-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MMFd2IdJDO0HOeNtQfwcmcIjTy3FUAokRUYT0YtkgqE94XCcmnObJzT038rOeSPJ TyiOT3mh26dCnyVRjSgN/w== 0000950116-04-003772.txt : 20041215 0000950116-04-003772.hdr.sgml : 20041215 20041215172443 ACCESSION NUMBER: 0000950116-04-003772 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041031 FILED AS OF DATE: 20041215 DATE AS OF CHANGE: 20041215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENEREX BIOTECHNOLOGY CORP CENTRAL INDEX KEY: 0001059784 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 820490211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25169 FILM NUMBER: 041205736 BUSINESS ADDRESS: STREET 1: 33 HARBOUR SQ STREET 2: STE 202 CITY: TORONTO ONTARIO CANADA STATE: A1 ZIP: M5J 2G2 BUSINESS PHONE: 4163642551 MAIL ADDRESS: STREET 1: 33 HARBOUR SQ STREET 2: STE 202 CITY: TORONTO ONTARIO CA STATE: A1 ZIP: M5J 2G2 10-Q 1 ten-q.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 OCTOBER 31, 2004 [ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM_________________ TO ________________ COMMISSION FILE NUMBER: 0-25169 GENEREX BIOTECHNOLOGY CORPORATION ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 98-0178636 ------------------------------- -------------------- (STATE OF OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 33 HARBOUR SQUARE, SUITE 202 TORONTO, ONTARIO CANADA M5J 2G2 ---------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 416/364-2551 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INTERNET WEBSITE: WWW.GENEREX.COM --------------- NOT APPLICABLE ------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS The number of outstanding shares of the registrant's common stock, par value $.001, was 34,807,448 as of October 31, 2004. 485501V3 GENEREX BIOTECHNOLOGY CORPORATION INDEX PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements -- unaudited Consolidated Balance Sheets -- October 31, 2004 and July 31, 2004 .................................... Consolidated Statements of Operations -- for the three month periods ended October 31, 2004 and 2003, and cumulative from November 2, 1995 to October 31, 2004................................... Consolidated Statements of Cash Flows -- For the three month periods ended October 31, 2004 and 2003, and cumulative from November 2, 1995 to October 31, 2004................................... Notes to Consolidated Financial Statements............................. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... Item 4. Controls and Procedures................................................ PART II: OTHER INFORMATION Item 1. Legal Proceedings...................................................... Item 2. Changes in Securities and Use of Proceeds.............................. Item 3. Defaults Upon Senior Securities........................................ Item 4. Submission of Matters to a Vote of Security Holders.................... Item 5. Other Information...................................................... Item 6. Exhibits and Reports on Form 8-K....................................... Signatures...................................................................... ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS October 31, July 31, 2004 2004 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 1,528,506 $ 4,950,419 Restricted cash 227,851 206,421 Other current assets 291,377 870,934 ------------- ------------ Total Current Assets 2,047,734 6,027,774 Property and Equipment, Net 4,444,521 4,291,622 Assets Held for Investment, Net 2,437,124 2,250,506 Patents, Net 5,678,008 5,696,905 Deposits -- 395,889 Due From Related Party 381,145 349,294 ------------- ------------ TOTAL ASSETS $ 14,988,532 $ 19,011,990 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 3,058,366 $ 1,947,399 Current maturities of long-term debt 1,472,006 1,366,122 ------------- ------------ Total Current Liabilities 4,530,372 3,313,521 Long-Term Debt, Less Current Maturities 935,356 858,661 Commitments and Contingencies Series A, Preferred stock, $.001 par value; authorized 1,000,000 shares, stated at redemption value, 1,191 shares issued and outstanding at October 31, 2004 and July 31, 2004 14,310,057 14,310,057 Stockholders' Equity: Special Voting Rights Preferred stock, $.001 par value; authorized, issued and outstanding 1,000 shares at October 31, 2004 and July 31, 2004 1 1 Common stock, $.001 par value; authorized 150,000,000 shares at October 31, 2004 and July 31, 2004, issued 34,882,448 and 34,262,448 shares at October 31, 2004 and July 31, 2004, and outstanding 34,882,448 and 34,262,448 shares at October 31, 2004 and July 31, 2004, respectively 34,809 34,264 Additional paid-in capital 98,138,146 97,110,291 Notes receivable - common stock (391,103) (384,803) Deficit accumulated during the development stage (103,184,401) (96,526,373) Accumulated other comprehensive income 615,295 296,371 ------------- ------------ Total Stockholders' Equity (4,787,253) 529,751 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,988,532 $ 19,011,990 ============= ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS Cumulative From For the Three Months Ended November 2, 1995 October 31, (Date of Inception) ----------------------------- to October 31, 2004 2003 2004 ----------- ----------- ------------- Revenues $ 142,750 $ 68,061 $ 1,769,934 Operating Expenses: Research and development 3,395,130 1,028,529 50,562,844 Research and development - related party -- -- 220,218 General and administrative 3,422,238 2,830,316 57,673,550 General and administrative - related party -- -- 314,328 ----------- ----------- ------------- Total Operating Expenses 6,817,368 3,858,845 108,770,940 ----------- ----------- ------------- Operating Loss (6,674,618) (3,790,784) (107,001,006) Other Income (Expense): Miscellaneous income (expense) -- (3,698) 125,348 Income from Rental Operations, net 47,066 4,081 141,416 Interest income 15,438 196,317 3,387,050 Interest expense (45,914) (18,186) (580,337) ----------- ----------- ------------- Net Loss Before Undernoted (6,658,028) (3,612,270) (103,927,529) Minority Interest Share of Loss -- -- 3,038,185 ----------- ----------- ------------- Net Loss (6,658,028) (3,612,270) (100,889,344) Preferred Stock Dividend -- -- 2,295,057 ----------- ----------- ------------- Net Loss Available to Common Shareholders $(6,658,028) $(3,612,270) $(103,184,401) =========== =========== ============= Basic and Diluted Net Loss Per Common Share $ (.19) $ (.13) =========== =========== Weighted Average Number of Shares of Common Stock Outstanding 34,810,981 27,900,591 =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS Cumulative From For the Three Months Ended November 2, 1995 October 31, (Date of Inception) --------------------------- October 31, 2004 2003 2004 ----------- ----------- ------------- Cash Flows From Operating Activities: Net loss $(6,658,028) $(3,612,270) $(100,889,344) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 271,738 234,458 2,748,970 Minority interest share of loss -- -- (3,038,185) Reduction of notes receivable - common stock in exchange for services rendered -- -- 423,882 Write-off of deferred offering costs -- -- 3,406,196 Write-off of abandoned patents -- -- 9,134 Common stock issued for services rendered 675,800 918,000 4,330,612 Non-cash compensation expense -- -- 45,390 Stock options and warrants issued for services rendered 490,600 27,000 6,776,718 Preferred stock issued for services rendered -- -- 100 Treasury stock redeemed for non-performance of services (138,000) -- (138,000) Founders' shares transferred for services rendered -- -- 353,506 Changes in operating assets and liabilities (excluding the effects of acquisition): Miscellaneous receivables -- -- 43,812 Other current assets 604,905 82,520 (238,992) Accounts payable and accrued expenses 1,048,260 (517,524) 3,667,508 Other, net -- -- 110,317 ----------- ----------- ------------- Net Cash Used in Operating Activities (3,704,725) (2,867,816) (82,388,376) Cash Flows From Investing Activities: Purchase of property and equipment (42,140) (120,742) (4,271,121) Costs incurred for patents (58,983) (78,303) (1,360,540) Change in restricted cash (2,476) (1,476) (192,805) Proceeds from maturity of short term investments -- 141,846 126,687,046 Purchases of short-term investments -- (3,200,345) (126,687,046) Cash received in conjunction with merger -- 82,232 82,232 Advances to Antigen Express, Inc. -- (32,000) (32,000) Increase in officers' loans receivable -- -- (1,126,157) Change in deposits 395,889 -- (477,194) Change in notes receivable - common stock (6,300) (6,218) (91,103) Change in due from related parties -- -- (2,222,390) Other, net -- -- 89,683 ----------- ----------- ------------- Net Cash Provided by (Used in) Investing Activities 285,990 (3,215,006) (9,601,395) Cash Flows From Financing Activities: Proceeds from issuance of long-term debt -- -- 1,154,316 Repayment of long-term debt (19,269) (17,869) (1,127,760) Change in due to related parties -- -- 154,541 Proceeds from exercise of warrants -- -- 4,552,984 Proceeds from exercise of stock options -- 104,590 1,010,440 Proceeds from minority interest investment -- -- 3,038,185 Proceeds from issuance of preferred stock -- -- 12,015,000 Purchase of treasury stock -- -- (483,869) Proceeds from issuance of common stock, net -- -- 73,283,715 Purchase and retirement of common stock -- -- (119,066) ----------- ----------- ------------- Net Cash Provided by (Used in) Financing Activities (19,269) 86,721 93,478,486 Effect of Exchange Rates on Cash 16,091 28,578 39,791 ----------- ----------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents (3,421,913) (5,967,523) 1,528,506 Cash and Cash Equivalents, Beginning of Period 4,950,419 12,356,578 -- ----------- ----------- ------------- Cash and Cash Equivalents, End of Period $ 1,528,506 $ 6,389,055 $ 1,528,506 =========== =========== =============
The Notes to Consolidated Financial Statements are an integral part of these statements. GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K. The results for the three months may not be indicative of the results for the entire year. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the fiscal year 2005, in the Company's opinion all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. 2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Additionally, those changes are expected to result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003, and for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, apply in accordance with their respective effective dates. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It also requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable noncontrolling interests. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. 3. EMPLOYEE STOCK PLANS The Company has elected to continue to account for its stock compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and related interpretations. Under APB 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is greater than or equal to the market price on the grant date. In connection with the termination of certain employees, the company repriced 1,240,000 options. The repriced options are accounted for under variable accounting and compensation cost is recognized for the difference between the exercise price and the market price of the common shares until such options are exercised, expired or forfeited. During the three months ended October 31, 2004 and 2003, the Company recaptured/recognized $-0- of compensation expense in connection with these options, respectively. The following table illustrates the effect on net loss and loss per share as if the Company had applied the fair value recognition provisions of SFAS 123.
Three Months Ended October 31, 2004 2003 ----------- ----------- Net Loss Available to Common Stockholders, as Reported $(6,658,028) $(3,612,270) Add: Total Stock-Based Employee Compensation Included in Reported Net Loss -- -- Deduct: Total Stock-Based Employee Compensation Income Determined Under Fair Value Based Method, Net of Related Tax Effect 1,430,640 175,500 ----------- ----------- Pro Forma Net Loss Available to Common Stockholders $(8,088,668) $(3,787,770) =========== =========== Loss Per Share: Basic and diluted, as reported $(0.19) $(0.13) ====== ====== Basic and diluted, pro forma $(0.23) $(0.14) ====== ======
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. COMPREHENSIVE INCOME/(LOSS) Comprehensive loss, which includes net loss and the change in the foreign currency translation account during the period, for the three months ended October 31, 2004 and 2003, was $6,339,104 and $3,352,646, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
October 31, July 31, 2004 2004 ---------- ---------- Accounts Payable $2,298,595 $1,283,410 Accrued Legal Fees and Settlement 361,199 252,537 Termination Agreements and Severance Pay 398,572 411,452 ---------- ---------- Total $3,058,366 $1,947,399 ========== ==========
6. PENDING LITIGATION On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against the Company under New York Stock Exchange rules. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.5 million shares of the Company's common stock. Sands based its claim upon an October 1997 letter agreement that was purported by Sands to confirm an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary of the Company that was acquired in late 1997. In exchange, the letter agreement purported to grant Sands the right to acquire 17 percent of Generex Pharmaceuticals' common stock for nominal consideration. Sands claimed that its right to receive shares of Generex Pharmaceuticals' common stock applies to the Company's common stock since outstanding shares of Generex Pharmaceuticals' common stock were converted into shares of the Company's common stock in the acquisition. Sands' claims also included additional shares allegedly due as a fee related to that acquisition, and $144,000 in monthly fees allegedly due under the terms of the purported agreement. GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. PENDING LITIGATION (CONTINUED) Pursuant to an arbitration award dated September 22, 1999, the arbitration panel that heard this case awarded Sands $14,070 and issued a declaratory judgment requiring the Company to issue to Sands a warrant to purchase 1,530,020 shares of the Company's common stock pursuant to and in accordance with the terms of the purported October 1997 letter agreement. On October 13, 1999, Sands commenced a special proceeding to confirm the arbitration award in the Supreme Court of the State of New York, County of New York (the "New York Supreme Court"). On November 10, 1999, the Company moved to vacate the arbitration award. On March 20, 2000, the New York Supreme Court granted Sands' petition to confirm the award and denied the Company's motion to vacate the award. The Company appealed and on January 23, 2001, the New York State Appellate Division, First Department (the "Appellate Division"), modified the judgment of the New York Supreme Court that had confirmed the arbitration award against the Company. The Appellate Division affirmed the portion of the New York Supreme Court judgment that had confirmed the granting of monetary relief of $14,070 to Sands but modified the judgment to vacate the portion of the arbitration award directing the issuance to Sands of a warrant to purchase 1,530,020 shares of the Company's common stock. The Appellate Division held that the portion of the award directing the Company to issue warrants to Sands is too indefinite to be enforceable and remanded the matter to the arbitration panel for a final and definite award with respect to such relief or its equivalent (including possibly an award of monetary damages). The arbitration panel commenced hearings on the matters remanded by the Appellate Division in June 2001. On November 7, 2001, the arbitration panel issued an award again requiring the Company to issue to Sands a warrant to purchase 1,530,020 shares of the Company's common stock purportedly pursuant to and in accordance with the terms of the October 1997 letter agreement. Thereafter, Sands submitted a motion to the New York Supreme Court to modify and confirm the arbitration panel's award while the Company filed a motion with the court to vacate the arbitration award. On February 25, 2002, the New York Supreme Court vacated the arbitration panel's award. The Supreme Court concluded that the arbitration panel had "disregarded the plain meaning" of the directive given by the Appellate Division in the Appellate Division's January 23, 2001 decision that remanded the matter of the warrant for reconsideration by the panel. The Supreme Court found that the arbitration panel's award "lacks a rational basis". The Supreme Court also remanded the matter to the New York Stock Exchange on the issue of whether the arbitration panel should be disqualified. Sands has appealed the February 25, 2002 order of the Supreme Court to the Appellate Division. The Company filed a cross-appeal on issues relating to the disqualification of the arbitration panel. On October 29, 2002, the Appellate Division issued a decision and order unanimously modifying the lower court's order by remanding the issue of damages to a new panel of arbitrators and otherwise affirming the lower court's order. The Appellate Division's decision and order limits the issue of damages before the new panel of arbitrators to reliance damages which is not to include an award of lost profits. Reliance damages are out-of-pocket damages incurred by Sands. The Appellate Division stated that the lower court properly determined that the arbitration award, which had granted Sands warrants for 1,530,020 shares of the registrant's stock, was incorrect. On March 18, 2003, the Appellate Division of the Supreme Court of New York denied a motion by Sands for re-argument of the October 29, 2002 decision, or, in the alternative, for leave to appeal to the Court of Appeals. A new arbitration took place in early June 2004. On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. Generex, awarding Sands $150,000 in reliance damages. A motion to confirm this award has been filed by Sands. The Company will file responding materials in the near future. The Company expects that the motion to confirm will be heard in early 2005. GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. PENDING LITIGATION (CONTINUED) Sands has advised the Company that it intends to seek leave from the New York Court of Appeals to appeal the prior orders of the Appellate Division vacating the prior Arbitration Panel's warrant awards. Consequently, it is likely that there will be further legal proceedings with respect to this matter. At the present time, the Company is not able to predict the ultimate outcome of this matter or to estimate a range of possible loss. Accordingly, the Company has accrued $150,000 and it is included in the balance sheet under the caption accounts payable and accrued expenses. In February 2001, a former business associate of the Company's former Vice President of Research and Development ("VP"), and an entity called Centrum Technologies Inc. ("CTI") commenced an action in the Ontario Superior Court of Justice against the Company and the VP seeking, among other things, damages for alleged breaches of contract and tortious acts related to a business relationship between this former associate and the VP that ceased in July 1996. The plaintiffs' statement of claim also seeks to enjoin the use, if any, by the Company of three patents allegedly owned by CTI. On July 20, 2001, the Company filed a preliminary motion to dismiss the action of CTI as a nonexistent entity or, alternatively, to stay such action on the grounds of want of authority of such entity to commence the action. The plaintiffs brought a cross motion to amend the statement of claim to substitute Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a corporation of which 50 percent of the shares are owned by the former business associate and the remaining 50 percent are owned by the Company. Consequently, the shareholders of CBI are in a deadlock. The court granted the Company's motion to dismiss the action of CTI and denied the plaintiffs' cross motion without prejudice to the former business associate to seek leave to bring a derivative action in the name of or on behalf of CBI. The former business associate subsequently filed an application with the Ontario Superior Court of Justice for an order granting him leave to file an action in the name of and on behalf of CBI against the VP and the Company. The Company has opposed the application which is now pending before the Court. In September 2003, the Ontario Superior Court of Justice granted the request and issued an order giving the former business associate leave to file an action in the name of and on behalf of CBI against VP and the Company. A statement of claim was served in July 2004. The Company is not able to predict the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss, if any, from this legal proceeding. In February 1997, an individual alleging to be a former employee of Generex Pharmaceuticals, Inc., commenced an action in the Ontario Superior Court of Justice for wrongful dismissal. The Ontario Superior Court of Justice rendered judgment in favor of the plaintiff for approximately $127,000 plus interest in November 1999 and further awarded costs to the plaintiff in March 2000. An appeal of the judgment was filed with the Court of Appeal for Ontario in April 2000. The appeal was heard on February 26, 2003, and on February 28, 2003, the Court of Appeals dismissed the appeal with costs. Generex Pharmaceuticals, Inc., has sought leave to appeal the Courts of Appeal's decision to the Supreme Court of Canada. The appeal was dismissed. The parties have signed Minutes of Settlement in April 2004, pursuant to which the Company is required to pay the plaintiff a total of $280,000 Canadian (approximately $230,000 US) in monthly installments. The installments consist of $20,000 CND on May 1, 2004, $20,000 CND on June 1, 2004, $50,000 CND on July 1, 2004 and 7 monthly payments of $27,142.86 CND each from August 1, 2004 to February 1, 2005. The Company is involved in certain other legal proceedings in addition to those specifically described herein. Subject to the uncertainty inherent in all litigation, the Company does not believe at the present time that the resolution of any of these legal proceedings is likely to have a material adverse effect on the Company's financial position, operations or cash flows. GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. PENDING LITIGATION (CONTINUED) With respect to all litigation, as additional information concerning the estimates used by the Company becomes known, the Company reassesses its position both with respect to accrued liabilities and other potential exposures. 7. NET LOSS PER SHARE Basic EPS and Diluted EPS for the three months ended October 31, 2004 and 2003 have been computed by dividing the net loss for each respective period by the weighted average number of shares outstanding during that period. All outstanding warrants and options, approximately 17,084,218 and 12,342,694 incremental shares at October 31, 2004 and 2003, respectively, have been excluded from the computation of Diluted EPS as they are antidilutive. 8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Three Months Ended October 31, -------------------------- 2004 2003 ------- ---------- Cash paid during the period for: Interest $45,914 $ 53,546 Income taxes $ -- $ -- Disclosure of non-cash investing and financing activities: Acquisition of Antigen Express, Inc through the issuance of common stock and the assumption of stock options $ -- $4,797,409
9. TRANSACTIONS WITH RELATED PARTY The Company's change in "Due from Related Party" for the three months ended October 31, 2004 represents only the effect of change in quarter end exchange rate versus that in effect at July 31, 2004. 10. COMMITMENTS AND CONTINGENCIES On October 18, 2004, the Company entered into a Securities Purchase Agreement to sell 800,000 shares of common stock at $2.50 per share for gross proceeds of $2,000,000. The closing date for this transaction is to be agreed upon, but the parties anticipate that the closing will occur in January 2005. 11. STOCKHOLDERS' EQUITY In August 2004, the Company issued 620,000 shares of unrestricted common stock to consultants for services rendered, which resulted in charges to the statement of operations of $675,800 based on the quoted market price of the Company stock on the date of issuance. In August 2004, the Company issued 500,000 warrants in exchange for services rendered. The warrants were fully vested on date of issuance and exercisable at $1.09 each for the purchase of one share of the Company's common stock. The warrants, which were valued using the Black Scholes pricing model, resulted in charges to the statement of operations of $415,000. In October, 2004, the Company granted a total of 1,942,000 options to purchase shares of common stock with an exercise price of $0.94, which equaled the five trading day closing average of the Company common stock on the date of issuance. All of the options, except for 105,000, were issued to employees; accordingly no charge to operations was incurred as the Company follows APB 25 (See Note 3). Options issued to other than employees were valued using the Black Scholes pricing model and resulted in a charge to operations of $75,600. GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. STOCKHOLDERS' EQUITY (CONTINUED) In October, 2004, the Company granted a total of 150,000 options to purchase shares of common stock with an exercise price of $1.10, which equaled the five trading day closing average of the Company common stock July 31, 2004. All of the options were issued to an employee; accordingly no charge to operations was incurred as the Company follows APB 25 (See Note 3). In October, 2004, the Company redeemed 75,000 shares of common stock as a result of non-performance of services. These shares were originally exchanged in October 2003 for services the Company believed to be rendered, which resulted in prior charges to the statement of operations of $138,000. In conjunction with the redemption of the shares, the Company reversed the prior charges to the statement of operations in the amount of $138,000. 12. SUBSEQUENT EVENTS On November 15, 2004, the Company completed a private placement of 6% Secured Convertible Debentures and warrants with four accredited investors for an aggregate purchase price of $4,000,000. The Debentures have a term of fifteen (15) months and amortize over thirteen (13) months in thirteen (13) equal monthly installments beginning on the first day of the third month following their issuance. Interest on the principal amount outstanding will accrue at a rate of six percent (6%) per annum. The Company may pay principal and accrued interest in cash or, at the Company's option, in shares of its common stock. If the Company elects to pay principal and interest in shares of its common stock, the value of each share of common stock will be equal to ninety percent (90%) of the average of the twenty (20) trading day volume weighted average price for the common stock for the twenty (20) trading day period immediately preceding the date of payment. At the option of the holder of each Debenture, the principal amount outstanding under each Debenture is initially convertible at any time after the closing of the private placement into shares of the Company's common stock at a conversion price of $0.82. The conversion price of each Debenture is based on the average of the ten (10) trading day volume weighted average price for Company's common stock for the ten (10) trading day period immediately preceding the date definitive agreements were signed. The warrants are initially exercisable into the same number of shares of Company's common stock initially issuable upon conversion of the Debentures. The initial exercise price of each warrant is equal to 110% of the conversion price of the Debentures, or $0.91. The conversion price of the Debentures and the exercise price of the warrants are each subject to a full-ratchet adjustment upon the issuance by the Company of securities at a price per share less than the then conversion price or exercise price, as applicable. In accordance with the terms of the private placement, the Company is required to register for resale the shares of common stock issuable upon conversion of the Debentures and upon exercise of the warrants. The Company expects to utilize the proceeds from the transaction to accelerate clinical development activities and for working capital and other general corporate purposes. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS We have made statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q of Generex Biotechnology Corporation for the fiscal quarter ended October 31, 2004 that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). The Act limits our liability in any lawsuit based on forward looking statements we have made. All statements, other than statements of historical facts, included in this quarterly report that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections, future capital expenditures, business strategy, competitive strengths, goals, expansion, market and industry developments and the growth of our businesses and operations, are forward-looking statements. These statements can be identified by introductory words such as "expects," "plans," "intends," "believes," "will," "estimates," "forecasts," "projects" or words of similar meaning, and by the fact that they do not relate strictly to historical or current facts. Our forward-looking statements address, among other things: o our expectations concerning product candidates for our technologies; o our expectations concerning existing or potential development and license agreements for third-party collaborations and joint ventures; o our expectations of when different phases of clinical activity may commence; and o our expectations of when regulatory submissions may be filed or when regulatory approvals may be received. Any or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions that we might make or by known or unknown risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in our forward-looking statements. Among the factors that could affect future results are: o the inherent uncertainties of product development based on our new and as yet not fully proven technologies; o the risks and uncertainties regarding the actual effect on humans of seemingly safe and efficacious formulations and treatments when tested clinically; o the inherent uncertainties associated with clinical trials of product candidates; and o the inherent uncertainties associated with the process of obtaining regulatory approval to market product candidates. Additional factors that could affect future results are set forth in Item 5 of Part II of this Report. We caution investors that the forward-looking statements contained in this Report must be interpreted and understood in light of conditions and circumstances that exist as of the date of this Report. We expressly disclaim any obligation or undertaking to update or revise forward-looking statements made in this Report to reflect any changes in management's expectations resulting from future events or changes in the conditions or circumstances upon which such expectations are based. GENERAL Corporate History. We were incorporated in Delaware in September 1997 for the purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to engage in pharmaceutical and biotechnological research and other activities. Our acquisition of Generex Pharmaceuticals was completed in October 1997 in a transaction in which the holders of all outstanding shares of Generex Pharmaceuticals exchanged their shares for shares of our common stock. In January 1998, we participated in a "reverse acquisition" with Green Mt. P. S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of this transaction, our shareholders (the former shareholders of Generex Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt., Green Mt. changed its corporate name to Generex Biotechnology Corporation ("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc. Because the reverse acquisition resulted in our shareholders becoming the majority holders of Generex Idaho, we were treated as the acquiring corporation in the transaction for accounting purposes. Thus, our historical financial statements, which essentially represented the historical financial statements of Generex Pharmaceuticals, were deemed to be the historical financial statements of Generex Idaho. In April 1999, we completed a reorganization in which we merged with Generex Idaho. In this transaction, all outstanding shares of Generex Idaho were converted into our shares, Generex Idaho ceased to exist as a separate entity, and we changed our corporate name back to "Generex Biotechnology Corporation". This reorganization did not result in any material change in our historical financial statements or current financial reporting. In August 2003, we acquired Antigen Express, Inc. ("Antigen"). Antigen is engaged in the research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Business History. We are engaged primarily in the research and development of drug delivery technologies. Our primary focus at the present time is our proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal) cavity using a hand-held aerosol applicator. A substantial number of large molecule drugs (i.e., drugs composed of molecules with a higher than specified molecular weight) have been approved for sale in the United States or are presently undergoing clinical trials as part of the process to obtain such approval, including various proteins, peptides, monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which generally can be administered by various methods, large molecule drugs historically have been administered predominately by injection. The principal reasons for this have been the vulnerability of large molecule drugs to digestion and the relatively large size of the molecule itself, which makes absorption into the blood stream through the skin or mucosa inefficient or ineffective. All injection therapies involve varying degrees of discomfort and inconvenience. With chronic and sub-chronic diseases, the discomfort and inconvenience associated with injection therapies frequently results in less than optimal patient acceptance of, and compliance with, the prescribed treatment plan. Poor acceptance and compliance can lead to medical complications and higher disease management costs. Also, elderly, infirm and pediatric patients with chronic or sub-chronic conditions may not be able to self-inject their medications. In such cases assistance is required which increases both the cost and inconvenience of the therapy. Our goal is to develop proprietary formulations of large molecule drugs that can be administered through the buccal mucosa, primarily the inner cheek walls, thereby eliminating or reducing the need for injections. We believe that our buccal delivery technology is a platform technology that has application to many large molecule drugs, and provides a convenient, non-invasive, accurate and cost effective way to administer such drugs. We have identified several large molecule drugs as possible candidates for development, but to date have focused our development efforts on a buccal insulin product. Our first product is an insulin formulation that is administered as a fine spray into the oral cavity using a hand-held aerosol spray applicator. Between January 1999 and September 2000, we conducted limited clinical trials on this product in the United States, Canada and Europe. In September 2000, we entered into an agreement (the "Development and License Agreement") to develop this product with Eli Lilly and Company ("Lilly"). To date, over 800 patients with diabetes have been dosed with our oral insulin product at approved facilities in seven countries. We conducted several clinical trials with insulin supplied by Lilly under our Development and License Agreement. Lilly did not, however, authorize or conduct any clinical trials or provide financial support for those trials. We did receive a $1,000,000 up front payment from Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end the Development and License Agreement for the development and commercialization of buccal delivery of insulin. On November 5, 2003, we entered into a termination agreement with Lilly terminating the Development and License Agreement, effective as of June 2, 2003. In accordance with the termination agreement, we retain all of the intellectual property and commercialization rights with respect to buccal spray drug delivery technology, and we have the continuing right to develop and commercialize the product. We also entered into a Bulk Supply Agreement (the "Bulk Supply Agreement") for the sale of human insulin crystals by Lilly to us over a three year period. The Bulk Supply Agreement establishes purchase prices, minimum purchase requirements, maximum amounts which may be purchased in each year and a non-refundable prepayment of $1,500,000 to be applied against amounts due for purchases. In January 2001, we established a joint venture with Elan International Services, Ltd. ("EIS"), a wholly-owned subsidiary of Elan Corporation, plc (EIS and Elan Corporation, plc being collectively referred to as "Elan"), to pursue the application of certain of our and Elan's drug delivery technologies, including our platform technology for the buccal delivery of pharmaceutical products, for the treatment of prostate cancer, endometriosis and/or the suppression of testosterone and estrogen. In January 2002, we and Elan agreed to expand the joint venture to encompass the buccal delivery of morphine for the treatment of pain and agreed to pursue buccal morphine as the initial pharmaceutical product for development under Generex (Bermuda) Ltd., the entity through which the joint venture is being conducted. This expansion of the joint venture occurred after we successfully completed a proof of concept clinical study of morphine delivery using our proprietary buccal delivery technology. In connection with the joint venture, EIS purchased 1,000 shares of a new series of our preferred stock, designated as Series A Preferred Stock, for $12,015,000. We applied the proceeds from the sale of the Series A Preferred Stock to subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS paid in capital of $2,985,000 to subscribe for a 19.9% equity ownership interest in the joint venture entity. While we presently own 80.1% of the joint venture entity, the Elan affiliate has the right, subject to certain conditions, to increase its ownership up to 50% by exchanging the Series A Preferred Stock for 30.1% of our equity ownership of the joint venture entity. Alternatively, the Series A Preferred Stock may be converted, under certain conditions, into shares of our common stock. Subsequent to its purchase of the shares of Series A Preferred Stock, EIS transferred the shares to an affiliate of Elan. In accordance with the terms of the Series A Preferred Stock, if any shares of Series A Preferred Stock are outstanding on January 16, 2007, we are required to redeem the shares of Series A Preferred Stock at a redemption price equal to the aggregate Series A Preferred Stock liquidation preference (which currently equals the aggregate original purchase price of the Series A Preferred Stock), either in cash, or in shares of common stock with a fair market value equal to the redemption price. In January 2002, 2003 and 2004, pursuant to the terms of the agreement with EIS, the Elan affiliate received a 6% stock dividend of Series A Preferred Stock. EIS also purchased 344,116 shares of our common stock for $5,000,000. We were permitted to use the proceeds of this sale for any corporate purpose. If the joint venture achieves certain milestones, we may require EIS to purchase an additional $1,000,000 of our common stock at a 30% premium to the then prevailing fair market value of our common stock. Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal delivery technology and certain Elan drug delivery technologies. Using the funds from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable license fee of $15,000,000 to Elan in consideration for being granted the rights to utilize the Elan drug delivery technologies. To date we have not received any substantial economic support from Elan in connection with the joint venture or the development of the morphine product, other than its initial capital contribution. However, we have continued to conduct research and development activities with the morphine product. In August 2003, we acquired Antigen Express, Inc. Antigen is engaged in the research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Our immunomedicine products work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self proteins and allergens). Our immunomedicine products are based on two platform technologies that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. The immunomedicine products are in the pre-clinical stage of development, and trials in human patients are not expected for at least 6 months. Development efforts are underway in melanoma, breast cancer, prostate cancer, HIV, influenza virus, smallpox, SARS and Type I diabetes mellitus. We are establishing collaborations with clinical investigators at academic centers to advance the technology, with the ultimate goal of conducting human clinical testing. We do not expect to receive any revenues from product sales in the current fiscal year. However, we have received and we expect to continue to receive some revenue from research grants for Antigen's immunomedicine products. In the first quarter of 2005, we received a total of $142,750 in such research grants. We do not expect the research grants to fully fund Antigen's expenses. We expect to satisfy all of our cash needs during the current year from capital raised through equity financings. We are a development stage company, and from inception through the end of fiscal year 2004 had not received any revenues from operations other than the up-front payment from Lilly. We have no products approved for commercial sale by drug regulatory authorities. We have begun the regulatory approval process for only three products, our oral insulin formulation, morphine and fentanyl. We believe that our buccal delivery technology is a platform technology that has application to a large number of large molecule drugs in addition to insulin. Estrogen, heparin, monoclonal antibodies, human growth hormone, fertility hormone, as well as a number of vaccines are among the compounds that we have identified as possible candidates for product development. DISCLOSURE REGARDING RESEARCH AND DEVELOPMENT PROJECTS Our major research and development projects are the refinement of our basic buccal delivery technology, our buccal insulin project and our buccal morphine product. Both our insulin product and our morphine product are in clinical trials. In Canada, we have recently begun Phase II-B trials for insulin. In order to obtain FDA and Canadian HPB approval for any of our product candidates, we will be required to complete "Phase III" trials which involve testing our product with a large number of patients over a significant period of time. The conduct of Phase III trials will require significantly greater funds than we either have on hand or have experience in raising in any year or two years' time. We will therefore need to receive funding from a corporate collaborator, or engage in fundraising on a scale with which we have no experience. Because of various uncertainties, we cannot predict the timing of completion of our buccal insulin or buccal morphine products. These uncertainties include the success of current studies, our ability to obtain the required financing and the time required to obtain regulatory approval even if our research and development efforts are completed and successful. For the same reasons, we cannot predict when any products may begin to produce net cash inflows. Most of our buccal delivery research and development activities to date have involved developing our platform technology for use with insulin and morphine. Insubstantial amounts have been expended on projects with other drugs, and those projects involved a substantial amount of platform technology development. Therefore, in the past, we have not made significant distinctions in the accounting for research and development expenses among products, as a significant portion of all research has involved improvements to the platform technology in connection with insulin, which may benefit all of our potential products. In the fiscal quarter ended October 31, 2004, approximately 90% of our $3,395,130 in research and development expenses was attributable to insulin and platform technology development, and approximately 1% was attributable to morphine and fentanyl projects. As morphine and fentanyl are both narcotic painkillers, the research is related. In the fiscal quarter ended October 31, 2003, approximately 79% of our $1,028,529 of research and development was expended for insulin and platform technology, and approximately 2% for morphine and fentanyl. Approximately 9%, or $291,078 of our research and development expenses for the fiscal quarter ended October 31, 2004 were related to Antigen's immunomedicine products compared to approximately 19% or $193,050 for the fiscal quarter ended October 31, 2003. Because these products are in a very early, pre-clinical stage of development, all of the expenses were accounted for as basic research and no distinctions were made as to particular products. Because of the early stage of development, we cannot predict the timing of completion of any products arising from this technology, or when products from this technology might begin producing revenues. However, we can predict that we do not expect to begin clinical trials during the current fiscal year. Developments in Fiscal Quarter ended October 31, 2004 - ----------------------------------------------------- On August 10, 2004 we issued an aggregate 620,000 shares of our common stock and 500,000 warrants to purchase our common stock to certain consultants in exchange for financial services recognizing expense of $1,090,800 to financial services. On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. Generex, awarding Sands $150,000 in reliance damages. A motion to confirm this award has been filed by Sands. We will file responding materials in the near future. We expect that the motion to confirm will be heard in early 2005. Sands has advised us that it intends to seek leave from the New York Court of Appeals to appeal the prior orders of the Appellate Division vacating the prior Arbitration Panel's warrant awards. Consequently, it is likely that there will be further legal proceedings with respect to this matter. On August 26, 2004, Dr. Pankaj Modi resigned from his position as an officer with us (Vice-President, Research & Development). Also, on August 26, 2004 Dr. Modi gave notice to us that the Consulting Agreement between Dr. Modi and us will terminate effective August 25, 2005. We are obligated to pay Dr. Modi's salary and any other compensation Dr. Modi is entitled to receive under his Consulting Agreement until August 25, 2005. We do not believe that Dr. Modi's resignation or the termination of his Consulting Agreement with us will materially adversely affect us. On October 18, 2004, we entered into a Securities Purchase Agreement to sell 800,000 shares of our common stock at $2.50 per share for gross proceeds of $2,000,000. The closing date for this transaction is to be agreed upon, but the parties anticipate that the closing will occur in January 2005. On October 26, 2004, we granted a total of 1,942,000 options to purchase shares of common stock to certain employees and consultants at $0.94 per share and 150,000 options to an employee to purchase shares of common stock at $1.10 per share. The options issued to non employees resulted in $75,600 charge to operations. Developments Subsequent to Fiscal Quarter Ended October 31, 2004. - ---------------------------------------------------------------- On November 15, 2004, we completed a private placement of 6% Secured Convertible Debentures and warrants with four accredited investors for an aggregate purchase price of $4,000,000. The Debentures have a term of fifteen (15) months and amortize over thirteen (13) months in thirteen (13) equal monthly installments beginning on the first day of the third month following their issuance. Interest on the principal amount outstanding will accrue at a rate of six percent (6%) per annum. We may pay principal and accrued interest in cash or, at our option, in shares of our common stock. If we elect to pay principal and interest in shares of our common stock, the value of each share of common stock will be equal to ninety percent (90%) of the average of the twenty (20) trading day volume weighted average price for the common stock for the twenty (20) trading day period immediately preceding the date of payment. At the option of the holder of each Debenture, the principal amount outstanding under each Debenture is initially convertible at any time after the closing of the private placement into shares of our common stock at a conversion price of $0.82. The conversion price of each Debenture is based on the average of the ten (10) trading day volume weighted average price for our common stock for the ten (10) trading day period immediately preceding the date definitive agreements were signed. The warrants are initially exercisable into the same number of shares of our common stock initially issuable upon conversion of the Debentures. The initial exercise price of each warrant is equal to 110% of the conversion price of the Debentures, or $0.91. The conversion price of the Debentures and the exercise price of the warrants are each subject to a full-ratchet adjustment upon the issuance by us of securities at a price per share less than the then conversion price or exercise price, as applicable. In accordance with the terms of the private placement, we are required to register for resale the shares of common stock issuable upon conversion of the Debentures and upon exercise of the warrants. We expect to utilize the proceeds from the transaction to accelerate clinical development activities and for working capital and other general corporate purposes. In connection with the transaction, we granted an Additional Investment Right to each investor. Pursuant to the terms of each Additional Investment Right, each investor has the right at any time after the 181st day following the date definitive agreements were signed and on or prior to the earlier of (i) the close of business on the one-year anniversary after the registration statement for the shares underlying the Debentures and the warrants has gone effective and (ii) the two (2) year anniversary of the closing of the private placement, to purchase on the same terms and conditions as the private placement, up to the same number of Debentures and warrants purchased by such investor at the closing of the private placement. In addition, we will pay to a placement agent (i) a cash fee equal to seven percent (7%) of the gross proceeds received by Generex and (ii) warrants exercisable into approximately 145,000 shares of our common stock at the same exercise price as the investors' warrants. We undertook this offering in reliance upon Rule 506 of Regulation D and Section 18(b)(4)(D) of the Securities Act of 1933, as amended. RESTATEMENT Subsequent to the issuance of our financial statements for the year ended July 31, 2001, management determined that its Series A Preferred stock should be reclassified from stockholders' equity, in accordance with Emerging Issues Task Force Topic D-98, "Classification and Measurement of Redeemable Securities," because the redemption feature of the Series A Preferred stock is beyond our control. This restatement did not affect net loss for the year ended July 31, 2001, nor did it affect total assets. The Series A Preferred stock should have been included outside the statement of stockholders' equity from the date of its issuance in January 2001. Results of Operations - Three months ended October 31, 2004 and 2003 - -------------------------------------------------------------------- We have been in the development stage since inception and have not generated any operating revenues to date, other than $1,000,000 in revenues received in connection with the Development and License Agreement with Lilly in the quarter ended October 31, 2000. We received a total of $627,184 in research grants and consulting revenue in fiscal 2004. In the fiscal quarter ended October 31, 2004 we received $142,750 in such grants. Our net loss for the quarter ended October 31, 2004 was $6,658,028 versus $3,612,270 in the corresponding quarter of the prior fiscal year. The increase in net loss in this fiscal quarter versus the corresponding quarter of the prior fiscal year is primarily due to an increase in research and development expenses of $2,366,601 and an increase in general and administrative expenses of $591,922. The increase in research and development expenses in the three-month period ending October 31, 2004 compared to the corresponding period of the prior fiscal year reflects the additional research and development activities by Antigen, bulk insulin purchases and increased activities of regulatory consultants. The level of clinical activity in first quarter of 2004 was also higher, compared to the same quarter last year. The increase in general and administrative expenses in the quarter ended October 31, 2004, compared to the quarter ended October 31, 2003, was the result of additional non-cash expenses incurred this year in connection with the issuance of common stock to consultants for financial services, additional litigation accrual in connection with Sands litigation and a small increase in expenses for accounting and legal services. Increased level of activities of Antigen also contributed to the increase in general and administrative expenses in this quarter compared to the same quarter last year. The increase in general and administrative expenses was lessened by a reduction in travel expenses. Financial Condition, Liquidity and Resources - -------------------------------------------- To date we have financed our development stage activities primarily through private placements of common stock. At October 31, 2004, we had cash and short-term investments (primarily notes of United States corporations) of approximately $1.5 million. At July 31, 2004, our cash and short term investments were approximately $5 million. The decrease was attributable to the use of cash for ongoing operations. At October 31, 2004, we believed that our anticipated cash position was sufficient to meet our working capital needs for the next 12 months based on the pace of our planned development activities. Beyond that, we will likely require additional funds to support our working capital requirements or for other purposes. From time to time as deemed appropriate by management, we may seek to raise funds through private or public equity financing or from other sources. If we were unable to raise additional capital as needed, we could be required to "scale back" or otherwise revise our business plan. Any significant scale back of operations or modification of our business plan due to a lack of funding could be expected to affect our prospects materially and adversely. In the past, we have funded most of our development and other costs with equity financing. While we have been able to raise equity capital as required, unforeseen problems with our clinical program or materially negative developments in general economic conditions could interfere with our ability to raise additional equity capital as needed, or materially adversely affect the terms upon which such capital is available. Critical Accounting Policies - ---------------------------- Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We consider certain accounting policies related to impairment of long-lived assets, intangible assets and accrued liabilities to be critical to our business operations and the understanding of our results of operations: Impairment of Long-Lived Assets. Management reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable under the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." If it is determined that an impairment loss has occurred based upon expected future cash flows, the loss is recognized in the Statement of Operations. Intangible Assets. We have intangible assets related to patents. The determination of the related estimated useful lives and whether or not these assets are impaired involves significant judgments. In assessing the recoverability of these intangible assets, we use an estimate of undiscounted operating income and related cash flows over the remaining useful life, market conditions and other factors to determine the recoverability of the asset. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets. Estimating accrued liabilities, specifically litigation accruals. Management's current estimated range of liabilities related to pending litigation is based on management's best estimate of future costs. While the final resolution of the litigation could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, management believes the ultimate outcome will not have a significant effect on our consolidated results of operations, financial position or cash flows. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements. CONTRACTUAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------- Payments Due by Period - -------------------------------------------------------------------------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS - -------------------------------------------------------------------------------------------------------------------------- Long-Term Debt Obligations 2,407,362 1,472,006 935,356 0 0 - -------------------------------------------------------------------------------------------------------------------------- Capital Lease Obligations 0 0 0 0 0 - -------------------------------------------------------------------------------------------------------------------------- Operating Lease Obligations 109,120 40,750 54,172 14,198 0 - -------------------------------------------------------------------------------------------------------------------------- Purchase Obligations 0 0 0 0 0 - -------------------------------------------------------------------------------------------------------------------------- Other Long-Term Liabilities Reflected on 0 0 0 0 0 the Registrant's Balance Sheet under GAAP - -------------------------------------------------------------------------------------------------------------------------- Total 2,516,482 1,512,756 989,528 14,198 0 - --------------------------------------------------------------------------------------------------------------------------
TRANSACTIONS WITH AFFILIATES On May 3, 2001, we advanced $334,300 to each of three senior officers, who are also our stockholders, in exchange for promissory notes. These notes bore interest at 8.5 percent per annum and were payable in full on May 1, 2002. These notes were guaranteed by a related company owned by these officers and secured by a pledge of 2,500,000 shares of our common stock owned by this related company. On June 3, 2002, our Board of Directors extended the maturity date of the loans to October 1, 2002. The other terms and conditions of the loans and guaranty remained unchanged and in full force and effect. As of July 31, 2002, the balance outstanding on these notes, including accrued interest, was $1,114,084. Pursuant to a decision made by the Compensation Committee as of August 30, 2002, these loans were satisfied through the application of 592,716 shares of pledged stock, at a value of $1.90 per share, which represented the lowest closing price during the sixty days prior to August 30, 2002. Prior to January 1, 1999, a portion of our general and administrative expenses resulted from transactions with affiliated persons, and a number of capital transactions also involved affiliated persons. Although these transactions were not the result of "arms-length" negotiations, we do not believe that this fact had a material impact on our results of operations or financial position. Prior to December 31, 1998, we classified certain payments to executive officers for compensation and expense reimbursements as "Research and Development - related party" and "General and Administrative - related party" because the executive officers received such payments through personal services corporations rather than directly. After December 31, 1998, these payments have been and will continue to be accounted for as though the payments were made directly to the officers, and not as a related party transaction. We do not foresee a need for, and therefore do not anticipate, any related party transactions in the current fiscal year. On August 7, 2002, we purchased real estate with an aggregate purchase price of approximately $1.6 million from an unaffiliated party. In connection with that transaction, Angara Enterprises, Inc., a licensed real estate broker that is an affiliate of Anna Gluskin, received a commission from the proceeds of the sale to the seller in the amount of 3% of the purchase price, or $45,714. We believe that this is less than the aggregate commission which would have been payable if a commission had been negotiated with an unaffiliated broker on an arm's length basis. We utilize a management company to manage all of our real properties. The property management company is owned by Rose Perri, Anna Gluskin and the estate of Mark Perri, our former Chairman of the Board. In the fiscal years ended July 31, 2004 and 2003 we paid the management company approximately $40,180 and $33,237, respectively, in management fees. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Additionally, those changes are expected to result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003, and for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, apply in accordance with their respective effective dates. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It also requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable noncontrolling interests. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks associated with changes in the exchange rates between U.S. and Canadian currencies and with changes in the interest rates related to our fixed rate debt. We do not believe that any of these risks will have a material impact on our financial condition, results of operations and cash flows. At the present time, we maintain our cash in short term government or government guaranteed instruments, short term commercial paper, interest bearing bank deposits or demand bank deposits which do not earn interest. A substantial majority of these instruments and deposits are denominated in U.S. dollars, with the exception of funds denominated in Canadian dollars on deposit in Canadian banks to meet short term operating needs in Canada. At the present time, with the exception of professional fees and costs associated with the conduct of clinical trials in the United States and Europe, substantially all of our operating expense obligations are denominated in Canadian dollars. We do not presently employ any hedging or similar strategy intended to mitigate against losses that could be incurred as a result of fluctuations in the exchange rates between U.S. and Canadian currencies. As of October 31, 2004, we have fixed rate debt totaling $2,407,362. This amount is comprised of $842,784 at a fixed interest rate of 5.8%, $328,360 at 8.5%, $ 623,033 at 9.7 %, $202,735 at 10%, and $410,450 at 11.5% per annum. These debt instruments mature from May 2005 through August 2006. As our fixed rate debt mature, we will likely refinance such debt at their existing market interest rates which may be more or less than interest rates on the maturing debt. Since this debt is fixed rate debt, if interest rates were to increase 100 basis points prior to maturity, there would be no impact on earnings or cash flows. We have neither issued nor own any long term debt instruments, or any other financial instruments, for trading purposes and as to which we would be subject to material market risks. ITEM 4. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. CHANGES IN INTERNAL CONTROLS. There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15(d) - 15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. Generex, awarding Sands $150,000 in reliance damages. A motion to confirm this award has been filed by Sands. We will file responding materials in the near future. We expect that the motion to confirm will be heard in early 2005. Sands has advised us that it intends to seek leave from the New York Court of Appeals to appeal the prior orders of the Appellate Division vacating the prior Arbitration Panel's warrant awards. Consequently, it is likely that there will be further legal proceedings with respect to this matter. At the present time, we are not able to predict the ultimate outcome of this matter or to estimate a range of possible loss. Accordingly, only $150,000 has been recorded in the accompanying financial statements. There were no other legal proceedings which first became reportable or in which there were material developments during the fiscal quarter ended October 31, 2004. For a full description of the foregoing legal proceeding, and all other legal proceedings against the Company, see the Company's Report on Form 10-K for the year ended July 31, 2004, which is incorporated herein by reference. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. The following transaction occurred during fiscal quarter ended October 31, 2004 and was previously reported in our annual report on Form 10-K for the fiscal year ended July 31, 2004. o On October 18, 2004, we entered into a Securities Agreement to sell 800,000 shares of our common stock at $2.50 per share for gross proceeds of $2,000,000. The closing date for this transaction is to be agreed upon, but the parties anticipate that the closing will occur in January 2005. The following transaction occurred subsequent to fiscal quarter ended October 31, 2004 and was previously reported on Form 8-K and on Form 10-K for the fiscal year ended July 31, 2004. o On November 15, 2004, we completed a private placement of 6% Secured Convertible Debentures and warrants with four accredited investors for an aggregate purchase price of $4,000,000. The Debentures have a term of fifteen (15) months and amortize over thirteen (13) months in thirteen (13) equal monthly installments beginning on the first day of the third month following their issuance. Interest on the principal amount outstanding will accrue at a rate of six percent (6%) per annum. We may pay principal and accrued interest in cash or, at our option, in shares of our common stock. If we elect to pay principal and interest in shares of our common stock, the value of each share of common stock will be equal to ninety percent (90%) of the average of the twenty (20) trading day volume weighted average price for the common stock for the twenty (20) trading day period immediately preceding the date of payment. At the option of the holder of each Debenture, the principal amount outstanding under each Debenture is initially convertible at any time after the closing of the private placement into shares of our common stock at a conversion price of $0.82. The conversion price of each Debenture is based on the average of the ten (10) trading day volume weighted average price for our common stock for the ten (10) trading day period immediately preceding the date definitive agreements were signed. The warrants are initially exercisable into the same number of shares of our common stock initially issuable upon conversion of the Debentures. The initial exercise price of each warrant is equal to 110% of the conversion price of the Debentures, or $0.91. The conversion price of the Debentures and the exercise price of the warrants are each subject to a full-ratchet adjustment upon the issuance by us of securities at a price per share less than the then conversion price or exercise price, as applicable. In accordance with the terms of the private placement, we are required to register for resale the shares of common stock issuable upon conversion of the Debentures and upon exercise of the warrants. We expect to utilize the proceeds from the transaction to accelerate clinical development activities and for working capital and other general corporate purposes. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION An investment in our stock is very speculative and involves a high degree of risk. You should carefully consider the following important factors, as well as the other information in this Report and the other reports that we have filed heretofore (and will file hereafter) with the Securities and Exchange Commission, before purchasing our stock. The following discussion outlines certain factors that we think could cause our actual outcomes and results to differ materially from our forward-looking statements. In addition to historical facts or statements of current condition, this Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. The following discussion outlines certain factors that we think could cause our actual outcomes and results to differ materially from our forward-looking statements. These factors are in addition to those set forth elsewhere in this Annual Report on Form 10-K. Risks Related to Our Financial Condition - ---------------------------------------- We have a history of losses, and will incur additional losses. We are a development stage company with a limited history of operations, and do not expect ongoing revenues from operation in the immediately foreseeable future. To date, we have not been profitable and our accumulated net loss before preferred stock dividend was $100,889,344 at October 31, 2004. Our losses have resulted principally from costs incurred in research and development, including clinical trials, and from general and administrative costs associated with our operations. While we seek to attain profitability, we cannot be sure that we will ever achieve product and other revenue sufficient for us to attain this objective. Our product candidates are in research or early stages of pre-clinical and clinical development. We will need to conduct substantial additional research, development and clinical trials. We will also need to receive necessary regulatory clearances both in the United States and foreign countries and obtain meaningful patent protection for and establish freedom to commercialize each of our product candidates. We cannot be sure that we will obtain required regulatory approvals, or successfully research, develop, commercialize, manufacture and market any other product candidates. We expect that these activities, together with future general and administrative activities, will result in significant expenses for the foreseeable future. We need additional capital To progress in product development or marketing, we will need additional capital which may not be available to us. This may delay our progress in product development or market. We will require funds in excess of our existing cash resources: o to proceed with the development of our buccal insulin product; o to proceed under our joint venture with Elan, which requires us to fund 80.1% of initial product development costs; o to develop other buccal and immunomedicine products; o to develop new products based on our buccal delivery and immunomedicine technologies, including clinical testing relating to new products; o to develop or acquire other technologies or other lines of business; o to establish and expand our manufacturing capabilities; o to finance general and administrative and research activities that are not related to specific products under development; and o to finance the research and development activities of our new subsidiary Antigen. In the past, we have funded most of our development and other costs through equity financing. We anticipate that our existing capital resources will enable us to maintain currently planned operations through the next twelve months. However, this expectation is based on our current operating plan, which could change as a result of many factors, and we may need additional funding sooner than anticipated. Because our operating and capital resources are insufficient to meet future requirements, we will have to raise additional funds in the near future to continue the development and commercialization of our products. Unforeseen problems, including materially negative developments in our joint venture with Elan, in our clinical trials or in general economic conditions, could interfere with our ability to raise additional equity capital or materially adversely affect the terms upon which such funding is available. Recent changes in the application of the rules of the NASDAQ Stock Market may also make it more difficult for us to raise private equity capital. It is possible that we will be unable to obtain additional funding as and when we need it. If we were unable to obtain additional funding as and when needed, we could be forced to delay the progress of certain development efforts. Such a scenario poses risks. For example, our ability to bring a product to market and obtain revenues could be delayed, our competitors could develop products ahead of us, and/or we could be forced to relinquish rights to technologies, products or potential products. New equity financing could dilute current stockholders. If we raise funds through equity financing to meet the needs discussed above, it will have a dilutive effect on existing holders of our shares by reducing their percentage ownership. The shares may be sold at a time when the market price is low because we need the funds. This will dilute existing holders more than if our stock price was higher. In addition, equity financings normally involve shares sold at a discount to the current market price. Our research and development and marketing efforts are likely to be highly dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, which may limit our efforts to successfully develop and market potential products. Because we have limited resources, we have sought to enter into collaboration agreements with other pharmaceutical companies that will assist us in developing, testing, obtaining governmental approval for and commercializing products using our buccal delivery and immunomedicine technologies. Any collaborator with whom we may enter into such collaboration agreements may not support fully our research and commercial interests since our program may compete for time, attention and resources with such collaborator's internal programs. Therefore, these collaborators may not commit sufficient resources to our program to move it forward effectively, or that the program will advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. Risks Related to Our Technologies - --------------------------------- Because our technologies and products are at an early stage of development, we cannot expect revenues in the foreseeable future. We have no products approved for commercial sale at the present time. To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products under development. We may not be successful in one or more of these stages of the development of our products, and/or any of the products we develop may not be commercially viable. While over 800 patients with diabetes have been dosed with our oral insulin formulation at approved facilities in seven countries, our insulin product has not been approved for marketing in any country. Until we have developed a commercially viable product which receives regulatory approval, we will not receive revenues from ongoing operations. We will not receive revenues from operations until we receive regulatory approval to sell our products. Many factors impact our ability to obtain approvals for commercially viable products. We have no products approved for commercial sale by drug regulatory authorities. We have begun the regulatory approval process for our oral insulin formulation, buccal morphine and fentanyl products. Our immunomedicine products are in the pre-clinical stage of development. Pre-clinical and clinical trials of our products, and the manufacturing and marketing of our technologies, are subject to extensive, costly and rigorous regulation by governmental authorities in the United States, Canada and other countries. The process of obtaining required regulatory approvals from the FDA and other regulatory authorities often takes many years, is expensive and can vary significantly based on the type, complexity and novelty of the product candidates. For these reasons, it is possible we will never receive approval for one or more product candidates. Delays in obtaining United States or foreign approvals for our products could result in substantial additional costs to us, and, therefore, could adversely affect our ability to compete with other companies. If regulatory approval is ultimately granted, the approval may place limitations on the intended use of the product we wish to commercialize, and may restrict the way in which we are permitted to market the product. Due to legal and factual uncertainties regarding the scope and protection afforded by patents and other proprietary rights, we may not have meaningful protection from competition. Our long-term success will substantially depend upon our ability to protect our proprietary technologies from infringement, misappropriation, discovery and duplication and avoid infringing the proprietary rights of others. Our patent rights, and the patent rights of biotechnology and pharmaceutical companies in general, are highly uncertain and include complex legal and factual issues. Because of this, our pending patent applications may not be granted. These uncertainties also mean that any patents that we own or will obtain in the future could be subject to challenge, and even if not challenged, may not provide us with meaningful protection from competition. Due to our financial uncertainties, we may not possess the financial resources necessary to enforce our patents. Patents already issued to us or our pending applications may become subject to dispute, and any dispute could be resolved against us. Because a substantial number of patents have been issued in the field of alternative drug delivery and because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims obtained in any application or the enforceability of our patents cannot be predicted. Consequently, we do not know whether any of our pending or future patent applications will result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subject to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated. Also because of these legal and factual uncertainties, and because pending patent applications are held in secrecy for varying periods in the United States and other countries, even after reasonable investigation we may not know with certainty whether any products that we (or a licensee) may develop will infringe upon any patent or other intellectual property right of a third party. For example, we are aware of certain patents owned by third parties that such parties could attempt to use in the future in efforts to affect our freedom to practice some of the patents that we own or have applied for. Based upon the science and scope of these third party patents, we believe that the patents that we own or have applied for do not infringe any such third party patents, however, we cannot know for certain whether we could successfully defend our position, if challenged. We may incur substantial costs if we are required to defend ourselves in patent suits brought by third parties. These legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the accused product or process. In addition to potential liability for significant damages, we could be required to obtain a license to continue to manufacture or market the accused product or process. Risks Related to Marketing of Our Potential Products - ---------------------------------------------------- We may not become, or stay, profitable even if our products are approved for sale. Even if we obtain regulatory approval to market our oral insulin product or any other product candidate, many factors may prevent the product from ever being sold in commercial quantities. Some of these factors are beyond our control, such as: o acceptance of the formulation or treatment by health care professionals and diabetic patients; o the availability, effectiveness and relative cost of alternative diabetes or immunomedicine treatments that may be developed by competitors; and o the availability of third-party (i.e., insurer and governmental agency) reimbursements. We may not be able to compete with treatments now being marketed and developed, or which may be developed and marketed in the future by other companies. Our products will compete with existing and new therapies and treatments. We are aware of a number of companies currently seeking to develop alternative means of delivering insulin, as well as new drugs intended to replace insulin therapy at least in part. We are also aware of a number of companies currently seeking to develop alternative means of enhancing and suppressing peptides. In the longer term, we also face competition from companies that seek to develop cures for diabetes and other malignant, infectious, autoimmune and allergic diseases through techniques for correcting the genetic deficiencies that underlie such diseases. We will have to depend upon others for marketing and distribution of our products, and we may be forced to enter into contracts limiting the benefits we may receive and the control we have over our products. We intend to rely on collaborative arrangements with one or more other companies that possess strong marketing and distribution resources to perform these functions for us. We may not be able to enter into beneficial contracts, and we may be forced to enter into contracts for the marketing and distribution of our products that substantially limit the potential benefits to us from commercializing these products. In addition, we will not have the same control over marketing and distribution that we would have if we conducted these functions ourselves. Numerous pharmaceutical, biotechnology and drug delivery companies, hospitals, research organizations, individual scientists and nonprofit organizations are engaged in the development of alternatives to our technologies. Many of these companies have greater research and development capabilities, experience, manufacturing, marketing, financial and managerial resources than we do. Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more rapidly than we can. If government programs and insurance companies do not agree to pay for or reimburse patients for our products, we will not be successful. Sales of our potential products depend in part on the availability of reimbursement by third-party payors such as government health administration authorities, private health insurers and other organizations. Third-party payors often challenge the price and cost-effectiveness of medical products and services. FDA approval of health care products does not guarantee that these third party payors will pay for the products. Even if third party payors do accept our product, the amounts they pay may not be adequate to enable us to realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change before our products are approved for marketing and any such changes could further limit reimbursement. Risks Related to Potential Liabilities - -------------------------------------- We face significant product liability risks, which may have a negative effect on our financial condition. The administration of drugs or treatments to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs or treatments are actually at fault for causing an injury. Furthermore, our products may cause, or may appear to have caused, serious adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug or treatment has been administered to patients for some time. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a severe negative effect on our financial condition. We maintain product liability insurance in amounts we believe to be commercially reasonable for our current level of activity and exposure, but claims could exceed our coverage limits. Furthermore, due to factors in the insurance market generally and our own experience, we may not always be able to purchase sufficient insurance at an affordable price. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business. Outcome of an Arbitration Proceeding with Sands Brothers may have an adverse impact on us. On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against us under New York Stock Exchange rules. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.5 million shares of our common stock. Sands based its claim upon an October 1997 letter agreement that was purported by Sands to confirm an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late 1997. In exchange therefor, the letter agreement purported to grant Sands the right to acquire 17% of Generex Pharmaceuticals' common stock for nominal consideration. Sands claimed that its right to receive shares of Generex Pharmaceuticals' common stock applies to our common stock since outstanding shares of Generex Pharmaceuticals' common stock were converted into shares of our common stock in the acquisition. Sands' claims also included additional shares allegedly due as a fee related to that acquisition, and $144,000 in monthly fees allegedly due under the terms of the purported agreement. After several arbitration and court proceedings, on October 29, 2002, the Appellate Division of the New York Supreme Court issued a decision remanding the issue of damages to a new panel of arbitrators and limiting the issue of damages before the new panel to reliance damages which is not to include an award of lost profits. Reliance damages are out-of-pocket damages incurred by Sands. On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued a final award in the case of Sands vs. the Company, awarding Sands $150,000 in reliance damages. A motion to confirm this award has been filed by Sands. The Company will file responding materials in the near future. The Company expects that the motion to confirm will be heard in early 2005. Sands has advised the Company that it intends to seek leave from the New York Court of Appeals to appeal the prior orders of the Appellate Division vacating the prior Arbitration Panel's warrant awards. Consequently, it is likely that there will be further legal proceedings with respect to this matter. Accordingly, only $150,000 has been recorded in the accompanying financial statements. The case is still ongoing and our ultimate liability cannot yet be determined with certainty. Our financial condition would be materially adversely affected to the extent that Sands receives shares of our common stock for little or no consideration or substantial monetary damages as a result of this legal proceeding. Apart from $150,000 accrual, we are not able to estimate an amount or range of potential loss from this legal proceeding at the present time. Risks Related to the Market for Our Common Stock - ------------------------------------------------ If our common stock is delisted from the NASDAQ SmallCap Market and/or becomes subject to Penny Stock regulations, the market price for our stock may be reduced and it may be more difficult for us to obtain financing. On June 5, 2003, our common stock was delisted from the NASDAQ National Market because of our failure to maintain a minimum of $10,000,000 in stockholders' equity. On June 5, 2003, our stock began trading on the NASDAQ SmallCap Market. The NASDAQ SmallCap Market has its own standards for continued listing, including a minimum of $2.5 million stockholders' equity. As of July 31, 2004, our stockholders' equity was $529,751. As a result, on November 19, 2004, we received notice from The Nasdaq Stock Market informing us that we do not comply with Market Place Rule 4310(c)(2)(B), which requires us to have a minimum of $2,500,000 in stockholders' equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. Although we provided to the Nasdaq Stock Market specific elements of a plan, including the proposed conversion of $14,300,000 of mezzanine equity to common equity on our balance sheet, to achieve and sustain compliance with all of The Nasdaq SmallCap Market listing requirements, there is no guarantee that we will achieve compliance with The Nasdaq SmallCap Market listing requirements, or sustain compliance with the requirements if achieved. In the event we cannot achieve or sustain compliance, our shares of common stock may be delisted from The Nasdaq SmallCap Market and begin trading on the over-the-counter bulletin board. In addition, for continued listing on both the Nasdaq National Market and SmallCap Market, our stock price must be at least $1.00. During October and November of 2004, our stock price traded below this minimum per share requirement for thirty (30) consecutive business days. As a result, on November 24, 2004, we received notice from The Nasdaq Stock Market informing us that we do not comply with Market Rule 4310(c)(4), which requires us to have a minimum bid price per share of at least $1.00 for thirty (30) consecutive business days. Although we have 180 calendar days, subject to extension by The Nasdaq Stock Market under certain circumstances, to regain compliance with the Rule, there is no guarantee that the bid price of our common stock will close at $1.00 per share or more for a minimum period of ten (10) consecutive business days, which is the minimum period of time The Nasdaq Stock Market requires to regain compliance. If our stock is delisted from NASDAQ, there will be less interest for our stock in the market. This may result in lower prices for our stock and make it more difficult for us to obtain financing. If our stock is not listed on NASDAQ and fails to maintain a price of $5.00 or more per share, our stock would become subject to the Securities and Exchange Commission's "Penny Stock" rules. These rules require a broker to deliver, prior to any transaction involving a Penny Stock, a disclosure schedule explaining the Penny Stock Market and its risks. Additionally, broker/dealers who recommend Penny Stocks to persons other than established customers and accredited investors must make a special written suitability determination and receive the purchaser's written agreement to a transaction prior to the sale. In the event our stock becomes subject to these rules, it will become more difficult for broker/dealers to sell our common stock. Therefore, it may be more difficult for us to obtain financing. The price of Our Common Stock may be volatile. There may be wide fluctuations in the price of our common stock. These fluctuations may be caused by several factors including: o announcements of research activities and technology innovations or new products by us or our competitors; o changes in market valuation of companies in our industry generally; o variations in operating results; o changes in governmental regulations; o developments in patent and other proprietary rights; o public concern as to the safety of drugs or treatments developed by us or others; o results of clinical trials of our products or our competitors' products; and o regulatory action or inaction on our products or our competitors' products. From time to time, we may hire companies to assist us in pursuing investor relations strategies to generate increased volumes of investment in our common stock. Such activities may result, among other things, in causing the price of our common stock to increase on a short-term basis. Furthermore, the stock market generally and the market for stocks of companies with lower market capitalizations and small biopharmaceutical companies, like us, have from time to time experienced, and likely will again experience significant price and volume fluctuations that are unrelated to the operating performance of a particular company. Our outstanding Special Voting Rights Preferred Stock and provisions of our Restated Certificate of Incorporation could delay or prevent the acquisition or sale of our business. Holders of our Special Voting Rights Preferred Stock have the ability to prevent any change of control in us. Dr. Pankaj Modi, owns all of our Special Voting Rights Preferred Stock. In addition, our Restated Certificate of Incorporation permits our Board of Directors to designate new series of preferred stock and issue those shares without any vote or action by our stockholders. Such newly authorized and issued shares of preferred stock could contain terms that grant special voting rights to the holders of such shares that make it more difficult to obtain stockholder approval for an acquisition of our business or increase the cost of any such acquisition. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* ____________________________ * Filed herewith. All other exhibits are incorporated by reference, as described. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: December 15, 2004 GENEREX BIOTECHNOLOGY CORPORATION By: /s/ Rose C. Perri By: /s/ Anna Gluskin - --------------------- -------------------- Principal Financial Officer Chief Executive Officer EX-31 2 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Anna E. Gluskin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Generex Biotechnology Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: December 15, 2004 By: /s/ Anna E. Gluskin ---------------------------------------- Anna E. Gluskin, Chief Executive Officer (Principal Executive Officer) EX-31 3 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Rose C. Perri, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Generex Biotechnology Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: December 15, 2004 By: /s/ Rose C. Perri -------------------------------------------- Rose C. Perri, Chief Operating Officer (Principal Financial and Accounting Officer) EX-32 4 ex32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATIONS Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. ss. 1350, as adopted), Anna E. Gluskin, Chief Executive Officer and President of Generex Biotechnology Corporation (the "Company"), and Rose C. Perri, Chief Operating Officer of the Company, each hereby certifies that, to the best of his or her knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended October 31, 2004, and to which this Certification is attached as Exhibit 32 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the end of the period covered by the Report. DATE: December 15, 2004 By: /s/ Anna E. Gluskin -------------------------------------------- Anna E. Gluskin, Chief Executive Officer (Principal Executive Officer) DATE: December 15, 2004 By: /s/ Rose C. Perri -------------------------------------------- Rose C. Perri, Chief Operating Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----