Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-25169
GENEREX BIOTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 98-0178636
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 Harbour Square, Suite 202, Toronto, Canada M5J 2G2
(Address of principal executive offices) (Zip Code)
Telephone Number: (416) 364-2551
Internet Website: www.generex.com
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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 report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at November 8, 2004, based on the closing sales price as of that
date, was approximately $24,780,884.
At November 8, 2004, the registrant had 34,829,648 shares of common stock
outstanding.
Documents incorporated by reference: Proxy Statement to be filed within 120 days
after the end of the fiscal year.
FORWARD-LOOKING STATEMENTS
Certain statements in the "Business" (Item 1) and "Management's Discussion and
Analysis of Financial Condition and Results of Operation" (Item 7) sections and
elsewhere in this Annual Report on Form 10-K of Generex Biotechnology
Corporation for the fiscal year ended July 31, 2004 constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This 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 annual 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 throughout the
"Business" (Item 1) section, including the subsection entitled "Certain
Additional Risk Factors," and elsewhere in this annual report. Because of the
risks and uncertainties associated with forward-looking statements, you should
not place undue reliance on them. Further, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
OVERVIEW
Generex Biotechnology Corporation is engaged primarily in the research and
development of drug delivery technologies. Our primary focus at the present time
is our proprietary technology for the administration of formulations of large
molecule drugs to the oral (buccal) cavity using a hand-held aerosol applicator.
A substantial number of large molecule drugs (i.e., drugs composed of molecules
with a higher than specified molecular weight) have been approved for sale in
the United States or are presently undergoing clinical trials as part of the
process to obtain such approval, including various proteins, peptides,
monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which
generally can be administered by various methods, large molecule drugs
historically have been administered predominately by injection. The principal
reasons for this have been the vulnerability of large molecule drugs to
digestion and the relatively large size of the molecule itself, which makes
absorption into the blood stream through the skin or mucosa inefficient or
ineffective.
All injection therapies involve varying degrees of discomfort and inconvenience.
With chronic and sub-chronic diseases, the discomfort and inconvenience
associated with injection therapies frequently results in less than optimal
patient acceptance of, and compliance with, the prescribed treatment plan. Poor
acceptance and compliance can lead to medical complications and higher disease
management costs. Also, elderly, infirm and pediatric patients with chronic or
sub-chronic conditions may not be able to self-inject their medications. In such
cases assistance is required which increases both the cost and inconvenience of
the therapy.
Our goal is to develop proprietary formulations of large molecule drugs that can
be administered through the buccal mucosa, primarily the inner cheek walls,
thereby eliminating or reducing the need for injections. We believe that our
buccal delivery technology is a platform technology that has application to many
large molecule drugs, and provides a convenient, non-invasive, accurate and cost
effective way to administer such drugs. We have identified several large
molecule drugs as possible candidates for development, but to date have focused
our development efforts on a buccal insulin product.
Our first product is an insulin formulation that is administered as a fine spray
into the oral cavity using a hand-held aerosol spray applicator. Between January
1999 and September 2000, we conducted limited clinical trials on this product in
the United States, Canada and Europe. In September 2000, we entered into an
agreement (the "Development and License Agreement") to develop this product with
Eli Lilly and Company ("Lilly"). To date, over 800 patients with diabetes have
been dosed with our oral insulin product at approved facilities in seven
countries. We conducted several clinical trials with insulin supplied by Lilly
under our Development and License Agreement. Lilly did not, however, authorize
or conduct any clinical trials or provide financial support for those trials. We
did receive a $1,000,000 up front payment from Lilly. On May 23, 2003, we
announced that we had agreed with Lilly to end the Development and License
Agreement for the development and commercialization of buccal delivery of
insulin. On November 5, 2003, we entered into a termination agreement with Lilly
terminating the Development and License Agreement, effective as of June 2, 2003.
In accordance with the termination agreement, we retain all of the intellectual
property and commercialization rights with respect to buccal spray drug delivery
technology, and we have the continuing right to develop and commercialize the
product. We also entered into a Bulk Supply Agreement (the "Bulk Supply
Agreement") for the sale of human insulin crystals by Lilly to us over a three
year period. The Bulk Supply Agreement establishes purchase prices, minimum
purchase requirements, maximum amounts which may be purchased in each year and a
non-refundable prepayment of $1,500,000 to be applied against amounts due for
purchases.
2
In January 2001, we established a joint venture with Elan International
Services, Ltd. ("EIS"), a wholly-owned subsidiary of Elan Corporation, plc (EIS
and Elan Corporation, plc being collectively referred to as "Elan"), to pursue
the application of certain of our and Elan's drug delivery technologies,
including our platform technology for the buccal delivery of pharmaceutical
products, for the treatment of prostate cancer, endometriosis and/or the
suppression of testosterone and estrogen. In January 2002, we and Elan agreed to
expand the joint venture to encompass the buccal delivery of morphine for the
treatment of pain and agreed to pursue buccal morphine as the initial
pharmaceutical product for development under Generex (Bermuda) Ltd., the entity
through which the joint venture is being conducted. This expansion of the joint
venture occurred after we successfully completed a proof of concept clinical
study of morphine delivery using our proprietary buccal delivery technology.
In connection with the joint venture, EIS purchased 1,000 shares of a new series
of our preferred stock, designated as Series A Preferred Stock, for $12,015,000.
We applied the proceeds from the sale of the Series A Preferred Stock to
subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS
paid in capital of $2,985,000 to subscribe for a 19.9% equity ownership interest
in the joint venture entity. Alternatively, the Series A Preferred Stock may be
converted, under certain conditions, into shares of our common stock. Subsequent
to its purchase of the shares of Series A Preferred Stock, EIS transferred the
shares to an affiliate of Elan. While we presently own 80.1% of the joint
venture entity, the Elan affiliate has the right, subject to certain conditions,
to increase its ownership up to 50% by exchanging the Series A Preferred Stock
for 30.1% of our equity ownership of the joint venture entity. In accordance
with the terms of the Series A Preferred Stock, if any shares of Series A
Preferred Stock are outstanding on January 16, 2007, we are required to redeem
the shares of Series A Preferred Stock at a redemption price equal to the
aggregate Series A Preferred Stock liquidation preference (which currently
equals the aggregate original purchase price of the Series A Preferred Stock),
either in cash, or in shares of common stock with a fair market value equal to
the redemption price. In January 2002, 2003 and 2004, pursuant to the terms of
the agreement with EIS, the Elan affiliate received a 6% stock dividend of
Series A Preferred Stock.
EIS also purchased 344,116 shares of our common stock for $5,000,000. We were
permitted to use the proceeds of this sale for any corporate purpose. If the
joint venture achieves certain milestones, we may require EIS to purchase an
additional $1,000,000 of our common stock at a 30% premium to the then
prevailing fair market value of our common stock.
Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal
delivery technology and certain Elan drug delivery technologies. Using the funds
from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable
license fee of $15,000,000 to Elan in consideration for being granted the rights
to utilize the Elan drug delivery technologies.
To date we have not received any substantial economic support from Elan in
connection with the joint venture or the development of the morphine product,
other than its initial capital contribution. However, we have continued to
conduct research and development activities with the morphine product.
3
In August 2003, we acquired Antigen Express, Inc. Antigen is engaged in the
research and development of technologies and immunomedicines for the treatment
of malignant, infectious, autoimmune and allergic diseases.
Our immunomedicine products work by stimulating the immune system to either
attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop
attacking benign elements (i.e., self proteins and allergens). Our
immunomedicine products are based on two platform technologies that were
discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and
Ii-Suppression. The immunomedicine products are in the pre-clinical stage of
development, and trials in human patients are not expected for at least 6
months. Development efforts are underway in melanoma, breast cancer, prostate
cancer, HIV, influenza virus, smallpox, SARS and Type I diabetes mellitus. We
are establishing collaborations with clinical investigators at academic centers
to advance the technology, with the ultimate goal of conducting human clinical
testing.
We do not expect to receive any revenues from product sales in the current
fiscal year. However, we have received and we expect to continue to receive some
revenue from research grants for Antigen's immunomedicine products. To date, we
have received a total of $627,184 in such research grants. We do not expect the
research grants to fully fund Antigen's expenses. We expect to satisfy all of
our cash needs during the current year from capital raised through equity
financings.
We are a development stage company, and from inception through the end of fiscal
year 2004 had not received any revenues from operations other than the up-front
payment from Lilly. We have no products approved for commercial sale by drug
regulatory authorities. We have begun the regulatory approval process for only
three products, our oral insulin formulation, morphine and fentanyl. We believe
that our buccal delivery technology is a platform technology that has
application to a large number of large molecule drugs in addition to insulin.
Estrogen, heparin, monoclonal antibodies, human growth hormone, fertility
hormone, as well as a number of vaccines are among the compounds that we have
identified as possible candidates for product development.
Buccal Delivery Technology
Our buccal delivery technology involves the preparation of a proprietary
formulation in which an active pharmaceutical agent is placed in a solution with
a combination of absorption enhancers and other excipients classified generally
recognized as safe ("GRAS") by the Food and Drug Administration ("FDA") when
used in accordance with specified quantity and other limitations. The resulting
formulation is aerosolized with a pharmaceutical grade chemical propellant and
is administered to the patient using our proprietary RapidMist(TM) device. The
device is a small, lightweight, hand-held, easy-to-use aerosol applicator
comprised of a container for the formulation, a metered dose valve, an actuator
and dust cap. Using the device, the patient self-administers the formulation by
spraying it into the mouth. The device contains multiple applications, the
number being dependent, among other things, on the concentration of the
formulation. Absorption of the pharmaceutical agent occurs in the buccal cavity,
principally through the inner cheek walls. In clinical studies of our insulin
product Oralin(TM), insulin absorption in the buccal cavity has been shown to be
very efficacious. We are also evaluating the use of our RapidMist device for the
delivery of both morphine and fentanyl.
4
Buccal Insulin Product
Insulin is a hormone that is naturally secreted by the pancreas to regulate the
level of glucose, a type of sugar, in the bloodstream. The term diabetes refers
to a group of disorders that are characterized by the inability of the body to
properly regulate blood glucose levels. When glucose is abundant, it is
converted into fat and stored for use when food is not available. When glucose
is not available from food, these fats are broken down into free fatty acids
that stimulate glucose production. Insulin acts by stimulating the use of
glucose as fuel and by inhibiting the production of glucose. In a healthy
individual, a balance is maintained between insulin secretion and glucose
metabolism.
There are two major types of diabetes. Type 1 diabetes (juvenile onset diabetes
or insulin dependent diabetes) refers to the condition where the pancreas
produces little or no insulin. Type 1 diabetes accounts for 5-10 percent of
diabetes cases. It often occurs in children and young adults. Type 1 diabetics
must take daily insulin injections, typically three to five times per day, to
regulate blood glucose levels.
In Type 2 diabetes (adult onset or non-insulin dependent diabetes mellitus), the
body does not produce enough insulin, or cannot properly use the insulin
produced. Type 2 diabetes is the most common form of the disease and accounts
for 90-95 percent of diabetes cases. In addition to insulin therapy, Type 2
diabetics may take oral drugs that stimulate the production of insulin by the
pancreas or that help the body to more effectively use insulin.
If not treated, diabetes can lead to blindness, kidney disease, nerve disease,
amputation, heart disease and stroke. Each year, between 12,000 and 24,000
people lose their sight because of diabetes. Diabetes is also the leading cause
of end-stage renal disease (kidney failure), accounting for about 40% of new
cases.
In addition, about 60-70 percent of people with diabetes have mild to severe
forms of diabetic nerve damage, which, in severe forms, can lead to lower limb
amputations. Diabetics are also 2 to 4 times more likely to have heart disease,
which is present in 75 percent of diabetes-related deaths, and are 2 to 4 times
more likely to suffer a stroke.
There is no known cure for diabetes. The World Health Organization estimates
that there are currently over 1.5 billion diabetics worldwide. It is further
estimated that this number will almost double by the year 2025. There are
estimated to be 17 million people suffering from diabetes in North America
alone, approximately 5 million of whom are undiagnosed, and diabetes is the
second largest cause of death by disease in North America.
We conducted the first clinical trials of our buccal insulin formulation with
human subjects in Ecuador in January 1998. We ultimately conducted a number of
studies in Ecuador in 1998, each of which involved a selection of between 8 and
10 patients. The principal purpose of these studies was to evaluate the
effectiveness of our oral insulin formulation in humans compared with injected
insulin and placebos. In March 2004, we entered into a Letter of Intent for the
establishment of a joint venture with Pharma Brand S.A., a distributor of
pharmaceutical products in Central and Latin America. In furtherance of this
joint venture, in August 2004, the Oralin(TM) dossier has been submitted to the
Ecuador Ministry of Public Health seeking approval for the manufacturing,
marketing, distribution and sale of Oralin(TM) and RapidMist(TM) Diabetes
Management System.
5
On the basis of the test results in Ecuador and other pre-clinical data, we made
an Investigatory New Drug submission to the Health Protection Branch in Canada
(Canada's equivalent to the United States' Food and Drug Administration) in July
1998, and received permission from the Canadian regulators to proceed with
clinical trials in September 1998. We filed an Investigational New Drug
Application with the Food and Drug Administration in October 1998, and received
FDA approval to proceed with human trials in November 1998.
We began our clinical trial programs in Canada and the United States in January
1999. Between January 1999 and September 2000 we conducted clinical trials of
our insulin formulation involving approximately 200 Type 1 and Type 2 diabetic
patients and healthy volunteers. The study protocol in most trials involved
administration of two different doses of our insulin formulation following
either a liquid sustacal meal or a standard meal challenge. The objective of
these studies was to evaluate our insulin formulation's efficacy in controlling
post-prandial (meal related) glucose levels. These trials demonstrated that our
insulin formulation controlled post-prandial hyperglycemia in a manner
comparable to injected insulin.
In April 2003, we were granted permission to commence Phase II-B clinical trials
in Canada. In September 2003, we commenced a 90 day study in 80 Type 2 diabetic
patients with poorly controlled blood glucose. The objective of the study is to
determine the metabolic effect of our insulin product.
We continue to conduct limited clinical studies and seek additional
collaborative partners in the United States, and other countries.
Other Large Molecule Drug Projects
We have identified numerous compounds, other than insulin, as candidates for
product development.
Morphine and Fentanyl
The delivery of morphine and fentanyl by oral formulation (pills) and injection
for the treatment of moderate to severe breakthrough and postoperative pain
often fails to provide patients with adequate relief and control (breakthrough
and postoperative pain are characterized as being moderate to severe in
intensity, having a rapid onset of action and a short to medium duration). Not
only does delivery by pills have a slow onset of action, it is often difficult
for patients to adjust their doses, with the result that patients are either
over or under medicated. Injections are invasive and require an attendant to
administer the medication which reduces the patient's control over the pain and
may cause increased anxiety. Often, patients must wait in pain until an
attendant can medicate them.
We seek to develop a buccal delivery formulation for morphine and fentanyl that
will have a critical series of attributes well suited for the treatment of
breakthrough and post operative pain and which will be cost effective and will
have a demonstrable improvement over current delivery methods. These include
fast access to the circulatory system, precise dosing control and a simple,
self-administration procedure.
6
We made an Investigatory New Drug submission for buccal morphine to the Health
Protection Branch in Canada in January 2002, and received permission from the
Canadian regulators to proceed with clinical trials in March 2002. We have
commenced clinical trials in Ecuador and we are in the process of recruiting
investigators to conduct clinical trials in Canada. In January 2002, we filed an
Investigational New Drug Application for buccal morphine with the Food and Drug
Administration. The buccal morphine product is being developed by Generex
Bermuda under our joint venture with a subsidiary of Elan Corporation.
We made an Investigatory New Drug submission for fentanyl to the Health
Protection Branch in Canada in August 2002, and received permission from the
Canadian regulators to proceed with clinical trials in October 2002.
Other Products
We have had discussions of possible research collaborations with various
pharmaceutical companies concerning use of our large molecule drug delivery
technology with insulin, morphine, fentanyl and other compounds, including
monoclonal antibodies, human growth hormone, fertility hormone, estrogen and
heparin, and a number of vaccines.
Prior to September 2000, we had not aggressively pursued development
opportunities apart from insulin because we believed it was more advantageous to
concentrate our resources, particularly our financial resources, on developing
the insulin product. While the insulin product remains our first priority, we
continue developmental work for buccal delivery formulation for morphine and
fentanyl.
Immunomedicine Technology and Products
Our new subsidiary, Antigen, is engaged in research and development of
technologies and immunomedicines for the treatment of malignant, infectious,
autoimmune and allergic diseases. Our immunomedicine products work by
stimulating the immune system to either attack offending agents (i.e., cancer
cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self
proteins and allergens). Our immunomedicine products are based on two platform
technologies that were discovered by an executive officer of Antigen, the Ii-Key
hybrid peptides and Ii-Suppression. These technologies are expected to greatly
boost immune cell responses which treat the ailments and conditions.
We have not filed an Investigational New Drug application to begin clinical
trials. Rather, our immunomedicine products are in the pre-clinical stage of
development and trials in human patients are not expected for at least 6 months.
For more details regarding our acquisition of Antigen, see "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" (Item
7) below.
CORPORATE HISTORY
We were incorporated in Delaware in September 1997 for the purpose of acquiring
Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to
engage in pharmaceutical and biotechnological research and other activities. Our
acquisition of Generex Pharmaceuticals was completed in October 1997 in a
transaction in which the holders of all outstanding shares of Generex
Pharmaceuticals exchanged their shares for shares of our common stock.
7
In January 1998, we participated in a "reverse acquisition" with Green Mt. P.
S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of
this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
In August 2003, subsequent to the end of fiscal 2003, we acquired all of the
capital stock of Antigen in exchange for approximately 2,800,000 shares of our
common stock, and Antigen became our wholly owned subsidiary.
GOVERNMENT REGULATION
Our research and development activities, and the eventual manufacturing and
marketing of our products, are subject to extensive regulation by the Food and
Drug Administration in the United States ("FDA") and comparable regulatory
authorities in other countries. Among other things, extensive regulation puts a
burden on our ability to bring products to market. While these regulations apply
to all competitors in our industry, many of our competitors have extensive
experience in dealing with the FDA and other regulators, while we do not. Also,
other companies in our industry do not depend completely on products which still
need to be approved by government regulators, as we now do.
If requisite regulatory approvals are not obtained and maintained, our business
will be substantially harmed. In many if not all cases, we expect that our
development partners will control or participate extensively in the regulatory
approval process once a development agreement is in place. The following
discussion summarizes the principal features of food and drug regulation in the
United States and other countries as they affect our business.
United States
All aspects of our research, development and foreseeable commercial activities
are subject to extensive regulation by the FDA and other regulatory authorities
in the United States. United States federal and state statutes and regulations
govern, among other things, the testing, manufacturing, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of
pharmaceutical products. The regulatory approval process, including clinical
trials, usually takes several years and requires the expenditure of substantial
resources. If regulatory approval of a product is granted, the approval may
include significant limitations on the uses for which the product may be
marketed. The steps required before a pharmaceutical product may be marketed in
the United States include:
8
o preclinical tests;
o the submission to the FDA of an Investigational New Drug application,
which must become effective before human clinical trials commence;
o human clinical trials to establish the safety and efficacy of the drug;
o the submission of a New Drug Application to the FDA; and
o FDA approval of the New Drug Application, including approval of all
product labeling and advertising.
Pre-clinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. The results of the pre-clinical tests are
submitted to the FDA as part of the Investigational New Drug application and are
reviewed by the FDA before the commencement of human clinical trials. Unless the
FDA objects to the Investigational New Drug application, the Investigational New
Drug application becomes effective 30 days following its receipt by the FDA. The
Investigational New Drug application for our oral insulin formulation became
effective in November 1998. We filed an Investigational New Drug application for
buccal morphine in January 2002.
Clinical trials involve the administration of the new drug to humans under the
supervision of a qualified investigator. The protocols for the trials must be
submitted to the FDA as part of the Investigational New Drug application. Also,
each clinical trial must be approved and conducted under the auspices of an
Institutional Review Board, which considers, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
Clinical trials are typically conducted in three sequential phases (Phase I,
Phase II, and Phase III), but the phases may overlap. Phase I clinical trials
test the drug on healthy human subjects for safety and other aspects, but not
effectiveness. Phase II clinical trials are conducted in a limited patient
population to gather evidence about the efficacy of the drug for specific
purposes, to determine dosage tolerance and optimal dosages, and to identify
possible adverse effects and safety risks. When a compound has shown evidence of
efficacy and acceptable safety in Phase II evaluations, Phase III clinical
trials are undertaken to evaluate clinical efficacy and to test for safety in an
expanded patient population at clinical trial sites in different geographical
locations. The FDA and other regulatory authorities require that the safety and
efficacy of therapeutic product candidates be supported through at least two
adequate and well-controlled Phase III clinical trials.
In the United States, the results of pre-clinical studies and clinical trials,
if successful, are submitted to the FDA in a New Drug Application to seek
approval to market and commercialize the drug product for a specified use. The
FDA may deny a New Drug Application if it believes that applicable regulatory
criteria are not satisfied. The FDA also may require additional testing for
safety and efficacy of the drug. We cannot be sure that any of our proposed
products will receive the FDA approval. Even if approved by the FDA, our
products and the facilities used to manufacture our products will remain subject
to review and periodic inspection by the FDA.
To supply drug products for use in the United States, foreign and domestic
manufacturing facilities must be registered with, and approved by the FDA.
Manufacturing facilities must also comply with the FDA's Good Manufacturing
Practices, and domestic facilities are subject to periodic inspection by the
FDA. Products manufactured outside the United States are inspected by regulatory
authorities in those countries under agreements with the FDA. To comply with
Good Manufacturing Practices, manufacturers must expend substantial funds, time
and effort in the area of production and quality control. The FDA stringently
applies its regulatory standards for manufacturing. Discovery of previously
unknown problems with respect to a product, manufacturer or facility may result
in consequences with commercial significance. These include restrictions on the
product, manufacturer or facility, suspensions of regulatory approvals,
operating restrictions, delays in obtaining new product approvals, withdrawals
of the product from the market, product recalls, fines, injunctions and criminal
prosecution.
9
Foreign Countries
Before we are permitted to market any of our products outside of the United
States, those products will be subject to regulatory approval by foreign
government agencies similar to the FDA. These requirements vary widely from
country to country. Generally, however, no action can be taken to market any
drug product in a country until an appropriate application has been approved by
the regulatory authorities in that country. FDA approval does not assure
approval by other regulatory authorities. The current approval process varies
from country to country, and the time spent in gaining approval varies from that
required for FDA approval. The Canadian regulatory process is substantially
similar to that of the United States. We obtained regulatory approval to begin
clinical trials of our oral insulin formulation in Canada in November 1998. In
Ecuador, regulatory authorities approved the limited non-commercial distribution
of our oral insulin formulation in September 1998. In August 2004, we submitted
the Oralin(TM) dossier to the Ecuador Ministry of Public Health seeking approval
for the manufacturing, marketing, distribution and sale of Oralin(TM) and
RapidMist(TM) Diabetes Management System. We obtained regulatory approval to
begin clinical trials of our buccal morphine product in Canada in March 2002 and
received regulatory approval to begin clinical trials of our fentanyl product in
Canada in October 2002. We are currently in the process of recruiting
investigators to conduct clinical trials of our buccal morphine product.
MARKETING
We intend to rely on collaborative arrangements with one or more other companies
that possess strong pharmaceutical marketing and distribution resources to
perform these functions for us. Accordingly, we will not have the same control
over marketing and distribution that we would have if we conducted these
functions ourselves.
With respect to the Generex Bermuda joint venture, Elan may, at its option,
choose to market morphine or any other product developed under the joint
venture. With respect to the Pharma Brand joint venture, we will work closely
with Pharma Brand to aggressively seek approval for the manufacture, production,
packaging and distribution of Oralin(TM) in Central and Latin America. Except
for these arrangements, we do not have any agreements with any other companies
for marketing or distributing our products. With respect to our insulin product,
we possess the worldwide marketing rights to this product after they reverted to
us upon the termination in June 2003 of the development and license agreement
with Lilly.
10
MANUFACTURING
To date, we have produced our oral insulin formulation only under laboratory
conditions on a small scale. In December 2000, we completed our pilot
manufacturing facility in Toronto in the same commercial complex in which our
original laboratory is located, and we are in the process of obtaining
regulatory approval for the facility. We believe that this facility will be
capable of producing our insulin product at levels necessary to supply our needs
for late stage human clinical trials of the product and for initial commercial
sales outside the United States, even though we have not yet actually produced
product at those levels. We will need to significantly increase our
manufacturing capability in order to manufacture any product in commercial
quantities.
We own facilities in Brampton and Mississauga, Ontario, all within 25 miles from
downtown Toronto that were purchased with the intention of improving and
equipping them for manufacturing. These facilities are currently leased to
unrelated third parties, however, we believe we can place these facilities into
production of our insulin product or other products within 12 to 18 months lead
time if additional production capabilities are necessary.
Our new subsidiary Antigen leases office and laboratory space in Worcester,
Massachusetts, which is sufficient for its present needs. The laboratory is
approximately 820 square feet and has permission to store and use biohazardous
(including recombinant DNA materials) and flammable chemicals.
RAW MATERIAL SUPPLIES
The excipients used in our formulation are available from numerous sources in
sufficient quantities for clinical purposes, and we believe that they will be
available in sufficient quantities for commercial purposes when required,
although we have not yet attempted to secure a commercial supply of any such
products.
Components suitable for our RapidMist(TM) device are available from a limited
number of potential suppliers, as is the chemical propellant used in the device.
We believe that the components which now comprise the device will be utilized
with the commercial version of our insulin product. We also expect to use the
RapidMist(TM) device in connection with our buccal morphine and fentanyl
products. We have also secured supply arrangements with the manufacturers of all
other components and the propellant that we presently use in our RapidMist(TM)
device for commercial quantities of such components and the propellant. All such
suppliers are prominent, reputable and reliable suppliers to the pharmaceutical
industry. Because we now have a single supplier for each of these components and
propellant, however, we are more vulnerable to supply interruptions than would
be the case if we had multiple suppliers for each component. We do not believe
that the risk of a single source of supply for proprietary raw materials or
device components is unusual in the pharmaceutical industry.
Insulin is available worldwide from only a few sources. However, alternative
supplies of insulin are under development in Europe. Upon termination in June
2003 of our license agreement with Lilly, we entered into a Bulk Supply
Agreement with Lilly, pursuant to which Lilly is required to provide us with
human insulin crystals over a three (3) year period. We also believe future
development and marketing partners under licensing and development agreements,
if any, will provide, or assist us to obtain, pharmaceutical compounds that are
used in products covered under such agreements.
11
While morphine is a controlled substance, it is readily available for use in
clinical trials. We currently have the appropriate licenses and facilities for
acquiring and storing morphine in Canada. Various regulatory issues surround the
import of morphine into the United States and we will need to address these
issues prior to commencing clinical trials in the United States.
Raw materials for our pre-clinical development stage immunomedicine products
include amino acids (for peptide therapeutics) and oligonucleotides (for genetic
constructs). These materials are readily available from commercial suppliers. We
utilize the services of several commercial laboratories for the manufacturing of
our pre-clinical development stage immunomedicine products.
INTELLECTUAL PROPERTY
We currently have fifteen issued U.S. patents pertaining to aspects of buccal
delivery technology and covering our oral insulin formulation. We have six U.S.
patent applications and one Canadian patent application pending, which also
relate to aspects of our buccal delivery technology, our oral insulin
formulation and our oral morphine formulation. In addition, we hold one U.S.
patent and two Canadian patents and have one U.S. application pending that
pertains to delivery technologies other than our buccal delivery technology.
We also have an indirect interest in three drug delivery patents held by another
company, Centrum Biotechnologies, Inc., which is 50% owned by us.
Our new subsidiary Antigen currently holds six issued U.S. patents, two
Australian patents, and a number of pending U.S. and foreign patent applications
concerning technology for modulating the immune system via activation of
antigen-specific helper T lymphocytes. Some of these patents are held under
exclusive licenses from the University of Massachusetts. Dr. Humphreys and Dr.
Xu, officers of Antigen, are the listed inventors or co-inventors on all of
these patents and patent applications, including those licensed from the
University of Massachusetts.
Our long-term success will substantially depend upon our ability to obtain
patent protection for our technology and our ability to protect our technology
from infringement, misappropriation, discovery and duplication. We cannot be
sure that any of our pending patent applications will be granted, or that any
patents which we own or obtain in the future will fully protect our position.
Our patent rights, and the patent rights of biotechnology and pharmaceutical
companies in general, are highly uncertain and include complex legal and factual
issues. We believe that our existing technology and the patents which we hold or
for which we have applied do not infringe any one else's patent rights. We
believe our patent rights will provide meaningful protection against others
duplicating our proprietary technologies. We cannot be sure of this, however,
because of the complexity of the legal and scientific issues that could arise in
litigation over these issues. (See "Legal Proceedings" (Item 3) for discussion
of certain legal proceedings involving intellectual property issues.)
We also rely on trade secrets and other unpatented proprietary information. We
seek to protect this information, in part, by confidentiality agreements with
our employees, consultants, advisors and collaborators.
12
COMPETITION
We expect that products based upon our buccal delivery technology and any other
products that we may develop will compete directly with products developed by
pharmaceutical and biotechnology companies, universities, government agencies
and public and private research organizations.
Products developed by our competitors may use a different active pharmaceutical
agent or treatment to treat the same medical condition or indication as our
product or may provide for the delivery of substantially the same active
pharmaceutical ingredient as our products using different methods of
administration. For example, a number of pharmaceutical and biotechnology
companies are engaged in various stages of research, development and testing of
alternatives to insulin therapy for the treatment of diabetes, as well as new
methods of delivering insulin. These methods, including nasal, transdermal,
needle free (high pressure) injection and pulmonary, may ultimately successfully
deliver insulin to diabetic patients. Some biotechnology companies have also
developed different technologies to enhance the presentation of peptide
antigens. Many of our competitors and potential competitors have substantially
greater scientific research and product development capabilities, as well as
financial, marketing and human resources, than we do.
Where the same or substantially the same active ingredient is available using
alternative delivery means or the same or substantially the same result is
achievable with a different treatment or technology, we expect that competition
among products will be based, among other things, on product safety, efficacy,
ease of use, availability, price, marketing and distribution. When different
active pharmaceutical ingredients are involved, these same competitive factors
will apply to both the active agent and the delivery method.
We consider other drug delivery and biotechnology companies to be direct
competitors for the cooperation and support of major drug and biotechnology
companies that own or market proprietary pharmaceutical compounds and
technologies, as well as for the ultimate patient market. Of primary concern to
us are the competitor companies that are known to be developing delivery systems
for insulin and other pharmaceutical agents that we have identified as product
candidates and technologies to enhance the presentation of peptide antigens.
Buccal Insulin Product
Nektar Therapeutics (formally Inhale Therapeutic Systems, Inc.) ("Nektar") is
developing a customized insulin formulation that is processed into a fine, dry
powder and administered to the deep lung using a proprietary inhalation device
developed for this purpose. Nektar is developing its insulin product in
collaboration with Pfizer, Inc., which in turn has announced agreements to
co-develop and co-promote the use of inhaled insulin with Aventis, a leading
pharmaceutical company which presently manufactures insulin for sale primarily
in Europe. As reported in March 2004, the European Medicines Evaluation Agency
(EMEA) has accepted the filing of a marketing authorization application for
Exubera(R) (inhaled human insulin powder). Nektar is also developing pulmonary
products with large molecule drugs other than insulin, and has stated that it is
investigating the use of its inhalation technology with small molecule drugs.
Aradigm Corporation ("Aradigm"), which has announced a joint development
agreement with Novo Nordisk A/S to jointly develop a pulmonary delivery system
for insulin by inhalation, also may be considered a direct competitor of ours in
the insulin area. Novo Nordisk is one of the two leading manufacturers of
insulin in the world, the other being Lilly. Aradigm and Novo Nordisk initiated
Phase III clinical trials in September 2002. In April 2004, Novo Nordisk
announced results from a planned interim analysis of the initial Phase III trial
and has decided to amend the current trial protocol. Novo Nordisk will make
decisions concerning the structure and timing of additional clinical trials
after these observations have been fully assessed.
13
Other companies have announced development efforts relating to alternative (to
injection) methods of delivering insulin or other large molecule drugs,
including Alkermes Pharmaceuticals, Inc., which announced a collaboration with
Lilly in April 2000 to develop a pulmonary method of administering insulin and
is currently undergoing Phase II clinical trials. There are also a number of
companies developing alternative means of delivering insulin in the form of oral
pills, transdermal patches, and intranasal methods, which are at early stages of
development.
In addition to other delivery systems for insulin, there are numerous products
which have been approved for use in the treatment of Type 2 diabetics in place
of or in addition to insulin therapy. These products may also be considered
competitive with insulin products.
Buccal Morphine and Fentanyl Products
Cephalon, Inc. currently markets Actiq(R) in the United States and has recently
acquired the rights to the product in Europe. Actiq(R) delivers buccal
transmucosal fentanyl to the cheek walls through the use of a lollipop. On
November 4, 1998 the FDA cleared Actiq(R) for marketing for use in the
management of breakthrough cancer pain. The product was launched in March 1999
in the United States.
Aradigm is developing the hand-held AERx Pain Management System for the
treatment of breakthrough cancer pain. The AERx Pain Management System is a
pulmonary delivery system to deliver the drug through inhalation. AERx has
distinct advantages over the administration by injection of morphine and similar
opiate-derived pain control drugs. Aradigm is in progress to complete both Phase
I and II clinical trials of these formulations.
Nastech Pharmaceuticals is developing an intranasal formulation of morphine that
is in Phase II clinical trials. Results reported to date show the product to be
safe and efficacious in the treatment of episodes of breakthrough pain. Nastech
is currently seeking a licensing partner for this product.
Immunomedicine Technology and Products
A number of companies that are engaged in the development of immunomedicines
employ technologies that are competitive to our new subsidiary, Antigen. Zycos
Inc. has developed the Biotope(R) technology, Cel-Sci Corporation has developed
the LEAPS delivery technology and Epimmune Inc. has developed the PADRE(R)
technology. These companies have initiated early stage clinical trials for
several products for the treatment of cancer, autoimmune, and allergic diseases.
These companies also have established collaborations with academic centers and
other companies for the development of certain products. We have not initiated
clinical trials with any of our immunomedicine products, nor have we established
commercial collaborations to date.
ENVIRONMENTAL COMPLIANCE
Our manufacturing, research and development activities involve the controlled
use of hazardous materials and chemicals. We believe that our procedures for
handling and disposing of these materials comply with all applicable government
regulations. However, we cannot eliminate the risk of accidental contamination
or injury from these materials. If an accident occurred, we could be held liable
for damages, and these damages could severely impact our financial condition. We
are also subject to many environmental, health and workplace safety laws and
regulations, particularly those governing laboratory procedures, exposure to
blood-borne pathogens, and the handling of hazardous biological materials.
Violations and the cost of compliance with these laws and regulations could
adversely affect us. However, we do not believe that compliance with the United
States, Canadian or other environmental laws will have a material effect on us
in the foreseeable future.
14
RESEARCH AND DEVELOPMENT EXPENDITURES
A substantial portion of our activities to date have been in research and
development. In the period from inception to July 31, 2004, our expenditures on
research and development were $47,387,932. These included $8,522,984 in the year
ended July 31, 2004, $5,150,075 in the year ended July 31, 2003 and $6,618,820
in the year ended July 31, 2002. The increase in our research and development
expenses in 2004 compared to 2003 is due principally to activities of Antigen
and our increased development of oral insulin formulation compared to last year,
including the purchase of bulk insulin. The decrease in our research and
development expenses in 2003 compared to 2002 is due principally to contraction
of our ongoing research and development activities under our collaboration with
Elan and the collaboration with Lilly, which ended in May 2003.
EMPLOYEES
At September 30, 2004, we had twenty-five full-time employees, including our
executive officers and other individuals who work for us full time but are
employed by management companies that provide their services and including eight
employees of our new subsidiary Antigen. Fourteen of our employees are executive
and administrative, nine are scientific and technical personnel who engage
primarily in development activities and in preparing formulations for testing
and clinical trials, and two are engaged in corporate and product promotion,
public relations and investor relations. We believe our employee relations are
good. None of our employees are covered by a collective bargaining agreement.
We will continue to need qualified scientific personnel and personnel with
experience in clinical testing, government regulation and manufacturing. We may
have difficulty in obtaining qualified scientific and technical personnel as
there is strong competition for these people from other pharmaceutical and
biotechnology companies as well as universities and research institutions. Our
business could be materially harmed if we are unable to recruit and retain
qualified scientific, administrative and executive personnel to support our
expanding activities, or if one or more members of our limited scientific and
management staff were unable or unwilling to continue their association with us.
We do not have fixed term agreements with any of our key management or
scientific staff, other than Dr. Pankaj Modi who, on August 26, 2004, resigned
from his position as Vice President, Research and Development and terminated his
Consulting Agreement with us, see "Developments in Fiscal 2004" under
Management's Discussion and Analysis. While Dr. Modi's resignation was effective
immediately, pursuant to the terms of the Consulting Agreement, the effective
date of termination of the Consulting Agreement is August 25, 2005.
15
We also use non-employee consultants to assist us in formulating research and
development strategy, in preparing regulatory submissions, in developing
protocols for clinical trials, and in designing, equipping and staffing our
manufacturing facilities. We also use non-employee consultants to assist us in
business development. These consultants and advisors usually have the right to
terminate their relationship with us on short notice. Loss of some of these key
advisors could interrupt or delay development of one or more of our products or
otherwise adversely affect our business plans.
16
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION HELD WITH GENEREX
Anna E. Gluskin 53 Chairman, President, Chief Executive Officer and
Director
Rose C. Perri 37 Chief Operating Officer, Acting Chief Financial Officer,
Treasurer, Secretary and Director
Gerald Bernstein, M.D. 71 Director, Vice President Medical Affairs
Mark Fletcher, Esquire 39 Executive Vice President and General Counsel
J. Michael Rosen 53 Director
John P. Barratt 60 Director
Mindy J. Allport-Settle 37 Director
Brian T. McGee 43 Director
All directors are elected to hold office until the next annual meeting of
stockholders following election and until their successors are duly elected and
qualified. Executive officers are appointed by the Board of Directors and serve
at the discretion of the Board.
Anna E. Gluskin -- Director since September 1997. Ms. Gluskin has served as the
President and Chief Executive Officer of Generex since October 1997 and the
Chairman since November 2002. She held comparable positions with Generex
Pharmaceuticals, Inc. from its formation in 1995 until its acquisition by
Generex in October 1997.
Rose C. Perri -- Director since September 1997. Ms. Rose Perri has served as
Treasurer and Secretary of Generex since October 1997, and as Chief Operating
Officer since August 1998. She was an officer of Generex Pharmaceuticals, Inc.
from its formation in 1995 until its acquisition by Generex in October 1997.
Effective November 2002, Ms. Perri became acting Chief Financial Officer.
Gerald Bernstein, M.D. -- Director since October 2002. Dr. Gerald Bernstein has
served as Vice President of Generex since October 1, 2001. Dr. Bernstein acts as
a key liaison for Generex on medical and scientific affairs to the medical,
scientific and financial communities and consults with Generex under a
consulting agreement on research and medical affairs and on development
activities. Dr. Bernstein has been an associate clinical professor at the Albert
Einstein College of Medicine in New York and an attending physician at Beth
Israel Medical Center, Lenox Hill Hospital and Montefore Medical Center, all in
New York since 1999. He was president of the American Diabetes Association from
1997 to 1998.
Mark Fletcher, Esq. -- Mr. Fletcher has served as our Executive Vice President
and General Counsel since April 2003. From October 2001 to March 2003, Mr.
Fletcher was engaged in the private practice of law as a partner at Goodman and
Carr LLP, a leading Toronto law firm. From March 1993 to September 2001, Mr.
Fletcher was a partner at Brans, Lehun, Baldwin LLP, a law firm in Toronto. Mr.
Fletcher received his LL.B. from the University of Western Ontario in 1989 and
was admitted to the Ontario Bar in 1991.
17
J. Michael Rosen -- Director since August 2000. Mr. Rosen has been a principal
in a number of related travel management and hotel marketing businesses since
1978. The principal companies in this group, all of which are headquartered in
Ontario, are Uniworld Travel & Tours, Inc., Nevada Vacations, Inc., Casino
Vacations, Inc. and Casino Tours, Inc. Mr. Rosen presently serves as the
President or a Vice President, and the Chief Financial Officer, of each of these
companies. Mr. Rosen is an accountant by training, and was engaged in the
private practice of accounting prior to 1978.
John P. Barratt -- Director since March 2003. Mr. Barratt is Court appointed
Responsible Person and Liquidation Manager of Beyond.com Corporation,
Debtor-in-Possession, A US Chapter 11 Bankruptcy Case. Prior to his appointment
in 2002, he served as Chief Operating Officer of Beyond.com, since 2000. From
January 1996 to September 2000, Mr. Barratt served as partner-in-residence for
the Quorum Group of Companies, an international investment partnership
specializing in providing debt and equity capital to the emerging high growth
technology sector. From 1988 to December 1995, Mr. Barratt was Executive Vice
President and Chief Operating Officer of Coscan Development Corporation. He
previously held a number of senior-level management positions, including Deputy
Chief Executive of Lloyds Bank Canada. Mr. Barratt also currently serves on the
Board of Directors and is Chairman of the Credit Committee and member of the
Audit Committee for the Bank of China (Canada), as a director and a member of
the Audit Committee of GLP NT Corporation and BNN Split Corporation. Mr. Barratt
also serves on the Advisory Board of Brascan SoundVest Diversified Income Fund
and Brascan SoundVest Total Return Fund.
Mindy J. Allport-Settle - Director since February 2004. Ms. Allport-Settle has
been President and Chief Executive Officer of Integrated Development, LLC
("Integrated") since 1998. Integrated is an independent consulting firm to the
pharmaceutical industry, providing informed guidance in operational, project and
contract management, new business development and regulatory compliance. In
addition to her position with Integrated, Ms. Allport-Settle has been a
Vice-President of Impact Management Services, Inc. ("IMS") since 2003, which
also provides consulting services to the pharmaceutical industry. In her current
positions at Integrated and IMS, Ms. Allport-Settle has worked with several
major pharmaceutical companies. From 2001 to 2002, Ms. Allport-Settle was
Director of Client Services for Scriptorium Publishing Service. From 1992 to
1994, Ms. Allport-Settle was an Eye Bank Technician/Organ Procurement Surgeon
for NC Eye & Human Tissue Bank; and from 1991 to 1998, Ms. Allport-Settle was a
Freelance Writer and Photographer. Ms. Allport-Settle is currently working on
her M.B.A. in Global Management at the University of Phoenix and expects to
receive her degree in 2005.
Brian T. McGee - Director since March 2004. Mr. McGee has been a partner of
Zeifman & Company, LLP ("Zeifman") since 1995. Mr. McGee began working at
Zeifman shortly after receiving a B.A. degree in Commerce from the University of
Toronto in 1985. Zeifman is a Chartered Accounting firm based in Toronto,
Ontario. A significant element of Zeifman's business is public corporation
accounting and auditing. Mr. McGee is a Chartered Accountant. Throughout his
career, Mr. McGee has focused on, among other areas, public corporation
accounting and auditing. In 1992, Mr. McGee completed courses focused on
International Taxation and Corporation Reorganizations at the Canadian Institute
of Chartered Accountants and in 2003, Mr. McGee completed corporate governance
courses on compensation and audit committees at Harvard Business School.
18
OTHER KEY EMPLOYEES AND CONSULTANTS
Slava Jarnitskii is our Financial Controller. He began his employment with
Generex Pharmaceuticals in September 1996 and has been in the employment of
Generex since its acquisition of Generex Pharmaceuticals in October 1997. Before
his employment with Generex Pharmaceuticals, Mr. Jarnitskii received a Masters
of Business Administration degree from York University in September 1996.
Dr. Robert E. Humphreys, M.D., Ph.D., is currently Executive Vice-President and
Chief Operating Officer of our subsidiary, Antigen Express, Inc. Dr. Humphreys
founded Antigen in 1996 and was its President. He has extensive experience in
the National Institute of Health, arthritis, cancer and diabetes study sections.
Dr. Humphreys is an inventor on (six) 6 awarded US patents and has over 150
peer-reviewed publications. Prior to founding Antigen, Dr. Humphreys was
Professor of Medicine and Pharmacology at University of Massachusetts Medical
School. He received his M.D. and Ph.D. degrees from Yale University and was a
post-doctoral fellow in biochemistry at Harvard University. He also received his
clinical training at Bethesda Naval Hospital and was an Officer at the Naval
Medical Research Institute.
Eric von Hofe, PhD, is currently a Vice President of Technology Development of
our subsidiary, Antigen Express, Inc. He has extensive experience with
technology development projects, including his previous position at Millennium
Pharmaceuticals as Director of Programs & Operations, Discovery Research. Prior
to that, Dr. von Hofe was Director, New Targets at Hybridon, Inc., where he
coordinated in-house and collaborative research that critically validated gene
targets for novel antisense medicines. He received his Ph.D. from the University
of Southern California in Experimental Pathology and was a postdoctoral fellow
at both the University of Zurich and Harvard School of Public Health. His work
has been published in twenty-eight articles in peer- reviewed journals and he
has been an inventor on four patents. Dr. von Hofe was Assistant Professor of
Pharmacology at the University of Massachusetts Medical School, where he
received a National Cancer Institute Career Development Award for defining
mechanisms by which alkylating carcinogens create cancers.
Dr. Minzhen Xu is Vice President - Biology of Antigen. Dr. Xu received an M.D.
from Shanghai Medical University in China and a Ph.D. in immunology from
University of Massachusetts Medical School. He has been with Antigen since its
inception and is the company's chief experimentalist.
CERTAIN ADDITIONAL RISK FACTORS
In addition to historical facts or statements of current condition, this Annual
Report on Form 10-K contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events.
The following discussion outlines certain factors that we think could cause our
actual outcomes and results to differ materially from our forward-looking
statements. These factors are in addition to those set forth elsewhere in this
Annual Report on Form 10-K.
19
Risks Related to Our Financial Condition
We have a history of losses, and will incur additional losses.
We are a development stage company with a limited history of operations, and do
not expect ongoing revenues from operation in the immediately foreseeable
future. To date, we have not been profitable and our accumulated net loss before
preferred stock dividend was $ 94,231,316 at July 31, 2004. Our losses have
resulted principally from costs incurred in research and development, including
clinical trials, and from general and administrative costs associated with our
operations. While we seek to attain profitability, we cannot be sure that we
will ever achieve product and other revenue sufficient for us to attain this
objective.
Our product candidates are in research or early stages of pre-clinical and
clinical development. We will need to conduct substantial additional research,
development and clinical trials. We will also need to receive necessary
regulatory clearances both in the United States and foreign countries and obtain
meaningful patent protection for and establish freedom to commercialize each of
our product candidates. We cannot be sure that we will obtain required
regulatory approvals, or successfully research, develop, commercialize,
manufacture and market any other product candidates. We expect that these
activities, together with future general and administrative activities, will
result in significant expenses for the foreseeable future.
We need additional capital
To progress in product development or marketing, we will need additional capital
which may not be available to us. This may delay our progress in product
development or market.
We will require funds in excess of our existing cash resources:
o to proceed with the development of our buccal insulin product;
o to proceed under our joint venture with Elan, which requires us to fund
80.1% of initial product development costs;
o to develop other buccal and immunomedicine products;
o to develop new products based on our buccal delivery and immunomedicine
technologies, including clinical testing relating to new products;
o to develop or acquire other technologies or other lines of business;
o to establish and expand our manufacturing capabilities;
o to finance general and administrative and research activities that are
not related to specific products under development; and
o to finance the research and development activities of our new
subsidiary Antigen.
In the past, we have funded most of our development and other costs through
equity financing. We anticipate that our existing capital resources will enable
us to maintain currently planned operations through the next twelve months.
However, this expectation is based on our current operating plan, which could
change as a result of many factors, and we may need additional funding sooner
than anticipated. Because our operating and capital resources are insufficient
to meet future requirements, we will have to raise additional funds in the near
future to continue the development and commercialization of our products.
Unforeseen problems, including materially negative developments in our joint
venture with Elan, in our clinical trials or in general economic conditions,
could interfere with our ability to raise additional equity capital or
materially adversely affect the terms upon which such funding is available.
Recent changes in the application of the rules of the NASDAQ Stock Market may
also make it more difficult for us to raise private equity capital.
20
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.
21
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.
22
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.
23
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.
24
After several arbitration and court proceedings, on October 29, 2002, the
Appellate Division of the New York Supreme Court issued a decision remanding the
issue of damages to a new panel of arbitrators and limiting the issue of damages
before the new panel to reliance damages which is not to include an award of
lost profits. Reliance damages are out-of-pocket damages incurred by Sands.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued
a final award in the case of Sands vs. the Company, awarding Sands $150,000 in
reliance damages. No motion to confirm this award has been filed by Sands as of
the date of this report. Sands has not sought leave to appeal the vacaturs of
the prior panel's warrant award to the New York Court of Appeals. As such, the
award is subject to further legal proceedings.
The case is still ongoing and our ultimate liability cannot yet be determined
with certainty. Our financial condition would be materially adversely affected
to the extent that Sands receives shares of our common stock for little or no
consideration or substantial monetary damages as a result of this legal
proceeding. We are not able to estimate an amount or range of potential loss
from this legal proceeding at the present time.
Risks Related to the Market for Our Common Stock
If our common stock is delisted from the NASDAQ SmallCap Market and/or becomes
subject to Penny Stock regulations, the market price for our stock may be
reduced and it may be more difficult for us to obtain financing.
On June 5, 2003, our common stock was delisted from the NASDAQ National Market
because of our failure to maintain a minimum of $10,000,000 in stockholders'
equity. On June 5, 2003, our stock began trading on the NASDAQ SmallCap Market.
The NASDAQ SmallCap Market has its own standards for continued listing,
including a minimum of $2.5 million stockholders' equity. As of July 31, 2004,
our stockholders' equity was $529,751 which makes us noncompliant with their
standard for continued listing.
In addition, for continued listing on both the NASDAQ National Market and
SmallCap Market, our stock price must be at least $1.00. During periods in
fiscal 2004 and the beginning of fiscal 2005, our stock price dropped close to
and below $1.00 per share. If we do not meet this requirement in the future, we
may be subject to delisting by NASDAQ.
If our stock is delisted from NASDAQ, there will be less interest for our stock
in the market. This may result in lower prices for our stock and make it more
difficult for us to obtain financing.
If our stock is not listed on NASDAQ and fails to maintain a price of $5.00 or
more per share, our stock would become subject to the Securities and Exchange
Commission's "Penny Stock" rules. These rules require a broker to deliver, prior
to any transaction involving a Penny Stock, a disclosure schedule explaining the
Penny Stock Market and its risks. Additionally, broker/dealers who recommend
Penny Stocks to persons other than established customers and accredited
investors must make a special written suitability determination and receive the
purchaser's written agreement to a transaction prior to the sale. In the event
our stock becomes subject to these rules, it will become more difficult for
broker/dealers to sell our common stock. Therefore, it may be more difficult for
us to obtain financing.
25
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.
26
ITEM 2. PROPERTIES
Our executive and principal administrative offices occupy approximately 5,000
square feet of office space in the Business Centre at 33 Harbour Square in
downtown Toronto, Ontario, Canada. We own the Business Centre, which comprises
approximately 9,100 square feet of usable space. The space in the Business
Centre that is not used by us is leased to third parties.
We own a laboratory facility in Toronto that we have used for limited production
of our oral insulin formulation for clinical purposes, and have completed a
pilot manufacturing facility for our insulin product in the same commercial
complex. Our laboratory facility is approximately 2,650 square feet. Our pilot
manufacturing facility, which also includes laboratory facilities, is
approximately 4,800 square feet. We also own all additional units in the same
building where our pilot manufacturing facility is located. These units are
currently leased to third parties and one is being used for storage. All of
these spaces could be used for manufacturing facilities if necessary. We have
obtained regulatory approval for the laboratory facility, and we are currently
in the process of obtaining regulatory approval for the pilot manufacturing
facility.
We have mortgages on our Toronto properties totaling $2,224,783 at July 31,
2004. These mortgages require the payment of interest, with minimal principal
reduction, prior to their due dates. These mortgages currently require an
aggregate $17,313 in monthly debt service payments. Aggregate principal
maturities for these mortgages will be $1,366,122 in fiscal 2005 and $858,661 in
fiscal 2006.
We lease approximately 1,710 square feet of office and laboratory space in
Worcester, Massachusetts that Antigen uses for its research and development
activities at an annual rent of $94,085. This space is sufficient for Antigen's
present activities.
We do not expect to need manufacturing capabilities related to our insulin
product beyond our pilot facility before the end of the current fiscal year. We
own an 11,625 square foot building in Brampton, Ontario, which is approximately
25 miles outside Toronto, and a 13,500 square foot building in Mississauga,
Ontario, which is about 20 miles from downtown Toronto, for ultimate use in
manufacturing. We have done preliminary work on these facilities, but we do not
expect to make a substantial investment in improving and equipping them for
manufacturing operations until our requirements in this area are better defined.
Both properties are currently leased to third parties.
We could use our other properties to expand research, development or testing of
our buccal and immunomedicine products if current facilities prove inadequate
for our needs.
27
ITEM 3. LEGAL PROCEEDINGS
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On October 2,
1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against us under New York Stock
Exchange rules. Sands alleged that it had the right to receive, for nominal
consideration, approximately 1.5 million shares of our common stock. Sands based
its claim upon an October 1997 letter agreement that was purported by Sands to
confirm an agreement appointing Sands as the exclusive financial advisor to
Generex Pharmaceuticals, Inc., a subsidiary of us that was acquired in late
1997. In exchange, the letter agreement purported to grant Sands the right to
acquire 17% of Generex Pharmaceuticals' common stock for nominal consideration.
Sands claimed that its right to receive shares of Generex Pharmaceuticals'
common stock applies to our common stock since outstanding shares of Generex
Pharmaceuticals' common stock were converted into shares of our common stock in
the acquisition. Sands' claims also included additional shares allegedly due as
a fee related to that acquisition, and $144,000 in monthly fees allegedly due
under the terms of the purported agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel
that heard this case awarded Sands $14,070 and issued a declaratory judgment
requiring us to issue to Sands a warrant to purchase 1,530,020 shares of our
common stock pursuant to and in accordance with the terms of the purported
October 1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of the State of
New York, County of New York (the "New York Supreme Court"). On November 10,
1999, we moved to vacate the arbitration award. On March 20, 2000, the New York
Supreme Court granted Sands' petition to confirm the award and denied our motion
to vacate the award. We appealed and on January 23, 2001, the New York State
Appellate Division, First Department (the "Appellate Division"), modified the
judgment of the New York Supreme Court that had confirmed the arbitration award
against us. The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of $14,070 to
Sands but modified the judgment to vacate the portion of the arbitration award
directing the issuance to Sands of a warrant to purchase 1,530,020 shares of our
common stock. The Appellate Division held that the portion of the award
directing us to issue warrants to Sands is too indefinite to be enforceable and
remanded the matter to the arbitration panel for a final and definite award with
respect to such relief or its equivalent (including possibly an award of
monetary damages). The arbitration panel commenced hearings on the matters
remanded by the Appellate Division in June 2001. On November 7, 2001, the
arbitration panel issued an award again requiring us to issue to Sands a warrant
to purchase 1,530,020 shares of our common stock purportedly pursuant to and in
accordance with the terms of the October 1997 letter agreement. Thereafter,
Sands submitted a motion to the New York Supreme Court to modify and confirm the
arbitration panel's award while we filed a motion with the court to vacate the
arbitration award. On February 25, 2002, the New York Supreme Court vacated the
arbitration panel's award. The Supreme Court concluded that the arbitration
panel had "disregarded the plain meaning" of the directive given by the
Appellate Division in the Appellate Division's January 23, 2001 decision that
remanded the matter of the warrant for reconsideration by the panel. The Supreme
Court found that the arbitration panel's award "lacks a rational basis". The
Supreme Court also remanded the matter to the New York Stock Exchange on the
issue of whether the arbitration panel should be disqualified. Sands has
appealed the February 25, 2002 order of the Supreme Court to the Appellate
Division. We filed a cross-appeal on issues relating to the disqualification of
the arbitration panel.
28
On October 29, 2002, the Appellate Division issued a decision and order
unanimously modifying the lower court's order by remanding the issue of damages
to a new panel of arbitrators and otherwise affirming the lower court's order.
The Appellate Division's decision and order limits the issue of damages before
the new panel of arbitrators to reliance damages which is not to include an
award of lost profits. Reliance damages are out-of-pocket damages incurred by
Sands. The Appellate Division stated that the lower court properly determined
that the arbitration award, which had granted Sands warrants for 1,530,020
shares of the registrant's stock, was incorrect.
On March 18, 2003, the Appellate Division of the Supreme Court of New York
denied a motion by Sands for re-argument of the October 29, 2002 decision, or,
in the alternative, for leave to appeal to the Court of Appeals. A new
arbitration took place in early June 2004.
On August 17, 2004, the Arbitration Panel of the New York Stock Exchange issued
a final award in the case of Sands vs. the Company, awarding Sands $150,000 in
reliance damages. No motion to confirm this award has been filed by Sands as of
the date of this report. Sands has not sought leave to appeal the vacaturs of
the prior panel's warrant award to the New York Court of Appeals. As such, the
award is subject to further legal proceedings.
At the present time, we are not able to predict the ultimate outcome of this
legal proceeding or to estimate a range of possible loss from this legal
proceeding. Therefore, no provision has been recorded in the accompanying
financial statements.
Subash Chandarana et al. v. Generex Biotechnology Corporation. In February 2001,
a former business associate of Dr. Pankaj Modi ("Modi"), and an entity called
Centrum Technologies Inc. ("CTI") commenced an action in the Ontario Superior
Court of Justice against us and Modi seeking, among other things, damages for
alleged breaches of contract and tortious acts related to a business
relationship between this former associate and Modi that ceased in July 1996.
The plaintiffs' statement of claim also seeks to enjoin the use, if any, by us
of three patents allegedly owned by CTI. On July 20, 2001, we filed a
preliminary motion to dismiss the action of CTI as a nonexistent entity or,
alternatively, to stay such action on the grounds of want of authority of such
entity to commence the action. The plaintiffs brought a cross motion to amend
the statement of claim to substitute Centrum Biotechnologies, Inc. ("CBI") for
CTI. CBI is a corporation of which 50 percent of the shares are owned by the
former business associate and the remaining 50 percent are owned by us.
Consequently, the shareholders of CBI are in a deadlock. The court granted our
motion to dismiss the action of CTI and denied the plaintiffs' cross motion
without prejudice to the former business associate to seek leave to bring a
derivative action in the name of or on behalf of CBI. The former business
associate subsequently filed an application with the Ontario Superior Court of
Justice for an order granting him leave to file an action in the name of and on
behalf of CBI against Modi and us. We have opposed the application which is now
pending before the Court. In September 2003, the Ontario Superior Court of
Justice granted the request and issued an order giving the former business
associate leave to file an action in the name of and on behalf of CBI against
Modi and us. A statement of claim was served in July 2004. We are not able to
predict the ultimate outcome of this legal proceeding at the present time or to
estimate an amount or range of potential loss, if any, from this legal
proceeding.
We are involved in certain other legal proceedings in addition to those
specifically described herein. Subject to the uncertainty inherent in all
litigation, we do not believe at the present time that the resolution of any of
these legal proceedings is likely to have a material adverse effect on our
financial position, operations or cash flows.
29
With respect to all litigation, as additional information concerning the
estimates used by us becomes known, we reassess its position both with respect
to accrued liabilities and other potential exposures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Generex Biotechnology Corporation
was held on May 17, 2004. At the meeting, 19,786,399 shares of Common Stock were
represented and entitled to vote. Generex stockholders elected all nominees to
the Board of Directors, approved a proposal relating to issuance of common stock
at less than market value and ratified the appointment of BDO Dunwoody, LLP as
independent public accountants for the fiscal year ending July 31, 2004. The
results of the vote for the Board of Directors was as follows:
- ------------------------------------------------------------ ------------------ ------------------- ------------------
Election of nominees to Board of
Directors for terms expiring May 2004 Votes For Votes Against Abstentions
- ------------------------------------- --------- ------------- -----------
- ------------------------------------------------------------ ------------------ ------------------- ------------------
Mindy Allport- Settle 19,492,947 0 293,452
- ------------------------------------------------------------ ------------------ ------------------- ------------------
John P. Barratt 19,497,602 0 288,797
- ------------------------------------------------------------ ------------------ ------------------- ------------------
Gerald Bernstein, M.D. 19,324,977 0 461,422
- ------------------------------------------------------------ ------------------ ------------------- ------------------
Anna E. Gluskin 19,466,979 0 319,420
- ------------------------------------------------------------ ------------------ ------------------- ------------------
Brian T. McGee 19,479,476 0 306,923
- ------------------------------------------------------------ ------------------ ------------------- ------------------
Rose C. Perri 19,454,744 0 331,655
- ------------------------------------------------------------ ------------------ ------------------- ------------------
J. Michael Rosen 19,489,126 0 297,273
- ------------------------------------------------------------ ------------------ ------------------- ------------------
The approved proposal relating to issuance of below market priced securities was
to authorize the Board of Directors, in the three-month period commencing with
the date of the meeting, to issue, without prior stockholder approval, in
connection with capital raising transactions, and/or acquisitions of assets,
businesses or companies, up to 10,000,000 shares of common stock, including
options, warrants, securities or other rights convertible into common stock, in
the aggregate, in excess of the number of shares that NASDAQ's Rules
4350(i)(1)(C) and (D) permit the Company to issue in such transactions without
prior stockholder approval. The issuance of such 10,000,000 shares to be upon
such terms as the Board of Directors shall deem to be in the best interests of
the Company, for a price of not less than 70% of the price at the time of such
issuance and for an aggregate consideration not to exceed $50,000,000. The
authorization also applies to prior issuances of common stock which are
considered retroactively to have been issued at below market price due to
"integration" with a new issuance.
30
The results of the votes on the proposals were as follows:
- ------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Broker
Votes For Votes Against Abstention Non-Votes
--------- ------------- ---------- ---------
- ------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Proposal to Authorize Issuance 6,052,604 834,765 57,382 12,841,648
of Shares at below Market Prices
- ------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Ratification of BDO Dunwoody 19,547,356 189,187 49,856 0
As Independent Public Accountants
- ------------------------------------------------ ----------------- ---------------- ----------------- ----------------
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been listed on the NASDAQ SmallCap Market since June 5,
2003. From May 5, 2000 to June 4, 2004, our common stock was listed on the
NASDAQ National Market. From February 1998 to May 2000, the "bid" and "asked"
prices for our common stock were quoted on the OTC Bulletin Board operated by
the National Association of Securities Dealers. Prior to February 1998, there
was no public market for our common stock.
The table below sets forth the high and low, intra-day sales prices of our
common stock reported on the NASDAQ National Market for each fiscal quarter (or
portion thereof) in the prior two years ended July 31, 2004. The table below
also sets forth the high and low closing "bid" prices for our common stock
reported on the NASDAQ SmallCap Market for the period from June 5, 2003 to July
31, 2004.
SALES PRICES
(EXCEPT WHERE INDICATED)
HIGH LOW
FISCAL 2003
First Quarter $2.63 $0.85
Second Quarter $2.60 $1.00
Third Quarter $1.42 $0.65
Fourth Quarter
05/01/03 - 06/04/03 $1.72 $0.87
06/05/03 - 07/31/03* $2.63 $1.35
FISCAL 2004
First Quarter $2.47 $1.12
Second Quarter $2.32 $1.23
Third Quarter $2.02 $1.26
Fourth Quarter $1.86 $1.00
* High and low closing "bid" prices, which represent prices between dealers, do
not include retail markup, markdown or commission and may not represent actual
transactions.
The closing sales price for our common stock reported on November 8, 2004, was
$0.80.
At November 8, 2004, there were 720 holders of record of our common stock.
31
EXISTING STOCK COMPENSATION PLANS
The following table sets forth information as of July 31, 2004 regarding our
existing compensation plans and individual compensation arrangements pursuant to
which our equity securities are authorized for issuance to employees or
non-employees (such as directors, consultants and advisors) in exchange for
consideration in the form of services:
---------------------------- --------------------------- ------------------------- -------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
---------------------------- --------------------------- ------------------------- -------------------------
(a) (b) (c)
---------------------------- --------------------------- ------------------------- -------------------------
Equity compensation
plans approved by
security holders
1998 Stock Option Plan 643,500 $5.00 0
2000 Stock Option Plan 1,229,500 $7.50 770,500
2002 Stock Option Plan 5,341,159 $2.39 2,658,841
--------- ----- ---------
Total 7,214,159 $3.49 3,429,341
---------------------------- --------------------------- ------------------------- -------------------------
Equity compensation 0 0 0
plans not approved by
security holders
---------------------------- --------------------------- ------------------------- -------------------------
Total 7,214,159 $3.49 3,429,341
---------------------------- --------------------------- ------------------------- -------------------------
DIVIDENDS
We have not paid dividends on our common stock in the past and have no present
intention of paying dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In the fiscal year ended July 31, 2004 and subsequent period we sold common
stock and other securities in transactions in reliance upon exemptions from the
registration requirements of the Securities Act of 1933 as follows:
o On August 8, 2003, we acquired all of the outstanding capital stock of
Antigen Express, Inc. pursuant to an Agreement and Plan of Merger
("Merger Agreement"). Pursuant to the Merger Agreement, Antigen became
our wholly-owned subsidiary. Upon consummation of the Merger, we issued
an aggregate of approximately 1,779,974 shares of our common stock to
the former Antigen shareholders in connection with the Merger, and
issued an additional 1,000,000 shares on January 31, 2004. The shares
of our common stock issued in connection with the Merger were
restricted securities. However, they are registered for resale pursuant
to a registration statement on Form S-3 that became effective in
November 2003.
32
o During the fiscal quarter ended October 31, 2003, we issued an
aggregate of 487,500 shares to Jeffrey Trenk, Sound Capital
Incorporated, Global Advisory Services, LLC and CEOcast Inc. for
consulting services. For financial reporting purposes, we recognized an
expense of $918,000 in connection with the issuance of these shares for
services, which was approximately equal to the fair market value of the
shares when issued. As these transactions were not eligible for S-8
registration, we relied on Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act") in connection with the issuance of
these shares. The shares are restricted, and each of the consultants,
being primarily engaged in the financial industry, had access to the
information which would have been presented in a registration statement
and sufficient sophistication so as to not require the protections
afforded by registration under the Securities Act. 150,000 of these
shares have been registered for resale on form S-3.
o In January 2004, we completed three private placements of our common
stock and warrants with four accredited investors. Under the terms of
the private placements, we sold units, consisting of an aggregate of
1,984,808 shares of common stock and five-year warrants to purchase an
aggregate of 496,202 shares of common stock, for gross proceeds of
$3,000,000. In addition to the shares of common stock and warrants
purchased by the investors at each closing, each investor received an
additional investment right to purchase for a period of time up to the
same number of shares of common stock and warrants initially purchased
by such investor. Each investor's additional investment right is
exercisable into additional shares of our common stock and warrants at
an exercise price equal to the last bid price, on a consolidated basis,
on the trading day immediately proceeding the date on which definitive
agreements were signed by us and each investor. The exercise price of
all warrants is equal to 130% of such bid price. We undertook the
offerings in reliance upon Rule 506 of Regulation D and Section
18(b)(4)(D) of the Securities Act of 1933. The proceeds from the
private placements will be used for working capital and other general
corporate purposes directly related to our growth, and the development
of our products.
o In February 2004, we completed three additional private placements of
common stock and warrants with three accredited investors. Pursuant to
the terms of these private placements, we sold units, consisting of an
aggregate of 829,092 shares of common stock and five year warrants to
purchase an aggregate of 207,274 shares of common stock, for gross
proceeds of $1,264,000. In addition to the shares of common stock and
warrants purchased by the investors at each closing, each investor
received an additional investment right to purchase for a period of
time up to the same number of shares of common stock and warrants
initially purchased by such investor. Each investor's additional
investment right is exercisable into additional shares of our common
stock and warrants at an exercise price equal to the last bid price, on
a consolidated basis, on the trading day immediately proceeding the
date on which definitive agreements were signed by us and each
investor. The exercise price of all warrants is equal to 130% of such
bid price. We undertook the offerings in reliance upon Rule 506 of
Regulation D and Section 18(b)(4)(D) of the Securities Act. The
proceeds from the private placements will be used for working capital
and other general corporate purposes directly related to our growth,
and the development of our products.
33
o On February 6, 2004, we authorized the issuance of an aggregate of
175,000 shares to Sound Capital Incorporated and Global Advisory
Services, LLC for consulting services. For financial reporting
purposes, we recognized an expense of $287,000 in connection with the
issuance of these shares for services, which was approximately equal to
the fair market value of the shares when issued. As transactions were
not eligible for S-8 registration, we relied on Section 4(2) of the
Securities Act in connection with the issuance of these shares. The
shares are restricted, and each of the consultants, being primarily
engaged in the financial industry, had access to the information which
would have been presented in a registration statement and sufficient
sophistication so as to not require the protections afforded by
registration under the Securities Act. All of these shares have been
registered for resale on form S-3.
o In July 2004, we completed a private placement of our common stock and
warrants with four accredited investors. In accordance with the terms
of the private placement, we sold units, consisting of an aggregate of
2,459,016 shares of our common stock and five-year warrants to purchase
an aggregate of 1,967,213 shares of common stock, for gross proceeds of
$3,000,000. In addition to the shares of common stock and warrants
purchased by the investors at closing, each received an additional
investment right to purchase for a period of time up to the same number
of shares of common stock and warrants initially purchased by such
investor. Each investor's additional investment right is exercisable
into additional shares of our common stock and warrants at an exercise
price equal to the last bid price, on a consolidated basis, on the
trading day immediately proceeding the dat