at least $1.00. During periods in fiscal 2004 and the beginning of fiscal 2005, our stock price dropped close to and below $1.00 per share. If we do not meet this requirement in the future, we may be subject to delisting by NASDAQ.
If our stock is delisted from NASDAQ, there will be less interest for our stock in the market. This may result in lower prices for our stock and make it more difficult for us to obtain financing.
If our stock is not listed on NASDAQ and fails to maintain a price of $5.00 or more per share, our stock would become subject to the Securities and Exchange Commission's "Penny Stock" rules. These rules require a broker to deliver, prior to any transaction involving a Penny Stock, a disclosure schedule explaining the Penny Stock Market and its risks. Additionally, broker/dealers who recommend Penny Stocks to persons other than established customers and accredited investors must make a special written suitability determination and receive the purchaser's written agreement to a transaction prior to the sale. In the event our stock becomes subject to these rules, it will become more difficult for broker/dealers to sell our common stock. Therefore, it may be more difficult for us to obtain financing.
The price of Our Common Stock may be volatile.
There may be wide fluctuations in the price of our common stock. These fluctuations may be caused by several factors including:
o announcements of research activities and technology innovations or new products by us or our competitors; o changes in market valuation of companies in our industry generally; o variations in operating results; o changes in governmental regulations; o developments in patent and other proprietary rights; o public concern as to the safety of drugs or treatments developed by us or others; o results of clinical trials of our products or our competitors' products; and o regulatory action or inaction on our products or our competitors' products.
From time to time, we may hire companies to assist us in pursuing investor relations strategies to generate increased volumes of investment in our common stock. Such activities may result, among other things, in causing the price of our common stock to increase on a short-term basis.
Furthermore, the stock market generally and the market for stocks of companies with lower market capitalizations and small biopharmaceutical companies, like us, have from time to time experienced, and likely will again experience significant price and volume fluctuations that are unrelated to the operating performance of a particular company.
Our outstanding Special Voting Rights Preferred Stock and provisions of our Restated Certificate of Incorporation could delay or prevent the acquisition or sale of our business.
Holders of our Special Voting Rights Preferred Stock have the ability to prevent any change of control in us. Dr. Pankaj Modi, owns all of our Special Voting Rights Preferred Stock. In addition, our Restated Certificate of Incorporation permits our Board of Directors to designate new series of preferred stock and issue those shares without any vote or action by our stockholders. Such newly authorized and issued shares of preferred stock could contain terms that grant special voting rights to the holders of such shares that make it more difficult to obtain stockholder approval for an acquisition of our business or increase the cost of any such acquisition.
ITEM 2.
ITEM 2. PROPERTIES
Our executive and principal administrative offices occupy approximately 5,000 square feet of office space in the Business Centre at 33 Harbour Square in downtown Toronto, Ontario, Canada. We own the Business Centre, which comprises approximately 9,100 square feet of usable space. The space in the Business Centre that is not used by us is leased to third parties.
We own a laboratory facility in Toronto that we have used for limited production of our oral insulin formulation for clinical purposes, and have completed a pilot manufacturing facility for our insulin product in the same commercial complex. Our laboratory facility is approximately 2,650 square feet. Our pilot manufacturing facility, which also includes laboratory facilities, is approximately 4,800 square feet. We also own all additional units in the same building where our pilot manufacturing facility is located. These units are currently leased to third parties and one is being used for storage. All of these spaces could be used for manufacturing facilities if necessary. We have obtained regulatory approval for the laboratory facility, and we are currently in the process of obtaining regulatory approval for the pilot manufacturing facility.
We have mortgages on our Toronto properties totaling $2,224,783 at July 31, 2004. These mortgages require the payment of interest, with minimal principal reduction, prior to their due dates. These mortgages currently require an aggregate $17,313 in monthly debt service payments. Aggregate principal maturities for these mortgages will be $1,366,122 in fiscal 2005 and $858,661 in fiscal 2006.
We lease approximately 1,710 square feet of office and laboratory space in Worcester, Massachusetts that Antigen uses for its research and development activities at an annual rent of $94,085. This space is sufficient for Antigen's present activities.
We do not expect to need manufacturing capabilities related to our insulin product beyond our pilot facility before the end of the current fiscal year. We own an 11,625 square foot building in Brampton, Ontario, which is approximately 25 miles outside Toronto, and a 13,500 square foot building in Mississauga, Ontario, which is about 20 miles from downtown Toronto, for ultimate use in manufacturing. We have done preliminary work on these facilities, but we do not expect to make a substantial investment in improving and equipping them for manufacturing operations until our requirements in this area are better defined. Both properties are currently leased to third parties.
We could use our other properties to expand research, development or testing of our buccal and immunomedicine products if current facilities prove inadequate for our needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against us under New York Stock Exchange rules. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.5 million shares of our common stock. Sands based its claim upon an October 1997 letter agreement that was purported by Sands to confirm an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary of us that was acquired in late 1997. In exchange, the letter agreement purported to grant Sands the right to acquire 17% of Generex Pharmaceuticals' common stock for nominal consideration. Sands claimed that its right to receive shares of Generex Pharmaceuticals' common stock applies to our common stock since outstanding shares of Generex Pharmaceuticals' common stock were converted into shares of our common stock in the acquisition. Sands' claims also included additional shares allegedly due as a fee related to that acquisition, and $144,000 in monthly fees allegedly due under the terms of the purported agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel that heard this case awarded Sands $14,070 and issued a declaratory judgment requiring us to issue to Sands a warrant to purchase 1,530,020 shares of our common stock pursuant to and in accordance with the terms of the purported October 1997 letter agreement. On October 13, 1999, Sands commenced a special proceeding to confirm the arbitration award in the Supreme Court of the State of New York, County of New York (the "New York Supreme Court"). On November 10, 1999, we moved to vacate the arbitration award. On March 20, 2000, the New York Supreme Court granted Sands' petition to confirm the award and denied our motion to vacate the award. We appealed and on January 23, 2001, the New York State Appellate Division, First Department (the "Appellate Division"), modified the judgment of the New York Supreme Court that had confirmed the arbitration award against us. The Appellate Division affirmed the portion of the New York Supreme Court judgment that had confirmed the granting of monetary relief of $14,070 to Sands but modified the judgment to vacate the portion of the arbitration award directing the issuance to Sands of a warrant to purchase 1,530,020 shares of our common stock. The Appellate Division held that the portion of the award directing us to issue warrants to Sands is too indefinite to be enforceable and remanded the matter to the arbitration panel for a final and definite award with respect to such relief or its equivalent (including possibly an award of monetary damages). The arbitration panel commenced hearings on the matters remanded by the Appellate Division in June 2001. On November 7, 2001, the arbitration panel issued an award again requiring us to issue to Sands a warrant to purchase 1,530,020 shares of our common stock purportedly pursuant to and in accordance with the terms of the October 1997 letter agreement. Thereafter, Sands submitted a motion to the New York Supreme Court to modify and confirm the arbitration panel's award while we filed a motion with the court to vacate the arbitration award. On February 25, 2002, the New York Supreme Court vacated the arbitration panel's award. The Supreme Court concluded that the arbitration panel had "disregarded the plain meaning" of the directive given by the Appellate Division in the Appellate Division's January 23, 2001 decision that remanded the matter of the warrant for reconsideration by the panel. The Supreme Court found that the arbitration panel's award "lacks a rational basis". The Supreme Court also remanded the matter to the New York Stock Exchange on the issue of whether the arbitration panel should be disqualified. Sands has appealed the February 25, 2002 order of the Supreme Court to the Appellate Division. We filed a cross-appeal on issues relating to the disqualification of the arbitration panel.
On October 29, 2002, the Appellate Division issued a decision and order unanimously modifying the lower court's order by remanding the issue of damages to a new panel of arbitrators and otherwise affirming the lower court's order. The Appellate Division's decision and order limits the issue of damages before the new panel of arbitrators to reliance damages which is not to include an award of lost profits. Reliance damages are out-of-pocket damages incurred by Sands. The Appellate Division stated that the lower court properly determined that the arbitration award, which had granted Sands warrants for 1,530,020 shares of the registrant's stock, was incorrect.
On March 18, 2003, the Appellate Division of the Supreme Court of New York denied a motion by Sands for re-argument of the October 29, 2002 decision, or, in the alternative, for leave to appeal to the Court of Appeals. A new arbitration took place in early June 2004.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. the Company, awarding Sands $150,000 in reliance damages. No motion to confirm this award has been filed by Sands as of the date of this report. Sands has not sought leave to appeal the vacaturs of the prior panel's warrant award to the New York Court of Appeals. As such, the award is subject to further legal proceedings.
At the present time, we are not able to predict the ultimate outcome of this legal proceeding or to estimate a range of possible loss from this legal proceeding. Therefore, no provision has been recorded in the accompanying financial statements.
Subash Chandarana et al. v. Generex Biotechnology Corporation. In February 2001, a former business associate of Dr. Pankaj Modi ("Modi"), 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. 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 have opposed the application which is now pending before the Court. In September 2003, the Ontario Superior Court of Justice granted the request and issued an order giving the former business associate leave to file an action in the name of and on behalf of CBI against Modi and us. A statement of claim was served in July 2004. 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.
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, as additional information concerning the estimates used by us becomes known, we reassess its position both with respect to accrued liabilities and other potential exposures.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Generex Biotechnology Corporation was held on May 17, 2004. At the meeting, 19,786,399 shares of Common Stock were represented and entitled to vote. Generex stockholders elected all nominees to the Board of Directors, approved a proposal relating to issuance of common stock at less than market value and ratified the appointment of BDO Dunwoody, LLP as independent public accountants for the fiscal year ending July 31, 2004. The results of the vote for the Board of Directors was as follows:
The approved proposal relating to issuance of below market priced securities was to authorize the Board of Directors, in the three-month period commencing with the date of the meeting, to issue, without prior stockholder approval, in connection with capital raising transactions, and/or acquisitions of assets, businesses or companies, up to 10,000,000 shares of common stock, including options, warrants, securities or other rights convertible into common stock, in the aggregate, in excess of the number of shares that NASDAQ's Rules 4350(i)(1)(C) and (D) permit the Company to issue in such transactions without prior stockholder approval. The issuance of such 10,000,000 shares to be upon such terms as the Board of Directors shall deem to be in the best interests of the Company, for a price of not less than 70% of the price at the time of such issuance and for an aggregate consideration not to exceed $50,000,000. The authorization also applies to prior issuances of common stock which are considered retroactively to have been issued at below market price due to "integration" with a new issuance.
The results of the votes on the proposals were as follows:
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed on the NASDAQ SmallCap Market since June 5, 2003. From May 5, 2000 to June 4, 2004, 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 the high and low, intra-day sales prices of our common stock reported on the NASDAQ National Market for each fiscal quarter (or portion thereof) in the prior two years ended July 31, 2004. The table below also sets forth the high and low closing "bid" prices for our common stock reported on the NASDAQ SmallCap Market for the period from June 5, 2003 to July 31, 2004.
SALES PRICES (EXCEPT WHERE INDICATED)
HIGH LOW
FISCAL 2003
First Quarter $2.63 $0.85 Second Quarter $2.60 $1.00 Third Quarter $1.42 $0.65 Fourth Quarter 05/01/03 - 06/04/03 $1.72 $0.87 06/05/03 - 07/31/03* $2.63 $1.35
FISCAL 2004
First Quarter $2.47 $1.12 Second Quarter $2.32 $1.23 Third Quarter $2.02 $1.26 Fourth Quarter $1.86 $1.00
* High and low closing "bid" prices, which represent prices between dealers, do not include retail markup, markdown or commission and may not represent actual transactions.
The closing sales price for our common stock reported on November 8, 2004, was $0.80.
At November 8, 2004, there were 720 holders of record of our common stock.
EXISTING STOCK COMPENSATION PLANS
The following table sets forth information as of July 31, 2004 regarding our existing compensation plans and individual compensation arrangements pursuant to which our equity securities are authorized for issuance to employees or non-employees (such as directors, consultants and advisors) in exchange for consideration in the form of services:
DIVIDENDS
We have not paid dividends on our common stock in the past and have no present intention of paying dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In the fiscal year ended July 31, 2004 and subsequent period we sold common stock and other securities in transactions in reliance upon exemptions from the registration requirements of the Securities Act of 1933 as follows:
o On August 8, 2003, we acquired all of the outstanding capital stock of Antigen Express, Inc. pursuant to an Agreement and Plan of Merger ("Merger Agreement"). Pursuant to the Merger Agreement, Antigen became our wholly-owned subsidiary. Upon consummation of the Merger, we issued an aggregate of approximately 1,779,974 shares of our common stock to the former Antigen shareholders in connection with the Merger, and issued an additional 1,000,000 shares on January 31, 2004. The shares of our common stock issued in connection with the Merger were restricted securities. However, they are registered for resale pursuant to a registration statement on Form S-3 that became effective in November 2003.
o During the fiscal quarter ended October 31, 2003, we issued an aggregate of 487,500 shares to Jeffrey Trenk, Sound Capital Incorporated, Global Advisory Services, LLC and CEOcast Inc. for consulting services. For financial reporting purposes, we recognized an expense of $918,000 in connection with the issuance of these shares for services, which was approximately equal to the fair market value of the shares when issued. As these transactions were not eligible for S-8 registration, we relied on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") in connection with the issuance of these shares. The shares are restricted, and each of the consultants, being primarily engaged in the financial industry, had access to the information which would have been presented in a registration statement and sufficient sophistication so as to not require the protections afforded by registration under the Securities Act. 150,000 of these shares have been registered for resale on form S-3.
o In January 2004, we completed three private placements of our common stock and warrants with four accredited investors. Under the terms of the private placements, we sold units, consisting of an aggregate of 1,984,808 shares of common stock and five-year warrants to purchase an aggregate of 496,202 shares of common stock, for gross proceeds of $3,000,000. In addition to the shares of common stock and warrants purchased by the investors at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor. Each investor's additional investment right is exercisable into additional shares of our common stock and warrants at an exercise price equal to the last bid price, on a consolidated basis, on the trading day immediately proceeding the date on which definitive agreements were signed by us and each investor. The exercise price of all warrants is equal to 130% of such bid price. We undertook the offerings in reliance upon Rule 506 of Regulation D and Section 18(b)(4)(D) of the Securities Act of 1933. The proceeds from the private placements will be used for working capital and other general corporate purposes directly related to our growth, and the development of our products.
o In February 2004, we completed three additional private placements of common stock and warrants with three accredited investors. Pursuant to the terms of these private placements, we sold units, consisting of an aggregate of 829,092 shares of common stock and five year warrants to purchase an aggregate of 207,274 shares of common stock, for gross proceeds of $1,264,000. In addition to the shares of common stock and warrants purchased by the investors at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor. Each investor's additional investment right is exercisable into additional shares of our common stock and warrants at an exercise price equal to the last bid price, on a consolidated basis, on the trading day immediately proceeding the date on which definitive agreements were signed by us and each investor. The exercise price of all warrants is equal to 130% of such bid price. We undertook the offerings in reliance upon Rule 506 of Regulation D and Section 18(b)(4)(D) of the Securities Act. The proceeds from the private placements will be used for working capital and other general corporate purposes directly related to our growth, and the development of our products.
o On February 6, 2004, we authorized the issuance of an aggregate of 175,000 shares to Sound Capital Incorporated and Global Advisory Services, LLC for consulting services. For financial reporting purposes, we recognized an expense of $287,000 in connection with the issuance of these shares for services, which was approximately equal to the fair market value of the shares when issued. As transactions were not eligible for S-8 registration, we relied on Section 4(2) of the Securities Act in connection with the issuance of these shares. The shares are restricted, and each of the consultants, being primarily engaged in the financial industry, had access to the information which would have been presented in a registration statement and sufficient sophistication so as to not require the protections afforded by registration under the Securities Act. All of these shares have been registered for resale on form S-3.
o In July 2004, we completed a private placement of our common stock and warrants with four accredited investors. In accordance with the terms of the private placement, we sold units, consisting of an aggregate of 2,459,016 shares of our common stock and five-year warrants to purchase an aggregate of 1,967,213 shares of common stock, for gross proceeds of $3,000,000. In addition to the shares of common stock and warrants purchased by the investors at closing, each received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor. Each investor's additional investment right is exercisable into additional shares of our common stock and warrants at an exercise price equal to the last bid price, on a consolidated basis, on the trading day immediately proceeding the date on which definitive agreements were signed by us and each investor. The exercise price of all warrants is equal to 130% of such bid price. We undertook the offerings in reliance upon Rule 506 of Regulation D and Section 18(b)(4)(D) of the Securities Act of 1933. The proceeds from the private placement will be used for working capital and other general corporate purposes directly related to our growth, and the development of our products.
o During the first fiscal quarter of 2005, we issued 770,000 shares and 500,000 warrants to purchase our common stock to consultants in exchange for services. For financial reporting purposes, we recognized an expense of $1,254,300 in connection with the issuance of these shares and warrants, which represents their fair market value.
On November 10, 2004, the Company entered into definitive agreements with four accredited investors, pursuant to which the Company will issue convertible promissory notes for aggregate gross proceeds of $4,000,000. The notes carry a 6% coupon and a 15 month term and amortize in 13 equal monthly installments commencing in the third month of the term. The notes are convertible into registered common stock of the Company at a per share price equal to the 10-day Volume Weighted Average Price (VWAP) on the closing date. The coupon and amortization payments are payable in cash or, at the Company's option, in registered stock valued at a 10% discount to the 20-day VWAP at as the payment date. The transaction terms include 100% five-year warrant coverage at a per share exercise price equal to a 10% premium to the 10-day VWAP on the closing date and a 100% additional investment right exercisable for up to twelve months following the effective date of the registration statement in respect of the transaction.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from and should be read in conjunction with our financial statements and related notes, which appear elsewhere in this Annual Report on Form 10-K. Our financial statements for the year ended July 31, 2004 and July 31, 2003 were audited by BDO Dunwoody, LLP. Our financial statements for the years ended July 31, 2002 and 2001 were audited by Deloitte & Touche LLP. Our financial statements for the year ended July 31, 2000 were audited by WithumSmith+Brown.
In thousands, except per share data
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Corporate History
We were incorporated in Delaware in September 1997 for the purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to engage in pharmaceutical and biotechnological research and other activities. Our acquisition of Generex Pharmaceuticals was completed in October 1997 in a transaction in which the holders of all outstanding shares of Generex Pharmaceuticals exchanged their shares for shares of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green Mt. P. S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of this transaction, our stockholders (the former shareholders of Generex Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt., Green Mt. changed its corporate name to Generex Biotechnology Corporation ("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc. Because the reverse acquisition resulted in our stockholders becoming the majority holders of Generex Idaho, we were treated as the acquiring corporation in the transaction for accounting purposes. Thus, our historical financial statements, which essentially represented the historical financial statements of Generex Pharmaceuticals, were deemed to be the historical financial statements of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex Idaho. In this transaction, all outstanding shares of Generex Idaho were converted into our shares, Generex Idaho ceased to exist as a separate entity, and we changed our corporate name back to "Generex Biotechnology Corporation." This reorganization did not result in any material change in our historical financial statements or current financial reporting.
In August, 2003, we acquired Antigen Express, Inc. ("Antigen") pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"). Antigen is engaged in the research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. For details about this acquisition, see "Business History."
Business History
We are primarily engaged in the development of proprietary drug delivery technology. Our principal business focus has been to develop a technology for buccal delivery (absorption through the inner cheek walls) of large molecule drugs, i.e., drugs composed of molecules with molecular weights above a specified level. Large molecule drugs historically have been administered only by injection because their size inhibits or precludes absorption if administered by oral, transdermal, transnasal or other means.
Our first product is an insulin formulation that is administered as a fine spray into the oral cavity using a hand-held aerosol spray applicator. Between January 1999 and September 2000, we conducted limited clinical trials on this product in the United States, Canada and Europe. In September 2000, we entered into an agreement (the "Development and License Agreement") to develop this product with Eli Lilly and Company ("Lilly"). To date, over 800 patients with diabetes have been dosed with our oral insulin product at approved facilities in seven countries. We have conducted several clinical trials with insulin supplied by Lilly under our agreement. Lilly did not, however, authorize or conduct any clinical trials or provide financial support for those trials. We did receive a $1,000,000 up front payment from Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end the Development and License Agreement for the development and commercialization of buccal delivery of insulin. On November 5, 2003, we entered into a termination agreement with Lilly terminating the Development and License Agreement, effective as of June 2, 2003. We will retain all of the intellectual property and commercialization rights with respect to buccal spray drug delivery technology, and we will have the continuing right to develop and commercialize the product. We also entered into a Bulk Supply Agreement (the "Bulk Supply Agreement") for the sale of human insulin crystals by Lilly to us over a three year period. The Bulk Supply Agreement establishes purchase prices, minimum purchase requirements, maximum amounts which may be purchased in each year and a non-refundable prepayment of $1,500,000 to be applied against amounts due for purchases.
In January 2001, we established a joint venture with Elan International Services, Ltd. ("EIS"), a wholly-owned subsidiary of Elan Corporation, plc (EIS and Elan Corporation, plc being collectively referred to as "Elan"), to pursue the application of certain of our and Elan's drug delivery technologies, including our platform technology for the buccal delivery of pharmaceutical products, for the treatment of prostate cancer, endometriosis and/or the suppression of testosterone and estrogen. In January 2002, we and Elan agreed to expand the joint venture to encompass the buccal delivery of morphine for the treatment of pain and agreed to pursue buccal morphine as the initial pharmaceutical product for development under Generex (Bermuda) Ltd., the entity through which the joint venture is being conducted. This expansion of the joint venture occurred after we successfully completed a proof of concept clinical study of morphine delivery using our proprietary buccal delivery technology.
In connection with the joint venture, EIS purchased 1,000 shares of a new series of our preferred stock, designated as Series A Preferred Stock, for $12,015,000. We applied the proceeds from the sale of the Series A Preferred Stock to subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS paid in capital of $2,985,000 to subscribe for a 19.9% equity ownership interest in the joint venture entity. Subsequent to its purchase of the Shares of Series A Preferred Stock, EIS transferred the shares to an affiliate of Elan. While we presently own 80.1% of the joint venture entity, the Elan affiliate has the right, subject to certain conditions, to increase its ownership up to 50% by exchanging the Series A Preferred Stock for 30.1% of our equity ownership of the joint venture entity. Alternatively, the Series A Preferred Stock may be converted, under certain conditions, into shares of our common stock. In accordance with the terms of the Series A Preferred Stock, if any shares of Series A Preferred Stock are outstanding on January 16, 2007, we are required to redeem the shares of Series A Preferred Stock at a redemption price equal to the aggregate Series A Preferred Stock liquidation preference (which currently equals the aggregate original purchase price of the Series A Preferred Stock), either in cash, or in shares of common stock with a fair market value equal to the redemption price. In January 2002, 2003 and 2004, pursuant to the terms of the agreement with EIS, the Elan affiliate received a 6% stock dividend of Series A Preferred Stock.
EIS also purchased 344,116 shares of our common stock for $5,000,000. We were permitted to use the proceeds of this sale for any corporate purpose. If the joint venture achieves certain milestones, we may require EIS to purchase an additional $1,000,000 of our common stock at a 30% premium to the then prevailing fair market value of our common stock.
Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal delivery technology and certain Elan drug delivery technologies. Using the funds from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable license fee of $15,000,000 to Elan in consideration for being granted the rights to utilize the Elan drug delivery technologies.
To date we have not received any substantial economic support from Elan in connection with the joint venture or the development of the morphine product, other than its initial capital contribution. However, we have continued to conduct research and development activities with the morphine product.
Our new subsidiary Antigen is engaged in research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Our immunomedicine products work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self proteins and allergens). Our immunomedicine products are based on two platform technologies that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. The immunomedicine products are in the pre-clinical stage of development, and trials in human patients are not expected for at least 12 months. Development efforts are underway in melanoma, breast cancer, prostate cancer, HIV, SARS vaccine and Type I diabetes. We are establishing collaborations with academic centers to advance the technology, with the ultimate goal of conducting human clinical testing.
We do not expect to receive any revenues from product sales in the current fiscal year. However, we have received and we expect to continue to receive some revenue from research grants for Antigen's immunomedicine products. To date, we have received a total of $627,184 in such research grants. We expect to satisfy all of our cash needs during the current year from capital raised through equity financings.
Disclosure Regarding Research and Development Projects
Our major research and development projects are the refinement of our basic buccal delivery technology, our buccal insulin project and our buccal morphine product.
Both our insulin product and our morphine product are in clinical trials. In Canada, we have recently begun Phase II-B trials for insulin. In order to obtain FDA and Canadian HPB approval for any of our product candidates, we will be required to complete "Phase III" trials which involve testing our product with a large number of patients over a significant period of time. The conduct of Phase III trials will require significantly greater funds than we either have on hand or have experience in raising in any year or two years' time. We will therefore need to receive funding from a corporate collaborator, or engage in fundraising on a scale with which we have no experience.
Because of various uncertainties, we cannot predict the timing of completion of our buccal insulin or buccal morphine products. These uncertainties include the success of current studies, our ability to obtain the required financing and the time required to obtain regulatory approval even if our research and development efforts are completed and successful. For the same reasons, we cannot predict when any products may begin to produce net cash inflows.
Most of our buccal delivery research and development activities to date have involved developing our platform technology for use with insulin and morphine. Insubstantial amounts have been expended on projects with other drugs, and those projects involved a substantial amount of platform technology development. Therefore, in the past, we have not made significant distinctions in the accounting for research and development expenses among products, as a significant portion of all research has involved improvements to the platform technology in connection with insulin, which may benefit all of our potential products. During fiscal 2004, approximately 88% of our $8,522,984 research expenses were attributable to insulin and platform technology development, and approximately 1% was attributable to morphine and fentanyl projects. As morphine and fentanyl are both narcotic painkillers, the research is related. During fiscal 2003, approximately 94% of our $5,150,075 of research and development was expended for insulin and platform technology, and approximately 5.5% for morphine and fentanyl.
Approximately 11%, or $937,385 of our research and development expenses for the fiscal year ended July 31, 2004 were related to Antigen's immunomedicine products. Because these products are in a very early, pre-clinical stage of development, all of the expenses were accounted for as basic research and no distinctions were made as to particular products. Because of the early stage of development, we cannot predict the timing of completion of any products arising from this technology, or when products from this technology might begin producing revenues. However, we can predict that we do not expect to begin clinical trials during the current fiscal year.
Developments in Fiscal 2004
In August 2003, we acquired all of the outstanding capital stock of Antigen pursuant to an Agreement and Plan of Merger (the "Merger Agreement") between us, Antigen and AGEXP Acquisition, Inc. ("AGEXP"), our wholly owned subsidiary that was formed for purposes of the transaction. Pursuant to the Merger Agreement:
o AGEXP merged with and into Antigen (the "Merger"); o Antigen became our wholly owned subsidiary; and o all of the former shareholders of Antigen were entitled to receive shares of our common stock in exchange for their shares of Antigen capital stock.
Antigen has facilities and its headquarters located at Worcester, Massachusetts. Antigen is engaged in research and development to develop immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Antigen's potential products are based on two platform technologies (Ii-Key hybrid peptides and Ii-Suppression) discovered by an officer of Antigen.
The Merger Agreement provided for each holder of Antigen common stock and each holder of each of the four outstanding series of Antigen preferred stock to receive shares of our common stock for each share of Antigen common stock or preferred stock held by such holder. The Merger Agreement established exchange rates for the conversion of Antigen common and the various series of preferred stock into our common stock. Upon consummation of the Merger, we issued an aggregate of approximately 1,779,974 shares of our common stock to the former Antigen stockholders in connection with the Merger, and issued an additional 1,000,000 shares on January 31, 2004. In addition, pursuant to the Merger Agreement, we assumed Antigen common stock purchase options. These options have been exercised for a total of 105,000 shares at an average exercise price of $0.40 per share. The remainder of the option shares expired November 6, 2003.
The shares of our common stock issued in connection with the Merger are restricted securities. However, they are registered for resale pursuant to a registration statement on Form S-3 that became effective in November 2003
More information regarding the accounting for this transaction is contained in Note 3 to our consolidated financial statements contained in this report.
We have committed to funding at least $2,000,000 for Antigen's research and development projects in the next two years.
In January 2004, we completed three private placements of our common stock and warrants. Under the terms of the private placements, we sold units, consisting of an aggregate of 1,984,808 shares of common stock and five-year warrants to purchase an aggregate of 496,202 shares of common stock, to four accredited investors for gross proceeds of $3,000,000. In addition to the shares of common stock and warrants purchased by the investors at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor.
We anticipate using the proceeds from the private placements for working capital and other general corporate purposes directly related to our growth, and the development of our products.
On January 31, 2004, we issued 1,000,000 shares of our common stock we were obligated to issue to the former shareholders of Antigen in accordance with the terms of the Merger Agreement.
In February 2004, we completed three additional private placements of common stock and warrants with three accredited investors. Pursuant to the terms of these private placements, we sold units, consisting of 829,092 shares of common stock and five year warrants to purchase 207,274 shares of common stock, for gross proceeds of $1,264,000. In addition to the shares of common stock and warrants purchased by the investors at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor.
We anticipate using the proceeds from the private placements for working capital and other general corporate purposes directly related to our growth, and the development of our products.
On February 3, 2004, we announced the resignations of Peter Levitch and Dr. Pankaj Modi from our Board of Directors.
On February 12, 2004, we announced the appointment of Mindy J. Allport-Settle to our Board of Directors, filling the vacancy left from Mr. Levitch's resignation. Ms. Allport-Settle has been President and Chief Executive Officer of Integrated Development, LLC ("Integrated") since 1998. Integrated is an independent consulting firm to the pharmaceutical industry, providing informed guidance in operational, project and contract management, new business development and regulatory compliance. In addition to her position with Integrated, Ms. Allport-Settle has been a Vice-President of Impact Management Services, Inc. ("IMS") since 2003, which also provides consulting services to the pharmaceutical industry. In her current positions at Integrated and IMS, Ms. Allport-Settle has worked with companies such as GlaxoSmithKline, Pfizer, AstraZeneca, Johnson Controls and DSM Pharmaceuticals.
On March 9, 2004, we entered into a Memorandum of Agreement as a result of termination of one of our employees, whereby we are required to pay approximately $432,000 and issue stock options to purchase 450,000 shares of our common stock at $1.47 per share.
On March 17, 2004, we announced the appointment of Brian McGee to our Board of Directors. Mr. McGee has been a partner of Zeifman & Company, LLP, Chartered Accounting firm based in Toronto, Ontario, since 1995. Mr. McGee began working at Zeifman shortly after receiving a B.A. degree in Commerce from the University of Toronto in 1985.
In July 2004, we completed a private placement of our common stock and warrants with four accredited investors. In accordance with the terms of the private placement, we sold units, consisting of an aggregate of 2,459,016 shares of our common stock and five-year warrants to purchase an aggregate of 1,967,213 shares of common stock, for gross proceeds of $3,000,000. In addition to the shares of common stock and warrants purchased by the investors at closing, each received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor. Each investor's additional investment right is exercisable into additional shares of our common stock and warrants at an exercise price equal to the last bid price, on a consolidated basis, on the trading day immediately proceeding the date on which definitive agreements were signed by us and each investor. The exercise price of all warrants is equal to 130% of such bid price. We undertook the offerings in reliance upon Rule 506 of Regulation D and Section 18(b)(4)(D) of the Securities Act of 1933. The proceeds from the private placements will be used for working capital and other general corporate purposes directly related to our growth, and the development of our products.
Developments Subsequent to Fiscal 2004.
On August 10, 2004 we issued an aggregate 770,000 shares of our common stock and 500,000 warrants to purchase our common stock to certain consultants in exchange for financial services recognizing expense of $1,254,300 to financial services.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. the Company, awarding Sands $150,000 in reliance damages. No motion to confirm this award has been filed by Sands as of the date of this report. Sands has not sought leave to appeal the vacaturs of the prior panel's warrant award to the New York Court of Appeals.
On August 26, 2004, Dr. Pankaj Modi resigned from his position as an officer of the Company (Vice-President, Research & Development). Also, on August 26, 2004 Dr. Modi gave notice to the Company that the Consulting Agreement between Dr. Modi and the Company will terminate effective August 25, 2005. See "Developments in Fiscal 2004" under Management's Discussion and Analysis. We do not believe that Dr. Modi's resignation or the termination of his Consulting Agreement with us will materially adversely affect us.
On October 18, 2004, the Company entered into Securities Purchase Agreement to sell 800,000 shares of common stock at $2.50 per share for the gross proceeds of $2,000,000. The closing date for this transaction is to be agreed upon, but in no event later than December 10, 2004.
On November 10, 2004, the Company entered into definitive agreements with four accredited investors, pursuant to which the Company will issue convertible promissory notes for aggregate gross proceeds of $4,000,000. The notes carry a 6% coupon and a 15 month term and amortize in 13 equal monthly installments commencing in the third month of the term. The notes are convertible into registered common stock of the Company at a per share price equal to the 10-day Volume Weighted Average Price (VWAP) on the closing date. The coupon and amortization payments are payable in cash or, at the Company's option, in registered stock valued at a 10% discount to the 20-day VWAP at as the payment date. The transaction terms include 100% five-year warrant coverage at a per share exercise price equal to a 10% premium to the 10-day VWAP on the closing date and a 100% additional investment right exercisable for up to twelve months following the effective date of the registration statement in respect of the transaction.
RESTATEMENT
Subsequent to the issuance of its financial statements for the year ended July 31, 2001, management determined that its Series A Preferred stock should be reclassified from stockholders' equity, in accordance with Emerging Issues Task Force Topic D-98, "Classification and Measurement of Redeemable Securities," because the redemption feature of the Series A Preferred stock is beyond our control. This restatement did not affect net loss for the year ended July 31, 2001, nor did it affect total assets. The Series A Preferred stock should have been included outside the statement of stockholders' equity from the date of its issuance in January 2001.
RESULTS OF OPERATIONS - - 2004 COMPARED WITH 2003
We had a net loss of $18,362,583 for the year ended July 31, 2004 (fiscal 2004) compared to a net loss of $13,261,764 in the year ended July 31, 2003 (fiscal 2003). The net loss for fiscal 2004 and 2003 excludes $810,003 and $764,154, respectively, in non-cash stock dividend on preferred shares. The increase in our fiscal 2004 net loss resulted from an increase in research and development expenses (to $8,522,984 from $5,150,075) and an increase in general and administrative expenses (to $10,669,541 from $8,698,615)
The increase in research and development expenses for fiscal 2004 reflects research and development activities of Antigen, the increase in activities of regulatory consultants, bulk insulin purchases and an increase in depreciation of the patents due to additional patents acquired in the Antigen Merger. The increase in general and administrative expenses for fiscal 2004 reflects the increase in consulting services, increased level of participation in industry shows and seminars, travel associated with shows and financing activities, increased insurance and depreciation expenses as well as termination agreements. The increase in general and administrative expenses was partially offset by a decrease in legal and litigation expenses and a reduction in executive compensation.
Our interest and miscellaneous income (net of interest expense) in fiscal 2004 decreased to $129,198 from $565,511 in fiscal 2003 due to decreases in our cash and short-term investments and lower interest rates. We received higher income from rental operations (net of expense) of $73,560 in fiscal 2004 compared to $20,790 in fiscal 2003.
In both of the last two fiscal years, we incurred substantial expenses for financial advisory and other financing services that were not related to a specific financing and, therefore, were accounted for as general and administrative expenses. These expenses ($2,256,503 in fiscal 2004 and $2,239,431 in fiscal 2003) were paid partially through the issuance of common stock and/or warrants and options to purchase common stock.
RESULTS OF OPERATIONS - - 2003 COMPARED WITH 2002
We had a net loss of $13,261,764 for the year ended July 31, 2003 (fiscal 2003) compared to a net loss of $13,693,034 in the year ended July 31, 2002 (fiscal 2002). The net loss for fiscal 2003 and 2002 excludes $764,154 and $720,900, respectively, in preferred stock dividend on preferred shares. The decrease in our fiscal 2003 net loss resulted from a decrease in research and development expenses (to $5,150,075 from $6,618,820) that was offset in part by an increase in general and administrative expenses (to $8,698,615 from $7,911,626)
The increase in general and administrative expenses for fiscal 2003 reflects the issuance of common stock, options and warrants to employees, consultants and advisors for services rendered that resulted in an increase in non-cash charges of $882,698 (to $1,313,585 from $430,887). The increase in general and administrative expenses was partially offset by a decrease in legal and litigation expenses and a reduction in travel expenses. The decrease in research and development expenses for fiscal 2003 reflects the decreased level of research and development activities under our collaboration with Elan and under the collaboration with Lilly, which terminated in May 2003.
Our interest and miscellaneous income (net of interest expense) in fiscal 2003 decreased to $565,511 from $784,852 in fiscal 2002 due to decreases in our cash and short-term investments and lower interest rates. We received income from rental operations (net of expense) of $20,790 in fiscal 2003. We did not receive any income from rental operations in fiscal 2003.
In both of the last two fiscal years, we incurred substantial expenses for financial advisory and other financing services that were not related to a specific financing and, therefore, were accounted for as general and administrative expenses. These expenses ($2,239,431 in fiscal 2003 and $1,144,252 in fiscal 2002) were paid partially through the issuance of common stock and/or warrants and options to purchase common stock.
In addition, in fiscal 2003, the minority shareholder's share of the loss generated by Generex (Bermuda), Ltd., was $625 as compared to a $52,560 in fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
To date we have financed our development stage activities primarily through private placements of common stock. In fiscal 2004, we raised an aggregate of approximately $7,264,000 from private placements. In fiscal 2004 we granted stock options, warrants and shares of common stock to employees, consultants and advisors with a value of $1,538,405 for services rendered, all of which are included in general and administrative expenses. In September 2001, we began a program to repurchase up to $1 million of our common stock from the open market. Through July 31, 2004 we repurchased and cancelled a total of 149,500 shares of common stock for $483,869 at an average price of $3.24 per share. Notwithstanding the repurchase of the shares of common stock, our net loss resulted in a decrease in stockholders' equity to $529,751 at July 31, 2004, versus $5,856,965 at July 31, 2003.
At July 31, 2004, we had on hand cash and short term investments (primarily notes of U.S. corporations) of approximately $5 million versus approximately $14.7 million at July 31, 2003.
We believe that our current cash position is sufficient to meet all of our working capital needs for at least the next 12 months. Beyond that, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise funds through private or public equity financing or from other sources. If we were unable to raise additional capital as needed, we could be required to "scale back" or otherwise revise our business plan. Any significant scale back of operations or modification of our business plan due to a lack of funding could be expected to materially and adversely affect our prospects.
In the past we have funded most of our development and other costs with equity financing. While we have been able to raise equity capital as required, unforeseen problems with our clinical program or materially negative developments in general economic conditions could interfere with our ability to raise additional equity capital as needed, or materially adversely affect the terms upon which such capital is available.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We consider certain accounting policies related to impairment of long-lived assets, intangible assets and accrued liabilities to be critical to our business operations and the understanding of our results of operations:
Impairment of Long-Lived Assets. Management reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable under the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." If it is determined that an impairment loss has occurred based upon expected future cash flows, the loss is recognized in the Statement of Operations.
Intangible Assets. We have intangible assets related to patents. The determination of the related estimated useful lives and whether or not these assets are impaired involves significant judgments. In assessing the recoverability of these intangible assets, we use an estimate of undiscounted operating income and related cash flows over the remaining useful life, market conditions and other factors to determine the recoverability of the asset. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets.
Estimating accrued liabilities, specifically litigation accruals. Management's current estimated range of liabilities related to pending litigation is based on management's best estimate of future costs. While the final resolution of the litigation could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, management believes the ultimate outcome will not have a significant effect on our consolidated results of operations, financial position or cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
TRANSACTIONS WITH AFFILIATES
On May 3, 2001, we advanced $334,300 to each of three senior officers, who are also our stockholders, in exchange for promissory notes. These notes bore interest at 8.5 percent per annum and were payable in full on May 1, 2002. These notes were guaranteed by a related company owned by these officers and secured by a pledge of 2,500,000 shares of our common stock owned by this related company. On June 3, 2002, our Board of Directors extended the maturity date of the loans to October 1, 2002. The other terms and conditions of the loans and guaranty remained unchanged and in full force and effect. As of July 31, 2002, the balance outstanding on these notes, including accrued interest, was $1,114,084. Pursuant to a decision made by the Compensation Committee as of August 30, 2002, these loans were satisfied through the application of 592,716 shares of pledged stock, at a value of $1.90 per share, which represented the lowest closing price during the sixty days prior to August 30, 2002.
Prior to January 1, 1999, a portion of our general and administrative expenses resulted from transactions with affiliated persons, and a number of capital transactions also involved affiliated persons. Although these transactions were not the result of "arms-length" negotiations, we do not believe that this fact had a material impact on our results of operations or financial position. Prior to December 31, 1998, we classified certain payments to executive officers for compensation and expense reimbursements as "Research and Development - related party" and "General and Administrative - related party" because the executive officers received such payments through personal services corporations rather than directly. After December 31, 1998, these payments have been and will continue to be accounted for as though the payments were made directly to the officers, and not as a related party transaction. We do not foresee a need for, and therefore do not anticipate, any related party transactions in the current fiscal year.
On August 7, 2002, we purchased real estate with an aggregate purchase price of approximately $1.6 million from an unaffiliated party. In connection with that transaction, Angara Enterprises, Inc., a licensed real estate broker that is an affiliate of Anna Gluskin, received a commission from the proceeds of the sale to the seller in the amount of 3% of the purchase price, or $45,714. We believe that this is less than the aggregate commission which would have been payable if a commission had been negotiated with an unaffiliated broker on an arm's length basis.
We utilize a management company to manage all of our real properties. The property management company is owned by Rose Perri, Anna Gluskin and the estate of Mark Perri, our former Chairman of the Board. In the fiscal years ended July 31, 2004 and 2003 we paid the management company approximately $40,180 and $33,237, respectively, in management fees.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Additionally, those changes are expected to result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003, and for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, apply in accordance with their respective effective dates. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It also requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable noncontrolling interests. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated with changes in the exchange rates between U.S. and Canadian currencies and with changes in the interest rates related to our fixed rate debt. We do not believe that any of these risks will have a material impact on our financial condition, results of operations and cash flows.
At the present time, we maintain our cash in short term government or government guaranteed instruments, short term commercial paper, interest bearing bank deposits or demand bank deposits which do not earn interest. A substantial majority of these instruments and deposits are denominated in U.S. dollars, with the exception of funds denominated in Canadian dollars on deposit in Canadian banks to meet short term operating needs in Canada. At the present time, with the exception of professional fees and costs associated with the conduct of clinical trials in the United States and Europe, substantially all of our operating expense obligations are denominated in Canadian dollars. We do not presently employ any hedging or similar strategy intended to mitigate against losses that could be incurred as a result of fluctuations in the exchange rates between U.S. and Canadian currencies.
As of July 31, 2004, we have a fixed rate debt totaling $2,224,783 comprised of $787,402 at 5.8%, $300,920 at 8.5%, $573,184 at 9.7%, $187,127 at 10% and $376,150 at 11.5%. All interest rates are fixed and the instruments mature from July 2005 through August 2006. As our fixed rate debt matures, we will likely refinance such debt at their existing market interest rates which may be more or less than the fixed interest rates on the maturing debt. Because this debt is fixed rate debt, if interest rates were to increase 100 basis points prior to maturity, there would be no impact on earnings or cash flows.
We have not issued nor do we own any long term debt instruments, or any other financial instruments, for trading purposes and as to which we would be subject to material market risks.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----
Report of Independent Registered Chartered Accountants -2
Consolidated Balance Sheets July 31, 2004 and 2003
Consolidated Statements of Operations For the Years Ended July 31, 2004, 2003 and 2002 and Cumulative From Inception to July 31, 2004
Consolidated Statements of Changes in Stockholders' Equity For the Period November 2, 1995 (Date of Inception) to July 31, 2004 -
Consolidated Statements of Cash Flows For the Years Ended July 31, 2004, 2003 and 2002 and Cumulative From Inception to July 31, 2004
Notes to Consolidated Financial Statements -
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Directors and Stockholders of Generex Biotechnology Corporation (A Development Stage Company)
We have audited the consolidated balance sheets of Generex Biotechnology Corporation (a development stage company) as at July 31, 2004 and 2003 and the consolidated statements of operation, stockholder's equity and cash flows for the years then ended and for the period from November 2, 1995 (date of inception) to July 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Generex Biotechnology Corporation for the period from November 2, 1995 (date of inception) to July 31, 2002. Such statements are included in the cumulative inception to July 31, 2004 totals on the consolidated statements of operations and cash flows and reflect a net loss of 67% of the related cumulative total. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts for the period from November 2, 1995 (date of inception) to July 31, 2004 included in the cumulative totals, is based solely upon the report of the other auditors.
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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, these consolidated financial statements present fairly, in all material respects, the financial position of Generex Biotechnology Corporation (a development stage company) as at July 31, 2004 and 2003 and the results of its operations and cash flows for the years then ended and for the period from November 2, 1995 (date of inception) to July 31, 2004 in conformity with United States generally accepted accounting principles.
/s/ BDO Dunwoody LLP Independent Registered Chartered Accountants Toronto, Ontario October 6, 2004, except for Note 20 which is as of November 10, 2004
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Stockholders of Generex Biotechnology Corporation:
We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of Generex Biotechnology Corporation and subsidiaries (a development stage company) for the year ended July 31, 2002 and for the period from November 2, 1995 (date of inception) to July 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The Company's financial statements for the period from November 2, 1995 (date of inception) through July 31, 2000 were audited by other auditors whose report, dated September 14, 2000, expressed an unqualified opinion on those statements. The financial statements for the period November 2, 1995 (date of inception) through July 31, 2000 reflect total revenues and net loss of $-0- and $21,816,725, respectively, of the related totals. The other auditors' report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such prior period, is based solely on the report of such auditors.
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 an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended July 31, 2002 and for the period from November 2, 1995 (date of inception) to July 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche, LLP Independent Registered Chartered Accountants
Toronto, Ontario October 7, 2002
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2004 Deficit
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS: Generex Biotechnology Corporation (the Company) is engaged in the research and development of drug delivery systems and technology. Since its inception, the Company has devoted its efforts and resources to the development of a platform technology for the oral administration of large molecule drugs, including proteins, peptides, monoclonal antibodies, hormones and vaccines, which historically have been administered by injection, either subcutaneously or intravenously.
The Company's new subsidiary, Antigen Express, Inc. (Antigen), is engaged in research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. The Company's immunomedicine products work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self proteins and allergens). The immunomedicine products are based on two platform technologies that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. These technologies are expected to greatly boost immune cell responses which diagnose and treat the ailments and conditions.
The Company is a development stage company, which has a limited history of operations and has not generated any revenues from operations prior to the acquisition of Antigen (see Note 3) with the exception of the $1 million received in conjunction with the execution of a development agreement. Subsequent to the acquisition of Antigen, the Company has grant revenue from government agencies related to Antigen's operations. The Company has no products approved for commercial sale at the present time. There can be no assurance that the Company will be successful in obtaining regulatory clearance for the sale of existing or any future products or that any of the Company's products will be commercially viable.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. For those consolidated subsidiaries where the Company ownership is less than 100 percent, the outside stockholders' interests are shown as minority interests. All significant intercompany transactions and balances have been eliminated.
DEVELOPMENT STAGE CORPORATION The accompanying consolidated financial statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standard (SFAS) No. 7, "Accounting and Reporting by Development Stage Enterprises."
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS Short-term investments consisted primarily of short-term notes of U.S. corporations and Canadian government savings bonds with original maturities of between three to twelve months and one to five years at July 31, 2003. These short-term notes are classified as held to maturity and are valued at amortized cost. At July 31, 2003, the cost of the investments approximated market value. There are no short-term investments as of July 31, 2004.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 thirty years. Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.
PROPERTY HELD FOR INVESTMENT Property held for investment is recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the assets of thirty years. Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.
PATENTS Legal costs incurred to establish patents are capitalized. Capitalized costs are amortized on the straight-line method over the related patent term. As patents are abandoned, the net book value of the patent is written off.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS The Company assesses the impairment of patents under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" whenever events or changes in circumstances indicate that the carrying value may not be recoverable. A determination of impairment (if any) is made based on estimates of future cash flows.
REVENUE RECOGNITION Revenue is derived principally from grants from government agencies. The Company recognizes revenue from restricted grants in the period which the Company has incurred the expenditures in compliance with the specific restrictions.
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 income tax expense.
INCOME TAXES Income taxes are accounted for under the asset and liability method prescribed by SFAS No. 109, "Accounting for Income Taxes." 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.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK-BASED COMPENSATION The Company has elected to continue to account for its stock compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Under APB 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is greater than or equal to the market price on the grant date. In connection with the termination of certain employees, the company repriced 1,240,000 options. The repriced options are accounted for under variable accounting and compensation cost is recognized for the difference between the exercise price and the market price of the common shares until such options are exercised, expired or forfeited. During the years ended July 31, 2004 and 2003, the Company recognized $45,390 and $-0- of compensation expense in connection with these options, respectively. Under APB No. 25, no stock-based employee compensation cost related to stock options is reflected in the Company's Statements of Operations, as all options granted under the plan had an exercise price more than or equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123.
NET LOSS PER COMMON SHARE Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. Refer to Note 15 for methodology for determining net loss per share.
COMPREHENSIVE LOSS Other comprehensive income (loss), which includes only foreign currency translation adjustments, is shown in the Statement of Changes in Stockholders' Equity.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
CONCENTRATION OF CREDIT RISK The Company maintains cash balances, at times, with financial institutions in the amount which are more than amounts insured by the Canada Deposit Insurance Corporation and the Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and considers the Company's risk negligible.
The Company places its short-term investments in short-term debt instruments of high quality U.S. corporations and government instruments. The Company does not believe there is a significant credit risk relating to these investments.
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION 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 a weighted average of exchange rates which were in effect during the period. Translation adjustments that arise from translating the foreign subsidiary's financial statements from local currency to U.S. currency are recorded in the other comprehensive loss component of stockholders' equity.
FINANCIAL INSTRUMENTS The carrying values of miscellaneous receivables, accounts payable and accrued expenses approximate their fair values due to their short-term nature. Due from related party approximates its fair value as it is due on demand and long-term debt approximates its fair value based upon the borrowing rates available for the nature of the underlying debt.
The Company follows the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Additionally, those changes are expected to result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003, and for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, apply in accordance with their respective effective dates. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It also requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable noncontrolling interests. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS: On August 8, 2003, the Company acquired all of the outstanding capital stock of Antigen Express, Inc. pursuant to an Agreement and Plan of Merger ("Merger Agreement") and Antigen became a wholly-owned subsidiary of the Company.
Antigen's facilities and headquarters are located in Worcester, Massachusetts. Antigen is engaged in research and development efforts focused on the development of immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases.
The acquisition of Antigen brings two additional platform technologies to the Company. The immunomedicines based on these technologies allow for specific modulation of the immune system to allow for activation and re-activation against cancer and infectious agents and de-activation in the case of if allergy and autoimmune disease. The delivery technologies currently possessed by the Company, when used with Antigen's active immunotherapies may provide for breakthrough therapeutics.
The Merger Agreement provides that each holder of Antigen common stock and each holder of each of the four outstanding series of Antigen preferred stock will receive shares of the Company's common stock, par value $0.001 per share, for each share of Antigen common stock or preferred stock held by such holder. The Merger Agreement establishes exchange rates for the conversion of Antigen common and the various series of preferred stock into the Company's common stock. Assuming that no Antigen stockholder exercises appraisal rights, an aggregate of 2,779,974 shares of the Company's common stock will be issued to the former Antigen stockholders in connection with the Merger. These shares have been valued based upon the average trading price as quoted on the NASDAQ for the five days prior and subsequent to the announcement of the acquisition for a total of $4,645,059 or $1.6709 per share. In addition, pursuant to the Merger Agreement, the Company assumed Antigen common stock purchase options. If these options are fully exercised, the option holders will receive 112,400 shares of the Company's common stock.
In conjunction with this acquisition, the Company recorded approximately $4,878,012 of intangible assets, consisting of granted patents and pending patent applications, which are being amortized on a straight-line basis over their estimated useful lives which range from ten to twenty years. The following table summarizes the fair value of the assets acquired and liabilities assumed in the acquisition:
Current assets $ 100,558 Property and equipment 10,026 Patents 4,878,012 -------------------
Total assets acquired $ 4,988,596
Current liabilities 191,187 ------------------- Net assets acquired $ 4,797,409 ===================
The results of operations of Antigen have been included in the consolidated financial statements since the date of acquisition.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (CONTINUED): The following unaudited pro forma financial information assumes that the acquisition consummated in 2003 had occurred as of the beginning of each period:
NOTE 4 - PROPERTY AND EQUIPMENT: The costs and accumulated depreciation of property and equipment are summarized as follows:
Depreciation expense amounted to $575,709, $474,764 and $393,655 for the years ended July 31, 2004, 2003 and 2002, respectively.
NOTE 5 - PROPERTY HELD FOR INVESTMENT, NET: The costs and accumulated depreciation of assets held for investment are summarized as follows:
Depreciation expense amounted to $59,715, $57,877 and $-0- for the years ended July 31, 2004, 2003 and 2002, respectively.
The Company's intent is to hold this property for investment purposes and collect rental income. Included in income from rental operations, net is $237,040 of rental income and $163,480 of rental expenses, including interest charges of $49,693, for the year ended July 31, 2004.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PATENTS: The costs and accumulated amortization of patents are summarized as follows:
Amortization expense amounted to $377,719, $57,195 and $37,892 for the years ended July 31, 2004, 2003 and 2002, respectively. Amortization expense is expected to be approximately $397,000 per year for the years ended July 31, 2005, 2006, 2007, 2008 and 2009.
NOTE 7 - INCOME TAXES: The Company has incurred losses since inception, which have generated net operating loss carryforwards. The net operating loss carryforwards arise from both United States and Canadian sources. Pretax losses arising from domestic operations (United States) was $15,357,321 and from foreign operations (Canada and Bermuda) was $3,815,265 for the year ended July 31, 2004. As of July 31, 2004, the Company has net operating loss carryforwards in Generex Biotechnology Corporation of approximately $55,293,175, which expire in 2013 through 2024, and in Generex Pharmaceuticals Inc. of approximately $23,859,031, which expire in 2006 through 2011. These loss carryforwards are subject to limitation in future years should certain ownership changes occur.
For the years ended July 31, 2004, 2002 and 2002, 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:
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (CONTINUED):
A reconciliation of the United States Federal Statutory rate to the Company's effective tax rate for the years ended July 31, 2004, 2003 and 2002 is as follows:
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following:
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES:
CONSULTING SERVICES The Company's Consulting Agreement with its Vice President of Research and Development (the V.P.), as amended and supplemented, continues through July 31, 2010, subject to termination without cause by the V.P. or the Company at any time after January 31, 2003 upon 12 months prior written notice. The Consulting Agreement provides for an annual base compensation of $250,000 per year (starting August 1, 2000), subject to annual increases. In addition, the Consulting Agreement provides for certain bonus compensation to be paid to the V.P. for achievement of certain milestones under the Company's development agreements with pharmaceutical companies. During the 2001 fiscal year, the Company paid the V.P. $300,000 for his involvement in securing a development agreement for a specific product with a pharmaceutical company. The Consulting Agreement also provides for the V.P. to be granted options to purchase 150,000 shares of common stock in each of the next 10 fiscal years, starting with the 2001 fiscal year. The options must be granted under option plans approved by the Company's stockholders.
In connection with amending and supplementing the Consulting Agreement in January 1998, the Company issued 1,000 shares of Special Voting Rights Preferred Stock to the V.P. See Note 12 for description of Special Voting Rights Preferred Stock.
Subsequent to July 31, 2004, the V.P. provided advanced notification of termination of this consulting agreement (see Note 20).
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
LEASES The Company has entered into various operating lease agreements for the use of vehicles and office equipment.
Aggregate minimum annual lease commitments of the Company under non-cancelable operating leases as of July 31, 2004 are as follows:
Year Amount ---- ------
2005 $ 37,345 2006 37,345 2007 19,939 2008 6,789 2009 6,789 Thereafter -- ------------- Total Minimum Lease Payments $ 108,207 =============
Lease expense amounted to $12,432, $23,712 and $13,766 for the years ended July 31, 2004, 2003 and 2002, respectively.
The preceding data reflects existing leases and does not include replacements upon their expiration. In the normal course of business, operating leases are generally renewed or replaced by other leases.
RENTAL OPERATIONS The Company leases a portion of the floor that it owns in an office building located in Toronto, Canada, as well as two commercial buildings. The following represents the approximate minimum amount of sublease income under current lease agreements to be received in years ending after July 31, 2004: Year Amount
2005 $ 186,458 2006 133,266 2007 123,253 2008 78,941 2009 32,356 Thereafter -- -------------- Total $ 554,274 ==============
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
PROPERTY HELD FOR INVESTMENT The Company leases units of property that it owns located in Toronto, Canada. The following represents the approximate minimum amount in lease income under current lease agreements to be received in years ending after July 31, 2004:
Year Amount
2005 $ 192,611 2006 179,640 2007 166,393 2008 114,762 2009 36,043 Thereafter -- ------------ Total $ 689,449 ============
SUPPLY AGREEMENTS The Company has a supply agreement with Valois, S.A. and Valois of America, Inc. (collectively Valois), to supply the Company with certain products developed and manufactured by Valois. Pursuant to the agreement, the Company shall pay milestone payments to Valois within 30 days of July 19 beginning in fiscal 2001 for the next five years. These milestone payments are based on exceeding certain specified levels of product purchases. If the milestone obligations are not met after a five-year period, the Company may elect to pay Valois an annual payment of $50,000 until the milestone obligation is met in order to maintain exclusive rights under the agreement. In the event the Company chooses to end the agreement after the fifth anniversary, the Company shall pay Valois a one-time payment of $350,000. There were no milestone payments required by the agreement in the years ended July 31, 2003, 2002 and 2001.
The Company has a supply agreement with Presspart Manufacturing Limited, whereby the Company will purchase its entire requirements for products to use in the administration of insulin through the buccal mucosa and shall not purchase the products or any metal containers competitive to the products from any other person in exchange for an exclusive non-transferable royalty-free irrevocable license to use the products. The contract shall continue for a minimum period of four contract years from the end of the first contract year in which the quantity of products purchased by the Company from Presspart exceeds 10,000,000 units, and thereafter, shall continue until terminated by either party by giving twelve months written notice.
CONCENTRATIONS IN DEVELOPMENT ARRANGEMENTS On November 5, 2003, the Company entered into a Bulk Supply Agreement with a pharmaceutical company for the sale of human insulin crystals to the Company over a three year period. The Bulk Supply Agreement establishes purchase prices, minimum purchase requirements, maximum amounts which may be purchased in each year and a non-refundable prepayment of $1,500,000 to be applied against amounts due for purchases. The prepayment is being expensed as purchases are made. The current and long-term portions have been determined based upon the purchase requirements as established in the agreement less amounts purchased. As of July 31, 2004, $495,000 is included in other current assets, which represents the remaining balance of the prepayment. Additionally, pursuant to this agreement, we have additional minimum purchase commitment of $5.7 million. The Company may reduce or eliminate this commitment by providing a written notice to the supplier prior to June 1, 2005.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
PENDING LITIGATION On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against the Company under New York Stock Exchange rules. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.5 million shares of the Company's common stock. Sands based its claim upon an October 1997 letter agreement that was purported by Sands to confirm an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary of the Company that was acquired in late 1997. In exchange, the letter agreement purported to grant Sands the right to acquire 17 percent of Generex Pharmaceuticals' common stock for nominal consideration. Sands claimed that its right to receive shares of Generex Pharmaceuticals' common stock applies to the Company's common stock since outstanding shares of Generex Pharmaceuticals' common stock were converted into shares of the Company's common stock in the acquisition. Sands' claims also included additional shares allegedly due as a fee related to that acquisition, and $144,000 in monthly fees allegedly due under the terms of the purported agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel that heard this case awarded Sands $14,070 and issued a declaratory judgment requiring the Company to issue to Sands a warrant to purchase 1,530,020 shares of the Company's common stock pursuant to and in accordance with the terms of the purported October 1997 letter agreement. On October 13, 1999, Sands commenced a special proceeding to confirm the arbitration award in the Supreme Court of the State of New York, County of New York (the "New York Supreme Court"). On November 10, 1999, the Company moved to vacate the arbitration award. On March 20, 2000, the New York Supreme Court granted Sands' petition to confirm the award and denied the Company's motion to vacate the award. The Company appealed and on January 23, 2001, the New York State Appellate Division, First Department (the "Appellate Division"), modified the judgment of the New York Supreme Court that had confirmed the arbitration award against the Company. The Appellate Division affirmed the portion of the New York Supreme Court judgment that had confirmed the granting of monetary relief of $14,070 to Sands but modified the judgment to vacate the portion of the arbitration award directing the issuance to Sands of a warrant to purchase 1,530,020 shares of the Company's common stock. The Appellate Division held that the portion of the award directing the Company to issue warrants to Sands is too indefinite to be enforceable and remanded the matter to the arbitration panel for a final and definite award with respect to such relief or its equivalent (including possibly an award of monetary damages). The arbitration panel commenced hearings on the matters remanded by the Appellate Division in June 2001. On November 7, 2001, the arbitration panel issued an award again requiring the Company to issue to Sands a warrant to purchase 1,530,020 shares of the Company's common stock purportedly pursuant to and in accordance with the terms of the October 1997 letter agreement. Thereafter, Sands submitted a motion to the New York Supreme Court to modify and confirm the arbitration panel's award while the Company filed a motion with the court to vacate the arbitration award. On February 25, 2002, the New York Supreme Court vacated the arbitration panel's award. The Supreme Court concluded that the arbitration panel had "disregarded the plain meaning" of the directive given by the Appellate Division in the Appellate Division's January 23, 2001 decision that remanded the matter of the warrant for reconsideration by the panel. The Supreme Court found that the arbitration panel's award "lacks a rational basis". The Supreme Court also remanded the matter to the New York Stock Exchange on the issue of whether the arbitration panel should be disqualified. Sands has appealed the February 25, 2002 order of the Supreme Court to the Appellate Division. The Company filed a cross-appeal on issues relating to the disqualification of the arbitration panel.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
PENDING LITIGATION (CONTINUED) On October 29, 2002, the Appellate Division issued a decision and order unanimously modifying the lower court's order by remanding the issue of damages to a new panel of arbitrators and otherwise affirming the lower court's order. The Appellate Division's decision and order limits the issue of damages before the new panel of arbitrators to reliance damages which is not to include an award of lost profits. Reliance damages are out-of-pocket damages incurred by Sands. The Appellate Division stated that the lower court properly determined that the arbitration award, which had granted Sands warrants for 1,530,020 shares of the registrant's stock, was incorrect.
On March 18, 2003, the Appellate Division of the Supreme Court of New York denied a motion by Sands for re-argument of the October 29, 2002 decision, or, in the alternative, for leave to appeal to the Court of Appeals. A new arbitration took place in early June 2004.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. the Company, awarding Sands $150,000 in reliance damages. No motion to confirm this award has been filed by Sands as of the date of this report. Sands has not sought leave to appeal the vacaturs of the prior panel's warrant award to the New York Court of Appeals. As such, the award is subject to further legal proceedings.
At the present time, the Company is not able to predict the ultimate outcome of this legal proceeding or to estimate a range of possible loss from this legal proceeding. Therefore, no provision has been recorded in the accompanying financial statements.
In February 2001, a former business associate of the Vice President of Research and Development (VP), and an entity called Centrum Technologies Inc. ("CTI") commenced an action in the Ontario Superior Court of Justice against the Company and the VP seeking, among other things, damages for alleged breaches of contract and tortious acts related to a business relationship between this former associate and the VP that ceased in July 1996. The plaintiffs' statement of claim also seeks to enjoin the use, if any, by the Company of three patents allegedly owned by the company called CTI. On July 20, 2001, the Company filed a preliminary motion to dismiss the action of CTI as a nonexistent entity or, alternatively, to stay such action on the grounds of want of authority of such entity to commence the action. The plaintiffs brought a cross motion to amend the statement of claim to substitute Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a corporation of which 50 percent of the shares are owned by the former business associate and the remaining 50 percent are owned by the Company. Consequently, the shareholders of CBI are in a deadlock. The court granted the Company's motion to dismiss the action of CTI and denied the plaintiffs' cross motion without prejudice to the former business associate to seek leave to bring a derivative action in the name of or on behalf of CBI. The former business associate subsequently filed an application with the Ontario Superior Court of Justice for an order granting him leave to file an action in the name of and on behalf of CBI against the VP and the Company. The Company has opposed the application which is now pending before the Court. In September 2003, the Ontario Superior Court of Justice granted the request and issued an order giving the former business associate leave to file an action in the name of and on behalf of CBI against Modi and the Company. A statement of claim was served in July 2004. The Company is not able to predict the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss, if any, from this legal proceeding.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
PENDING LITIGATION (CONTINUED) In February 1997, an individual alleging to be a former employee of Generex Pharmaceuticals, Inc., commenced an action in the Ontario Superior Court of Justice for wrongful dismissal. The Ontario Superior Court of Justice rendered judgment in favor of the plaintiff for approximately $127,000 plus interest in November 1999 and further awarded costs to the plaintiff in March 2000. An appeal of the judgment was filed with the Court of Appeal for Ontario in April 2000. The appeal was heard on February 26, 2003, and on February 28, 2003, the Court of Appeals dismissed the appeal with costs. Generex Pharmaceuticals, Inc., has sought leave to appeal the Courts of Appeal's decision to the Supreme Court of Canada. The appeal was dismissed. The parties have signed Minutes of Settlement in April 2004, pursuant to which the Company is required to pay the plaintiff a total of $280,000 Canadian (approximately $211,000 US) in monthly installments. The installments consist of $20,000 CND on May 1, 2004, $20,000 CND on June 1, 2004, $50,000 CND on July 1, 2004 and 7 monthly payments of $27,142.86 CND each from August 1, 2004 to February 1, 2005.
The Company is involved in certain other legal proceedings in addition to those specifically described herein. Subject to the uncertainty inherent in all litigation, the Company does not believe at the present time that the resolution of any of these legal proceedings is likely to have a material adverse effect on the Company's financial position, operations or cash flows.
With respect to all litigation, as additional information concerning the estimates used by the Company becomes known, the Company reassesses its position both with respect to accrued liabilities and other potential exposures.
EMPLOYMENT AGREEMENTS On March 17, 2003, the Company entered into an employment agreement for an initial term of five years, whereby the Company is required to pay an annual base salary and bonus of $130,000 to the employee. In the event the agreement is terminated within the initial five-year term, by reason other than cause, death, voluntary retirement or disability, the Company is required to pay the employee in one lump sum twelve months base salary and the average annual bonus.
On August 6, 2003, in conjunction with the Antigen acquisition, (see Note 3) the Company entered into at will employment agreements with five Antigen employees requiring the Company to pay an annual aggregate salary of $621,500 to the five employees. In the event any agreement is terminated by reason other than death, disability, a voluntary termination not for good reason (as defined in the agreement) or a termination for cause, the Company is required to pay the employee severance in accordance with the terms of the individual employment agreement. On November 19, 2003, the Company terminated an employment agreement with one of these individuals.
SETTLEMENT AGREEMENTS In April 2004 the Company entered into a settlement agreement with an individual requiring payments of totaling approximately $211,000 ($280,000 Canadian dollars) commencing May 2004 (see Pending Litigation). As of July 31, 2004, $109,000 is included in accounts payable.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
TERMINATION AGREEMENTS On November 19, 2003, the Company terminated its employment agreement with an employee of its wholly owned subsidiary Antigen. In accordance with the terms of the agreement, the terminated employee will receive severance salary in the amount of $175,000, payable in twelve monthly installments of $14,583 each, less withholdings mandated by applicable law. In addition, the terminated employee's benefits package will remain in effect for a period of one year from the date of termination. The remaining installments totaling $72,917 are included in accounts payable and accrued expenses.
On March 9, 2004, the Company entered into a Memorandum of Agreement as a result of the termination of one of its employees whereby the Company has committed to pay approximately $432,000 ($575,000 Canadian dollars), the unpaid portion of $338,535 ($450,000 Canadian dollars) is included in accounts payable and accrued expenses at July 31, 2004, and issue options to purchase 450,000 shares of common stock at an exercise price of $1.47.
NOTE 10 - RELATED PARTY TRANSACTIONS:
The amount due from a related party at July 31, exclusive of the officers' loans receivable, is as follows:
This amount, which is due from EBI, Inc., is non-interest bearing, unsecured and has no fixed terms of repayment. EBI, Inc. is a shareholder of the Company and is controlled by the estate of the Company's former Chairman of the Board.
The Company estimates the following additional amounts would have been recorded if such transaction was consummated under arms-length agreements:
The interest income amounts were computed at estimated prevailing rates based on the average receivable balance outstanding during the periods reflected.
During the years ended July 31, 2004, the Company's three senior officers, and during the years ended July 31, 2003 and 2002, the Company's four senior officers, who are also shareholders of the Company, were compensated indirectly by the Company through management services contracts between the Company and management firms of which they are owners. The amounts paid to these management firms amounted to $927,523, $1,319,238 and $1,075,847 for the years ended July 31, 2004, 2003 and 2002, respectively.
See Note 9 for a discussion of the consulting agreement with the Company's Vice President of Research and Development.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTY TRANSACTIONS (CONTINUED): On May 3, 2001, three of the Company's senior officers, who are also shareholders of the Company, were given loans of $334,300 each, in exchange for promissory notes. These notes bear interest at 8.5 percent per annum and were originally payable in full on May 1, 2002. The notes were extended until October 1, 2002, at terms comparable to the original notes. These notes are guaranteed by a related company owned by these officers and secured by 2,500,000 pledged shares of the Company's common stock currently owned by this related company. In September 2002, the notes were redeemed pursuant to the Stock Pledge Agreement. The outstanding balance of $1,126,157 was repaid with 592,716 shares of common stock, as determined by the Compensation Committee. These shares effectively became treasury stock.
On August 7, 2002 the Company purchased real estate with an aggregate purchase price of approximately $1.6 million from an unaffiliated party. In connection with that transaction, Angara Enterprises, Inc., a licensed real estate broker that is an affiliate of a senior officer of the Company, received a commission from the proceeds of the sale to the seller in the amount of 3% of the purchase price. Management believes that this is less than the aggregate commission which would have been payable if an unaffiliated broker had been used.
The Company utilizes a management company to manage all of its real properties. The property management company is owned by two of the Company's senior officers and the estate of the Company's former Chairman of the Board. For the years ended July 31, 2004, 2003 and 2002, the Company has paid the management company $40,180, $33,237 and $37,535, respectively, in management fees.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - LONG-TERM DEBT: Long-term debt consists of the following:
Aggregate maturities of long-term debt of the Company due within the next five years ending July 31, are as follows:
Year Amount
2005 $ 1,366,122 2006 858,661 Thereafter -- ---------------- Total $ 2,224,783 ================
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SERIES A PREFERRED STOCK: During 2001, the Company issued 1,000 shares of Series A Preferred Stock (Series A) with a par value of $.001 per share. The holder has the right at any time after January 16, 2004 to convert Series A shares into shares of common stock of the Company; the number of shares of common stock issuable upon conversion is variable based on a formula which reflects the common stock price. The holder also has the option to exchange the shares of the Company's Series A Preferred stock for 3,612 shares of the Company's convertible preferred shares of Generex (Bermuda), Ltd. which represents 30.1 percent of the Company's equity ownership in Generex (Bermuda) Ltd. Upon exercise, the holder and the Company would each own 50 percent of Generex (Bermuda) Ltd. (See Note 18 for discussions of Generex (Bermuda), Ltd.) Holders of Series A shares are not entitled to vote. In addition, the holders of Series A shares are entitled to receive a dividend per share equal to the dividend declared and paid on shares of the Company's common stock as and when dividends are declared and paid on the Company's common stock, and are also entitled to receive a mandatory annual dividend equal to 6 percent per year on the original issue price of $12,015 per share. This dividend is to be compounded each anniversary of the date of issuance of the Series A shares and payable by issuance of additional Series A shares valued at the original issue price. Any Series A shares outstanding on January 16, 2007, are to be redeemed for cash or shares of common stock.
On January 15, 2002, the Company paid a 6 percent stock dividend on the Company's Series A Preferred Stock. The dividend was paid in shares of Series A Preferred Stock, and resulted in a charge to accumulated deficit of $720,900, which was calculated based upon the original issue price of the preferred shares.
On January 15, 2003, the Company paid a 6 percent stock dividend on the Company's Series A Preferred Stock. The dividend was paid in shares of Series A Preferred Stock, and resulted in a charge to accumulated deficit of $764,154, which was calculated based upon the original issue price of the preferred shares.
On January 15, 2004, the Company paid a 6 percent stock dividend on the Company's Series A Preferred Stock. The dividend was paid in shares of Series A Preferred Stock, and resulted in a charge to accumulated deficit of $810,003, which was calculated based upon the original issue price of the preferred shares.
At July 31, 2004 and 2003, the Series A had an aggregate liquidation preference of $14,310,057 and $13,500,054, respectively.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY:
WARRANTS As of July 31, 2004, the Company has the following warrants to purchase common stock outstanding:
NOTES RECEIVABLE - COMMON STOCK Notes receivable - common stock consist of two separate promissory notes. The first promissory note was issued in conjunction with the redemption of Series A Redeemable Common Stock Purchase Warrants in June 1999, and was for $50,000. This note, which was originally due on December 1, 1999, was initially extended until October 1, 2000, and then extended until June 1, 2001. On July 31, 2001, the uncollected balance on this note, including accrued interest at 7 percent per annum, was $57,720 and a new promissory note was signed. Under the terms of the July 31, 2001 note, the principal of $57,720, together with accrued interest at 7 percent per annum, was due July 31, 2002. On July 31, 2002, the uncollected balance on this note, including accrued interest, was $61,867 and a new promissory note was signed. Under the terms of the July 31, 2002 note, the principal of $61,867, together with accrued interest at 7 percent per annum, was due July 31, 2003. On July 31, 2003, the uncollected balance on this note, including accrued interest, was $66,198 and a new promissory note was signed. Under the terms of the July 31, 2003 note, the principal of $66,198, together with accrued interest at 7 percent per annum, is due July 31, 2004. As of July 31, 2004 and 2003, the outstanding balance on this note, including accrued interest at 7 percent per annum, was $70,857 and $66,198, respectively. As of July 31, 2004, this note has not been extended.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED):
NOTES RECEIVABLE - COMMON STOCK (CONTINUED) The second promissory note was issued in conjunction with the exercise of 50,000 Common Stock Options in March 2001, and was for $250,000. This note was originally due on March 15, 2002, when a new promissory note was signed, effectively extending the due date to March 15, 2003. On March 15, 2003 a new promissory note was signed, effectively extending the due date to March 15, 2004. As of July 31, 2004 and 2003, the outstanding balance on this note, including accrued interest at 7 percent per annum, was $313,946 and $293,800, respectively. As of July 31, 2004, this note has not been extended. Subsequent to the year end, the Company initiated a legal action to collect on this note.
PREFERRED STOCK The Company has authorized 1,000,000 shares of preferred stock with a par value of one-tenth of a cent ($.001) per share. The preferred stock may be issued in various series and shall have preference as to dividends and to liquidation of the Company. The Company's Board of Directors is authorized to establish the specific rights, preferences, voting privileges and restrictions of such preferred stock, or any series thereof.
SPECIAL VOTING RIGHTS PREFERRED STOCK In 1997, the Company issued 1,000 shares of Special Voting Rights Preferred Stock (SVR Shares) with a par value of $.001. The Company has the right at any time after December 31, 2000, upon written notice to all holders of preferred shares, to redeem SVR Shares at $.10 per share. Holders of SVR Shares are not entitled to vote, except as specifically required by applicable law or in the event of change in control, as defined. In addition, holders of SVR Shares are entitled to receive a dividend per share equal to the dividend declared and paid on shares of the Company's common stock as and when dividends are declared and paid on the Company's common stock.
TREASURY STOCK In September 2001, the Board of Directors of the Company authorized the repurchase of up to $1 million of the Company's common stock from the open market. During the fiscal years ended July 31, 2004 and 2003, the Company purchased -0- and 53,000 shares of common stock to be held in treasury at a cost of $-0- and $88,338, respectively. Also included in treasury stock are 592,716 shares of common stock valued at $1,126,157 received as repayment of officer loans receivable (see Note 10). On November 25, 2003, the Company cancelled all 742,216 shares held in Treasury Stock. The Company originally purchased these shares for $1,610,026.
As of July 31, 2004 and 2003, there were -0- and 742,216 shares held in treasury valued at $-0- and $1,610,026, respectively.
NOTE 14 - STOCK BASED COMPENSATION:
STOCK OPTION PLANS The Company has three stock option plans under which options exercisable for shares of common stock have been or may be granted to employees, directors, consultants and advisors. A total of 1,500,000 shares of common stock are reserved for issuance under the 1998 Stock Option Plan (the 1998 Plan), a total of 2,000,000 shares of common stock are reserved for issuance under the 2000 Stock Option Plan (the 2000 Plan) and a total of 8,000,000 shares of common stock are reserved for issuance under the 2001 Stock Option Plan (the 2001 Plan).
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK BASED COMPENSATION (CONTINUED):
STOCK OPTION PLANS (CONTINUED) The 1998, 2000 and 2001 Plans (the Plans) are administered by the Compensation Committee (the Committee). The Committee 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 Committee 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 Committee.
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 are Non-Qualified Options.
The following is a summary of the common stock options granted, canceled or exercised under the Plan:
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK BASED COMPENSATION (CONTINUED):
STOCK OPTION PLANS (CONTINUED) The following table summarizes information on stock options outstanding at July 31, 2004:
Options typically vest over a period of two years and have a contractual life of five years.
Options exercisable at July 31, are as follows:
During the years ended July 31, 2004, 2003 and 2002, $45,390, $-0- and $-0-, respectively, was charged to compensation expense with respect to options granted to employees and directors of the Company.
The fair value of each option granted is estimated on grant date using the Black-Scholes option pricing model which 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 following is the average of the data used to calculate the fair value:
The weighted average fair value of the Company's stock options calculated using the Black-Scholes option-pricing model for options granted during the years ended July 31, 2004, 2003 and 2002 was $1.24, $1.35 and $4.33 per share, respectively.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK BASED COMPENSATION (CONTINUED):
EQUITY INSTRUMENTS ISSUED FOR SERVICES RENDERED During the years ended July 31, 2004, 2003 and 2002, the Company issued stock options, warrants and shares of common stock in exchange for services rendered to the Company. The fair value of each stock option and warrant was valued using the Black Scholes pricing model which takes into account as of the grant date the exercise price and expected life of the stock option or 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 stock option or warrant. Shares of common stock are valued at the quoted market price on the date of grant. The fair value of each grant was charged to the related expense in the statement of operations for the services received.
NOTE 15 - NET LOSS PER SHARE: Basic EPS and Diluted EPS for the years ended July 31, 2004, 2003 and 2002 have been computed by dividing the net loss available to common stockholders for each respective period by the weighted average shares outstanding during that period. All outstanding warrants and options and shares to be issued upon conversion of Series A Preferred stock, representing approximately 15,058,348 incremental shares, have been excluded from the 2004 computation of Diluted EPS as they are antidilutive due to the losses generated.
NOTE 16 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SEGMENT INFORMATION: The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 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 interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 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 regions in which the Company had identifiable assets and revenues are presented in the following table. Identifiable assets are those that can be directly associated with a geographic area.
NOTE 18 - COLLABORATIVE AGREEMENTS: The Company has a joint venture with Elan International Services, Ltd. ("EIS"), a wholly owned subsidiary of Elan Corporation, plc (EIS and Elan Corporation, plc being collectively referred to as "Elan"). Through the joint venture, the parties agreed to pursue the application of certain of the Company's and Elan's drug delivery technologies, including the Company's platform technology for the buccal delivery of large molecule drugs, to pharmaceutical products for the treatment of prostate cancer, endometriosis and/or the suppression of testosterone and estrogen. In January 2002, the parties expanded the joint venture agreement to include buccal morphine for the management of pain. The parties will conduct the joint venture through Generex (Bermuda), Ltd. (Generex Bermuda), a Bermuda limited liability company. The parties are free to develop other products on their own outside the field of the joint venture.
The Company applied the $12,015,000 that it received from EIS for the shares of the Company's Series A Preferred Stock (see Note 12) to form Generex Bermuda. The Company's interest in this company consists of 6,000 shares of Generex Bermuda common stock and 3,612 shares of convertible preferred stock, representing an 80.1 percent equity ownership interest in Generex Bermuda. At the same time, EIS remitted $2,985,000 to purchase 2,388 shares of Generex Bermuda convertible preferred stock, representing a 19.9 percent equity ownership interest in Generex Bermuda. The Series A Preferred stock has an exchange feature which allows EIS to acquire an additional 30.1 percent equity ownership interest in Generex Bermuda. As of July 31, 2004, 2003 and 2002, the minority interest has been reduced to $-0- due to their share of Generex Bermuda's net loss.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - COLLABORATIVE AGREEMENTS (CONTINUED): Generex Bermuda was granted rights to use the Company's buccal delivery technology and certain Elan drug delivery technologies for purposes of the joint venture. Using the funds from the initial capitalization, Generex Bermuda paid a nonrefundable license fee of $15,000,000 to Elan in consideration for being granted rights to use the Elan drug delivery technologies during the year ended July 31, 2001. The Company expensed the entire cost of the license as a research and development expense because of the uncertainties surrounding the future realization of revenue from the use of the license. During the years ended July 31, 2003 and 2002, Generex Bermuda continued to incur research and development and operational expenses in conjunction with the joint venture's operations. There has been no activity for the year ended July 31, 2004.
NOTE 19 - QUARTERLY INFORMATION (UNAUDITED): The following schedule sets forth certain unaudited financial data for the preceding eight quarters ending July 31, 2004. In our opinion, the unaudited information set forth below has been prepared on the same basis as the audited information and includes all adjustments necessary to present fairly the information set forth herein. The operating results for the quarter are not indicative of results for any future period.
NOTE 20 - SUBSEQUENT EVENTS: On August 10, 2004, the Company issued an aggregate 770,000 shares of common stock and 500,000 warrants to purchase common stock to certain consultants in exchange for financial services.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. the Company, awarding Sands $150,000 in reliance damages. No motion to confirm this award has been filed by Sands as of the date of this report. Sands has not sought leave to appeal the vacaturs of the prior panel's warrant award to the New York Court of Appeals.
On August 26, 2004, the Vice President of Research and Development resigned from his position as an officer of the Company. The V.P. also gave notice to the Company that the Consulting Agreement between the V.P. and the Company will terminate effective August 25, 2005. The Company does not believe that the V.P.'s resignation or the termination of his Consulting Agreement will have a material adverse effect.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS (CONTINUED): On October 18, 2004, the Company entered into Securities Purchase Agreement to sell 800,000 shares of common stock at $2.50 per share for the gross proceeds of $2,000,000. The closing date for this transaction is to be agreed upon, but in no event later than December 10, 2004.
On November 10, 2004, the Company entered into definitive agreements with four accredited investors, pursuant to which the Company will issue convertible promissory notes for aggregate gross proceeds of $4,000,000. The notes carry a 6% coupon and a 15 month term and amortize in 13 equal monthly installments commencing in the third month of the term. The notes are convertible into registered common stock of the Company at a per share price equal to the 10-day Volume Weighted Average Price (VWAP) on the closing date. The coupon and amortization payments are payable in cash or, at the Company's option, in registered stock valued at a 10% discount to the 20-day VWAP at as the payment date. The transaction terms include 100% five-year warrant coverage at a per share exercise price equal to a 10% premium to the 10-day VWAP on the closing date and a 100% additional investment right exercisable for up to twelve months following the effective date of the registration statement in respect of the transaction.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective July 1, 2003, we dismissed Deloitte & Touche, LLP ("Deloitte") and engaged BDO Dunwoody, LLP ("BDO Dunwoody") to serve as the independent public accountants to audit our financial statements for the fiscal year ending July 31, 2003. We have retained BDO Dunwoody to serve as the independent public accountants to audit our financial statements for the fiscal year ending July 31, 2004 as well.
The dismissal of Deloitte and the appointment of BDO Dunwoody as independent public accountants replacing Deloitte was approved by the audit committee of our Board of Directors. Deloitte did not decline to stand for re-election.
During fiscal years ended July 31, 2004 and July 31, 2003, BDO Dunwoody's reports on our financial statements did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. Deloitte's reports on our financial statements for the fiscal year ended July 31, 2002, the last fiscal year during which Deloitte served as our independent public accountants, did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two fiscal years during which Deloitte served as our independent public accountants, and the subsequent interim period preceding Deloitte's dismissal, we had no disagreements with Deloitte, as the term "disagreement" is defined in Item 304(a)(1)(iv) of Regulation S-K, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreements, if not resolved to Deloitte's satisfaction, would have caused Deloitte to make reference to the subject matter of the disagreements in its reports. During the two fiscal years during which Deloitte served as our independent public accountants, and the subsequent interim period preceding Deloitte's dismissal, there were no "reportable events" as that term is defined in Item 304 (a)(1)(v) of Regulation S-K.
Effective July 1, 2003, we engaged BDO Dunwoody as our independent public accountants. During the past two fiscal years, we have had no consultations with BDO Dunwoody concerning: (a) the application of accounting principles to a specific transaction or the type of opinion that might be rendered on our financial statements, as to which a written report was provided to us or as to which we received oral advice from BDO Dunwoody, that BDO Dunwoody concluded was an important factor in reaching a decision on any accounting, auditing or financial reporting issue; or (b) any matter that was the subject of a disagreement or a reportable event, as those terms are defined in Item 304(a)(1)(iv) and (v) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
NOT APPLICABLE.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference from the Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit No. Description - ----------- -----------
2 Agreement and Plan of Merger among Generex Biotechnology Corporation, Antigen Express, Inc. and AGEXP Acquisition Inc. filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the Commission on August 15, 2003 is incorporated herein by reference.
3.1 Restated Certificate of Incorporation of Generex Biotechnology Corporation, as amended, filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended January 31, 2004 filed with the Commission on March 15, 2004 is incorporated herein by reference.
3.2 Bylaws of the Company filed as Exhibit 3.2 to our Registration Statement on Form S-1 (File No. 333-82667) filed with the Commission on July 12, 1999 ("1999 S-1") is incorporated herein by reference.
4.1.1 Form of common stock certificate filed as Exhibit 4.1 to our 1999 S-1 is incorporated herein by reference.
4.1.2 Certificate of Designations, Preferences and Rights of Series A Preferred Stock filed as Exhibit 4.4 to our Report on Form 8-K filed with the Commission on January 23, 2001 ("January 2001 8-K") is incorporated herein by reference.
4.2.1 1998 Stock Option Plan filed as Exhibit 4.3 to our 1999 S-1 is incorporated herein by reference.
4.2.2 2000 Stock Option Plan filed as Exhibit 4.3.2 to our Form 10-K for the fiscal year ended July 31, 2000 filed with the Commission on October 30, 2000 is incorporated herein by reference.
4.2.3 2001 Stock Option Plan filed as Exhibit 4.2.3 to our Form 10-K for the fiscal year ended July 31, 2001 filed with the Commission on October 29, 2001 ("2001 10-K").
4.2.4 Amended 2001 Stock Option Plan filed as Exhibit 4.1 to our Quarterly Report on Form 10-Q for fiscal quarter ended October 31, 2004 filed with the Commission on December 15, 2003 is incorporated hereby by reference.
4.3 Form of Warrant issued to Ladenburg Thalmann & Co., Inc. dated July 6, 2001, filed as Exhibit 4.15 to our Registration Statement on Form S-3 (File No. 333-67118) filed with the Commission on August 8, 2001 is incorporated herein by reference.
4.4.1 Form of Securities Purchase Agreement entered into with Cranshire Capital, L.P.; RAM Trading Ltd.; Gryphon Master Fund; Kodiak Opportunity, L.P.; Kodiak Opportunity 3C7, L.P.; Kodiak Opportunity Offshore, Ltd.; Novelly Exempt Trust; Langley Partners, L.P.; Montrose Investments, Ltd.; WEC Asset Management, LLC; ZLP Master Technology Fund, Ltd.; Alpha Capital Aktiengesellschaft; and The dotCOM Fund, LLC, dated July 3, 2001, filed as Exhibit 1 to our Report on Form 8-K dated July 6, 2001 and filed with the Commission on July 17, 2001 ("July 2001 8-K") is incorporated herein by reference.
4.4.2 Form of Registration Rights Agreement entered into with Cranshire Capital, L.P.; RAM Trading Ltd.; Gryphon Master Fund; Kodiak Opportunity, L.P.; Kodiak Opportunity 3C7, L.P.; Kodiak Opportunity Offshore, Ltd.; Novelly Exempt Trust; Langley Partners, L.P.; Montrose Investments, Ltd.; WEC Asset Management, LLC; ZLP Master Technology Fund, Ltd.; Alpha Capital Aktiengesellschaft; and The dotCOM Fund, LLC, dated July 3, 2001, filed as Exhibit 2 to our July 2001 8-K is incorporated herein by reference.
4.4.3 Form of Warrant granted to Cranshire Capital, L.P.; RAM Trading Ltd.; Gryphon Master Fund; Kodiak Opportunity, L.P.; Kodiak Opportunity 3C7, L.P.; Kodiak Opportunity Offshore, Ltd.; Novelly Exempt Trust; Langley Partners, L.P.; Montrose Investments, Ltd.; WEC Asset Management, LLC; ZLP Master Technology Fund, Ltd.; Alpha Capital Aktiengesellschaft; and The dotCOM Fund, LLC, dated July 6, 2001, filed as Exhibit 3 to our July 2001 8-K is incorporated herein by reference.
4.5.1 Securities Purchase Agreement entered into with Capital Ventures International, dated July 3, 2001, filed as Exhibit 4 to our July 2001 8-K is incorporated herein by reference.
4.5.2 Registration Rights Agreement entered into with Capital Ventures International, dated July 3, 2001, filed as Exhibit 5 to our July 2001 8-K is incorporated herein by reference.
4.5.3 Warrant granted to Capital Ventures International, dated July 3, 2001, filed as Exhibit 6 to our July 2001 8-K is incorporated herein by reference.
4.6.1 Form of Securities Purchase Agreement entered into with Elliott International, L.P. and Elliott Associates, L.P., dated July 3, 2001, filed as Exhibit 7 to our July 2001 8-K is incorporated herein by reference.
4.6.2 Form of Registration Rights Agreement entered into with Elliott International, L.P. and Elliott Associates, L.P., dated July 3, 2001, filed as Exhibit 8 to our July 2001 8-K is incorporated herein by reference.
4.6.3 Warrant issued to Elliott International, L.P. and Elliott Associates, L.P., dated July 5, 2001, filed as Exhibit 9 to our July 2001 8-K is incorporated herein by reference.
4.7.1 Securities Purchase Agreement between Generex Biotechnology Corporation, Elan International Services, Ltd. and Elan Corporation, plc., dated January 16, 2001, filed as Exhibit 4.1 to our Report on Form 8-K/A dated January 16, 2001 filed with the Commission on February 1, 2001 is incorporated herein by reference.
4.7.2 Registration Rights Agreement between Generex Biotechnology Corporation and Elan International Services, Ltd. dated January 16, 2001 filed as Exhibit 4.2 to our January 2001 8-K is incorporated herein by reference.
4.7.3 Form of Warrant issued to Elan International Services, Ltd. filed as Exhibit 4.3 to our January 2001 8-K is incorporated herein by reference.
4.8.1 Form of Securities Purchase Agreement entered into with certain parties to October 2000 Private Placement filed as Exhibit 2 to our Report on Form 8-K dated October 4, 2000 and filed on October 16, 2000 ("October 2000 8-K") is incorporated herein by reference.
4.8.2 Form of Registration Rights Agreement entered into with certain parties to October 2000 Private Placement filed as Exhibit 3 to our October 2000 8-K is incorporated herein by reference.
4.8.3 Form of Warrant issued to certain parties to October 2000 Private Placement filed as Exhibit 4 to our October 2000 8-K is incorporated herein by reference.
4.9 Securities Purchase Agreement entered into with Smallcap World Fund, Inc. dated September 29, 2000 filed as Exhibit 1 to our October 2000 8-K is incorporated herein by reference.
4.10 Form of Warrant (GCR Series) held by Robert P. Carter, Harvey Kaye, Fittube, Inc., Edward Maskaly and Gulfstream Capital Group, L.C. filed as Exhibit 4.4.2 to our Registration Statement on Form 10 filed with the Commission December 14, 1998, as amended February 24, 1999 ("Form 10"), is incorporated herein by reference.
4.11 Letter Agreement and Warrant with M. H. Meyerson & Co., Inc. dated November 17, 1998 filed as Exhibit 4.4.4 to our Form 10 is incorporated herein by reference.
4.12 Option Agreement with Wolfe Axelrod Weinberger LLC dated January 3, 2000, filed as Exhibit 4.5 to our Quarterly Report on Form 10-Q for the quarter ended January 31, 2000 filed with the Commission on March 14, 2000 is incorporated herein by reference.
4.13.1 Form of Securities Purchase Agreement entered into with Cranshire Capital, L.P.; Gryphon Partners, L.P.; Langley Partners, L.P.; Lakeshore Capital, Ltd.; LH Financial; Omicron Capital; Photon Fund, Ltd.; Howard Todd Horberg and Vertical Ventures, LLC dated May 29, 2003 filed as Exhibit 4.1 to our Quarterly Report on Form 10-Q/A for the quarter ended April 30, 2003 ("3Q 2003 10-Q/A") filed with the Commission on August 13, 2003 is incorporated herein by reference.
4.13.2 Form of Registration Rights Agreement entered into with Cranshire Capital, L.P.; Gryphon Partners, L.P.; Langley Partners, L.P.; Lakeshore Capital, Ltd.; LH Financial; Omicron Capital; Photon Fund, Ltd.; Howard Todd Horberg and Vertical Ventures, LLC dated May 29, 2003 filed as Exhibit 4.2 to our 3Q 2003 10-Q/A is incorporated herein by reference.
4.13.3 Form of Warrant granted to Cranshire Capital, L.P.; Gryphon Partners, L.P.; Langley Partners, L.P.; Lakeshore Capital, Ltd.; LH Financial; Omicron Capital; Photon Fund, Ltd.; Howard Todd Horberg and Vertical Ventures, LLC dated May 29, 2003 filed as Exhibit 4.3 to our 3Q 2003 10-Q/A is incorporated herein by reference.
4.13.4 Form of Securities Purchase Agreement entered into with Cranshire Capital, L.P. dated June 6, 2003 filed as Exhibit 4.4 to our 3Q 2003 10-Q/A is incorporated herein by reference.
4.13.5 Form of Registration Rights Agreement entered into with Cranshire Capital, L.P. dated June 6, 2003 filed as Exhibit 4.5 to our 3Q 2003 10-Q/A is incorporated herein by reference.
4.13.6 Form of Warrant granted to Cranshire Capital, L.P. dated June 6, 2003 filed as Exhibit 4.6 to our 3Q 2003 10-Q/A is incorporated herein by reference.
4.13.7 Form of replacement Warrant issued to warrant holders exercising at reduced exercise price in May and June 2003.*
4.14.1 Securities Purchase Agreement, dated December 19, 2003, by and among Generex Biotechnology Corporation and the investors named therein filed as Exhibit 4.1 to our Report on Form 8-K/A dated January 5, 2004 filed with the Commission March 24, 2004 ("March 24, 2004 8-K") is incorporated hereby by reference.
4.14.2 Registration Rights Agreement, dated December 19, 2003, by and among Generex Biotechnology Corporation and the investors named therein filed as Exhibit 4.2 to our March 24, 2004 8-K is incorporated herein by reference.
4.14.3 Form of Warrant issued in connection with 4.14.1 filed as Exhibit 4.3 to our March 24, 2004 8-K is incorporated herein by reference.
4.14.4 Form of Additional Investment Right issued in connection with 4.14.1 filed as Exhibit 4.4 to our March 24, 2004 8-K is incorporated herein by reference.
4.15.1 Securities Purchase Agreement, dated January 7, 2004, by and between Generex Biotechnology Corporation and ICN Capital Limited filed as Exhibit 4.1 to our Report on Form 8 dated January 7, 2004 filed with the Commission March 1, 2004 ("March 1, 2004 8-K") is incorporated herein by reference.
4.15.2 Registration Rights Agreement, dated January 7, 2004, by and between Generex Biotechnology Corporation and ICN Capital Limited filed as Exhibit 4.2 to our March 24, 2004 8-K is incorporated herein by reference.
4.15.3 Warrant issued in connection with 4.15.1 filed as Exhibit 4.3 to our March 24, 2004 8-K is incorporated herein by reference.
4.15.4 Additional Investment Right issued in connection with 4.15.1 filed as Exhibit 4.4 to our March 24, 2004 8-K is incorporated herein by reference.
4.16.1 Securities Purchase Agreement, dated January 9, 2004, by and between Generex Biotechnology Corporation and Vertical Ventures, LLC filed as Exhibit 4.5 to our March 24, 2004 8-K is incorporated herein by reference.
4.16.2 Registration Rights Agreement, dated January 9, 2004, by and between Generex Biotechnology Corporation and Vertical Ventures, LLC filed as Exhibit 4.6 to our March 24, 2004 8-K is incorporated herein by reference.
4.16.3 Warrant issued in connection with 4.16.1 filed as Exhibit 4.7 to our March 24, 2004 8-K is incorporated herein by reference.
4.16.4 Additional Investment Right issued in connection with 4.16.1 filed as Exhibit 4.8 to our March 24, 2004 8-K is incorporated herein by reference.
4.17.1 Securities Purchase Agreement, dated February 6, 2004, by and between Generex Biotechnology Corporation and Alexandra Global Master Fund, Ltd. filed as Exhibit 4.9 to our March 24, 2004 8-K is incorporated herein by reference.
4.17.2 Registration Rights Agreement, dated February 6, 2004, by and between Generex Biotechnology Corporation and Alexandra Global Master Fund, Ltd. filed as Exhibit 4.10 to our March 24, 2004 8-K is incorporated herein by reference.
4.17.3 Warrant issued in connection with 4.17.1 filed as Exhibit 4.11 to our March 24, 2004 8-K is incorporated herein by reference.
4.17.4 Additional Investment Right issued in connection with 4.17.1 filed as Exhibit 4.12 to our March 24, 2004 8-K is incorporated herein by reference.
4.17.5 Escrow Agreement, dated February 26, 2004, by and among Generex Biotechnology Corporation, Eckert Seamans Cherin & Mellott, LLC and Alexandra Global Master Fund, Ltd. filed as Exhibit 4.13 to our March 24, 2004 8-K is incorporated herein by reference.
4.18.1 Securities Purchase Agreement, dated February 11, 2004, by and between Generex Biotechnology Corporation and Michael Sourlis filed as Exhibit 4.14 to our March 24, 2004 8-K is incorporated herein by reference.
4.18.2 Registration Rights Agreement, dated February 11, 2004, by and between Generex Biotechnology Corporation and Michael Sourlis filed as Exhibit 4.15 to our March 24, 2004 8-K is incorporated herein by reference.
4.18.3 Warrant issued in connection with 4.18.1 filed as Exhibit 4.16 to our March 24, 2004 8-K is incorporated herein by reference.
4.18.4 Additional Investment Right issued in connection with 4.18.1 filed as Exhibit 4.17 to our March 24, 2004 8-K is incorporated herein by reference.
4.19.1 Securities Purchase Agreement, dated February 13, 2004, by and between Generex Biotechnology Corporation and Zapfe Holdings, Inc. filed as Exhibit 4.18 to our March 24, 2004 8-K is incorporated herein by reference.
4.19.2 Registration Rights Agreement, dated February 13, 2004, by and between Generex Biotechnology Corporation and Zapfe Holdings, Inc. filed as Exhibit 4.19 to our March 24, 2004 8-K is incorporated herein by reference.
4.19.3 Warrant issued in connection with 4.19.1 filed as Exhibit 4.20 to our March 24, 2004 8-K is incorporated herein by reference.
4.19.4 Additional Investment Right issued in connection with 4.19.1 filed as Exhibit 4.21 to our March 24, 2004 8-K is incorporated herein by reference.
4.20.1 Securities Purchase Agreement, dated June 23, 2004, by and among Generex Biotechnology Corporation and the investors named therein filed as Exhibit 4.1 to our Report on Form 8-K dated July 12, 2004 filed with the Commission on July 14, 2004 ("July 2004 8-K") is incorporated herein by reference.
4.20.2 Registration Rights Agreement, dated June 23, 2004, by and among Generex Biotechnology Corporation and the investors named therein filed as Exhibit 4.2 to July 2004 8-K is incorporated herein by reference.
4.20.3 Form of Warrant issued in connection with 4.20.1 filed as Exhibit 4.3 to July 2004 8-K is incorporated herein by reference.
4.20.4 Form of Additional Investment Right issued in connection with 4.20.1 filed as Exhibit 4.4 to July 2004 8-K is incorporated herein by reference.
10.1.1 Memorandum of Agreement dated January 7, 1998 between Generex Pharmaceuticals, Inc., GHI Inc., Generex Biotechnology Corporation, Dr. Pankaj Modi and Galaxy Technology, Canada and Consulting Agreement between Generex Pharmaceuticals and Pankaj Modi dated October 1, 1996 filed as Exhibit 10.1.1 to our Form 10 is incorporated herein by reference.
10.1.2 Assignment and Assumption Agreement between Generex Pharmaceuticals and Pankaj Modi dated October 1, 1996 filed as Exhibit 10.1.2 to our Registration Statement on Form 10/A filed with the Commission on February 24, 1999 is incorporated herein by reference
10.1.3 Supplemental Agreement dated December 31, 2000 between Generex Pharmaceuticals, Inc., Generex Biotechnology Corporation and Dr. Pankaj Modi, filed as Exhibit 10.1.4 to our 2001 10-K.
10.2.1 Development and License Agreement dated September 5, 2000 between Generex Biotechnology Corporation and Eli Lilly and Company filed as Exhibit 10.1 to our Report on Form 8-K/A dated September 5, 2000 and filed with the Commission on January 24, 2001 is incorporated herein by reference.
10.3.1 Amended and Restated Subscription, Joint Development and Operating Agreement dated January 15, 2002, between Elan Corporation, plc, Elan International Services, Ltd. and Generex Biotechnology Corporation and Generex (Bermuda), Ltd. filed as Exhibit 10.1 to our Current Report on Form 8-K/A ("September 2003 8-K/A") filed with the Commission on September 9, 2003 is incorporated herein by reference.
10.3.2 Amended and Restated License Agreement dated January 15, 2002, between Elan Corporation, plc and Generex (Bermuda), Ltd. filed as Exhibit 10.2 to our September 2003 8-K/A is incorporated herein by reference.
10.3.3 Amended and Restated License Agreement dated January 15, 2002, between Generex Biotechnology Corporation and Generex (Bermuda), Ltd. filed as Exhibit 10.3 to our September 2003 8-K/A is incorporated herein by reference.
10.4 Stockholders Agreement among Generex Biotechnology Corporation and the former holders of capital stock of Antigen Express, Inc. filed as Exhibit 10.4 to our Form 10-K for the fiscal year ended July 31, 2003 filed with the Commission on October 29, 2003 is incorporated herein by reference.
16. Letter from Deloitte & Touche, LLP regarding its concurrence with the statements made by Generex in this Report regarding its dismissal as principal accountant filed as Exhibit 16 to our Current Report on Form 8-K/A filed with the Commission on July 11, 2003 is incorporated herein by reference.
21 Subsidiaries of the Registrant.*
23.1 Consent of BDO Dunwoody, LLP, independent registered chartered accountants.*
23.2 Consent of Deloitte & Touche LLP, independent registered chartered accountants.*
24 Powers of Attorney, filed as Exhibit 24 to our 2001 10-K.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
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* Filed herewith. All other exhibits are incorporated by reference, as described.
REPORTS ON FORM 8-K
The following Reports on Form 8-K were filed during the last quarter of the fiscal year ended July 31, 2004 and subsequent interim period ended October 27, 2004:
o Report on Form 8-K, filed with the Commission July 14, 2004, relating to the private placement of unregistered common stock and warrants under Item 5 - Other Events.
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 28th day of October 2004.
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Anna E. Gluskin ---------------------------- Name: Anna E. Gluskin Title: President Date: November 10, 2004
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.