10-Q 1 tenq.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2004 [ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM_________________ TO ________________ COMMISSION FILE NUMBER: 0-25169 GENEREX BIOTECHNOLOGY CORPORATION ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 98-0178636 ------------------------------- -------------------- (STATE OF OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 33 HARBOUR SQUARE, SUITE 202 TORONTO, ONTARIO CANADA M5J 2G2 ---------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 416/364-2551 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INTERNET WEBSITE: WWW.GENEREX.COM NOT APPLICABLE ------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS The number of outstanding shares of the registrant's common stock, par value $.001, was 31,772,632 as of June 9, 2004. GENEREX BIOTECHNOLOGY CORPORATION INDEX PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -- unaudited............................. 3 Consolidated Balance Sheets -- April 30, 2004 and July 31, 2003........................................... 3 Consolidated Statements of Operations -- for the three and nine month periods ended April 30, 2004 and 2003, and cumulative from November 2, 1995 to April 30, 2004......................................... 4 Consolidated Statements of Cash Flows -- For the nine month periods ended April 30, 2004 and 2003, and cumulative from November 2, 1995 to April 30, 2004......................................... 5 Notes to Consolidated Financial Statements................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................................... 24 Item 4. Controls and Procedures.................................................... 24 PART II: OTHER INFORMATION Item 1. Legal Proceedings.......................................................... 25 Item 2. Changes in Securities and Use of Proceeds.................................. 25 Item 3. Defaults Upon Senior Securities............................................ 26 Item 4. Submission of Matters to a Vote of Security Holders........................ 26 Item 5. Other Information.......................................................... 27 Item 6. Exhibits and Reports on Form 8-K........................................... 33 Signatures.......................................................................... 34
2 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
April 30, July 31, 2004 2003 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 6,195,539 $ 12,356,578 Restricted cash 197,975 188,967 Short-term investments 466,038 2,362,071 Other current assets 1,132,054 319,293 ------------ ------------ Total Current Assets 7,991,606 15,226,909 Property and Equipment, Net 4,264,891 4,218,832 Assets Held for Investment, Net 1,905,063 1,906,312 Patents, Net 5,751,068 898,876 Deposits 359,662 25,000 Due From Related Party 370,808 362,779 ------------ ------------ TOTAL ASSETS $ 20,643,098 $ 22,638,708 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 1,899,543 $ 1,386,214 Current maturities of long-term debt 437,175 426,767 ------------ ------------ Total Current Liabilities 2,336,718 1,812,981 Long-Term Debt, Less Current Maturities 1,446,851 1,468,708 Commitments and Contingencies Series A, Preferred stock, $.001 par value; authorized 1,000,000 shares, stated at redemption value, 1,191 and 1,123 shares issued and outstanding at April 30, 2004 and July 31, 2003, respectively 14,310,057 13,500,054 Stockholders' Equity: Special Voting Rights Preferred stock, $.001 par value; authorized, issued and outstanding 1,000 shares at April 30, 2004 and July 31, 2003 1 1 Common stock, $.001 par value; authorized 150,000,000 and 50,000,000 shares at April 30, 2004 and July 31, 2003, respectively issued 31,803,432 and 26,017,524 shares at April 30, 2004, and July 31, 2003, respectively, and outstanding 31,803,432 and 25,275,308 shares at April 30, 2004 and July 31, 2003, respectively 31,805 26,017 Treasury stock, at cost; -0- and 742,216 shares at April 30, 2004 and July 31, 2003, respectively -- (1,610,026) Additional paid-in capital 94,150,625 85,065,980 Notes receivable - common stock (378,585) (359,998) Deficit accumulated during the development stage (91,450,755) (77,353,787) Accumulated other comprehensive income 196,381 88,778 ------------ ------------ Total Stockholders' Equity 2,549,472 5,856,965 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,643,098 $ 22,638,708 ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements 3 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative From For the Three Months Ended For the Nine Months Ended November 2, 1995 April 30, April 30, (Date of Inception) ---------------------------- ---------------------------- to April 30, 2004 2003 2004 2003 2004 ------------ ------------ ------------ ------------ ------------ Revenues $ 235,129 $ -- $ 420,693 $ -- $ 1,420,693 Operating Expenses: Research and development 2,393,167 731,104 5,378,284 3,497,425 44,023,014 Research and development - related party -- -- -- -- 220,218 General and administrative 2,750,055 2,032,637 8,487,814 6,760,448 52,069,585 General and administrative - related party -- -- -- -- 314,328 ------------ ------------ ------------ ------------ ------------ Total Operating Expenses 5,143,222 2,763,741 13,866,098 10,257,873 96,627,145 ------------ ------------ ------------ ------------ ------------ Operating Loss (4,908,093) (2,763,741) (13,445,405) (10,257,873) (95,206,452) Other Income (Expense): Miscellaneous income (expense) 102 24,380 (3,760) 67,735 125,181 Income from Rental Operations, net 31,470 (4,079) 68,603 17,504 89,393 Interest income 13,906 152,532 190,519 373,141 3,312,867 Interest expense (37,460) (16,963) (96,922) (52,695) (514,872) ------------ ------------ ------------ ------------ ------------ Net Loss Before Undernoted (4,900,075) (2,607,871) (13,286,965) (9,852,188) (92,193,883) Minority Interest Share of Loss -- -- -- 625 3,038,185 ------------ ------------ ------------ ------------ ------------ Net Loss (4,900,075) (2,607,871) (13,286,965) (9,851,563) (89,155,698) Preferred Stock Dividend -- -- 810,003 756,945 2,295,057 ------------ ------------ ------------ ------------ ------------ Net Loss Available to Common Shareholders $ (4,900,075) $ (2,607,871) $(14,096,968) $(10,608,508) $(91,450,755) ============ ============ ============ ============ ============ Basic and Diluted Net Loss Per Common Share $ (.16) $ (.13) $ (.48) $ (.53) ============ ============ ============ ============ Weighted Average Number of Shares of Common Stock Outstanding 31,315,745 20,027,893 29,447,887 20,066,234 ============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements 4 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative From For the Nine Months Ended November 2, 1995 April 30, (Date of Inception) ------------------------------ to April 30, 2004 2003 2004 ------------- ------------- ------------------ Cash Flows From Operating Activities: Net loss $ (13,286,965) $ (9,851,563) $ (89,155,698) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 754,037 428,787 2,216,697 Minority interest share of loss -- (625) (3,038,185) Reduction of notes receivable - common stock in exchange for services rendered -- -- 423,882 Write-off of deferred offering costs -- -- 3,406,196 Write-off of abandoned patents -- 9,134 9,134 Common stock issued for services rendered 1,356,599 153,475 3,651,438 Non-cash compensation expense 45,390 -- 45,390 Stock options and warrants issued for services rendered 178,433 1,159,910 6,286,118 Preferred stock issued for services rendered -- -- 100 Founders' shares transferred for services rendered -- -- 353,506 Changes in operating assets and liabilities (excluding the effects of acquisition): Miscellaneous receivables -- 12,802 43,812 Other current assets (814,084) (147,130) (1,119,186) Accounts payable and accrued expenses 403,794 (619,926) 2,601,990 Other, net -- -- 110,317 ------------- ------------- ------------- Net Cash Used in Operating Activities (11,362,796) (8,855,136) (74,164,489) Cash Flows From Investing Activities: Purchase of property and equipment (395,468) (401,958) (3,978,066) Costs incurred for patents (251,820) (148,236) (1,268,027) Change in restricted cash (4,964) (170,993) (188,047) Proceeds from maturity of short term investments 6,534,816 15,095,089 126,221,008 Purchases of short-term investments (4,638,783) (8,493,397) (126,687,046) Cash received in conjunction with merger 82,232 -- 82,232 Advances to Antigen Express, Inc. (32,000) -- (32,000) Increase in officers' loans receivable -- (12,073) (1,126,157) Change in deposits (360,084) 100,000 (837,278) Change in notes receivable - common stock (18,587) (17,028) (78,585) Change in due from related parties -- -- (2,255,197) Other, net -- -- 89,683 ------------- ------------- ------------- Net Cash Provided by (Used in) Investing Activities 915,342 5,951,404 (10,057,480) Cash Flows From Financing Activities: Proceeds from issuance of long-term debt -- -- 993,149 Repayment of long-term debt (54,937) (42,493) (1,090,288) Change in due to related parties -- -- 154,541 Proceeds from exercise of warrants -- -- 4,552,984 Proceeds from exercise of stock options 126,640 -- 1,010,440 Proceeds from minority interest investment -- 625 3,038,185 Proceeds from issuance of preferred stock -- -- 12,015,000 Purchase of treasury stock -- (89,058) (483,869) Proceeds from issuance of common stock, net 4,195,988 -- 70,324,964 Purchase and retirement of common stock -- -- (119,066) ------------- ------------- ------------- Net Cash Provided by (Used in) Financing Activities 4,267,691 (130,926) 90,396,040 Effect of Exchange Rates on Cash 18,724 26,952 21,468 ------------- ------------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents (6,161,039) (3,007,706) 6,195,539 Cash and Cash Equivalents, Beginning of Period 12,356,578 8,131,463 -- ------------- ------------- ------------- Cash and Cash Equivalents, End of Period $ 6,195,539 $ 5,123,757 $ 6,195,539 ============= ============= =============
The Notes to Consolidated Financial Statements are an integral part of these statements 5 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K. The results for the three and nine months may not be indicative of the results for the entire year. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the fiscal year 2004, in the Company's opinion all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. 2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Additionally, those changes are expected to result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003, and for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, apply in accordance with their respective effective dates. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. 6 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It also requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable noncontrolling interests. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. 3. EMPLOYEE STOCK PLANS The Company has elected to continue to account for its stock compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and related interpretations. Under APB 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is greater than or equal to the market price on the grant date. In connection with the termination of certain employees, the company repriced 1,240,000 options. The repriced options are accounted for under variable accounting and compensation cost is recognized for the difference between the exercise price and the market price of the common shares until such options are exercised, expired or forfeited. During the three and nine months ended April 30, 2004, the Company recaptured/recognized $(30,000) and $45,390 of compensation expense in connection with these options, respectively. During the three and nine months ended April 30, 2003, the Company recorded no compensation expense in connection with options issued. The following table illustrates the effect on net loss and loss per share as if the Company had applied the fair value recognition provisions of SFAS 123.
Three Months Ended Nine Months Ended April 30, April 30, 2004 2003 2004 2003 -------------- ------------- -------------- -------------- Net Loss Available to Common Stockholders, as Reported $ (4,900,075) $ (2,607,871) $ (14,096,968) $ (10,608,508) Add: Total Stock-Based Employee Compensation Included in Reported Net Loss 30,000 -- (45,390) -- Deduct: Total Stock-Based Employee Compensation Income Determined Under Fair Value Based Method, Net of Related Tax Effect 508,500 337,781 1,867,720 2,920,689 ------------- ------------ ------------- ------------- Pro Forma Net Loss Available to Common Stockholders $ (5,438,575) $ (2,945,652) $ (15,919,298) $ (13,529,197) ============= ============ ============= ============= Loss Per Share: Basic and diluted, as reported $ (0.16) $ (0.13) $ (0.48) $ (0.53) ========= ======== ========= ======== Basic and diluted, pro forma $ (0.17) $ (0.15) $ (0.54) $ (0.67) ========= ======== ========= ========
7 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. COMPREHENSIVE INCOME/(LOSS) Comprehensive loss, which includes net loss and the change in the foreign currency translation account during the period, for the three months ended April 30, 2004 and 2003, was $5,036,597 and $2,401,879 and nine months ended April 30, 2004 and 2003, was $13,179,362 and $9,546,121, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
April 30, July 31, 2004 2003 ------------- -------------- Accounts Payable $ 1,629,543 $ 1,094,129 Accrued Legal Fees and Settlement 270,000 292,085 ------------- -------------- Total $ 1,899,543 $ 1,386,214 ============= ==============
6. ACQUISITIONS On August 8, 2003, the Company acquired all of the outstanding capital stock of Antigen Express, Inc. ("Antigen") pursuant to an Agreement and Plan of Merger ("Merger Agreement") and Antigen became a wholly-owned subsidiary of the Company. (See Note 14) Antigen's facilities and headquarters are located in Worcester, Massachusetts. Antigen is engaged in research and development efforts focused on the development of immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. The acquisition of Antigen brings two additional platform technologies to the Company. The immunomedicines based on these technologies allow for specific modulation of the immune system to allow for activation and re-activation against cancer and infectious agents and de-activation in the case of if allergy and autoimmune disease. The delivery technologies currently possessed by the Company, when used with Antigen's active immunotherapies may provide for breakthrough therapeutics. The Merger Agreement also calls for the Company to fund an aggregate amount of not less than $2,000,000 ratably over the two year period following the effective date of the agreement. The advances will be debt, equity or a combination thereof in the sole discretion of the Company. In conjunction with this acquisition, the Company recorded approximately $4,878,012 of intangible assets, consisting of granted patents and pending patent applications, which are being amortized on a straight-line basis over their estimated useful lives which range from ten to twenty years. The following table summarizes the fair value of the assets acquired and liabilities assumed in the acquisition: Current assets $ 100,558 Property and equipment 10,026 Patents 4,878,012 ------------ Total assets acquired $ 4,988,596 Current liabilities 191,187 ------------ Net assets acquired $ 4,797,409 ============ 8 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. ACQUISITIONS (CONTINUED) The results of operations of Antigen have been included in the consolidated financial statements since the date of acquisition. The following unaudited pro forma financial information assumes that the acquisition consummated in 2003 had occurred as of the beginning of each period:
For the Three Months Ended For the Nine Months Ended April 30, April 30, 2004 2003 2004 2003 ------------ ------------- ------------ ------------ Total Revenues $ 235,129 $ 83,908 $ 420,693 $ 275,285 Net Loss Available to Common Stockholders $ 4,900,075 $ 2,647,901 $ 14,096,968 $ 10,923,290 Basic and Diluted Net Loss Per Common Share $ (.16) $ (.12) $ (.48) $ (.48)
7. INTANGIBLE ASSETS The components of the Company's identifiable intangible assets were as follows:
April 30, July 31, 2004 2003 ------------ -------------- Patents $ 6,156,906 $ 1,020,805 Less: Accumulated Amortization 405,838 121,929 ------------ ------------- Patents, Net $ 5,751,068 $ 898,876 ============ ============= Weighted Average Life 16.4 years 17 years
Amortization expense amounted to $283,147 and $41,988 for the nine months ended April 30, 2004 and 2003, respectively. Amortization expense is expected to be approximately $347,000 per year for the years ended July 31, 2004, 2005, 2006, 2007 and 2008. 8. PENDING LITIGATION On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against the Company under New York Stock Exchange rules. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.5 million shares of the Company's common stock. Sands based its claim upon an October 1997 letter agreement that was purported by Sands to confirm an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary of the Company that was acquired in late 1997. In exchange, the letter agreement purported to grant Sands the right to acquire 17 percent of Generex Pharmaceuticals' common stock for nominal consideration. Sands claimed that its right to receive shares of Generex Pharmaceuticals' common stock applies to the Company's common stock since outstanding shares of Generex Pharmaceuticals' common stock were converted into shares of the Company's common stock in the acquisition. Sands' claims also included additional shares allegedly due as a fee related to that acquisition, and $144,000 in monthly fees allegedly due under the terms of the purported agreement. 9 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. PENDING LITIGATION (CONTINUED) Pursuant to an arbitration award dated September 22, 1999, the arbitration panel that heard this case awarded Sands $14,070 and issued a declaratory judgment requiring the Company to issue to Sands a warrant to purchase 1,530,020 shares of the Company's common stock pursuant to and in accordance with the terms of the purported October 1997 letter agreement. On October 13, 1999, Sands commenced a special proceeding to confirm the arbitration award in the Supreme Court of the State of New York, County of New York (the "New York Supreme Court"). On November 10, 1999, the Company moved to vacate the arbitration award. On March 20, 2000, the New York Supreme Court granted Sands' petition to confirm the award and denied the Company's motion to vacate the award. The Company appealed and on January 23, 2001, the New York State Appellate Division, First Department (the "Appellate Division"), modified the judgment of the New York Supreme Court that had confirmed the arbitration award against the Company. The Appellate Division affirmed the portion of the New York Supreme Court judgment that had confirmed the granting of monetary relief of $14,070 to Sands but modified the judgment to vacate the portion of the arbitration award directing the issuance to Sands of a warrant to purchase 1,530,020 shares of the Company's common stock. The Appellate Division held that the portion of the award directing the Company to issue warrants to Sands is too indefinite to be enforceable and remanded the matter to the arbitration panel for a final and definite award with respect to such relief or its equivalent (including possibly an award of monetary damages). The arbitration panel commenced hearings on the matters remanded by the Appellate Division in June 2001. On November 7, 2001, the arbitration panel issued an award again requiring the Company to issue to Sands a warrant to purchase 1,530,020 shares of the Company's common stock purportedly pursuant to and in accordance with the terms of the October 1997 letter agreement. Thereafter, Sands submitted a motion to the New York Supreme Court to modify and confirm the arbitration panel's award while the Company filed a motion with the court to vacate the arbitration award. On February 25, 2002, the New York Supreme Court vacated the arbitration panel's award. The Supreme Court concluded that the arbitration panel had "disregarded the plain meaning" of the directive given by the Appellate Division in the Appellate Division's January 23, 2001 decision that remanded the matter of the warrant for reconsideration by the panel. The Supreme Court found that the arbitration panel's award "lacks a rational basis". The Supreme Court also remanded the matter to the New York Stock Exchange on the issue of whether the arbitration panel should be disqualified. Sands has appealed the February 25, 2002 order of the Supreme Court to the Appellate Division. The Company filed a cross-appeal on issues relating to the disqualification of the arbitration panel. On October 29, 2002, the Appellate Division issued a decision and order unanimously modifying the lower court's order by remanding the issue of damages to a new panel of arbitrators and otherwise affirming the lower court's order. The Appellate Division's decision and order limits the issue of damages before the new panel of arbitrators to reliance damages which is not to include an award of lost profits. Reliance damages are out-of-pocket damages incurred by Sands. The Appellate Division stated that the lower court properly determined that the arbitration award, which had granted Sands warrants for 1,530,020 shares of the registrant's stock, was "totally irrational." On March 18, 2003, the Appellate Division of the Supreme Court of New York denied a motion by Sands for re-argument of the October 29, 2002 decision, or, in the alternative, for leave to appeal to the Court of Appeals. A new arbitration took place in early June 2004. A decision has not been rendered by the arbitrators. At the present time, the Company is not able to predict the ultimate outcome of this legal proceeding or to estimate a range of possible loss from this legal proceeding. Therefore, no provision has been recorded in the accompanying financial statements. 10 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. PENDING LITIGATION (CONTINUED) In February 2001, a former business associate of the Vice President of Research and Development (VP), and an entity called Centrum Technologies Inc. ("CTI") commenced an action in the Ontario Superior Court of Justice against the Company and the VP seeking, among other things, damages for alleged breaches of contract and tortious acts related to a business relationship between this former associate and the VP that ceased in July 1996. The plaintiffs' statement of claim also seeks to enjoin the use, if any, by the Company of three patents allegedly owned by the company called CTI. On July 20, 2001, the Company filed a preliminary motion to dismiss the action of CTI as a nonexistent entity or, alternatively, to stay such action on the grounds of want of authority of such entity to commence the action. The plaintiffs brought a cross motion to amend the statement of claim to substitute Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a corporation of which 50 percent of the shares are owned by the former business associate and the remaining 50 percent are owned by the Company. Consequently, the shareholders of CBI are in a deadlock. The court granted the Company's motion to dismiss the action of CTI and denied the plaintiffs' cross motion without prejudice to the former business associate to seek leave to bring a derivative action in the name of or on behalf of CBI. The former business associate subsequently filed an application with the Ontario Superior Court of Justice for an order granting him leave to file an action in the name of and on behalf of CBI against the VP and the Company. The Company has opposed the application which is now pending before the Court. In September 2003, the Ontario Superior Court of Justice granted the request and issued an order giving the former business associate leave to file an action in the name of and on behalf of CBI against Modi and the Company. The Company is not able to predict the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss, if any, from this legal proceeding. In February 1997, an individual alleging to be a former employee of Generex Pharmaceuticals, Inc., commenced an action in the Ontario Superior Court of Justice for wrongful dismissal. The Ontario Superior Court of Justice rendered judgment in favor of the plaintiff for approximately $127,000 plus interest in November 1999 and further awarded costs to the plaintiff in March 2000. An appeal of the judgment was filed with the Court of Appeal for Ontario in April 2000. The appeal was heard on February 26, 2003, and on February 28, 2003, the Court of Appeals dismissed the appeal with costs. Generex Pharmaceuticals, Inc., has sought leave to appeal the Courts of Appeal's decision to the Supreme Court of Canada. The appeal was dismissed. The parties have signed Minutes of Settlement in April 2004, pursuant to which the Company is required to pay the plaintiff a total of $280,000 Canadian (approximately $205,000 US) in monthly installments. The installments consist of $20,000 CND on May 1, 2004, $20,000 CND on June 1, 2004, $50,000 CND on July 1, 2004 and 7 monthly payments of $27,142.86 CND each from August 1, 2004 to February 1, 2005. 11 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. PENDING LITIGATION (CONTINUED) In July 2002 an individual and his related corporation commenced actions against certain defendants, including the Company and certain officers of the Company, in the Ontario Superior Court of Justice, claiming compensatory damages, punitive damages and various forms of injunctive and declaratory relief for breach of contract and various business torts. Management believes the claims against the Company and the officers are frivolous and completely without merit. Neither the Company nor its officers are a party to any agreement with the plaintiffs. Most of the requested relief relates to restrictions on the use of patents and information allegedly owned by the plaintiffs, and an accounting for the use of such items. Neither the Company nor its officers have used any patents or information owned by the plaintiffs. All of the patents and information claimed to be owned by the plaintiffs are completely unrelated to any product or technology the Company is currently developing or intends to develop. Therefore, even if the court were to award some declaratory or injunctive relief, neither the Company nor its officers would be affected. Management is defending this action vigorously. The parties have now signed Minutes of Settlement resolving all outstanding issues in the action. The settlement did not have a material adverse effect on the Company's financial position, operations or cash flows. The Company is involved in certain other legal proceedings in addition to those specifically described herein. Subject to the uncertainty inherent in all litigation, the Company does not believe at the present time that the resolution of any of these legal proceedings is likely to have a material adverse effect on the Company's financial position, operations or cash flows. With respect to all litigation, as additional information concerning the estimates used by the Company becomes known, the Company reassesses its position both with respect to accrued liabilities and other potential exposures. 9. EMPLOYMENT AGREEMENTS On August 6, 2003, in conjunction with the Antigen acquisition, (see Note 6) the Company entered into at will employment agreements with five Antigen employees requiring the Company to pay an annual aggregate salary of $621,500 to the five employees. In the event any agreement is terminated by reason other than death, disability, a voluntary termination not for good reason (as defined in the agreement) or a termination for cause, the Company is required to pay the employee severance in accordance with the terms of the individual employment agreement. On November 19, 2003, the Company terminated an employment agreement with one of these individuals (see Note 13). 10. NET LOSS PER SHARE Basic EPS and Diluted EPS for the three and nine months ended April 30, 2004 and 2003 have been computed by dividing the net loss for each respective period by the weighted average number of shares outstanding during that period. All outstanding warrants and options, approximately 14,478,070 and 10,778,408 incremental shares at April 30, 2004 and 2003, respectively, have been excluded from the computation of Diluted EPS as they are antidilutive. 12 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Nine Months Ended April 30, ------------------------------ 2004 2003 ------------------------------ Cash paid during the period for: Interest $ 97,701 $ 97,191 Income taxes $ -- $ -- Disclosure of non-cash investing and financing activities: Issuance of Series A Preferred Stock as a preferred stock dividend $ 810,003 $ 756,945 Application of deposit to advances to Antigen Express, Inc. $ 25,000 $ -- Settlement of officers' loans receivable in exchange for shares of common stock held in treasury $ -- $ 1,126,157 Assumption of long-term debt in conjunction with building purchase $ -- $ 1,080,846 Utilization of deposit in conjunction with building purchase $ -- $ 501,839 Acquisition of Antigen Express, Inc through the issuance of common stock and the assumption of stock options $ 4,797,409 $ -- Retirement of treasury stock $ 1,610,026 $ --
12. TRANSACTIONS WITH RELATED PARTY The Company's change in "Due from Related Party" for the nine months ended April 30, 2004 represents only the effect of change in quarter end exchange rate versus that in effect at July 31, 2003. 13. COMMITMENTS AND CONTINGENCIES On November 5, 2003, the Company entered into an agreement ("Termination Agreement") with Eli Lilly and Company to terminate the September 2000 Development and License Agreement, effective June 2, 2003. At the same time, the parties entered into a Bulk Supply Agreement for the sale of human insulin crystals by Lilly to the Company over a three year period. The Bulk Supply Agreement establishes purchase prices, minimum purchase requirements, maximum amounts which may be purchased in each year and a non-refundable prepayment of $1,500,000 to be applied against amounts due for purchases. The prepayment is being expensed as purchases are made. The current and long-term portions have been determined based upon the purchase requirements as established in the agreement less amounts purchased. As of April 30, 2004, $660,000 is included in other current assets and $345,000 is included in deposits, which represents the remaining balance of the prepayment. On November 19, 2003, the Company terminated its employment agreement with an employee of its wholly owned subsidiary, Antigen Express, Inc. In accordance with the terms of the agreement, the terminated employee will receive severance salary in the amount of $175,000, payable in twelve monthly installments of $14,583 each, less withholdings mandated by applicable law. In addition, the terminated employee's benefits package will remain in effect for a period of one year from the date of termination. The remaining installments are included in accounts payable and accrued expenses. 13 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) On March 9, 2004, the Company entered into a Memorandum of Agreement as a result of the termination of one of its employees whereby the Company has committed to pay approximately $432,000 ($575,000 Canadian dollars), the unpaid portion of $328,365 is included in accounts payable and accrued expenses at April 30, 2004, and issue options to purchase 450,000 shares of common stock at an exercise price of $1.47. On March 25, 2004, the Company signed a Letter of Intent with PharmaBrand S.A. ("PharmaBrand") for the procurement of any and all requisite or desirable governmental, regulatory and other registrations, approvals, authorizations and contents for the manufacturing, packaging, marketing, distribution and sale of pharmaceutical products in Latin America and Central America. The final terms of the Joint Venture are still being negotiated. On March 30, 2004, the Company entered into an agreement to acquire certain real property for a purchase price of $164,183 ($225,000 Canadian), $14,594 ($20,000 Canadian) of which has been deposited into attorney trust for application to the final acquisition (see Note 15). In April 2004 the Company entered into a settlement agreement with an individual requiring payments of totaling approximately $205,000 ($280,000 Canadian dollars) commencing May 2004 (see Note 8). This amount is included in accounts payable as of April 30, 2004. 14. STOCKHOLDERS' EQUITY On August 8, 2003, the Company, in conjunction with the Antigen acquisition (see Note 6), issued 1,779,974 shares of common stock in exchange for outstanding shares of Antigen. The Company issued an additional 1,000,000 shares of common stock to the stockholders as defined in the Merger Agreement on January 31, 2004. The 2,779,974 were valued at $1.67 per share, which represented the fair market value of the Company common stock on the date the terms of the agreement were essentially agreed upon, resulting in an aggregate value of $4,642,557 which was assigned to the purchase price of Antigen. In addition, all outstanding options to purchase shares of common stock of Antigen, which totaled 112,400, became fully vested and exercisable for shares of the Company under the terms of the agreement. The options were valued at $154,852 under the Black Scholes pricing model and also included in the purchase price. The total purchase price of $4,797,409 was assigned to the assets acquired, including $4,878,012 of intangible assets, and liabilities assumed. During the nine months ended April 30, 2004, 150,400 stock options were exercised with exercise prices ranging from $0.30 to $2.10 per share, resulting in proceeds of $126,640. In October 2003, the Company issued 487,500 shares of unrestricted common stock to consultants for services rendered, which resulted in charges to the statement of operations of $918,000 based on the quoted market price of the Company stock on the date of issuance. In October 2003, the Company issued 20,000 warrants in exchange for services rendered. The warrants were fully vested on date of issuance and exercisable at $2.50 each for the purchase of one share of the Company's common stock, The warrants, which were valued using the Black Scholes pricing model, resulted in a charge to general and administrative expense of $27,000. 14 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 14. STOCKHOLDERS' EQUITY (CONTINUED) On November 4, 2003, the Company granted a total of 1,046,000 options to purchase shares of common stock with an exercise price of $1.71, which equaled the market price of the Company common stock on the date of issuance. All of the options, except for 115,000, were issued to employees; accordingly no charge to operations was incurred as the Company follows APB 25 (See Note 3). Options issued to other than employees were valued using the Black Scholes pricing model and resulted in a charge to operations of $151,433. On November 25, 2003, the Company cancelled all 742,216 shares held in Treasury Stock. The Company originally purchased these shares for $1,610,026. In January 2004 the Company performed a series of private placements, raising $3,000,000 net of issuance costs of $68,012, through the issuance of 1,984,808 shares of common stock. In conjunction with the placement, the Company issued 496,202 warrants to purchase shares of the Company's common stock at exercise prices ranging from $1.86 to $2.20 at a rate of one share for every four shares of common stock purchased. In addition to the shares of common stock and warrants purchased by the investor at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by the investor. On January 15, 2004, the Company paid a 6 percent stock dividend on the Company's Series A Preferred Stock. The dividend was paid in shares of Series A Preferred stock, and resulted in a charge to accumulated deficit of $810,003, which was based upon the original issue price of the preferred shares. In February 2004, the Company completed three additional private placements for aggregate gross proceeds of $1,264,000 through the issuance of 829,092 shares of common stock and 207,275 warrants to purchase shares of the Company's common stock. In addition to the shares of common stock and warrants purchased by the investor at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of commons stock and warrants initially purchased by such investor. In February 2004, the Company issued 287,500 shares of common stock to consultants for services rendered. The shares were fair valued at quoted market price at date of issuance and resulted in a charge to operations of $425,501. In February 2004, the Company issued 8,850 shares of common stock to employees as compensation for past service. The shares were fair valued at quoted market price at date of issuance and resulted in a charge to operations of $13,098. 15. SUBSEQUENT EVENTS The following event occurred subsequent to April 30, 2004: On June 8, 2004, the Company completed its acquisition of certain real property (see Note 13). 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS We have made statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report that may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by introductory words such as "expects," "plans," "intends," "believes," "will," "estimates," "forecasts," "projects" or words of similar meaning, and by the fact that they do not relate strictly to historical or current facts. Our forward-looking statements address, among other things: o our expectations concerning product candidates for our technology; o our expectations concerning existing or potential development and license agreements for third party collaborations and joint ventures; o our expectations of when different phases of clinical activity may commence; and o our expectations of when regulatory submissions may be filed or when regulatory approvals may be received. Any or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions that we might make or by known or unknown risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in our forward-looking statements. Among the factors that could affect future results are: o the inherent uncertainties of product development based on a new and as yet not fully proven drug delivery technology; o the risks and uncertainties regarding the actual effect on humans of seemingly safe and efficacious formulations when tested clinically; o the inherent uncertainties associated with identification and initial development of product candidates; o the inherent uncertainties associated with clinical trials of product candidates; and o the inherent uncertainties associated with the process of obtaining regulatory approval to market product candidates. Additional factors that could affect future results are set forth in Item 5 of Part II of this Report. We caution investors that the forward-looking statements contained in this Report must be interpreted and understood in light of conditions and circumstances that exist as of the date of this Report. We expressly disclaim any obligation or undertaking to update or revise forward-looking statements made in this Report to reflect any changes in management's expectations resulting from future events or changes in the conditions or circumstances upon which such expectations are based. GENERAL Corporate History. We were incorporated in Delaware in September 1997 for the purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to engage in pharmaceutical and biotechnological research and other activities. Our acquisition of Generex Pharmaceuticals was completed in October 1997 in a transaction in which the holders of all outstanding shares of Generex Pharmaceuticals exchanged their shares for shares of our common stock. In January 1998, we participated in a "reverse acquisition" with Green Mt. P. S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of this transaction, our stockholders (the former shareholders of Generex Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt., Green Mt. changed its corporate name to Generex Biotechnology Corporation ("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc. Because the reverse acquisition resulted in our stockholders becoming the 16 majority holders of Generex Idaho, we were treated as the acquiring corporation in the transaction for accounting purposes. Thus, our historical financial statements, which essentially represented the historical financial statements of Generex Pharmaceuticals, were deemed to be the historical financial statements of Generex Idaho. In April 1999, we completed a reorganization in which we merged with Generex Idaho. In this transaction, all outstanding shares of Generex Idaho were converted into our shares, Generex Idaho ceased to exist as a separate entity, and we changed our corporate name back to "Generex Biotechnology Corporation." This reorganization did not result in any material change in our historical financial statements or current financial reporting. In August, 2003, we acquired Antigen Express, Inc. ("Antigen") pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"). Antigen is engaged in the research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. For details about this acquisition, see "Business History." Business History. We are primarily engaged in the development of proprietary drug delivery technology. Our principal business focus has been to develop a technology for buccal delivery (absorption through the inner cheek walls) of large molecule drugs, i.e., drugs composed of molecules with molecular weights above a specified level. Large molecule drugs historically have been administered only by injection because their size inhibits or precludes absorption if administered by oral, transdermal, transnasal or other means. Our first product is an insulin formulation that is administered as a fine spray into the oral cavity using a hand-held aerosol spray applicator. Between January 1999 and September 2000, we conducted limited clinical trials on this product in the United States, Canada and Europe. In September 2000, we entered into an agreement (the "Development and License Agreement") to develop this product with Eli Lilly and Company ("Lilly"). To date, over 750 patients with diabetes have been dosed with our oral insulin product at approved facilities in seven countries. We have conducted several clinical trials with insulin supplied by Lilly under our agreement. Lilly did not, however, authorize or conduct any clinical trials or provide financial support for those trials. We did receive a $1,000,000 up front payment from Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end the Development and License Agreement for the development and commercialization of buccal delivery of insulin. On November 5, 2003, we entered into a termination agreement with Lilly terminating the Development and License Agreement, effective as of June 2, 2003. We will retain all of the intellectual property and commercialization rights with respect to buccal spray drug delivery technology, and we will have the continuing right to develop and commercialize the product. We also entered into a Bulk Supply Agreement (the "Bulk Supply Agreement") for the sale of human insulin crystals by Lilly to us over a three year period. The Bulk Supply Agreement establishes purchase prices, minimum purchase requirements, maximum amounts which may be purchased in each year and a non-refundable prepayment of $1,500,000 to be applied against amounts due for purchases. In January 2001, we established a joint venture with Elan International Services, Ltd. ("EIS"), a wholly-owned subsidiary of Elan Corporation, plc (EIS and Elan Corporation, plc being collectively referred to as "Elan"), to pursue the application of certain of our and Elan's drug delivery technologies, including our platform technology for the buccal delivery of pharmaceutical products, for the treatment of prostate cancer, endometriosis and/or the suppression of testosterone and estrogen. In January 2002, we and Elan agreed to expand the joint venture to encompass the buccal delivery of morphine for the treatment of pain and agreed to pursue buccal morphine as the initial pharmaceutical product for development under Generex (Bermuda) Ltd., the entity through which the joint venture is being conducted. This expansion of the joint venture occurred after we successfully completed a proof of concept clinical study of morphine delivery using our proprietary buccal delivery technology. In connection with the joint venture, EIS purchased 1,000 shares of a new series of our preferred stock, designated as Series A Preferred Stock, for $12,015,000. We applied the proceeds from the sale of the Series A Preferred Stock to 17 subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS paid in capital of $2,985,000 to subscribe for a 19.9% equity ownership interest in the joint venture entity. Alternatively, the Series A Preferred Stock may be converted, under certain conditions, into shares of our common stock. Subsequent to its purchase of the Shares of Series A Preferred Stock, EIS transferred the shares to an affiliate of Elan. While we presently own 80.1% of the joint venture entity, the Elan affiliate has the right, subject to certain conditions, to increase its ownership up to 50% by exchanging the Series A Preferred Stock for 30.1% of our equity ownership of the joint venture entity. In accordance with the terms of the Series A Preferred Stock, if any shares of Series A Preferred Stock are outstanding on January 16, 2007, we are required to redeem the shares of Series A Preferred Stock at a redemption price equal to the aggregate Series A Preferred Stock liquidation preference (which currently equals the aggregate original purchase price of the Series A Preferred Stock), either in cash, or in shares of common stock with a fair market value equal to the redemption price. In January 2002, 2003 and 2004, pursuant to the terms of the agreement with EIS, the Elan affiliate received a 6% stock dividend of Series A Preferred Stock. EIS also purchased 344,116 shares of our common stock for $5,000,000. We were permitted to use the proceeds of this sale for any corporate purpose. If the joint venture achieves certain milestones, we may require EIS to purchase an additional $1,000,000 of our common stock at a 30% premium to the then prevailing fair market value of our common stock. Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal delivery technology and certain Elan drug delivery technologies. Using the funds from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable license fee of $15,000,000 to Elan in consideration for being granted the rights to utilize the Elan drug delivery technologies. To date we have not received any substantial economic support from Elan in connection with the joint venture or the development of the morphine product, other than its initial capital contribution. However, we have continued to conduct research and development activities with the morphine product. Our new subsidiary Antigen is engaged in research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Our immunomedicine products work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self proteins and allergens). Our immunomedicine products are based on two platform technologies that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. The immunomedicine products are in the pre-clinical stage of development, and trials in human patients are not expected for at least 12 months. Development efforts are underway in melanoma, breast cancer, prostate cancer, HIV, SARS vaccine and Type I diabetes. We are establishing collaborations with academic centers to advance the technology, with the ultimate goal of conducting human clinical testing. We do not expect to receive any revenues from product sales in the current fiscal year. However, we have received and we expect to continue to receive some revenue from research grants for Antigen's immunomedicine products. To date, we have received a total of $420,693 in such research grants. We do not expect the research grants to fully fund Antigen's expenses. We expect to satisfy all of our cash needs during the current year from capital raised through equity financings. DISCLOSURE REGARDING RESEARCH AND DEVELOPMENT PROJECTS Our major research and development projects are the refinement of our basic buccal delivery technology, our buccal insulin project and our buccal morphine product. Both our insulin product and our morphine product are in clinical trials. In Canada, we have recently begun Phase II-B trials for insulin. In order to obtain FDA and Canadian HPB approval for any of our product candidates, we will be required to complete "Phase III" trials which involve testing our product with a large number of patients over a significant period of time. The conduct of Phase III trials will require significantly greater funds than we either have on hand 18 or have experience in raising in any year or two years' time. We will therefore need to receive funding from a corporate collaborator, or engage in fundraising on a scale with which we have no experience. Because of various uncertainties, we cannot predict the timing of completion of our buccal insulin or buccal morphine products. These uncertainties include the success of current studies, our ability to obtain the required financing and the time required to obtain regulatory approval even if our research and development efforts are completed and successful. For the same reasons, we cannot predict when any products may begin to produce net cash inflows. Most of our buccal delivery research and development activities to date have involved developing our platform technology for use with insulin and morphine. Insubstantial amounts have been expended on projects with other drugs, and those projects involved a substantial amount of platform technology development. Therefore, in the past, we have not made significant distinctions in the accounting for research and development expenses among products, as a significant portion of all research has involved improvements to the platform technology in connection with insulin, which may benefit all of our potential products. In the first nine months of fiscal 2004, approximately 90% of our $5,378,284 in research expenses was attributable to insulin and platform technology development, and approximately 1% was attributable to morphine and fentanyl projects. As morphine and fentanyl are both narcotic painkillers, the research is related. In the same period of 2003, approximately 83% of our $3,497,425 of research and development was expended for insulin and platform technology, and approximately 7% for morphine and fentanyl. Approximately 10%, or $547.370 of our research and development expenses for the nine month period ended April 30, 2004 were related to Antigen's immunomedicine products. Because these products are in a very early, pre-clinical stage of development, all of the expenses were accounted for as basic research and no distinctions were made as to particular products. Because of the early stage of development, we cannot predict the timing of completion of any products arising from this technology, or when products from this technology might begin producing revenues. However, we can predict that we do not expect to begin clinical trials during the current fiscal year. Developments in Fiscal Quarter ended April 30, 2004 --------------------------------------------------- In February 2004, we completed three private placements of common stock and warrants with three accredited investors. Pursuant to the terms of these private placements, we sold units, consisting of 829,092 shares of common stock and five year warrants to purchase 207,274 shares of common stock, for gross proceeds of $1,264,000. In addition to the shares of common stock and warrants purchased by the investors at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor. We anticipate using the proceeds from the private placements for working capital and other general corporate purposes directly related to our growth, and the development of our products. On February 3, 2004, we announced the resignations of Peter Levitch and Dr. Pankaj Modi from our Board of Directors. Dr. Modi continues to serve as an officer of the Company. On February 12, 2004, we announced the appointment of Mindy J. Allport-Settle to our Board of Directors, filling the vacancy left from Mr. Levitch's resignation. Ms. Allport-Settle has been President and Chief Executive Officer of Integrated Development, LLC ("Integrated") since 1998. Integrated is an independent consulting firm to the pharmaceutical industry, providing informed guidance in operational, project and contract management, new business development and regulatory compliance. In addition to her position with Integrated, Ms. Allport-Settle has been a Vice-President of Impact Management Services, Inc. ("IMS") since 2003, which also provides consulting services to the pharmaceutical industry. In her current positions at Integrated and IMS, Ms. Allport-Settle has worked with companies such as GlaxoSmithKline, Pfizer, AstraZeneca, Johnson Controls and DSM Pharmaceuticals. 19 On March 9, 2004, we entered into a Memorandum of Agreement as a result of termination of one of our employees, whereby we are required to pay approximately $432,000 and issue stock options to purchase 450,000 shares of our common stock at $1.47 per share. On March 17, 2004, we announced the appointment of Brian T. McGee to our Board, filling the vacancy left by Dr. Modi's resignation. With the addition of Mr. McGee, a majority of the Company's directors are independent directors, as such term is defined under NASDAQ Rule 4200(a)(15). McGee has been a partner of Zeifman & Company, LLP ("Zeifman"), since 1995. Mr. McGee began working at Zeifman shortly after receiving a B.A. degree in Commerce from the University of Toronto in 1985. Zeifman is a Chartered Accounting firm based in Toronto, Ontario. A significant element of Zeifman's business is public corporation accounting and auditing. Mr. McGee is a Chartered Accountant. Developments subsequent to Fiscal Quarter ended April 30, 2004 -------------------------------------------------------------- On May 17, 2004, we held our Annual Meeting of Stockholders. At the meeting, the stockholders re-elected all incumbent directors, including Ms. Allport-Settle and Mr. McGee. Results of Operations - Three and nine months ended April 30, 2004 and 2003 --------------------------------------------------------------------------- We have been in the development stage since inception and have not generated any operating revenues to date, other than $1,000,000 in revenues received in connection with the Development and License Agreement with Lilly in the quarter ended October 31, 2000 and $420,693 in research grants received by Antigen during the nine months ended April 30, 2004. Our net loss for the quarter ended April 30, 2004 was $4,900,075 versus $2,607,871 in the corresponding quarter of the prior fiscal year. The increase in net loss in this fiscal quarter versus the corresponding quarter of the prior fiscal year is primarily due to a significant increase in research and development expenses and an increase in our general and administrative expenses. The increase in general and administrative expenses in the quarter ended April 30, 2004, compared to the quarter ended April 30, 2003, was the result of the increase in financial and consulting services and advertising expenses this year, compared to the same period last year. The increase in general and administrative expenses was partially offset by a reduction in legal expenses. The significant increase of $1,662,063 in research and development expenses in the three-month period ending April 30, 2004 compared to the corresponding period of the prior fiscal year reflects the additional research and development activities by Antigen in the three-month period ending April 30, 2004, increased activities in the clinical development program for our oral insulin formulation and reduced research and development activities last year compared to the same period in 2004. Last year's reduction is attributable to contraction of our research and development activities under our collaboration agreements with Lilly and Elan. Our net loss for the nine months ended April 30, 2004 increased to $13,286,965 versus $9,851,563 for the corresponding period of the prior fiscal year. The increase in net loss was due to an increase in research and development activities of $1,880,859 and an increase in general and administrative expenses of 1,727,366 this year, compared to the same period in 2003. This increase in research and development expenses was due the activities of Antigen and the increased level of activities of our oral insulin program compared to last year. The increase in general and administrative expenses for the nine month ended April 30, 2004 was primarily due to activities of Antigen, accrual of the severance paid to an employee and an increase in financial and consulting services this year compared to 2003. During January 2004, we issued 68 additional shares of Series A Preferred Stock to an affiliate of Elan in payment of the 6% annual stock dividend that was required to be paid on the 1,124 outstanding shares of such stock (1,000 of which were issued in January 2001 as part of our joint venture with Elan and 124 20 of which have been issued as dividends). This resulted in a non-cash charge to accumulated deficit of $810,003 that increased the "net loss available to common stockholders" over the nine months ended April 30, 2004 by a corresponding amount. Inflation and changing prices have not had a significant effect on continuing operations and are not expected to have a material effect in the foreseeable future. Financial Condition, Liquidity and Resources -------------------------------------------- To date we have financed our development stage activities primarily through private placements of common stock. In February 2004, we completed private placements of common stock and warrants with three accredited investors. Pursuant to the terms of these private placements, we sold units, consisting of 829,092 shares of common stock and five year warrants to purchase 207,274 shares of common, stock for gross proceeds of $1,264,000. In addition to the shares of common stock and warrants purchased by the investors at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor. In September 2001, we began a program to repurchase up to $1 million of our common stock from the open market. We repurchased a total of 149,500 shares of common stock to be held in treasury for $484,588, at an average price of $3.24 per share. The Company cancelled all shares held in Treasury Stock on November 25, 2003 that included 592,716 shares received in satisfaction of outstanding loans to officers, as described in "Transactions with Affiliates," below. At April 30, 2004, we had cash and short-term investments (primarily notes of United States corporations) of approximately $6.7 million. At July 31, 2003, our cash and short term investments were approximately $14.7 million. The decrease was attributable to the use of approximately $12.2 million for ongoing operations, which was somewhat offset by the infusion of approximately $4.2 million received by us in the private placements completed in January and February. Our proceeds from the maturity of short term investments were $6,534,816 during the nine month period ended April 30, 2004 versus $15,095,089 during the nine month period ended April 30, 2003. The change is primarily attributable to the lower cash balances in the current period and higher short term interest rates in the same period last year. We believe that our current cash position is sufficient to meet all of our working capital needs for at least the next 7 months based on the pace of our current development activities. Therefore, we will require additional funds to support our working capital requirements in the near future. From time to time as deemed appropriate by management, we may seek to raise additional funds through private or public equity financing or from other sources. If we are unable to raise additional capital as needed, we could be required to "scale back" or otherwise revise our business plan. Any significant scale back of operations or modification of our business plan due to a lack of funding could be expected to affect our prospects materially and adversely. In the past, we have funded most of our development and other costs with equity financing. Often this equity financing is through private placements of our securities in below market transactions. Our stock is listed on the NASDAQ Stock Market, which imposes tight restrictions on the use of below market issuances to raise capital. While we have been able to raise equity capital as required in the past, the NASDAQ rules and regulations may limit our ability to raise capital through these private placements in the future. In addition, unforeseen problems with our clinical program or materially negative developments in general economic conditions could interfere with our ability to raise additional equity capital as needed, or materially adversely affect the terms upon which such capital is available. Critical Accounting Policies ---------------------------- Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 21 assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We consider certain accounting policies related to impairment of long-lived assets, intangible assets and accrued liabilities to be critical to our business operations and the understanding of our results of operations: Impairment of Long-Lived Assets. Management reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable under the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." If it is determined that an impairment loss has occurred based upon expected future cash flows, the loss is recognized in the Statement of Operations. Intangible Assets. We have intangible assets related to patents. The determination of the related estimated useful lives and whether or not these assets are impaired involves significant judgments. In assessing the recoverability of these intangible assets, we use an estimate of undiscounted operating income and related cash flows over the remaining useful life, market conditions and other factors to determine the recoverability of the asset. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets. Estimating accrued liabilities, specifically litigation accruals. Management's current estimated range of liabilities related to pending litigation is based on management's best estimate of future costs. While the final resolution of the litigation could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, management believes the ultimate outcome will not have a significant effect on our consolidated results of operations, financial position or cash flows. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements. CONTRACTUAL OBLIGATIONS
-------------------------------------------------------------------------------------------------------------------------- Payments Due by Period -------------------------------------------------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 1-3 YEARS 3-5 YEARS MORE THAN YEAR 5 YEARS ---------------------------------------------------- ------------ ------------- ------------- ------------- -------------- Long-Term Debt Obligations 1,884,026 437,175 843,646 116,758 486,447 ---------------------------------------------------- ------------ ------------- ------------- ------------- -------------- Capital Lease Obligations 0 0 0 0 0 ---------------------------------------------------- ------------ ------------- ------------- ------------- -------------- Operating Lease Obligations 62,721 27,197 35,524 0 0 ---------------------------------------------------- ------------ ------------- ------------- ------------- -------------- Purchase Obligations 0 0 0 0 0 ---------------------------------------------------- ------------ ------------- ------------- ------------- -------------- Other Long-Term Liabilities Reflected on the 0 0 0 0 0 Registrant's Balance Sheet under GAAP ---------------------------------------------------- ------------ ------------- ------------- ------------- -------------- Total 1,946,747 464,372 879,170 116,758 486,447 ---------------------------------------------------- ------------ ------------- ------------- ------------- --------------
TRANSACTIONS WITH AFFILIATES On May 3, 2001, we advanced $334,300 to each of three senior officers, who are also our stockholders, in exchange for promissory notes. These notes bore interest at 8.5 percent per annum and were payable in full on May 1, 2002. These notes were guaranteed by a related company owned by these officers and secured by a pledge of 2,500,000 shares of our common stock owned by this related company. On June 3, 2002, our Board of Directors extended the maturity date of the loans to October 1, 2002. The other terms and conditions of the loans and guaranty remained unchanged and in full force and effect. As of July 31, 2002, the balance outstanding on these notes, including accrued interest, was 22 $1,114,084. Pursuant to a decision made by the Compensation Committee as of August 30, 2002, these loans were satisfied through the application of 592,716 shares of pledged stock, at a value of $1.90 per share, which represented the lowest closing price during the sixty days prior to August 30, 2002. Prior to January 1, 1999, a portion of our general and administrative expenses resulted from transactions with affiliated persons, and a number of capital transactions also involved affiliated persons. Although these transactions were not the result of "arms-length" negotiations, we do not believe that this fact had a material impact on our results of operations or financial position. Prior to December 31, 1998, we classified certain payments to executive officers for compensation and expense reimbursements as "Research and Development - related party" and "General and Administrative - related party" because the executive officers received such payments through personal services corporations rather than directly. After December 31, 1998, these payments have been and will continue to be accounted for as though the payments were made directly to the officers, and not as a related party transaction. We do not foresee a need for, and therefore do not anticipate, any related party transactions in the current fiscal year. On August 7, 2002, we purchased real estate with an aggregate purchase price of approximately $1.6 million from an unaffiliated party. In connection with that transaction, Angara Enterprises, Inc., a licensed real estate broker that is an affiliate of Anna Gluskin, received a commission from the proceeds of the sale to the seller in the amount of 3% of the purchase price, or $45,714. We believe that this is less than the aggregate commission which would have been payable if a commission had been negotiated with an unaffiliated broker on an arm's length basis. We utilize a management company to manage all of our real properties. The property management company is owned by Rose Perri, Anna Gluskin and the estate of Mark Perri, our former Chairman of the Board. In the fiscal quarters ended April 30, 2004 and 2003 we paid the management company approximately $9,394 and $8,498, respectively, in management fees. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments 23 and Hedging Activities." The changes are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Additionally, those changes are expected to result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003, and for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, apply in accordance with their respective effective dates. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It also requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable noncontrolling interests. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks associated with changes in the exchange rates between U.S. and Canadian currencies and with changes in the interest rates related to our fixed rate debt. We do not believe that any of these risks will have a material impact on our financial condition, results of operations and cash flows. At the present time, we maintain our cash in short term government or government guaranteed instruments, short term commercial paper, interest bearing bank deposits or demand bank deposits which do not earn interest. A substantial majority of these instruments and deposits are denominated in U.S. dollars, with the exception of funds denominated in Canadian dollars on deposit in Canadian banks to meet short term operating needs in Canada. At the present time, with the exception of professional fees and costs associated with the conduct of clinical trials in the United States and Europe, substantially all of our operating expense obligations are denominated in Canadian dollars. We do not presently employ any hedging or similar strategy intended to mitigate against losses that could be incurred as a result of fluctuations in the exchange rates between U.S. and Canadian currencies. As of April 30, 2004, we have fixed rate debt totaling $1,884,026 of which $778,342, $558,066 and $547,618 bears interest at a fixed rate of 5.8%, 9.7% and 10%, respectively. These debt instruments mature from July 2004 through October 2005. As our fixed rate debt mature, we will likely refinance such debt at their existing market interest rates which may be more or less than interest rates on the maturing debt. Since this debt is fixed rate debt, if interest rates were to increase 100 basis points prior to maturity, there would be no impact on earnings or cash flows. We have neither issued nor own any long term debt instruments, or any other financial instruments, for trading purposes and as to which we would be subject to material market risks. ITEM 4. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. 24 CHANGES IN INTERNAL CONTROLS. There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15(d) - 15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Hope Manufacturing, Inc. and Steven Wood. This previously reported Ontario Superior Court action has been settled by our payment of a non-material sum of money. The parties have executed a mutual full and final release Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. A new arbitration hearing was held in early June, 2004. A decision has not yet been rendered by the new arbitration panel which held that hearing. There were no other legal proceedings which first became reportable or in which there were material developments during the fiscal quarter ended April 30, 2004. For a full description of the foregoing legal proceedings, and all other legal proceedings against us, see our Report on Form 10-K, as amended, for the year ended July 31, 2003, which is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following transaction occurred during fiscal quarter ended April 30, 2004: o In February 2004, we completed two additional private placements of common stock and warrants with two accredited investors. Pursuant to the terms of these private placements, we sold units, consisting of 829,092 shares of common stock and five year warrants to purchase 207,274 shares of common stock, for gross proceeds of $1,264,000. In addition to the shares of common stock and warrants purchased by the investors at each closing, each investor received an additional investment right to purchase for a period of time up to the same number of shares of common stock and warrants initially purchased by such investor. Each investor's additional investment right is exercisable into additional shares of our common stock and warrants at an exercise price equal to the last bid price, on a consolidated basis, on the trading day immediately proceeding the date on which definitive agreements were signed by us and each investor. The exercise price of all warrants is equal to 130% of such bid price. We undertook the offerings in reliance upon Rule 506 of Regulation D and Section 18(b)(4)(D) of the Securities Act. The proceeds from the private placements will be used for working capital and other general corporate purposes directly related to our growth, and the development of our products. o On February 6, 2004, we authorized the issuance of an aggregate of 287,500 shares of common stock to three consultants for consulting services. The shares were fair valued at quoted market price at date of issuance and resulted in a charge to operations of $425,501. As the transactions were not eligible for S-8 registration, we relied on Section 4(2) of the Securities Act in connection with the issuance of these shares. The shares are restricted, and each of the consultants, being primarily engaged in the financial industry, had access to the information which would have been presented in a registration statement and sufficient sophistication so as to not require the protections afforded by registration under the Securities Act. All of these shares have been registered for resale on form S-3. 25 o In February 2004, the Company issued 8,850 shares of common stock to employees as compensation for past service. The shares were fair valued at quoted market price at date of issuance and resulted in a charge to operations of $13,098. We relied on the exemption provided by section 4(2) of the securities ACT, or, alternatively, on the fact that no consideration was given as there was no prior agreement as to the issuance of these shares. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of Generex Biotechnology Corporation was held on March 17, 2004. At the meeting, 19,786,399 shares of Common Stock were represented and entitled to vote. Generex stockholders elected all nominees to the Board of Directors, approved a proposal relating to issuance of common stock at less than market value and ratified the appointment of BDO Dunwoody, LLP as independent public accountants for the fiscal year ending July 31, 2004. The results of the vote for the Board of Directors was as follows:
Election of nominees to Board of Directors for terms expiring May 2004 Votes For Votes Against Abstentions ------------------------------------- --------- ------------- ----------- Mindy Allport- Settle 19,492,947 0 293,452 John P. Barratt 19,497,602 0 288,797 Gerald Bernstein, M.D. 19,324,977 0 461,422 Anna E. Gluskin 19,466,979 0 319,420 Brian T. McGee 19,479,476 0 306,923 Rose C. Perri 19,454,744 0 331,655 J. Michael Rosen 19,489,126 0 297,273
The proposal approved relating to issuance of below market priced securities was to authorize the Board of Directors, in the three-month period commencing with the date of the meeting, to issue, without prior stockholder approval, in connection with capital raising transactions, and/or acquisitions of assets, businesses or companies, up to 10,000,000 shares of common stock, including options, warrants, securities or other rights convertible into common stock, in the aggregate, in excess of the number of shares that NASDAQ's Rules 4350(i)(1)(C) and (D) permit the Company to issue in such transactions without prior stockholder approval. The issuance of such 10,000,000 shares to be upon such terms as the Board of Directors shall deem to be in the best interests of the Company, for a price of not less than 70% of the at the time of such issuance and for an aggregate consideration not to exceed $50,000,000. The authorization also applies to prior issuances of common stock which are considered retroactively to have been issued at below market price dud to "integration" with a new issuance 26 The results of the votes on the proposals were as follows:
Broker Votes For Votes Against Abstention Non-Votes ---------- ------------- ----------- ----------- Proposal to Authorize Issuance 6,052,604 834,765 57,382 12,841,648 of Shares at below Market Prices Ratification of BDO Dunwoody 19,547,356 189,187 49,856 0 As Independent Public Accountants
ITEM 5. OTHER INFORMATION An investment in our stock is very speculative and involves a high degree of risk. You should carefully consider the following important factors, as well as the other information in this Report and the other reports that we have filed heretofore (and will file hereafter) with the SEC, before purchasing our stock. The following discussion outlines certain factors that we think could cause our actual outcomes and results to differ materially from our forward-looking statements. We have a history of losses, and will incur additional losses. We are a development stage company with a limited history of operations, and do not expect ongoing revenues from operation in the immediately foreseeable future. To date, we have not been profitable and our accumulated net loss before preferred stock dividend was $89,158,333 at April 30, 2004. Our losses have resulted principally from costs incurred in research and development, including clinical trials, and from general and administrative costs associated with our operations. While we seek to attain profitability, we cannot be sure that we will ever achieve product and other revenue sufficient for us to attain this objective. Our product candidates are in research or early stages of pre-clinical and clinical development. We will need to conduct substantial additional research, development and clinical trials. We will also need to receive necessary regulatory clearances both in the United States and foreign countries and obtain meaningful patent protection for and establish freedom to commercialize each of our product candidates. We cannot be sure that we will obtain required regulatory approvals, or successfully research, develop, commercialize, manufacture and market any other product candidates. We expect that these activities, together with future general and administrative activities, will result in significant expenses for the foreseeable future. We need for additional capital To progress in product development or marketing, we will need additional capital which may not be available to us. This may delay our progress in product development or market. We will require funds in excess of our existing cash resources: o to proceed with the development of our buccal insulin product o to proceed under our joint venture with Elan, which requires us to fund 80.1% of initial product development costs; o to develop other buccal and immunomedicine products; o to develop new products based on our buccal delivery and immunomedicine technologies, including clinical testing relating to new products; o to develop or acquire other technologies or other lines of business; o to establish and expand our manufacturing capabilities; 27 o to finance general and administrative and research activities that are not related to specific products under development; and o to finance the research and development activities of our new subsidiary Antigen. We have agreed to fund at least $2,000,000 of Antigen expenditures during the first two years following the acquisition. To date we have funded approximately $900,000 of those expenditures. In the past, we have funded most of our development and other costs through equity financing. We anticipate that our existing capital resources will enable us to maintain currently planned operations through the next seven months. However, this expectation is based on our current operating plan, which could change as a result of many factors, and we may need additional funding sooner than anticipated. Because our operating and capital resources are insufficient to meet future requirements, we will have to raise additional funds in the near future to continue the development and commercialization of our products. Unforeseen problems, including materially negative developments in our joint venture with Elan, in our clinical trials or in general economic conditions, could interfere with our ability to raise additional equity capital or materially adversely affect the terms upon which such funding is available. Recent changes in the application of the rules of the NASDAQ Stock Market may also make it more difficult for us to raise private equity capital. It is possible that we will be unable to obtain additional funding as and when we need it. If we were unable to obtain additional funding as and when needed, we could be forced to delay the progress of certain development efforts. Such a scenario poses risks. For example, our ability to bring a product to market and obtain revenues could be delayed, our competitors could develop products ahead of us, and/or we could be forced to relinquish rights to technologies, products or potential products. New equity financing could dilute current stockholders. If we raise funds through equity financing to meet the needs discussed above, it will have a dilutive effect on existing holders of our shares by reducing their percentage ownership. The shares may be sold at a time when the market price is low because we need the funds. This will dilute existing holders more than if our stock price was higher. In addition, equity financings normally involve shares sold at a discount to the current market price. Our research and development and marketing efforts are likely to be highly dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, which may limit our efforts to successfully develop and market potential products. Because we have limited resources, we have sought to enter into collaboration agreements with other pharmaceutical companies that will assist us in developing, testing, obtaining governmental approval for and commercializing products using our buccal delivery and immunomedicine technologies. Any collaborator with whom we may enter into such collaboration agreements may not support fully our research and commercial interests since our program may compete for time, attention and resources with such collaborator's internal programs. Therefore, these collaborators may not commit sufficient resources to our program to move it forward effectively, or that the program will advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. Risks Related to Our Technologies --------------------------------- Because our technologies and products are at an early stage of development, we cannot expect revenues in the foreseeable future. We have no products approved for commercial sale at the present time. To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products under development. We may not be successful in one or more of these stages of the development of our products, and/or any of the products we develop may not be commercially viable. 28 While over 750 patients with diabetes have been dosed with our oral insulin formulation at approved facilities in seven countries, our clinical program has not reached a point where we are prepared to apply for regulatory approvals to market the product in any country. Until we have developed a commercially viable product which receives regulatory approval, we will not receive revenues from ongoing operations. We will not receive revenues from operations until we receive regulatory approval to sell our products. Many factors impact our ability to obtain approvals for commercially viable products. We have no products approved for commercial sale by drug regulatory authorities. We have begun the regulatory approval process for our oral insulin formulation, buccal morphine and fentanyl products. Our immunomedicine products are in the pre-clinical stage of development. Pre-clinical and clinical trials of our products, and the manufacturing and marketing of our technologies, are subject to extensive, costly and rigorous regulation by governmental authorities in the United States, Canada and other countries. The process of obtaining required regulatory approvals from the FDA and other regulatory authorities often takes many years, is expensive and can vary significantly based on the type, complexity and novelty of the product candidates. For these reasons, it is possible we will never receive approval for one or more product candidates. Delays in obtaining United States or foreign approvals for our products could result in substantial additional costs to us, and, therefore, could adversely affect our ability to compete with other companies. If regulatory approval is ultimately granted, the approval may place limitations on the intended use of the product we wish to commercialize, and may restrict the way in which we are permitted to market the product. Due to legal and factual uncertainties regarding the scope and protection afforded by patents and other proprietary rights, we may not have meaningful protection from competition. Our long-term success will substantially depend upon our ability to protect our proprietary technologies from infringement, misappropriation, discovery and duplication and avoid infringing the proprietary rights of others. Our patent rights, and the patent rights of biotechnology and pharmaceutical companies in general, are highly uncertain and include complex legal and factual issues. Because of this, our pending patent applications may not be granted. These uncertainties also mean that any patents that we own or will obtain in the future could be subject to challenge, and even if not challenged, may not provide us with meaningful protection from competition. Due to our financial uncertainties, we may not possess the financial resources necessary to enforce our patents. Patents already issued to us or our pending applications may become subject to dispute, and any dispute could be resolved against us. Because a substantial number of patents have been issued in the field of alternative drug delivery and because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims obtained in any application or the enforceability of our patents cannot be predicted. Consequently, we do not know whether any of our pending or future patent applications will result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subject to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated. Also because of these legal and factual uncertainties, and because pending patent applications are held in secrecy for varying periods in the United States and other countries, even after reasonable investigation we may not know with certainty whether any products that we (or a licensee) may develop will infringe upon any patent or other intellectual property right of a third party. For example, we are aware of certain patents owned by third parties that such parties could attempt to use in the future in efforts to affect our freedom to practice some of the patents that we own or have applied for. Based upon the science and scope of these third party patents, we believe that the patents that we own or have applied for do not infringe any such third party patents, however, we cannot know for certain whether we could successfully defend our 29 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. 30 Risks Related to Potential Liabilities -------------------------------------- We face significant product liability risks, which may have a negative effect on our financial condition. The administration of drugs or treatments to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs or treatments are actually at fault for causing an injury. Furthermore, our products may cause, or may appear to have caused, serious adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug or treatment has been administered to patients for some time. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a severe negative effect on our financial condition. We maintain product liability insurance in amounts we believe to be commercially reasonable for our current level of activity and exposure, but claims could exceed our coverage limits. Furthermore, due to factors in the insurance market generally and our own experience, we may not always be able to purchase sufficient insurance at an affordable price. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business. Outcome of an Arbitration Proceeding with Sands Brothers may have an adverse impact on us. On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against us under New York Stock Exchange rules. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.5 million shares of our common stock. Sands based its claim upon an October 1997 letter agreement that was purported by Sands to confirm an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late 1997. In exchange therefor, the letter agreement purported to grant Sands the right to acquire 17% of Generex Pharmaceuticals' common stock for nominal consideration. Sands claimed that its right to receive shares of Generex Pharmaceuticals' common stock applies to our common stock since outstanding shares of Generex Pharmaceuticals' common stock were converted into shares of our common stock in the acquisition. Sands' claims also included additional shares allegedly due as a fee related to that acquisition, and $144,000 in monthly fees allegedly due under the terms of the purported agreement. After several arbitration and court proceedings, on October 29, 2002, the Appellate Division of the New York Supreme Court issued a decision remanding the issue of damages to a new panel of arbitrators and limiting the issue of damages before the new panel to reliance damages which is not to include an award of lost profits. Reliance damages are out-of-pocket damages incurred by Sands. On November 27, 2002, Sands filed with the Appellate Division a motion to reargue the appeal, or, in the alternative, for leave to appeal to the Court of Appeals of New York from the order of the Appellate Division. On March 18, 2003, the Appellate Division denied Sands' motion. A new arbitration hearing was held in early June, 2004. A decision has not yet been rendered by the new arbitration panel which held that hearing. Despite the recent favorable decisions, the case is still ongoing and our ultimate liability cannot yet be determined with certainty. Our financial condition would be materially adversely affected to the extent that Sands receives shares of our common stock for little or no consideration or substantial monetary damages as a result of this legal proceeding. We are not able to estimate an amount or range of potential loss from this legal proceeding at the present time. 31 Risks Related to the Market for Our Common Stock ------------------------------------------------ If our common stock is delisted from the NASDAQ SmallCap Market and/or becomes subject to Penny Stock regulations, the market price for our stock may be reduced and it may be more difficult for us to obtain financing. On June 5, 2003, our common stock was delisted from the NASDAQ National Market because of our failure to maintain a minimum of $10,000,000 in stockholders' equity. On June 5, 2003, our stock began trading on the NASDAQ SmallCap Market. The NASDAQ SmallCap Market has its own standards for continued listing, including a minimum of $2.5 million stockholders' equity. As of April 30, 2004, our stockholders' equity was $2,549,472. In addition, for continued listing on both the NASDAQ National Market and SmallCap Market, our stock price must be at least $1.00. During periods in fiscal 2002 and the beginning of fiscal 2003, our stock price dropped close to $1.00 per share. If we do not meet this requirement in the future, we may be subject to delisting by NASDAQ. If our stock is delisted from NASDAQ, there will be less interest for our stock in the market. This may result in lower prices for our stock and make it more difficult for us to obtain financing. If our stock is not listed on NASDAQ and fails to maintain a price of $5.00 or more per share, our stock would become subject to the Securities and Exchange Commission's "Penny Stock" rules. These rules require a broker to deliver, prior to any transaction involving a Penny Stock, a disclosure schedule explaining the Penny Stock Market and its risks. Additionally, broker/dealers who recommend Penny Stocks to persons other than established customers and accredited investors must make a special written suitability determination and receive the purchaser's written agreement to a transaction prior to the sale. In the event our stock becomes subject to these rules, it will become more difficult for broker/dealers to sell our common stock. Therefore, it may be more difficult for us to obtain financing. The price of Our Common Stock may be volatile. There may be wide fluctuation in the price of our common stock. These fluctuations may be caused by several factors including: o announcements of research activities and technology innovations or new products by us or our competitors; o changes in market valuation of companies in our industry generally; o variations in operating results; o changes in governmental regulations; o developments in patent and other proprietary rights; o public concern as to the safety of drugs or treatments developed by us or others; o results of clinical trials of our products or our competitors' products; and o regulatory action or inaction on our products or our competitors' products. From time to time, we may hire companies to assist us in pursuing investor relations strategies to generate increased volumes of investment in our common stock. Such activities may result, among other things, in causing the price of our common stock to increase on a short-term basis. Furthermore, the stock market generally and the market for stocks of companies with lower market capitalizations and small biopharmaceutical companies, like us, have from time to time experienced, and likely will again experience significant price and volume fluctuations that are unrelated to the operating performance of a particular company. Our outstanding Special Voting Rights Preferred Stock and provisions of our Restated Certificate of Incorporation could delay or prevent the acquisition or sale of our business. 32 Holders of our Special Voting Rights Preferred Stock have the ability to prevent any change of control in us. Our Vice President of Research and Development, Dr. Pankaj Modi, owns all of our Special Voting Rights Preferred Stock. In addition, our Restated Certificate of Incorporation permits our Board of Directors to designate new series of preferred stock and issue those shares without any vote or action by our stockholders. Such newly authorized and issued shares of preferred stock could contain terms that grant special voting rights to the holders of such shares that make it more difficult to obtain stockholder approval for an acquisition of our business or increase the cost of any such acquisition. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* --------------------- * Filed herewith. All other exhibits are incorporated by reference, as described. (b) Reports on Form 8-K. The following Reports on Form 8-K were filed in the quarter ended April 30, 2004 and thereafter: o On February 6, 2004, we filed Current Report on Form 8-K announcing the resignations of Peter Levitch and Pankaj Modi, Ph.D. from our Board of Directors under Item 5 of Form 8-K - "Other Events." o On February 12, 2004, we filed a Current Report on Form 8-K announcing the election of Mindy J. Allport Settle to our Board of Directors and announcing the postponement of our annual meeting of stockholders for the 2003 fiscal year under Item 5 of Form 8-K - "Other Events." o On March 1, 2004, we filed a Current Report on Form 8-K announcing the completion of private placements with certain accredited investors under Item 5 of Form 8-K - "Other Events." Exhibits relating to the private placements were filed under Item 7. o On March 22, 2004 we filed a Current Report on Form 8-K announcing the appointment of Brian McGee to the Board of Directors, under Item 5 of Form 8-K - "Other Events." o On March 24, 2004 we filed an amendment to our Current Report on Form 8-K, reporting certain private placements under Item 5 of Form 8-K - "Other Events." The amendment included as Exhibits under Item 7 forms of the documents relating to the private placements. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: June 14, 2004 GENEREX BIOTECHNOLOGY CORPORATION By: /s/ Rose C. Perri By: /s/ Anna Gluskin --------------------------- ----------------------- Principal Financial Officer Chief Executive Officer 34