SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
AMENDMENT NO. 1 TO GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
GENEREX BIOTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Idaho 82-0490211
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
33 Harbor Square, Suite 202, Toronto, Canada M5J2G2
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 416/364-2551
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Securities to be registered under Section 12(b) of the Act: None
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(Title of Class)
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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GENEREX BIOTECHNOLOGY CORPORATION
FORM 10
TABLE OF CONTENTS
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Item 1. BUSINESS...................................................................... 1
(a) General Development of Business......................................... 1
(b) Industry Segment Financial Information.................................. 3
(c) Description of Business................................................. 3
(i) Principal products and services............................... 3
(ii) Status of new products announced.............................. 14
(iii) Sources and availability of raw materials..................... 15
(iv) Patents, trademarks, licenses, etc............................ 15
(v) Seasonality................................................... 16
(vi) Industry practices relative to working capital items.......... 16
(vii) Major customers............................................... 17
(viii) Backlog....................................................... 17
(ix) Government contracts.......................................... 17
(x) Competition................................................... 17
(xi) Research and development expenditures......................... 19
(xii) Environmental compliance...................................... 19
(xiii) Employees..................................................... 19
(d) Revenues, etc. by Geographic Region..................................... 19
Item 2. FINANCIAL INFORMATION......................................................... 20
(a) Selected Financial Data.................................................. 20
(b) Management's Discussion and Analysis of Financial Condition
Condition and Results of Operations...................................... 21
(c) Quantitative and Qualitative Disclosure About Financial
Market Risks.................................................. 23
Item 3. PROPERTIES.................................................................... 24
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT....................................................... 24
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Item 5. DIRECTORS AND EXECUTIVE OFFICERS............................................ 27
Item 6. EXECUTIVE COMPENSATION...................................................... 31
Item 7. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................................ 32
Item 8. LEGAL PROCEEDINGS........................................................... 34
Item 9. MARKET PRICE, DIVIDENDS AND RELATED STOCK-
HOLDER MATTERS.......................................................... 34
(a) Market Information.................................................... 34
(b) Holders of Common Stock............................................... 35
(c) Dividends............................................................. 35
Item 10. RECENT SALES OF UNREGISTERED SECURITIES..................................... 35
Item 11. DESCRIPTION OF SECURITIES TO BE REGISTERED.................................. 39
Item 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS................................... 43
Item 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 44
Item 14. CHANGES IN, AND DISAGREEMENTS WITH
ACCOUNTANTS............................................................. 45
Item 15. FINANCIAL STATEMENTS AND EXHIBITS........................................... 45
(a) Financial Statements.................................................. 45
(b) Exhibits.............................................................. 46
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Item 1. BUSINESS
Item 1(a) General Development of Business
Generex Biotechnology Corporation (the "Company") was incorporated in 1983
as Green MT. P.S., Inc. The Company had been inactive for more than ten years
prior to January 1998 when it acquired Generex Pharmaceuticals, Inc. ("GPI"), a
Canadian corporation, and changed its corporate name to "Generex Biotechnology
Corporation". The acquisition of GPI was a "reverse acquisition" in that,
immediately following the acquisition, the former shareholders of GPI owned
approximately 90% of the Company's outstanding Common Stock. See Item 2(b),
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General" below.
The Company is engaged in the development of drug delivery systems. Its
principal business focus has been to develop a technology for the oral
administration of large molecule (i.e., molecules above a specified molecular
weight) drugs. Historically, large molecule drugs have been administered only by
injection because their size inhibits or precludes absorption if administered
only by oral, transdermal, transnasal or other means. The principal application
to date of the Company's large molecule drug delivery technology is a liquid
insulin formulation that can be administered orally. The Company intends to
market this formulation in the United States under the name Oralgen(TM), and in
Canada and elsewhere under the name Oralin(TM).
Oral Insulin Formulation: The Company's oral insulin formulation is
administered with a metered dose applicator developed by the Company. The
formulation, which includes insulin and various excipients (i.e., a non-active
pharmaceutical ingredient) to facilitate the absorption of insulin molecules
through the mucous membranes in the mouth and upper gastro-intestinal tract, is
sprayed into the mouth and back of the throat, where absorption occurs.
The Company completed pre-clinical studies and proof of concept trials of
its oral insulin formulation in early 1998. An Investigational New Drug
submission ("IND") to Canada's regulatory equivalent of the United States Food
and Drug Administration was made in July 1998, and approved in September 1998.
The Company commenced Phase II clinical trials of the product in Canada in
November 1998.
The Company submitted an IND to the United States Food and Drug
Administration in October of this year. In November, the FDA approved the
Company's request to proceed with human clinical trials under this IND. The
Company has begun its Phase II program in the United States and expects to begin
clinical testing in the United States in March 1999.
Also in September of this year, the Company received regulatory approval in
Ecuador for limited, non-commercial distribution of its oral insulin formulation
to diabetic patients. This clinical program, which is expected to involve
approximately 200 patients, is scheduled to begin later this year.
The Company now expects to receive clearance to begin commercial sales of
its oral insulin formulation in Ecuador in 1999. It does not expect to receive
regulatory clearance to market the product in the United States or Canada until
2000 at the earliest. There are numerous risks and uncertainties, including
technical, financial, regulatory and other risks and uncertainties, that the
Company must overcome before any such clearances are obtained. See "Risk
Factors" in Item 1(c)(i) below.
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The Company plans to market its oral insulin formulation through agreements
with major pharmaceutical companies. While the Company is engaged in discussions
with several companies concerning licensing and distribution agreements, it has
not yet entered into any such agreements.
The Company intends to produce the quantities of its oral insulin
formulation required for clinical trials, and for commercial sales in South
America, from Company-owned facilities located in the Toronto area which it
acquired in 1998. Longer term, the Company intends to expand its manufacturing
capabilities in Canada, and to establish regional manufacturing facilities to
service commercial markets as the Company obtains clearances to market.
Other Large Molecule Drugs: The Company believes that its large molecule
drug oral delivery technology is a "platform" technology that can be used
successfully with a significant number of large molecule pharmaceuticals besides
insulin. In each case, oral administration of the drug would be expected to
improve the quality of life of patients and patient compliance by reducing or
eliminating the need for injections or intravenous administration.
Due to its limited resources, to date the Company has not aggressively
pursued collaborative projects to evaluate the efficacy of its drug delivery
technology with other proprietary products. The Company is discussing with
prospective collaborative partners a number of research projects involving human
growth hormones, monoclonal antibodies, fertility hormones, animal growth
hormones and others.
Other Drug Delivery Technology: The Company has pending patent applications
which relate to other drug delivery technologies, but has not made a substantial
effort to develop commercial applications for these other technologies. Rather,
the Company has focused its efforts on developing its oral insulin formulation
and identifying other potential commercial applications of its oral drug
delivery technology.
Plan of Operation: The Company's plan of operation for the remainder of its
1998-1999 fiscal year is to focus on the following programs and objectives:
o to continue its program of clinical trials for its oral insulin
product, as described above;
o to initiate research on additional applications of its large molecule
drug delivery technology;
o to expand the capacity of a pilot manufacturing facility in Toronto at
an estimated cost of $250,000;
o to the extent that adequate resources are available after funding its
clinical programs and the expansion of its pilot manufacturing
facility, to complete the development of and to equip additional
testing, administrative and manufacturing facilities in the Toronto
area;
o to recruit additional scientific, manufacturing and administrative
personnel to staff its expanded operations; and
o to enter into one or more marketing agreements for its oral insulin
product.
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Item 1(b) Industry Segment Financial Information
The Company is in the development stage and has not yet generated any
revenues from operations. At this time, the Company believes that its future
business operations will be within a single industry segment and, for the
foreseeable future, involve a single class of products.
Item 1(c) Description of Business
Item 1(c)(i) Principal products and services
The Company is engaged in the development and commercialization of
proprietary drug delivery technologies. The Company's prior research and
development efforts to date have focused on the oral administration of large
molecule drugs. Within this category, the first product for which the Company
has sought regulatory approvals to market is a liquid formulation of insulin for
the treatment of diabetes. The product is designed to be administered by the
patient orally using a hand-held metered dosage applicator which the Company has
developed for this purpose.
As described below, the Company believes that its large molecule drug
delivery technology can be used to administer a significant number of other
active pharmaceutical agents in addition to insulin. The Company also has
pending patent applications which relate to other drug delivery technologies.
See "Other Delivery Technologies" below.
Oral Insulin Product
Background - Insulin Therapy for Diabetes: The term diabetes refers to a
disease that is characterized by abnormally high levels of glucose in the blood
as a result of defects in the complex relationship between glucose metabolism
and insulin secretion. When glucose is abundant, it is converted into fat
(triglycerides) and stored in the adipose tissue for use when food is not
available. When glucose is not available from food, triglycerides in the adipose
tissue are broken down into free fatty acids that stimulate glucose production
by the liver. Insulin, which is secreted by the pancreas, plays an important
role in regulating the level of glucose in the blood stream. In a healthy
metabolic state, a balance is maintained between insulin secretion and glucose
metabolism.
Type 1 diabetes (juvenile onset diabetes or insulin dependent diabetes) is
believed to result from the impaired function of the pancreas. In Type 1
diabetes, the pancreas produces no insulin and patients typically inject insulin
three to five times per day to regulate blood glucose levels. Type 1 diabetic
patients represent approximately 10% of the total diabetic population and about
30% of the total insulin that is used.
Type 2 diabetes (adult onset or noninsulin dependent diabetes mellitus) is
believed to involve a defect referred to as "insulin resistance" in which the
body cannot utilize insulin effectively. This condition leads to excessive blood
levels of glucose (hyperglycemia). Many researchers believe that Type 2
diabetics develop insulin resistance first, then impaired glucose tolerance, and
finally insulin dependent diabetes. In a portion of the population the ability
to control blood glucose is lost over time, despite increased insulin
production, as insulin resistance increases. At this stage, such persons are
considered impaired glucose tolerant, a condition characterized by normal blood
glucose levels before eating and hyperglycemia after eating. A person who loses
the ability to regulate blood glucose levels and exhibits persistent
hyperglycemia is considered to suffer from Type 2 diabetes.
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When blood glucose levels are not controlled within a normal range, severe
complications can result. Hyperglycemia over an extended period of time is
believed to damage the walls of blood vessels, causing complications such as
blindness from microvascular deterioration in the retina, loss of circulation in
the extremities leading to amputation, coronary artery disease, and kidney
failure. In addition, associated high blood levels of triglycerides, free fatty
acids, and total cholesterol pose serious health risks to the diabetic and are
believed to lead to cardiovascular disease, including coronary heart disease.
After diagnosis, the first course of therapy for Type 2 diabetics generally
is to try to control hyperglycemia through diet and exercise. If this fails to
achieve glycemic control, the patient typically begins medication. The two
leading medications for Type 2 diabetes traditionally have been insulin and a
class of oral drugs called sulfonylureas. Each of these drugs reduces glucose
levels by increasing serum insulin levels. Most patients initially take
sulfonylureas, which work by stimulating the production of insulin in the
pancreas. Many diabetics who take sulfonylureas still experience elevated blood
glucose and lipid levels. Over time, many Type 2 diabetics taking sulfonylureas
lose their ability to produce more insulin and control glucose levels.
There is no known cure for diabetes, which the World Health Organization
recently identified as the second largest cause of death by disease in North
America. In North America, total diabetes treatment costs in 1998 are believed
to have exceeded $100 billion, of which an estimated 50% will be direct costs
such as medication, supplies and medical care, with the balance being indirect
costs such as lost wages.
Oral Insulin Research & Development. Insulin has a high molecular weight
and, when administered orally, virtually no absorption occurs in the mouth and
gastrointestinal tract. Substantially all insulin presently used in the
treatment of diabetes is injected, usually using a disposable needle.
The Company's development efforts have focused on finding a means to orally
administer insulin. In the course of its research, the Company identified and
evaluated numerous compounds in different combinations and concentrations.
Initially, the Company conducted pre-clinical studies in rats and dogs to
evaluate the clinical end point (glucose lowering) and efficacy of oral insulin
formulations in comparison with injected insulin under fasting conditions. In
the study with rats, the Company's oral insulin formulation showed glucose
lowering (>96%) comparable to injected insulin. Plasma insulin levels exceeded
50% of levels found using injected insulin. The same formulation administered to
dogs under fasting conditions showed glucose lowering (>96%) comparable to
injected insulin, while insulin absorption exceeded 60% of the injected insulin
benchmark.
Beginning in January 1998, the Company conducted a number of studies in
Ecuador with Type 1 diabetic patients, each of which involved a selection of
between 8 and 10 patients, to evaluate the efficacy of its oral insulin
formulation in humans in comparison with the injected insulin and placebos. The
studies were conducted over periods of four or five days. In these studies, oral
formulations containing 30, 40 and 50 units of insulin were shown to provide
glucose lowering results similar to 10 units of injected insulin. With respect
to bioavailability, the oral insulin formulations provided mean insulin
absorption equivalent to the injected insulin.
Concurrently with these studies of its oral insulin formulation, the
Company also experimented with a number of delivery devices and techniques to
orally deliver the formulation. In the earliest tests of the formulations, the
test subjects administered the formulation directly to the mouth using a
calibrated dropper, and then simply "swished" the formulation in their mouths
for approximately three minutes before swallowing. Eventually, the Company
settled on the use of an aerosol applicator which patients insert in the mouth
and activate by depressing an actuator to deliver a precisely measured dose. The
administration is virtually instantaneous. The spray is not intended to be
inhaled, and patients are instructed
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not to breathe in when applying a "puff" of the product. Even if inhaled
accidentally, no absorption of the formulation occurs in the lungs because of
the droplet size delivered by the applicator.
The applicator which the Company has developed to administer its oral
insulin formulation is approximately 3.25 inches long, has a diameter of
approximately one inch, and, when filled with the formulation, weighs
approximately 4.5 ounces. Thus, it is easily and conveniently carried and
stored. Based on test results to date, the formulation within the applicator is
stable and remains effective at room temperature for over 150 days, well in
excess of the 5-day supply which typically would be contained in the applicator.
The Company believes that the convenient size of the applicator, the stability
of the oral insulin formulation at room temperature, and the ease and pain-free
nature of administration of the product by patients will make its oral insulin
formulation the product of choice for diabetics.
On the basis of its test results in Ecuador and other pre-clinical data,
the Company made an Investigational New Drug submission (an "IND") to the Health
Protection Branch (the "HPB") in Canada (Canada's equivalent to the FDA) in July
1998, and received permission from the HPB to proceed with Phase II clinical
trials in September 1998. The Company started these trials in November 1998, and
they are now in progress.
The Company filed an IND with the FDA in October 1998, and in November 1998
received FDA approval to proceed with human trials. The Company began its Phase
II program in the United States in January 1999, and expects to begin clinical
trials in March of this year.
The Company also expects to conduct additional clinical trials in Ecuador.
These trials will involve approximately 36 to 40 patients initially, and
approximately 200 patients eventually, and are expected to extend over a period
of three months. These tests are intended to provide additional data relating to
extended term use of the product that will be useful in seeking regulatory
approvals in the United States, Canada and other countries.
Other Large Molecule Drug Projects.
As noted previously, the Company believes that its large molecule drug
delivery system is appropriate for a variety of other drugs. The Company has
numerous extensive discussions of possible research collaborations with
pharmaceutical companies concerning the use of the Company's large molecule drug
delivery technology with the prospective research partner's proprietary
products, including monoclonal antibodies, human growth hormone, fertility
hormone, and others. The Company has not aggressively pursued these
relationships, however, since it preferred to focus its limited financial and
other resources on the development of its oral insulin formulation. An earlier
project with Centocor, Inc., conducted in late 1997, in which mice were dosed
orally with a monoclonal antibody provided by Centocor, produced results which
were positive, from the Company's standpoint, but neither the Company nor
Centocor has made any move to continue the research. At least initially, the
Company will continue to be constrained in pursuing these additional research
projects by limited financial and other resources.
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Manufacturing.
The Company plans to retain the manufacture of its oral insulin
formulation, while relying on industry partners for marketing and distribution.
The Company produced the formulation needed for its clinical studies in a
Good Laboratory Practice environment consistent with applicable regulatory
guidelines. The Company has now equipped a Company-owned pilot facility in
Toronto which is capable of preparing formulation for, filling and shipping
approximately 500 applicators per daily, eight-hour shift. The Company estimates
that its cost to equip, test and start up this initial production facility,
including facility design and personnel training, was approximately $465,000.
The Company believes that its pilot facility, with the addition of a second
production line, will be able to produce sufficient product for its clinical
program in the United States, Canada and Ecuador, and to initiate commercial
distribution on a limited scale in South America. The cost to duplicate the
initial "production line" will be less than the cost for the initial line since
substantially all design costs would be eliminated and the same testing and
quality assurance equipment will be used by both lines.
The Company also plans to equip and start up full scale manufacturing
facilities in Brampton, Ontario, and Mississauga, Ontario, both of which are
within 25 miles from downtown Toronto. These facilities also are Company-owned.
The Company believes that the Brampton facility can be placed into production in
the third quarter of 1999, and that the Mississauga facility can be placed into
production in the third quarter of 2000. At the present time, the Company does
not foresee a need to place these facilities into production before 2000.
Based on its experience with its in Canadian facilities, the Company's
present business plan is to establish a manufacturing capability in South
America, to serve that market, and eventually to add manufacturing capacity as
and where required. The Company has acquired a building site in a "duty free"
zone in Ecuador for a South American manufacturing facility, but has taken no
other steps at this time to establish any manufacturing capability outside
Canada.
As indicated under the caption "Government Regulation" below, the Company's
manufacturing facilities must comply with regulatory requirements of the host
country and of countries to which product produced at the facility is exported.
The Company believes that its pilot facility will be in compliance with Good
Manufacturing Practices in January 1999, and expects to seek approval of the
facility from Canada's Health Protection Branch at that time.
Marketing
The Company's marketing options include selling its drug delivery
technology outright (for all applications or certain applications only),
licensing one or more companies to market products based upon the technology, or
to market products directly through a sales force comprised of Company staff and
independent distributors. At the present time, the Company plans to establish
joint ventures or licensing agreements for marketing its products. With respect
to its oral insulin product, the Company expects to enter into one or more
marketing agreements before commencing Phase III trials in the United States and
Canada, which the Company now expects to begin in the second half of calendar
1999.
The Company believes that marketing requirements for its oral insulin
product will be significantly less than those generally associated with
marketing opportunities of comparable magnitude since there is no requirement
for "missionary advertising" which typically is a long process used to introduce
and create demand for a new product or therapy, or to create a brand image in
the face of strong competition from similar brands or
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technologies. As a consequence, the number of potential marketing or
distribution partners for the Company increases substantially, as such
prospective partners need not have an existing position in the diabetes
treatment market. What is required, however, is a supply of insulin. At the
present time, the world market for insulin is shared primarily by Eli Lilly &
Company (US) and Novo Nordisk A/S (Denmark) which, together, produce
approximately 90% to 95% of the world supply. The rest of the market is shared
by a handful of other producers/sellers. See Item (c)(iii), "Sources and
Availability of Raw Materials" below.
Government Regulation
The Company's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, are subject to extensive regulation, primarily by FDA, in the United
States. These activities also are regulated in other countries where the Company
intends to test, manufacture and/or market its products.
The steps required before a pharmaceutical agent may be marketed in the
United States for use by humans include (a) preclinical laboratory, in vivo, and
formulation studies; (b) the submission to FDA of an Investigational New Drug
application ("IND"), which must become effective before human clinical trials
may commence; (c) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug; (d) the submission of a New Drug
Application ("NDA") to FDA; and (e) FDA approval of the NDA, including approval
of all product labeling and advertising.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to asses the potential
safety and efficacy of each product. The results of the preclinical tests are
submitted to FDA as part of an IND and are reviewed by FDA before the
commencement of human clinical trials. Unless FDA objects to an IND, the IND
becomes effective 30 days following its receipt by FDA.
Clinical trials involve the administration of the investigational drug to
humans under supervision of a qualified investigator. Clinical trials must be
conducted in accordance with Good Clinical Practices under protocols that detail
the objectives of the study, the parameters to be used to monitor safety, and
efficacy criteria to be evaluated. Each protocol must be submitted to FDA as
part of the IND. Also, each clinical trial must be approved and conducted under
the auspices of an Institutional Review Board, which will consider, among other
things, ethical factors, the safety of human subjects, and the possible
liability of the institution conducting the clinical trials.
Clinical trials typically are conducted in three sequential phases (Phase
I, II and III), but the phases may overlap. In Phase I clinical trials, the drug
is tested in healthy human subjects for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase II clinical trials are conducted in a limited patient
population to gather evidence about the efficacy of the drug for specific,
targeted indications; to determine dosage tolerance and optimal dosage; and to
identify possible adverse effects and safety risks. When a compound has shown
evidence of efficacy and an acceptable safety profile in Phase II trials, Phase
III clinical trials are undertaken to evaluate clinical efficacy and to test for
safety in an expanded patient population at geographically dispersed clinical
trial sites. FDA and other regulatory authorities require that safety and
efficacy of therapeutic product candidates be supported through at least two
adequate and well-controlled Phase III clinical trials. The conduct of clinical
trials in general, and the performance of the Phase III clinical trial protocols
in particular, are complex and difficult.
In the United States, the results of preclinical studies and clinical
trials, if successful, are submitted to FDA in an NDA to seek approval to market
and commercialize the drug product for a
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specified use. FDA may deny an NDA if it believes that applicable regulatory
criteria are not satisfied. FDA also may require additional testing for safety
and efficacy of the drug.
There is no assurance that any of the Company's product candidates will
receive regulatory approvals for commercialization. Even if regulatory approvals
for the Company's product candidates are obtained, however, the Company, its
products, and the facilities manufacturing the Company's products are subject to
continual review and periodic inspection. FDA will require post-marketing
reporting to monitor the safety of the Company's products.
To supply drug products for use in the United States, foreign and domestic
manufacturing establishments must comply with FDA's Good Manufacturing Practices
and are subject to periodic inspection by FDA or, in the case of products
manufactured outside the United States, by regulatory authorities in the country
in which the products manufactured under reciprocal agreements between the
regulatory authorities in such countries and FDA. In complying with Good
Manufacturing Standards, manufacturers must expend funds, time and effort in the
area of production and quality control to ensure full technical compliance. FDA
stringently applies regulatory standards for manufacturing, each United States
drug manufacturing establishment must be registered with FDA. Failure to comply
with regulations applicable to a pharmaceutical manufacturer or manufacturing
facility may result in restrictions or sanctions such as warning letters,
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.
Before the Company is permitted to market any of its products outside of
the United States, those products will be subject to regulatory approval similar
to FDA requirements in the United States. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country, however, and FDA approval does not assure approval by
regulatory authorities in other countries. In some countries the sale price of a
drug product also must be approved. The pricing review period often begins after
market approval is granted. Even if a foreign regulatory authority approves any
of the Company's product candidates, there is no assurance that it will approve
satisfactory prices for the products.
Risk Factors
The Company's plans to develop and commercialize its technology and
products are subject to numerous risks and uncertainties. As a result, there is
no assurance that the Company will be able to obtain required regulatory
clearances and approvals for its products, or that it will be able to develop
and commercialize successfully any existing or potential product. Certain risks
relating to the Company are described below. These are not the only risks
relating to the Company and its business; merely those the Company considers
most significant. Other risks, not discussed below, could be considered
important by some investors.
Forward Looking Statements. This Registration Statement contains
"forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "should",
"anticipates" or comparable terminology . The future events or results referred
to in forward-looking statements may not be achieved, and it is extremely
unlikely that all of the Company's projects and products will develop as now
planned. Numerous factors, including the risks and uncertainties described
below, are likely to cause actual results to vary from the future results
referred to in the Company's forward-looking statements, and the variations
could be material and adverse to the Company's shareholders.
Failure of Product Development and Commercialization Efforts. The Company
is a development stage company and has not yet generated any revenues from
operations. At the present time, the Company has no products approved for
commercial sale by drug regulatory authorities, and only one
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product, its oral insulin formulation, for which it has begun the regulatory
approval process. See "-- Government Regulation" above.
Even if the Company obtains regulatory approvals for its oral insulin
product and/or successfully develops and obtains regulatory approvals for other
products, that does not necessarily mean that it will be successful in
commercializing the products. Success in commercializing any such products would
depend upon many factors beyond the Company's control, including acceptance by
health care professionals and patients, and the availability, effectiveness and
relative cost of alternative therapies.
The difficulty and uncertainty associated with bringing any new drug
product to market is further complicated in the Company's case since its
proprietary technology concerns the delivery of other drugs. Thus, when the drug
to be delivered is a proprietary product such as bio-synthetic (i.e., DNA
derived) insulin, the Company requires the cooperation of the pharmaceutical
companies which own the proprietary rights to the active pharmaceutical agent.
In the case of insulin, Eli Lilly & Company ("Lilly") and Novo Nordisk A/S
("Novo Nordisk") dominate the manufacture and supply of insulin, with an
estimated 90%-95% (together) of the world's supply of synthetic insulin. At the
present time, the Company has no agreement or other understanding with Lilly,
Novo Nordisk or any other major pharmaceutical company concerning insulin supply
or other related matters. See Item 1(c)(iii), "Sources and availability of raw
materials" below.
In order to achieve long term success, the Company must satisfactorily
resolve the risks and uncertain to product development, regulation,
commercialization and insulin supply referred to above. Inability to do so would
substantially and adversely affect its shareholders.
Future Capital Needs; Uncertainty Of Additional Funding. The Company has
incurred substantial losses from operations through July 31, 1998, and expects
to continue to incur substantial and increasing losses for at least another 12
to 18 months as its research and development efforts and pre-clinical and
clinical testing programs expand, and as the Company equips, starts-up and,
subsequently, scales up its manufacturing facilities. See Item 1(c)(i) -
"Manufacturing" above, and Item 3, "Properties" below. These operations and
losses have consumed substantial and increasing amounts of cash. The Company's
negative cash flow from operations is expected to continue and to accelerate at
least over the next 12 to 18 months as the Company requires funds:
o to pursue regulatory approvals for its oral insulin product;
o to begin development of new applications of its large molecule drug
oral delivery technology, and to conduct the clinical tests necessary
to develop and refine the technologies and proposed products, if any;
o to conduct clinical trials;
o to establish and expand manufacturing facilities; and
o to market its products.
The level of the Company's future capital requirements will depend on many
factors, including: the rate and extent of progress in its clinical program and
research and development activities; its ability to establish and maintain
favorable collaborative arrangements with others as required; the time and costs
involved in obtaining regulatory approvals; the cost of developing production
capability; and filing, prosecuting, maintaining and enforcing patent claims.
Whatever level of funding is required, it is certain
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that the Company will need to raise substantial additional capital to fund its
operations over the next 12 to 18 months.
The Company may not be able to obtain additional financing as and when
required, on acceptable terms or at all. Furthermore, if additional funds are
raised by issuing equity securities, substantial dilution to shareholders may
result. If adequate funds are not available, the Company may be required to
delay, reduce the scope of, or eliminate one or more of its research,
development or other programs or obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to technologies, product candidates or products that the Company would
not otherwise relinquish. Because of the uncertainties related to the Company's
ability to satisfy future needs for financing, the report of the Company's
auditors on its financial statements for the year ended July 31, 1998, contain a
"going concern" qualification.See Item 2(b), "Management's Discussion and
Analysis of Financial Condition and Results of Operations below.
The Company Will Require Marketing and Other Assistance from Industry
Partners. As indicated above, the Company is dependent to a certain extent on
the cooperation of pharmaceutical companies which own proprietary drug products
that are a candidate for use with the Company's drug delivery technology. Also,
since the Company currently lacks the marketing and sales experience, personnel,
distribution channels and other infrastructure needed to successfully
commercialize products on its own, it plans to rely on one or more corporate
partners possessing strong marketing and distribution resources to market its
products. The Company does not have any arrangements for marketing its products
at the present time. Failure to make satisfactory marketing arrangements would
adversely affect the Company.
Limited Manufacturing Experience. To date, the Company has produced its
oral insulin formulation under laboratory conditions on the small scale needed
for pre-clinical studies and early stage trials. To achieve the levels of
production necessary to support late stage human clinical trials and for initial
commercial sales of this product, the Company has established a pilot
manufacturing capability in a Company-owned facility in Toronto. The Company
intends to produce oral insulin product at this facility in sufficient
quantities to satisfy its requirements for clinical testing, as well as for
initial commercial sales in South America if and at such time as it receives
regulatory approval to market the product in South America. To move beyond this
level of manufacturing, however, to a level that would support a successful
product launch in the United States, Canada and elsewhere, would require a very
large (relatively speaking) "scale up" and expansion of the Company's
manufacturing capabilities.
Significant additional work and substantial additional funding will be
required before the Company is in a position to produce its oral insulin product
in large quantities. Staffing, manufacturing, regulatory and quality control
problems are likely to arise in connection with any "scale up", and there is no
assurance that the Company will be able to resolve those problems in a timely
manner or at a commercially reasonable cost. A failure to surmount such problems
could delay or prevent commercialization of the Company's oral insulin product.
The Company intends to use one or more contract manufacturers to produce
the metered dose applicator that is used to administer its oral insulin
formulation. No contracts are in place, however, and there is no assurance that
the Company will be able to enter into or maintain satisfactory contract
manufacturing arrangements for the applicator.
Dependence Upon Proprietary Technology. If it is successful in establishing
the efficacy and competitiveness of its technology, the Company's long term
success will depend in substantial part upon protecting the technology from
infringement, misappropriation, duplication and discovery. The Company presently
owns two US patent applications that cover its core large molecule drug delivery
technology, one of which has been allowed, although the patent has not been
formally issued by the patent office, and one of which is pending. The Company
has five other patent applications pending, two of which are
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pending only in Canada. The Company expects to file additional patent
applications which relate to its large molecule drug delivery technology and
metered dosage applicator within the next several months.
In addition to the patent and patent applications described above, the
Company owns an indirect 50% interest in three patents held by Centrum
Biotechnologies, Inc., an Ontario corporation which is 50% owned by Dr. Pankaj
Modi, the Company's Vice President of Research and Development. These three
patents (the "Centrum Patents") were assigned by Dr. Modi prior to his
association with the Company. Two of the Centrum Patents (one covering oral and
intranasal delivery of proteinic drugs in liquid formulations, and the other
covering biodegradable polymer microspheres) represent the results of earlier
phases of Dr. Modi's research into large molecule oral drug delivery
technologies. See Item 1(c)(iv), "Patents, trademarks, licenses, etc." below.
There is no assurance that any of the Company's pending patent applications
will result in a patent being issued, or that any patent of the Company that now
is or later may be issued is or will be valid, enforceable, or offer meaningful
protection from or advantage over competitors using similar or competitive
technology. Although issued patents are presumed valid under federal law, none
of the Company's patents has been challenged in litigation, and there is no
assurance that any of such patents would be found valid if challenged.
The Company is not aware of any patent or other intellectual property
claims by others that would materially affect its ability to use, and license
others to use, any of its drug delivery technologies. Since pending United
States patent applications are maintained in secret until they are issued as
patents, however, they cannot be searched as such by the Company. Accordingly,
there may be pending applications filed by others which might later issue as
patents and create infringement issues for the Company. With specific reference
to the Centrum Patents, the Company does not believe that its other patents
infringe, or that patents it has applied for if issued will infringe, upon the
Centrum Patents. There is no assurance, however, that the manufacture, use or
sale of the Company's oral insulin formulation or future product candidates will
not infringe existing patent rights of Centrum or others. The Company may be
unable to avoid infringement of those patents and may have to seek a license,
defend an infringement actions, or challenge the validity of the patents in
court. There is no assurance that the Company would be able to obtain a license
on acceptable terms if required, or prevail in any patent litigation, or that
the Company would have sufficient resources to aggressively pursue such
litigation that became necessary. If the Company were found liable for
infringement, it could be responsible for significant money damages, encounter
significant delays in bringing products to market, or be precluded from
participating in the manufacture, use or sale of products or methods of
treatment covered by such patents.
The Company pursues a policy of requiring its officers, employees,
consultants, advisors and potential research partners to agree that confidential
information developed or disclosed during the course of the relationship will be
kept confidential, except in specified circumstances, and to protect the
Company's interest in inventions, etc. developed in the course of the
relationship. Such agreements are difficult to police and enforce, however, and
there is no assurance that these agreements will provide meaningful protection
for the Company's inventions, trade secrets or other proprietary information in
the event of unauthorized use or disclosure of such information, or in the case
of competing claims to inventions.
Dependence Upon Existing Management; Need for Additional Technical And
Management Personnel. The Company is highly dependent upon a very limited
scientific and management staff. At the present time, the Company does not have
fixed term agreements with any of its principal officers, other than Pankaj
Modi. While the Company does have a fixed contract with Dr. Modi that extends
until December 31, 2004, this agreement cannot guarantee Dr. Modi's continued
availability. The Company
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carries a $10 million "key man" life insurance policy on Dr. Modi. It does not
own life insurance on any other officer.
The Company also uses non-employee consultants to a significant extent to
assist it in formulating research and development strategy, in preparing
regulatory submissions, in developing protocols for clinical trials, and in
designing, equipping and staffing its manufacturing facilities. These
consultants and advisors usually have the right to terminate their relationships
with the Company on short notice. Loss of key personnel and/or termination of
key consulting arrangements could jeopardize the Company's business plans.
To continue and accelerate its product development and commercialization
plans, the Company will be required to hire additional qualified scientific
personnel to perform research and development, as well as personnel with
expertise in clinical testing, government regulation and manufacturing. The
Company also expects to require additional executive and administrative
personnel. Retaining and attracting qualified personnel, consultants and
advisors will be critical to the Company's success. The Company will face
particularly stiff competition for qualified scientific and technical personnel
from pharmaceutical, biotechnology and drug delivery companies, as well as
universities and other research institutions. There is no assurance that the
Company will be able to retain and attract the additional personnel that it will
require, and its failure to do so would have a material adverse effect on its
ability to develop and commercialize its products, and to properly manage and
lead a growing publicly-owned company.
Government Regulation. All medical devices and new drugs, including the
Company's oral insulin formulation and other products that the Company may
develop in the future, are subject to extensive and rigorous regulation by the
federal government, principally the FDA, and by state and local governments.
Such regulations govern the development, testing, manufacture, labeling,
storage, premarket clearance or approval, advertising, promotion, sale and
distribution of such products. The regulatory process for obtaining FDA
premarket clearances or approvals for medical devices and drug products is
generally lengthy, expensive and uncertain. Securing FDA marketing clearances
and approvals usually requires the submission of extensive clinical data and
supporting information to the FDA. Product clearances and approvals, if granted,
can be withdrawn for failure to comply with regulatory requirements or upon the
occurrence of unforeseen problems following initial marketing.
Medical devices or drug products that are marketed abroad also are subject
to regulation by foreign governments. In Canada, the regulatory approval process
is administered by the Health Protection Branch and is comparable to the
procedure in the United States.
The manufacture of drug products also is closely regulated by FDA in the
United States, and by comparable regulatory agencies in other countries.
There is no assurance that the Company will be able to obtain necessary
regulatory clearances or approvals on a timely basis, if at all, for its
products. Delays in receipt or failure to receive such clearances or approvals
or failure to comply with existing or future regulatory requirements with
respect to products or product manufacture would have a material adverse effect
on the Company.
Highly Competitive Markets; Risk Of Alternative Therapies. The
pharmaceutical, biotechnology and medical device industries are highly
competitive and rapidly evolving. The Company's success will depend on its
ability to successfully develop products and technologies for drug delivery and
especially, for the foreseeable future, products for oral delivery of insulin
and other large molecule drugs.
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The Company will be in competition with pharmaceutical, biotechnology and
drug delivery companies and other entities engaged in the development of
alternative drug delivery systems or new drug research and testing, as well as
with entities producing and developing injectable drugs that provide alternative
therapies. The Company is aware of a number of companies currently seeking to
develop new products and non-invasive alternatives to injectable drug delivery,
including oral, intranasal, transdermal and inhalation delivery systems. Most of
these competitors are themselves better financed than the Company is at the
present time, and many have commitments from or arrangements with major
pharmaceutical companies for financial, technical and marketing assistance.
Without proper financial, technical and marketing support, the Company could
fail to compete successfully with these companies, irrespective of the relative
merits of its products. For additional information, see Item 1(c)(x),
"Competition" below.
Pending Litigation. Sands Brothers & Co. Ltd., a New York City-based
investment banking and brokerage firm, initiated an arbitration against the
Company under New York Stock Exchange rules on October 2, 1998, based upon a
claim that it (Sands) has the right to purchase, for nominal consideration,
approximately 1.5 million shares of the Company's Common Stock. This claim is
based upon an October 1997 letter purportedly confirming the terms of an
agreement appointing Sands as the exclusive financial advisor to Generex
Pharmaceuticals, Inc. ("GPI"), a wholly owned subsidiary of the Company, and
granting Sands the right to receive shares then representing 17% of the
outstanding capital stock of GPI which, following the acquisition of GPI by the
Company, would represent the Company's Common Stock as an inducement to act in
that capacity under the purported agreement. Sands also claims that it is
entitled to approximately 460,000 additional shares of the Company as a result
of the Company's acquisition of GPI, and $144,000 in fees under the terms of the
purported agreement. If Sands were to prevail on its claims, it would acquire
shares representing approximately 13% of the Company's outstanding Common Stock,
and existing shareholders' interests would be proportionately diluted by that
amount.
The Sands' arbitration is now scheduled to begin on June 8, 1999. The
Company is unable to predict the outcome of the arbitration at this time. If and
to the extent that Sands were to succeed in its claim, the interests of the
Company's present shareholders would be diluted. See Item 8, "Legal Proceedings
- -- Sands' Litigation" below.
The Company also is a party to three other pending litigations. See Item 8.
"Legal Proceedings -- Other Litigation" below.
Exposure To Product Liability. The research, development and
commercialization of therapeutic products and medical devices entails
significant product liability risks. The use of its products in clinical trials
and the commercial sale of such products may expose the Company to liability
claims. These claims might be made directly by consumers or by pharmaceutical
companies or others selling such products. Companies often address the exposure
of such risk by obtaining product liability insurance. The Company has obtained
limited product liability insurance ($2 million per occurrence, $2 million total
coverage), but there can be no assurance that the Company will be able to
continue to obtain such insurance on acceptable terms or that the product
liability insurance which the Company does obtain will be sufficient to protect
it from material loss if significant product liability claims are made against
the Company.
Possible Stock Price Volatility. The trading price of the Company's Common
Stock and the price at which the Company may sell securities in the future could
be subject to large fluctuations in response to announcements of research
activities, technological innovations or new products by the Company or its
competitors, changes in government regulations, developments concerning
proprietary rights, formation or termination of corporate alliances, variations
in operating results, litigation, results of clinical trials of the Company's or
its competitors' products, FDA approval or denial of Investigational New Drug
applications, other FDA action or inaction or similar actions or inaction by FDA
counterparts in other countries, general market and economic conditions and
other events. The possibility of price volatility in price may make the
Company's Common Stock an unsuitable investment for persons who, for
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personal reasons, could be required to sell, at a time when the market price for
the Common Stock was depressed for reasons not related to the long term value of
the Common Stock.
Anti-Takeover Provisions. Until December 31, 2000, after which such shares
can be redeemed by the Company, Pankaj Modi, Vice President of Research and
Development and a director of the Company, as holder of all outstanding shares
of the Company's Special Voting Rights Preferred Stock, can prevent any change
of control of the Company that does have their support. See Item 11,
"Description of Securities, etc. - Special Voting Rights Preferred Stock". In
addition, certain provisions of the Company's Articles of Incorporation and the
Idaho Business Corporation Act may be deemed to have "anti-take-over" effects in
that they could delay, defer or prevent a takeover attempt that a shareholder
might consider to be in the Company's or the shareholders' best interests. For
example, the ability of the Company's Board of Directors to designate series of
Preferred Stock without any vote or action by the Company's stockholders could
be considered an "anti-takeover" device, since the terms of Preferred Stock
which might be issued could contain terms which could contain special voting
rights or increase the costs of acquiring the Company. See Item 11, "Description
of Securities, etc. - 'Anti-Takeover' Provisions" below.
Future sales of Restricted Securities. As of February 12, 1999, the Company
had 13,341,586 shares of Common Stock which were outstanding, or sold and
pending issuance, of which approximately 11,929,361 shares, or approximately 89%
of the total, were, or when issued will be, "restricted securities" which had
not been registered with the Securities and Exchange Commission or any state
securities agency and as to which future sales in the United States were
restricted. The remaining shares of the Company's outstanding Common Stock are
not restricted and are immediately saleable in the United States, without
restriction, by their owners.
Approximately 75% of the Company's restricted Common Stock has been
outstanding more than one year and may be sold publicly under Rule 144 under the
Securities Act of 1933, provided the seller complies with the manner of sale and
other conditions and limitations of that Rule. Rule 144 also requires that
specified information concerning the Company must be available to the public at
the time any such sale is made. The balance of the restricted shares outstanding
will become saleable over the next 12 months, beginning in March 1999. Sales of
substantial numbers of these shares, as well as the perception that they are
available for sale, may adversely affect the market price of the Company's
Common Stock.
Impact of Future Issuance of Capital Stock. The Company has 50,000,000
shares of Common Stock authorized, of which 13,341,586 shares were outstanding
or sold and in the process of being issued at February 12, 1999, and 1,711,362
shares of Common Stock have been reserved for issuance upon the exercise of
outstanding warrants and options. The Company also has authorized 1,000,000
shares of "undesignated" Preferred Stock (i.e., shares as to which the
Company's Board of Directors may fix the relative, voting, dividend and other
rights at the time of issuance), none of which are presently outstanding.
Although the Board of Directors of the Company has no present intention to do
so, it has the authority, without action by the shareholders, to issue
authorized and unissued shares of Common Stock or Preferred Stock. Issuance of
additional shares of Common Stock or shares of Preferred Stock could dilute the
equity interests, and adversely affect the voting rights, of existing holders of
Common Stock.
"Penny Stock" Regulation. Federal securities laws and regulations require
brokers to make special disclosures and to maintain certain records relating to
transactions in "penny stocks", i.e., a term which includes stocks with a market
price less than $5.00 per share which are not listed on The Nasdaq Stock Market
Inc. ("Nasdaq") or a major stock exchange. The Company's Common Stock is not
listed on Nasdaq or on any securities exchange. The Company intends to apply to
have its Common Stock listed on Nasdaq, but there is no assurance that approval
will be received or, if received, that the Company will meet the requirements
for continued listing. If in the future the Company's Common Stock should fail
to qualify for listing on Nasdaq and, as a non-Nasdaq security, fail to maintain
a market price of $5.00 or more per share, broker's effecting transactions in
the Company's Common Stock could become subject to these additional disclosure
and record keeping requirements which could, in turn, adversely affect the
market for the Company's Common Stock.
Transactions with Affiliates. The Company has engaged in numerous
transactions with affiliates. See Item 7. "Certain Relationships and Related
Transactions". Since such transactions are not the result of "arms-length"
negotiations, there is a risk that their terms may not be as favorable to the
Company as could have been obtained through arms-length negotiations with
non-affiliated parties.
Item 1(c)(ii) Status of new products announced
The Company's oral insulin formulation is the only product as to which it
has made any public announcement. Information concerning the status of this
product is set forth above in Item 1(c)(i), "Principal Products and Services -
Oral Insulin Research and Development".
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Item 1(c)(iii) Sources and availability of raw materials
With the exception of insulin, all of the products required to make the
Company's oral insulin formulation are non-proprietary and in plentiful supply.
The propellant used in the Company's metered dose applicator is a proprietary
product, but is available from several suppliers and, in the quantities which
the Company requires, the Company does not anticipate any supply difficulties.
With respect to insulin, there are limited sources of supply. Eli Lilly &
Company and Novo Nordisk A/S together produce approximately 90% to 95% of the
world insulin supply, and are the only sources of a fully synthetic human
recombinant insulin that is approved for sale in the United States. The only
other Company which has a significant share of the world insulin market is
Hoescht Marion Roussel ("HMR"), which has approximately 40% of the German
market, and limited sales elsewhere, but presently does not have an insulin
product that is approved for sale in the United States.
At the present time, the Company is using insulin obtained from retail
supply sources. The Company also has received limited quantities of insulin from
certain insulin producers for use in clinical studies and for other
non-commercial purposes. In order to obtain wide distribution of its oral
insulin product, however, the Company will be required to secure a direct supply
of insulin in commercial quantities. The Company has discussed insulin supply
with Lilly and Novo Nordisk, as well as HMR and other pharmaceutical companies
which do not now have a significant share of the world insulin market or an
insulin product that is approved for sale in the United States. The Company does
not now have a supply agreement for commercial quantities of insulin, however,
and inability to obtain an adequate supply of insulin would severely and
adversely affect the Company's prospects.
Item 1(c)(iv) Patents, trademarks, licenses, etc.
At present, the Company holds two US patent applications which cover its
core large molecule drug delivery technology, one of which has been allowed and
the other of which is pending. The Company has five other patent applications
pending, two of which are pending only in Canada. The Company expects to file
additional patent applications in the next several months which will relate to
its core technology and the metered dose applicator used to administer its oral
insulin formulation. All of the Company's patents are the result of original
research and discoveries by Pankaj Modi, the Company's Vice President, Research
and Development. See Item 5, "Directors and Executive Officers" below.
In October 1996, the Company entered into a Consulting Agreement with Dr.
Modi pursuant to which, among other things, Dr. Modi assigned to the Company his
entire right, title and interest in and to all inventions, ideas, designs and
discoveries made by him during the term of such Agreements which relate in any
manner to the development, manufacturing, marketing, distribution and sale of
generic drug products, including, without limitation, controlled release drugs,
topical insulin, intra-nasal insulin and liposome creams. Concurrently with
execution of this Consulting Agreement, Dr. Modi and the Company entered into an
Assignment and Assumption Agreement pursuant to which Dr. Modi assigned to the
Company his interests in and to specific drug delivery systems, controlled
release drug delivery systems and technology patents
invented/discovered/conceived by Dr. Modi prior to the execution of the
Agreement, including all of his interests in three patents (the "Centrum
Patents") covering oral and intranasal delivery of proteinic drugs in liquid
formulations, biodegradable polymer microspheres and controlled release of drugs
or hormones from biodegradable polymer microspheres which previously had been
assigned to Centrum Biotechnologies, Inc., a Canadian company which at that time
was 50% owned by Dr. Modi. In consideration for his assignment, Dr. Modi
received a portion of the shares of Generex Pharmaceuticals, Inc. common stock
which were received by the founders of that corporation. These shares
subsequently were converted into 1,100,000 shares of the Company's Common Stock.
In addition, Generex Pharmaceuticals, Inc. agreed to reimburse to Dr. Modi
approximately $100,000 for expenses incurred by him in connection with his
research activities prior to October 1, 1996. Pursuant to the Assignment and
Assumption Agreement, Generex Pharmaceuticals, Inc. has since acquired Dr.
Modi's interest in Centrum Biotechnologies for no additional consideration.
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Dr. Modi's research activities since October 1996, with the Company's
financial support, have developed formulations and procedures including the
Company's oral insulin formulation, which, the Company believes, are outside the
scope of the patents, etc., assigned to it by Dr. Modi and which, in particular,
are not covered by and would not infringe any of the Centrum Patents. At this
time, however, the Company has not obtained any formal legal opinions that Dr.
Modi's subsequent inventions and discoveries do not infringe any of the Centrum
Patents which, as indicated above, are only 50% owned by the Company. At this
time, there can be no assurance that the Company's present oral drug delivery
technology for insulin and other drug delivery technology does not infringe one
or more of the Centrum Patents.
The patent positions of biotechnology and pharmaceutical companies,
including the Company, are highly uncertain and involve complex legal and
factual questions. There is no assurance that patents will issue from the patent
applications filed by the Company or that the scope of any claims granted in any
patent will provide proprietary protection or a competitive advantage to the
Company. Nor can there be any assurance that the validity or enforceability of
patents issued or licensed to the Company will not be challenged by others or
that, if challenged, a court will find the patents to be valid and enforceable.
In addition, there is no assurance that competitors will not be able to
circumvent any patents issued or licensed to the Company. In the United States,
patent applications are maintained in secrecy until patents issue, and
publications in the scientific and patent literature lag behind actual
discoveries. As a result, the Company cannot be certain that its scientists were
the first to make inventions covered by its patents and patent applications. If
a third party has also filed a patent application for the Company's inventions,
the Company may have to participate in interference proceedings declared by the
United States Patent and Trademark Office to determine priority of invention.
Moreover, patent interference proceedings would be lengthy and expensive, even
if the outcome is favorable to the Company. While no patent that could be
potentially infringed by manufacture, use or sale of the Company's product
candidates in the fields of Type 1 and Type 2 diabetes has come to the attention
of the Company, the Company's product candidates are still in the development
stage, and neither its formulations nor its method of manufacture have been
finalized.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. The Company seeks to protect
trade secrets and proprietary knowledge, in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants, or independent individuals or
entities develop inventions or processes independently that may be applicable to
unpatented proprietary information, disputes may arise about ownership of
proprietary rights to those inventions and processes which would require
protracted and costly litigation to resolve. Failure by the Company to obtain or
maintain patent and trade secret protection, for any reason, would have a
material adverse effect on the Company. See Item 1(c)(i), "Risk Factors -
Dependence Upon Proprietary Technology".
The Company has applied to register the trade names Oralgen(TM) in the
United States, Canada, and other jurisdictions, and the name Oralin(TM) in
Canada and other jurisdictions.
Item 1(c)(v) Seasonality
There is not now, and the Company does not expect there to be in the
future, a material seasonal aspect to its business.
Item 1(c)(vi) Industry practices relative to working capital items
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At this point in its development, there are no industry specific working
capital practices relevant to the Company.
Item 1(c)(vii) Major customers
The Company has not yet commenced commercial operation. It anticipates
that, in the future, its customers will consist principally of a limited number
of companies which it licenses to use its technology and/or distribute its
products.
Item 1(c)(viii) Backlog
The Company has no backlog of sales.
Item 1(c)(ix) Government Contracts
The Company is not now a party to any government contracts, nor has it sold
any product in the past pursuant to any government contracts.
Item 1(c)(x) Competition
Biotechnology and pharmaceutical companies, academic institutions,
governmental agencies, and other public and private research organizations also
conduct research, seek patent protection, and establish collaborative
arrangements with commercial entities for product development and marketing.
Products resulting from these activities may compete directly with any that the
Company develops. These companies and institutions also compete with the Company
in recruiting and retaining highly qualified scientific personnel. Many
competitors and potential competitors have substantially greater scientific
research and product development capabilities, as well as greater financial,
marketing and human resources, than the Company.
With respect to the Company's oral insulin formulation, numerous
pharmaceutical and biotechnology companies are engaged in various stages of
research, development and testing of alternatives to insulin therapy, as well as
new means of administering insulin, including the following:
Inhale Therapeutics has developed a technology utilizing a fine powder form
of insulin that is administered using a proprietary inhalation device and
absorbed in the deep lungs. Inhale has announced successful results using its
inhalation techniques in Phase II clinical trials with Type 1 and Type 2
diabetics, and in November of this year announced that it had "kicked off" Phase
III trials with an investigators meeting, which is to be followed with
recruitment, enrollment and dosing of patients. The announcement did not
disclose when actual dosing of patients was expected to begin.
In November 1998, Pfizer, Inc., which has a collaboration agreement with
Inhale, announced that it had entered into worldwide agreements to co-develop
and co-promote the use of inhaled insulin with Hoechst Marion Roussel, a leading
pharmaceutical-based health care company which has been making insulin for
approximately 75 years, and is estimated to have a 40% share of the German
insulin market.
Cortecs International announced in late 1997 the results of two insulin
studies with its proprietary product, "Macrulin", in an oral insulin capsule
form and with a liquid version administered with a tube into the stomach.
Cortecs claimed that these studies showed a significant lowering of glucose
levels in Type 2 diabetic patients, and announced its intention to conduct
multiple dose studies during 1998.
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Aradigm Corporation has announced a joint development agreement with Novo
Nordisk A/S to jointly develop a pulmonary delivery system to administer insulin
by inhalation, with the expectation that Phase II testing would begin in the
second half of 1998. The delivery system is expected to be based on proprietary
technologies to create aerosols from disposable unit-dose drug formulations and
an "electronic inhaler" to deliver locally to the lung or systemically through
the lung. Novo Nordisk is one of the two leading manufacturers of insulin in the
world, the other being Eli Lilly & Company.
Dura Pharmaceuticals and Eli Lilly & Company announced in September 1998
that they are collaborating to develop pulmonary delivery technology for insulin
products based upon proprietary technology of Dura for the pulmonary delivery of
peptides and proteins.
Endorex Corporation has announced receipt of a patent for a technology for
the oral administration of vaccines which it licenses from the Massachusetts
Institute of Technology. The company said that the patent covered a vaccine
delivery system that utilizes polymerized liposomes which it is developing
through a joint venture with Elan Pharmaceutical Technologies, a company which
specializes in drug delivery technologies and systems.
In addition to competitive 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 include the
following:
Glucophage(R) is a proprietary product of Bristol-Myers Squibb Company
that is used to improve glycemic control in diabetic subjects without increasing
serum insulin levels. It is believed to work, at least in part, by reducing
glucose output from the liver.
Arcabose(R) is a proprietary product sold in the United States by
Bayer Corporation. The product is sold in Europe under the tradename
Glucobay(TM). Acarbose(R) reduces blood glucose levels primarily after meals by
slowing down the digestion of carbohydrates and lengthening the time it takes
for carbohydrates to convert to glucose.
Rezulin(R) is a proprietary product sold by Warner Lambert for use as
monotherapy or combination therapy for Type 2 diabetes. The product is believed
to work in part by increasing the body's sensitivity to insulin.
Prandin(TM) is a proprietary product sold by Novo Nordisk and
Schering-Plough Corporation which has been approved by the FDA for monotherapy
and adjunctive therapy for certain diabetic patients. The product is believed to
act via calcium channels to stimulate insulin secretion.
Virtually all of the Company's competitors have greater research and
development capabilities, experience, manufacturing, marketing, sales, financial
and managerial resources than the Company now has. The Company's competitors may
succeed in developing competing technologies, in obtaining regulatory approval
for products more rapidly than the Company and in gaining greater market
acceptance of their products than the Company's products. There can be no
assurance that developments by others will not render some or all of the
Company's proposed products or technologies uncompetitive or obsolete, which
could have a material adverse effect on the Company.
The Company expects that competition among products approved for sale to
treat diabetes will be based, among other things, on product safety, efficacy,
ease of use, availability, price, marketing and distribution. The Company
believes that the principal advantage of its
18
<PAGE>
oral insulin formulation will be ease of use, resulting in greater patient
compliance. Possible negatives at this time are cost and availability.
Item 1(c)(xi) Research and development expenditures
In the period from inception (November 2, 1995) through the fiscal year
ended July 31, 1998, the Company's expenditures on research and development (all
of which were Company sponsored) were as follows: Years ended July 31, 1998 --
$876,404; and 1997 -- $727,479; period from inception (November 2, 1995 through
July 31, 1996 -- $67,142.
Item 1(c)(xii) Environmental compliance
The Company's manufacturing, research and development activities involve,
or may involve, the controlled use of hazardous materials and chemicals. The
Company believes that its procedures for handling and disposing of such
materials comply with applicable governmental regulations. Risk of accidental
contamination or injury from these materials cannot be eliminated. If such an
accident occurs, the Company could be held liable for resulting damages, which
could be material to the Company's financial condition and business. The Company
will include an environmental assessment in the NDA in accordance with FDA
regulations. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens, and the handling of biohazardous
materials. Additional laws and regulations affecting the Company may be adopted
in the future. Any violation of, and the cost of compliance with, these laws and
regulations could materially and adversely affect the Company.
The Company does not believe that compliance with United States, Canadian
and/or other environmental laws will have a material effect on the Company or
the Company's capital or other expenditures in the current fiscal year or in the
foreseeable future.
Item 1(c)(xiii) Employees
As of February 12, 1999, the Company had 18 full-time employees, of which
nine employees are executive and administrative, three are engaged in research
and development activities, and six are employed in manufacturing and/or
manufacturing supervision. None of the Company's employees is covered by a
collective bargaining agreement, and the Company believes its employee relations
are good.
Item 1(d) Revenues, etc. by Geographic Region
Through the end of its last fiscal year, the Company had not received any
revenues from operations. Substantially all of its assets were located and
deployed in Canada, where the Company's principal operating subsidiary is
located.
19
<PAGE>
Item 2. FINANCIAL INFORMATION
Item 2(a) Selected Financial Data
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth below as of and for the fiscal years
ended July 31, 1996 and 1997, for the period from inception (November 2, 1995)
to July 31, 1996, and cumulative from inception (November 2, 1995) to July 31,
1998, has been derived from the audited consolidated financial statements of the
Company. The results of operations set forth below are not necessarily
indicative of results to be expected for any future period. The information
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
of the Company, including the notes thereto, included elsewhere in this
Registration Statement.
<TABLE>
<CAPTION>
For the Cumulative
Period From
November 2, November 2,
For the Years Ended 1995 (Date 1995 (Date
July 31, of Inception) of Inception)
--------------------------- to July 31, to July 31,
1998 1997 1996 1998
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................................. $ -- $ -- $ -- $ --
Research and development expense ..................... 707,520 676,145 67,142 1,450,807
Research and development expense-related party ....... 168,884 51,334 -- 220,218
General and administration expense ................... 3,359,581 628,064 296,281 4,283,926
General and administrative expense-related party ..... 314,328 -- -- 314,328
----------- ----------- --------- -----------
Total operating expenses ............................. 4,550,313 1,355,543 363,423 6,269,279
----------- ----------- --------- -----------
Other expense - interest ............................. 63,291 -- -- 63,291
----------- ----------- --------- -----------
Net loss ............................................. (4,613,604) (1,355,543) (363,423) (6,332,570)
Basic and diluted net loss per common share .......... (.46) (.25) (.40) N/A
Weighted average number of common shares
outstanding .......................................... 10,078,875 5,512,840 903,972 N/A
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
July 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital ...................................... $ 873,215 $ 289,839
Total assets ......................................... 5,455,708 3,672,775
Total long-term debt (less current maturities) ....... 912,817 --
Total stockholders' equity ........................... 2,642,298 3,448,836
</TABLE>
20
<PAGE>
Item 2(b) Management's Discussion and Analysis of
Financial Condition and Results of Operations
When used in this discussion, the words "expect(s)", "feels", "believe(s)",
"will", "may", "anticipate(s)" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from the
possible results described in such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, and are urged to
carefully review and consider the various disclosures elsewhere in this
Prospectus which discuss factors which affect the Company's business, including
the discussion under the caption "Risk Factors".
General
The Company was incorporated in 1983 as Green Mt. P.S., Inc. In January
1998, the Company acquired all of the outstanding capital stock of Generex
Pharmaceuticals, Inc. ("Generex Pharmaceuticals"), a Canadian corporation formed
in November 1995 to engage in pharmaceutical and biotechnological research and
other activities, and changed its corporate name to Generex Biotechnology
Corporation. The acquisition was effected by the merger of GBT Delaware, Inc. a
recently formed Delaware corporation which in October 1997 had acquired all of
the outstanding capital stock of Generex Pharmaceuticals, with a wholly-owned
subsidiary of the Company which had been formed for this transaction (the
"Reverse Acquisition"). As a result of the Reverse Acquisition, the former
shareholders of Generex Pharmaceuticals acquired a majority of the Company's
outstanding capital stock and, for accounting purposes, GBT Delaware, Inc. was
treated as the acquiring corporation. Thus, the historical financial
statements of GBT Delaware, Inc., which, in essence, represented the historical
financial statements of Generex Pharmaceuticals prior to the Reverse Acquisition
date, are deemed to be the historical financial statements of the Company.
Results of Operations
Years ended July 31, 1998, 1997 and 1996
The sole business of the Company is research, evaluation, development and
commercialization of proprietary drug delivery technologies. The Company has
been in the development stage since its inception and has not generated any
operating revenues to date. Through July 31, 1998, it has accumulated
substantial operating deficit as a result of research, development and general
and administrative expenses incurred. These expenses have increased year to
year, and increased substantially in the fiscal year ended July 31, 1998,
primarily because of large increases in general and administrative expenses
($3,673,909 in the year ended July 31, 1998, versus $628,064 in the prior year).
The increase in general and administrative expenses in the fiscal year
ended July 31, 1998, was attributable primarily to increases in salaries
($570,230 in the year ended July 31, 1998, versus $77,806 in the prior fiscal
year), professional fees ($527,941 versus $98,078), consulting services paid for
through the issuance of securities valued at $110,000, versus zero in the prior
year, and settlement of a liquidated damage claim by a former lender ($738,000)
based upon the Company's failure to become a "public company" prior to December
7, 1997, also paid through the issuance of securities. Certain of these expenses
were nonrecurring expenses related to the Company becoming a public company and
to financing transactions. The potential decrease in general and administrative
expenses in the current fiscal year, however, is expected to be offset by an
increase in personnel expense and in research and development expenses,
primarily in connection with clinical trials of the Company's oral insulin
formulation in the United States and Canada. The Company anticipates research,
development and administrative expenses approximately in the range of $1.5 to $2
million in the second half of its current fiscal year.
21
<PAGE>
The Company does not expect to receive significant revenue from product
sales in the current fiscal year, but may receive licensing income, or income in
the nature of licensing income (e.g., "signing bonuses" or "advance royalties"),
in connection with its entering into marketing and distribution agreements.
Income from such sources, if received, would, in all likelihood, be material
relative to the Company's total cash needs when received. The Company does not,
however, have any commitments for such payments at the present time.
Liquidity and Capital Resources
The Company has financed its operations primarily through private
placements of equity securities.
Prior to its acquisition by the Company in January 1998, Generex
Pharmaceuticals raised approximately $5.2 million (net of financing costs and
foreign currency translation adjustments) through the sale of shares of its
common stock which, in connection with the Reverse Acquisition, were converted
into 9,234,118 shares of the Company's Common Stock. Between the Reverse
Acquisition date and July 31, 1998, the Company raised approximately $2.7
million of additional equity capital (after foreign currency translation
adjustment and excluding the value of Common Stock and Warrants issued in
payment for services) through the sale for cash of 1,407,253 shares of Common
Stock and warrants to purchase 993,253 shares. An additional 224,901 shares of
Common Stock and warrants to purchase 660,172 shares of Common Stock were issued
for services.
The Company's projected capital and operating costs in the current fiscal
year (August 1, 1998 through July 31, 1999) exceeded its working capital at the
beginning of the year by approximately $3.1 million. That difference was
satisfied through additional equity capital received in the current fiscal year.
Since July 31, 1998, through December 9, 1998, the Company received
approximately $4 million in additional equity capital, net of cash expenses
incurred in connection with such financing transactions, for which it has
issued, or is committed to issue, a total of 1,107,353 shares of Common Stock.
These totals do not include 61,801 shares issued in payment for services valued
at $217,897, or 180,000 shares issued in settlement of an outstanding claim and
valued at $738,000.
The Company's cash on hand is sufficient to fund operations contemplated in
the remainder of the current fiscal year. The bulk of the Company's cash needs
beyond the current fiscal year are expected to be met from licensing income,
contributions of marketing partners to clinical program costs and/or equity
investment. The Company is in discussions with numerous potential financing
sources, including investment banking firms and individual and institutional
investors relative to additional equity capital, and major pharmaceutical
companies concerning equity investments, marketing and other collaboration
agreements that would, if entered into by the Company, result in the receipt of
license fees, advance royalties or other "up front" payments, and/or
contribution to the costs of conducting clinical trials. However, the Company
has no commitments for financing of any kind at this time.
Implementation of the Company's business plan beyond the current fiscal
year will require the availability of sufficient funds from the sources
described above. If funds are not available from these sources, or from
alternative sources, the Company will be required to "scale back" or otherwise
revise its business plan. Any significant scale back of operations or
modification of the Company's business plan required due to a lack of funding
could be expected to materially and adversely affect the Company's prospects.
Transactions with Affiliates
A portion of the Company's administrative expenses have resulted from
transactions with affiliated persons. A number of the Company's capital
transactions also have involved affiliated persons. Although these transactions
were not the result of "arms-length" negotiations, the Company does not believe
that this fact had a material impact on the Company's results of operations or
financial position. See Item 1(a) - Risk Factors: "Transactions with Affiliates"
and Item 7. "Certain Relationships and Related Transactions".
Year 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. Management of the Company
has completed its assessment of year 2000 issues and believes that the
consequences of such issues will not have a material effect on the Company's
business, results of operations or financial condition, without taking into
account any efforts by the Company to avoid such consequences.
22
<PAGE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. SFAS
No. 1300 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 did not have a material impact on the Company's
financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and selected information in the notes thereto. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. SFAS No. 131 need not be applied to interim financial
statements in the year of adoption, but comparative information is required in
the second year of application. The Company believes that the adoption of SFAS
No. 131 will not have a material impact on the Company's financial reporting.
In 1998, the FASB issued Statement of Financial Accounting Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 modifies the accounting for derivative and hedging
activities and is effective for fiscal years beginning after December 15, 1999.
The Company believes that the adoption of SFAS No. 133 will not have a material
impact on the Company's financial reporting.
In 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use". The Company
believes that the adoption of SOP 98-1 will not have a material impact on the
Company's financial reporting.
Item 2(c) Quantitative and Qualitative Disclosures About
Financial Derivative and Other Market Risks
The Company employs no "hedging" strategies at the present time, and all of
its cash deposits are denominated in US dollars. The only current risk that the
Company faces is appreciation in the Canadian dollar relative to the US dollar,
since most of its operations are now conducted in Canada.
23
<PAGE>
Item 3. PROPERTIES
The Company's executive and principal administrative offices occupy
approximately 6,100 square feet of office space in the Business Centre at 33
Harbour Square in downtown Toronto, Ontario, Canada. The Business Centre, which
comprises approximately 9,100 square feet of usable space, is owned by the
Company. The space in the Centre that is not used by the Company is leased to
third parties, although, under the terms upon which it acquired this space in
December 1997, the former owner of the property retained the rental income from
third party leases through 1998.
The Company also has equipped and commenced production at a pilot
manufacturing facility for its oral insulin formulation. This facility, which is
owned by the Company, is located in Toronto, and consists of approximately 3,600
square feet of laboratory, manufacturing and storage place. At the present time,
the Company has equipped and outfitted only approximately one-third of the
usable space. As equipped, on a single shift, the facility has the capacity to
prepare the oral insulin formulation for, and to fill and deliver, approximately
500 of the Company's metered dosage applicators per day. The Company believes
that it can increase its single shift production capacity at this facility at
modest cost (approximately $300,000) to approximately 1,000 applicators per day
by installing a second production line.
The Company also owns a 11,625 square foot building in Brampton, Ontario,
approximately 25 miles outside Toronto, a second 13,500 square foot building in
Mississauga, Ontario, about 20 miles from downtown Toronto, and a commercial
building site in Manta, Ecuador. The Company has begun the preliminary work
necessary to equip and start up the Brampton and Mississauga facilities to
produce its oral insulin formulation and other products as they are developed.
The building site in Ecuador is located in a "free trade" zone and the Company
intends to establish an 18,000 square foot manufacturing facility at this
location to serve the South American market. That project too is in the
preliminary stage. The Company believes that, if required to do so, it will be
able to place the Brampton facility "on line" by mid-1999, and the Mississauga
and Manta, Ecuador facilities on line by mid-2000. At this time, the Company
does not expect a need for manufacturing capabilities beyond its pilot facility
until the year 2000.
The Company's executive and administrative offices are encumbered by a
purchase money mortgage in the original amount of $800,000 CAD, which is payable
in March 2000, with interest only payable until then. The Company's pilot
manufacturing facility is encumbered by a purchase money mortgage in the amount
of $125,000 CAD, due on September 11, 1999, and payable interest only until
then.
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The Company had 13,341,586 shares of Common Stock outstanding, or sold and
pending issuance, at February 12, 1999, and 1,000 shares of Special Voting
Rights Preferred Stock ("SVR Preferred"). The following table sets forth certain
information regarding the ownership of the Company's Common Stock and SVR
Preferred as of such date, by (i) each of the Company's executive officers and
directors, (ii) each other person known to the Company to be the beneficial
owner of more than 5% of such shares of Common Stock, and (iii) all executive
officers and directors as a group.
24
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Name and Address Beneficial Ownership(1)(2)
- ----------------------------------------------------------------------------------------------------------------------
Number of Shares -- Percent Number of Percent
Common Stock (1) of Total Shares -- SVR Preferred of Total
- ------------------------------------------ ---------------------- ---------- ----------------------- ----------
(i) Directors and Executive Officers
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
<S> <C> <C> <C> <C>
E. Mark Perri 4,353,417(3) 32.6% -0- -0-
33 Harbour Square, Ste. 3502
Toronto, Ontario
Canada M5J 2G2
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
Anna E. Gluskin 1,188,000(4) 8.9% -0- -0
33 Harbour Square, Ste. 2409
Toronto, Ontario
Canada M5J 2G2
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
Rose C. Perri 1,188,000(4) 8.9% -0- -0-
33 Harbour Square, Ste. 2409
Toronto, Ontario
Canada M5J 2G2
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
Pankaj Modi, Ph.D.(3) 1,100,000(6) 8.2% 1,000 100%
1928 Main Street West, Ste. 608
Hamilton, Ontario
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
Officers and directors as a group 5,451,417 40.9% 1,000 100%
(4 persons)
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
(ii) Other Beneficial Owners
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
EBI, Inc. In Trust 1,520,093(6) 11.4% -0- -0-
c/o Miller & Simons
First Floor, Butterfield Square
P.O. Box 260
Providencials
Turks and Calcos Islands, BWI
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
GHI, Inc. In Trust 2,500,000(7) 18.7% -0- -0-
c/o Miller & Simons
First Floor, Butterfield Square
P.O. Box 260
Providencials
Turks and Calcos Islands, BWI
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
Thompson Kernaghan 1,240,000(8) 8.9% -0- -0-
& Co., Ltd.
365 Bay Street, 10th Floor
Toronto, Ontario
Canada M5H 2V2
- ------------------------------------------ ---------------------- ---------- ---------------------- ----------
</TABLE>
25
<PAGE>
- -------------------------
(1) Unless otherwise indicated, this column reflects shares (a) owned
beneficially and of record, and/or (b) as to which the named party has
sole voting power and investment power. This column also includes
shares issuable upon the exercise of options, warrants or similar
rights which are exercisable within 60 days from December 9, 1998.
(2) In computing the percentage of shares beneficially owned by any person,
shares which the person has the right to acquire within 60 days from
February 12, 1999, upon the exercise of options or other rights held by
such person are deemed outstanding. Such shares are not deemed to be
outstanding in computing the percentage ownership of any other person.
(3) Includes 25,993 shares owned beneficially and of record by Mr. Perri,
and a total of 1,519,324 shares beneficially owned by Mr. Perri but
owned of record by Golden Bull Estates, Ltd. (61,225 shares), EBI, Inc.
(1,089,993 shares), GHI, Inc. (124,000 shares), Time Release Corp.
(22,678 shares) and Goldenway Dynasty Inc. (221,428 shares). Also
includes 2,378,000 shares owned of record by GHI, Inc. and 430,100
shares owned of record by EBI, Inc. which Mr. Perri may be deemed to
own beneficially solely by reason of his power to vote shares which are
owned beneficially by other shareholders by reason of their ownership
of the economic benefits of ownership. See Notes 7 and 8 below.
(4) These shares are owned of record by GHI, Inc. See Note 7 below.
(5) Dr. Modi also owns all of the outstanding shares of the Company's SVR
Preferred Stock. See "Description of Securities - SVR Preferred Stock".
(6) These shares are beneficially owned by Mark Perri (1,089,993 shares)
and certain non-affiliates of the Company. Mr. Perri has the sole power
to vote the shares, but not investment power over shares that he does
not beneficially own.
(7) These shares are beneficially owned by Mark Perri (124,000 shares),
Anna Gluskin (1,188,000 shares) and Rose C. Perri (1,188,000 shares).
Mr. Perri has the sole power to vote the shares, but not investment
power over shares beneficially owned by Ms. Gluskin and Ms. Perri.
(8) Thompson Kernaghan & Co., Ltd., is a Canadian broker dealer and holds
these shares for the benefit of certain partners, officers and clients
of the firm, none of whom own beneficially 5% or more of the Company's
Common Stock. Includes 620,000 shares issuable upon exercise of the
Company's Series A Redeemable Common Stock Purchase Warrants owned of
record by Thompson Kernaghan & Co., Ltd.
26
<PAGE>
Item 5. DIRECTORS AND EXECUTIVE OFFICERS
The current executive officers and directors of the Company are as follows:
Name Age Position
- ---- --- --------
E. Mark Perri 37 Chairman, Chief Financial Officer and a Director
Anna E. Gluskin 47 President, Chief Executive Officer and a Director
Pankaj Modi, Ph.D. 45 Vice President of Research & Development and a
Director
Rose C. Perri 31 Chief Operating Officer, Secretary, Treasurer
and a Director
Mark Perri and Rose Perri are siblings. There are no other family
relationships among the Company's officers and directors. Certain biographical
information concerning the Company's executive officers follows:
E. Mark Perri - Mr. Perri has served as the Company's Chairman and Chief
Financial Officer since its acquisition of Generex Pharmaceuticals, Inc. ("GPI")
in January 1998, and has held comparable positions with GPI since its
organization in November 1995. Mr. Perri devotes approximately 90% of his time
to his duties as Chairman. The remainder of his time is devoted to private
business interests that are majority owned by Mr. Perri, his sister Rose, who
also is an officer and director of the Company, other members of the Perri
family and, in some cases, Anna Gluskin, who is President, Chief Executive
Officer and director of the Company. These interests include Golden Bull
Estates, Ltd. and Perri Rentals which own, lease and/or operate commercial and
residential real estate in the Toronto area, Angara Group Ltd., which is engaged
in the manufacture and sale of chemicals, generic drugs and other products in
Central America and republics of the former Soviet Union, and Perri
International Inc. which holds interests in biotechnology companies in Europe.
Mr. Perri also has minority interests in a number of private companies which do
not require a significant investment of his time. Between February 1994 and the
organization of GPI in November 1995, Mr. Perri devoted 100% of his time to the
investments and business interests described above, as well as to
pre-incorporation activities on behalf of GPI.
Mr. Perri holds a Bachelor of Arts degree from the University of Waterloo
and a University of Toronto Masters (MLS) designation.
Anna E. Gluskin - Ms. Guskin has served as the Company's President and
Chief Executive Officer since its acquisition of GPI, and prior to that time
held comparable positions with GPI. Between February 1994 and the organization
of GPI in November 1995, Ms. Gluskin was engaged in the real estate business in
the Toronto area as an independent real estate broker, and in pre-incorporation
activities on behalf of GPI. Since August 1997, Ms. Gluskin has served as
Chairman of Interlock Consolidated, Inc., an inactive, non-trading Canadian
public company that previously had engaged in the sale of prefabricated housing.
Ms. Gluskin is also a minority shareholder of Golden Bull Estates, Ltd., and
Angara Group, Ltd., private companies that are majority-owned by Mark and Rose
Perri.
Ms. Gluskin holds a Masters degree in Microbiology and Genetics from Moscow
State University.
Pankaj Modi, Ph.D. - Dr. Modi has served as a consultant to GPI and as its
Director - Insulin Research, since October 1996, and as Vice President of
Research and development and a director of the Company since its acquisition of
GPI in January 1998. Prior to joining GPI, between February 1994 and October
1996, Dr. Modi was engaged in independent research and was employed as a senior
research associate at McMaster University.
27
<PAGE>
Dr. Modi was educated at the University of Bombay in India, where he
received his Bachelor of Science degree in Biology, Physics and Chemistry in
1975. His post-graduate education is extensive and includes a Master of Science
degree in Chemical Engineering (Brooklyn Polytechnic University, 1976); a Master
of Science degree in Polymeric Materials/Biomedical Sciences (Brooklyn
Polytechnic University, 1976); a Master of Business Administration degree
(University of Dallas, 1978) and a Doctorate in Biomedical Sciences/Biopolymeric
Materials (University of Toronto, 1992).
Rose C. Perri - Ms. Perri has served as the Company's Secretary and
Treasurer since January 1998, and as its Chief Operating Officer since August
1998. She has served as Secretary of GPI from its organization. Ms. Perri
devotes a portion of her time (less than 10%) to business interests controlled
by the Perri family, principally Perri Rentals, Inc. Between February 1994 and
the organization of GPI in November 1995, Ms. Perri devoted 100% of her time to
the investments and business interests described above, as well as to
pre-incorporation activities on behalf of GPI.
Ms. Perri graduated from the University of Toronto in 1990 with a Bachelor
of Arts degree and completed the Business Administration Studies program at York
University in 1993.
Other Key Employees and Consultants
Slava Jarnitskii is the Financial Controller of the Company. He has been
employed by the Company since January 1998, and by Generex Pharmaceuticals,
Inc., since September 1996. Between February 1994 and September 1996, Mr.
Jarnitskii was engaged in graduate studies at York University and received an
MBA degree in September 1996.
Scientific Advisory Board and Consultants
The Company has established a Scientific Advisory Board to provide it with
ongoing advise and counsel regarding research direction, product development,
analysis of data and general counseling. The Company consults with individual
members of this Board on a non-scheduled basis. Brief descriptions of the
backgrounds of the Advisory Board members are set forth below.
Jaime Guevara-Aguirre, M.D., Institute of Endocrinology, Metabolism and
Reproduction, Quito, Ecuador. Dr. Jaime Guevara-Aguirre founded the Institute of
Endocrinology, Metabolism and reproduction IEMIR in Quito, Ecuador in 1987 and
continues to be a director. He has been involved extensively in medical research
in such areas as growth hormone insensitivity, body and bone composition and
insulin-like growth factor therapy.
Dr. Guevara was a professor of Endocrinology for the Department of Internal
Medicine, Central University, Quito, Ecuador between 1980-1994. He also serves
as a director of Centro Medico de Neuro-Endocrinologia.
Edward C. Keystone, M.D., F.R.C.P.(C), Chief, Rheumatic Disease Unit,
Wellesley Hospital & Director, Division of Advanced Therapeutic Studies, The
Toronto Wellesley Arthritis & Immune Disorder Research Centre, Toronto Hospital.
Dr. Keystone is a certified specialist in both Internal Medicine and
Rheumatology. Since 1992, he has served as the Director, Division of
Rheumatology at the Wellesley Central Hospital in Toronto, Canada, In 1991, he
became the Director of Research, Department of Medicine and was named the
Assistant Chief of Medicine, positions he continues to hold at the hospital. He
is a full professor in the Department of Medicine at the University of Toronto.
Dr. Keystone is actively involved in conducting clinical research trials in
rheumatoid arthritis with an emphasis on biological therapies. His research
laboratory interest is in the immunopathologic processes contributing to the
perpetuation of rheumatoid arthritis.
Bhushan M. Kapur, Ph.D., C.Chem., F.R.S.C., F.A.C.B., F.C.A.C.B., Assistant
Professor, Department of Laboratory Medicine and Pathology, University of
Toronto. Dr. Kapur received his doctorate in organic chemistry from Basel
University, Switzerland. He has been on the Faculty of Medicine at the
University of Toronto since 1978.
28
<PAGE>
Dr. Kapur specializes in clinical biochemistry with particular emphasis on
toxicology. He serves as a consulting toxicologist to the Hospital for Sick
Children, Division of Pharmacology and Toxicology, in Toronto, and is the
President of CliniTox, Inc., a company which provides consulting services in
clinical biochemistry and toxicology.
Sigmund Krajden, M.D., C.M., F.R.C.P.(C), Department of Medicine &
Laboratory Medicine, St. Joseph's Health Centre, Toronto, Canada. Dr. Krajden
received his medical degree in 1971 from McGill University, Montreal, Quebec and
has trained in Quebec, Ontario and California. He specializes in the field of
microbiology and infectious diseases and is currently the Director of the
Medical Microbiology Department and Chief of Infectious Diseases at St. Joseph's
Health Centre in Toronto, Canada. In addition, Dr. Krajden is an Assistant
Professor at the University of Toronto.
Arthur Krosnick, M.D., F.A.C.P., C.D.A., received his medical degree from
Temple University School of Medicine, following which he served a rotating
internship at Mercer Hospital, Trenton, New Jersey, and a three year residency
in Internal Medicine, with emphasis on diabetes, at the Graduate and
Presbyterian Hospitals of the University of Pennsylvania. Among his current
appointments, Dr. Krosnick serves as Research Director, Joslin Center for
Diabetes at St. Barnabas Hospital, Chairman of the New Jersey State Diabetes
Advisory Counsel and the Advisory Committee on Diabetes, New Jersey State
Department of Health, and Clinical Associate Professor, Department of
Occupational and Environmental Medicine, Robert Wood Johnson Medical School.
Dr. Krosnick is acting as the principal investigator for the Company's
initial Phase II clinical trials in the United States.
Pankaj Modi, Ph.D., Vice President, Research and Development and a Director
of the Company. See "Management - Executive Officers and Directors".
Kusiel Perlman, M.D., F.R.C.P.(C), Division of Endocrinology, Hospital for
Sick Children, Toronto, Canada. Dr. Perlman received his medical degree from the
University of Manitoba in 1972 and pursued post-graduate studies in the
Department of Pediatrics at the University of Manitoba, Case Western Reserve
University and the University of Toronto from 1973 to 1979. Presently, he is a
Project Director in the Research Institute at the Hospital for Sick Children in
Toronto. Concurrently, he is an Assistant Professor in the Division of
Endocrinology at both The Hospital for Sick Children and the Toronto Hospital
Corporation.
Dr. Perlman's association with The Hospital for Sick Children in Toronto
started in July 1978, where he received his training as a Clinical Fellow in
Endocrinology (Pediatrics) and as a Research Fellow (Pediatrics). In 1980, Dr.
Perlman was appointed as a Senior Research Associate and in 1988 became the
director of the hospital's Clinical Investigation Unit.
William Steinbrink, M.D., received his medical degree in 1974 from the
Pittsburgh School of Medicine, and received his graduate training at Harvard
Medical School, at Beth Israel Hospital in Boston, and at Western Pennsylvania
Hospital in Pittsburgh. Dr. Steinbrink currently is on staff at the Department
of Obstetrics and Gynecology at Harmot Medical Center and Saint Vincent Health
Center in Erie, Pennsylvania and with Bayside Inc., a private clinic in Erie,
Pennsylvania, specializing in obstetrics, gynecology and infertility. He is a
Fellow of the American College of Obstetrics and Gynecology.
Bernard Zinman, M.D.C.M., F.R.C.P.(C), F.A.C.P., Director of the Banting &
Best Diabetes Centre, University of Toronto, Toronto, Canada. Dr. Zinman is a
certified specialist in endocrinology and metabolism and is a Professor in the
Department of Medicine at the University of Toronto. Since 1991, he has served
as Head of the Division of Endocrinology and Metabolism at the Mount Sinai
Hospital and The
29
<PAGE>
Toronto Hospital in Toronto, Canada. Since 1993, Dr. Zinman has been the
Director of the Banting and Best Diabetes Centre and is a Senior Scientist at
The Samuel Lunefeld Research Institute.
Dr. Zinman is acting as the principal investigator for the Canadian
clinical trials of the Company's oral insulin formulation. Previously, he has
acted as the principal investigator of the University of Toronto Diabetes
Control and Complications Control Trial ("DCCT") Centre and headed the follow up
of EDIC (Epidemiology) of Diabetes Intervention and Complication Toronto Centre.
Between 1985 and 1994, he was Chair of the Treatment Committee (DCCT) for the
National Institute of Health, a member of the Professional Practice Committee
and Vice-Chair of the Exercise Council for the American Diabetes Association.
Corporate Governance Standards
The Company intends to apply to have its Common Stock approved for
quotation on The Nasdaq Stock Market, Inc. National Market System ("Nasdaq
NMS"). Issuers whose securities are quoted on the Nasdaq NMS are required to
comply with certain corporate governance standards, including a requirement that
at least two directors of the issuer be "independent" directors, and that the
issuer have an audit committee, a majority of the members of which are
"independent" directors. The Company does not have any independent directors at
the present time, but expects to add a minimum of two independent directors to
its Board of Directors within the next 60 days.
Limitation of Directors' Liability
The Company's Articles of Incorporation provide that no director of the
Company will be personally liable to the Company or any of its stockholders for
monetary damages arising from the director's breach of fiduciary duty as a
director. This limitation does not apply with respect to any action in which the
director would be liable under the Idaho Business Corporation Act for
authorizing illegal dividends, stock repurchase or redemptions. This limitation
also does not apply with respect to any liability in which the director (i)
intentionally harms the Company or its shareholders; (ii) violates the criminal
laws; or (iii) derives an improper personal benefit.
The Company also maintains directors and officers liability insurance which
provides coverage of $1 million per loss, and $1 million per policy year.
The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors and
officers.
30
<PAGE>
Item 6. EXECUTIVE COMPENSATION
Compensation of Executive Officers
Mark Perri, Rose Perri and Anna Gluskin are compensated indirectly by the
Company through a management services agreement of indefinite term between the
Company and The Great Tao, Inc., a management firm of which they are equal
owners. At the present time, their combined compensation through this
arrangement is $420,000 CAD per annum (approximately $277,500 US).
The following table sets forth information concerning compensation paid to
Anna Gluskin as President and Chief Executive Officer of the Company in the
fiscal year ended July 31, 1998. No officer received compensation in excess of
$100,000 in the fiscal year ended July 31, 1998. Mark Perri, Rose Perri and Anna
Gluskin have all received substantial economic and other benefits, however,
through non-interest bearing loans from the Company. See Item 7, "Certain
Relationships and Related Transactions" below.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ --------------------------------------
Awards Payouts
--------------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------- -------- -------------- -------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anna E. Gluskin, 1997 92,488(1) -0- (2) -0- -0- -0- -0-
Chief Executive
Officer
- ------------------- -------- -------------- -------- ------------ ------------ ------------ ------------ ------------
</TABLE>
(1) Based on the Canadian/US dollar exchange rate on July 31, 1998. Ms. Gluskin
was compensated for her services to the Company in the fiscal year ended
July 31, 1998, through The Great Tao, Inc., a management company of which
she is a one-third owner.
(2) Less than $50,000.
Other Compensation, Directors' Compensation
None of the Company's officers and directors received any options or stock
appreciation rights ("SARs") during the fiscal year ended July 31, 1998,
exercised any options or SARs during the year, or owned any options or SARs at
year end.
The Company has no long term incentive plans or defined benefit or
actuarial pension plans or the like in force.
31
<PAGE>
None of the Company's directors received compensation in the past fiscal
year for their services as directors.
Item 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was incorporated in 1983 as Green MT. P.S., Inc., and had been
inactive for a number of years prior to January 1998 when it acquired Generex
Pharmaceuticals, Inc. ("GPI") and changed its corporate name to "Generex
Biotechnology Corporation". In connection with that transaction, GPI's
historical shareholders acquired control of the Company, and the historical
shareholders of the Company retained approximately 11% of the Company's
outstanding capital stock.
Prior to the Company's acquisition of GPI in January 1998, GPI, which was
incorporated in November 1995, was a private company. Unless otherwise
indicated, the transactions described below occurred prior to the Company's
acquisition of GPI or pursuant to contractual arrangements entered into prior to
that time. The Company has adopted a policy requiring approval by stockholders
or by a majority of disinterested directors to approve transactions in which a
director of the Company has an interest apart from such director's interest in
the Company.
Real Estate Financing Transactions: In May 1997, EBI, Inc., a company
controlled by Mark Perri, acquired shares of Common Stock of GPI for $3 million
(CAD) which, based on the exchange rate then in effect, represented
approximately $2.1 million (US). These funds were restricted for use by GPI,
initially to acquire an insulin research facility and subsequently amended to
permit use to acquire properties used for manufacturing the Company's oral
insulin product and other proprietary drug delivery products, and related
testing, laboratory and administrative services. Under the terms of the
investment, GPI was required to lend these funds back to EBI, Inc. pending use
for such permitted purposes by GPI, and the entire amount was loaned back to EBI
and was outstanding at July 31, 1997. During the fiscal year ended July 31,
1998, a total of $2,491,835 CAD was repaid by EBI and applied to real estate
purchases by GPI and the Company, resulting in a balance due from EBI of
$508,165 CAD at July 31, 1998 (approximately $335,710 US based on the exchange
rate then in effect). These funds are due on demand by GPI, provided they are
used for the purchase and/or construction or equipping of oral insulin
manufacturing and testing facilities.
Real Estate Purchases: Two of the properties purchased by GPI with funds
repaid by EBI were purchased from Antonio Perri, Mark Perri's father. Mr. Perri
had owned these properties for more than two years prior to their sale to the
Company. The Company believes that the terms of these purchases (the Brampton
facility for $680,000 CAD and the Mississauga facility for $810,000 CAD) were at
least as favorable to the Company as could have been obtained from an unrelated
party through arms-length negotiations.
Occupancy of Executive Offices: Prior to December 17, 1997, the Company
occupied its executive offices at Harbour Square Business Center under an
Occupancy Agreement between GPI, Angara Equities, Inc. and 1097346 Ontario, Inc.
(the "Angara/1097346 lease") pursuant to which GPI paid Angara a monthly
occupancy fee of $4,880 CAD, which represents the rental and other charges
allocable to its space under Angara's lease for space, which included the
Company's offices, 1097346 Ontario, Inc., the owner of the space. Angara
Equities, Inc. is owned by Mark Perri, Rose Perri and Anna Gluskin, officers and
director of the Company, and the arrangement between Angara and GPI was a direct
"pass through" of costs from which Angara derived no direct economic benefit. At
the time the Angara/1097346 lease was executed in May 1996, 1097346 Ontario,
Inc. was owned by an unrelated party, and the terms of the Angara/1097346 lease
were negotiated at arms length.
On December 17, 1997, the Company acquired 100% of the outstanding capital
stock of 1097346 Ontario, Inc. from its prior owner for $661,769 US and the
Angara/1097346 lease was terminated.
32
<PAGE>
Loans To and From Stockholders: Between November 1995 and July 31, 1997,
Angara Equities, Inc. ("Angara"), a company owned and controlled by Mark Perri,
Rose Perri and Anna Gluskin, incurred a net indebtedness of $1,127,218.05 (CAD)
to GPI. The indebtedness arose from cash advances and the payment by GPI of
expenses incurred by Angara and certain of its affiliates, net of repayments and
the payment of GPI expenses by Angara. The highest amount outstanding at any
time during this period was $1,654,264.48 CAD (approximately $1,092,860 US).
During this period, GPI also made advances to The Great Tao, Inc. ("TGT"),
a company owned by Mark Perri, Rose Perri and Anna Gluskin and through which
they receive compensation for their services to the Company. At July 31, 1997,
TGT was indebted to GPI in the amount of $175,000 CAD. The highest amount
outstanding at any time during this period was $175,000 CAD (approximately
$126,628 US).
During the fiscal year ended July 31, 1998, GPI advanced a total of
$1,526,250.40 (CAD) to Angara, TGT and other entities owned by Mr. Perri, Ms.
Perri and Ms. Gluskin, and received repayments of advances and payments on
account of past advances in the aggregate amount of $1,875,997.30 (CAD),
including $420,000 CAD credited to TGT on account of compensation due to Mr.
Perri, Ms. Perri and Ms. Gluskin during the year. As a result, a total of
$932,470.70 CAD (approximately $616,000 US) was due to GPI from these entities
at fiscal year end. The highest amount outstanding at any time during the fiscal
year was $1,864,288.12 CAD (approximately $1,231,610 US).
The transactions between GPI and entities owned and controlled by Mark
Perri, Rose Perri and Anna Gluskin were not negotiated at arms-length, and were
not on normal commercial terms. No interest was charged on any of the advances,
and the transactions were of far greater financial benefit and convenience to
the officer/stockholder participants than to GPI. As indicated above, these
transactions and financing arrangements were primarily initiated prior to the
"reverse acquisition" pursuant to which the Company acquired GPI. All advances
from GPI to entities owned and controlled by Mr. Perri, Ms. Perri and Ms.
Gluskin are expected to be repaid in full by the end of the current fiscal year.
Consulting Agreement with Pankaj Modi, Ph.D.: In October 1996, GPI entered
into a Consulting Agreement with Dr. Modi pursuant to which, among other things,
Dr. Modi assigned to GPI his entire right, title and interest in and to all
inventions, ideas, designs and discoveries made by him during the term of such
Agreements which relate in any manner to the development, manufacturing,
marketing, distribution and sale of generic drug products, including, without
limitation, controlled release drugs, topical insulin, intra-nasal insulin and
liposome creams. Concurrently with execution of this Consulting Agreement, Dr.
Modi and GPI entered into an Assignment and Assumption Agreement pursuant to
which Dr. Modi assigned to the Company his interests in and to specific drug
delivery systems, controlled release drug delivery systems and technology
patents invented/discovered/conceived by Dr. Modi prior to the execution of the
Agreement, including three existing patents covering insulin delivery systems,
applicable to peptides and proteins; drug vaccines and hormones delivery; and
controlled release of drugs and hormones. In addition to these patents, Dr. Modi
assigned to GPI four US and/or Canadian patent applications and certain
abstracts covering, among other things, liposomes drug delivery for vaccines,
drugs, hormones, peptides and cosmetic delivery; transdermal drug delivery for
proteins, peptides, hormones and small molecules; controlled release drug
delivery systems for capsules, caplets, and liquid suspensions; and DNA
technology relating to insulin preparation.
Under this Consulting Agreement, the Company pays Dr. Modi annual
compensation of $132,000 CAD (approximately $87,200 US based on the exchange
rate in effect on July 31, 1998), and also has agreed to reimburse Dr. Modi for
$150,000 CAD (approximately $99,000 US) of expenses incurred by Dr. Modi in
research activities prior to his association with the Company, all of which was
outstanding at July 31, 1998.
33
<PAGE>
Item 8. LEGAL PROCEEDINGS
Sands Litigation
Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against the Company under New York
Stock Exchange ("NYSE") rules on October 2, 1998. Earlier in the year, Sands
commenced an action against the Company in the New York Supreme Court making the
same claims. The claims were dismissed, upon the Company's motion, since the
nature of the claims subjected them to mandatory arbitration under NYSE Rules at
the Company's instance.
Sands has alleged that it has the right to receive, for nominal
consideration, approximately 2 million shares of the Company's Common Stock.
This claim is based upon an October 1997 letter agreement which purportedly
confirmed the terms of an agreement the exclusive financial advisor to Generex
Pharmaceuticals, Inc. ("GPI"), a wholly owned subsidiary of the Company, and
granted the right to receive shares representing 17% of the outstanding capital
stock of GPI, on a "fully diluted" basis as an inducement to act in that
capacity under the purported agreement. Following the acquisition of GPI by the
Company, Sands' claimed right to receive shares of GPI common stock would,
allegedly, now apply to the Company's Common Stock. Sands also claims that it is
entitled to additional shares of the Company as a result of the Company's
acquisition of GPI (approximately 460,000 shares), and $144,000 in fees under
the terms of the purported Agreement. Sands has never performed any services for
the Company, and the Company and GPI have denied that the individual who is
alleged to have entered into the purported agreement between Sands and GPI, had
the authority to act on GPI's behalf, and, accordingly, is defending against
Sands' claim primarily on the basis that no agreement has ever existed between
GPI and Sands. The arbitration is scheduled to begin on June 8, 1999, and the
Company is unable to predict the outcome at this time.
Other Litigation
Generex Pharmaceuticals, Inc. is a defendant in two litigations now pending
in Canada:
(a) In February 1997, a wrongful dismissal claim seeking damages of
$450,000 (CAD) was brought in Ontario Court in Toronto, Ontario, against GPI
(Lorne Taylor v. Generex Pharmaceuticals, Inc.). Management of the Company
believes that the claim is without merit, and no reserve or other provision has
been made for any loss that may result from the litigation.
(b) GPI is defending an action in Alberta Court in Calgary, Alberta, in
which "Generex, Inc." was made a party defendant in June 1996 (Elbourne, et al.
v. Acepharm, Inc., et al.). The claim seeks damages for the diminution of the
value of the claimant's shares in Acepharm, Inc. in the amount of $1,000,000,
together with punitive damages of $5,000,000. The claim is a result of a dispute
over the ownership and/or control of Acepharm, Inc., from which GPI had
expressed an interest in acquiring certain assets. When GPI became aware of the
dispute in ownership/control of Acepharm, Inc., it abandoned the opportunity to
purchase the assets. The Company believes that the claim against it is without
merit, and no provision has been made for any losses that may result from
litigation.
(c) In February 1999, MQS, Inc., a former consultant to the Company,
commenced a civil action against the Company in the United States District Court
for the District of New Jersey claiming that 242,168 shares of the Company's
Common Stock and $243,065.50 are due to it for services which it rendered
through December 22, 1998. MQS alternatively claims compensation on a quantum
merit basis for the value of its services, and punitive damages. The Company has
not yet responded to the Complaint in this action.
The Company maintains product liability coverage for claims arising from
the use of its products in clinical trials, etc., but does not have any
insurance which covers its potential liability in any of the legal proceedings
described above.
Item 9. MARKET PRICE, DIVIDENDS AND RELATED STOCK-
HOLDER MATTERS
Item 9(a) Market Information
"Bid" and "asked" prices for the Company's Common Stock have been quoted on
the Nasdaq OTC Electronic Bulletin Board since February 1998, prior to which
there was no public market for the Common Stock. The table below sets forth for
the periods indicated the high and low transaction prices for the Common Stock
in the over-the-counter market as furnished by the Nasdaq OTC Bulletin Board
from the inception of trading through February 5, 1999. High and low transaction
prices for the Common Stock reported on the OTC Bulletin Board on February 5,
1999, were $8.625 and $9.6875, respectively.
34
<PAGE>
High Low
---- ---
1998
----
First quarter $6.50 $6.375
Second quarter $9.375 $6.125
Third quarter $8.125 $6.50
Fourth quarter $16.50 $7.50
1999
----
First quarter (through $15.875 $7.00
February 5, 1999)
Item 9(b) Holders of Common Stock
At January 22, 1999, the Company had 551 holders of record of its Common
Stock.
Item 9(c) Dividend Policy
Holders of Common Stock are entitled to receive such dividends as the Board
of Directors may from time to time declare out of funds legally available for
the payment of dividends. Holders of the Company's Special Voting Rights
Preferred Stock are entitled to receive a dividend per share equal to dividends
paid on shares of Common Stock, as and when dividends on Common Stock are
declared and paid. The Company has never paid and does not presently anticipate
paying dividends on its Common Stock.
Item 10. RECENT SALES OF UNREGISTERED SECURITIES
In the three year period ended February 12, 1999, the Company has offered
and sold Common Stock and other securities in the transactions described below
in reliance upon exemptions from the registration requirements of the Securities
Act of 1933 (the "Securities Act") pursuant to Section 4(2) thereof; Rule 506,
Regulation D, and Rule 901 et seq, Regulations S.
No "public solicitation", as that term is defined in Rule 502(c), was
employed by the Company in connection with the sale of securities in reliance
upon Section 4(2), Rule 506, all purchasers were, to the Company's reasonable
belief, accredited investors who purchased for investment, all disclosures
required under Rule 502(d) were made by the Company, and all other conditions to
the availability of the Rule 506 exemption were, to its knowledge and belief,
complied with by the Company.
In the case of sales made in reliance upon Regulation S, the sales were
made outside the United States, the Company obtained documentation establishing
to its satisfaction that the purchasers were not U.S. persons, and has taken
appropriate precautions to assure that the shares are not sold or otherwise
transferred to a U.S. person for a period of one year following the sale by the
Company.
In order to assure that resale restrictions applicable to restricted
securities are complied with, the Company has placed a legend evidencing the
restrictions on all certificates representing the shares, and has issued "stop
transfer" instructions to its transfer agent to prevent unapproved transfers.
The transactions were as follows:
(a) In April 1996, the Company issued 16,000,000 shares of Common Stock to J.
Rockwell Smith for $7,500, all but 105,000 shares of which were contributed back
to the Company in connection with its acquisition of Generex Pharmaceuticals,
Inc. ("GPI") in January 1998. The shares were issued in reliance upon Section
4(2) of the Securities Act.
(b) In January 1998, the Company issued 9,234,118 shares of Common Stock to
the former shareholders of GPI (39 individuals and entities) in the Reverse
Acquisition described in Items 1(a) and 2(b) above. The shares were issued in
reliance upon Section 4(2) and Rule 506, Regulation D, in the case of shares
issued to residents of the United States, and upon Regulation S in the case of
shares issued to Canadian and other non-U.S. persons.
(c) Between March 1, 1998, and June 30, 1998, the Company offered and sold
1,153,425 Units of securities at a price of $2.50 per Unit, each Unit consisting
of one share of Common Stock and one Series A Redeemable Warrant to purchase one
share of Common Stock at a price of $5.00 per share. Of this total, 160,172
Units were issued in payment for services (98,172 Units for legal services and
62,000 units as a commission or "finder's fee" in connection with the sale of
shares to Thompson Kernaghan & Co., Ltd.), and valued for this purpose at $2.50
per Unit. All such sales were issued in reliance on Section 4(2) of the
Securities Act of 1933 (the "1933 Act") and Rule 506 of Regulation D ("Rule
506") promulgated thereunder, or, in the case of certain Canadian purchasers,
pursuant to Regulation S and the 1933 Act and applicable Canadian securities
laws. The purchasers in this offering were as follows:
35
<PAGE>
Investor No. of Units
- -------- ------------
J.R. Consultants, Inc. 10,000
Robert Portman 20,000
Eva Langot 10,753
William M. Kimbrough, Ttee for William M. Kimbrough, 10,000
Rev Liv Tr. Under TA dtd 8/6/93
Ralph Shapiro and Bridgett Shapiro, JTWROS 10,000
James L. Morrison, Ttee, The Morrison Family Trust 10,000
Greg DeMille 10,000
Connolly Epstein Chicco 98,172
Foxman Oxholm & Ewing
Lawrence J. Lesser 10,000
Barry J. Essig 10,000
Spindler Family Trust UA dtd 4/18/87 10,000
Arthur G. Kaiser 10,000
Robert J. Selsky 10,000
Neil G. Epstein and Laura Jansen, JTWROS 10,000
Warren V. Blasland, Jr. 10,000
Melissa Ann Kaiser 5,000
Optima, Inc. 2,500
Mode, Inc. 24,000
Thomson Kernaghan & Co., Ltd. 620,000
Deana Hazel Kaiser 5,000
Arthur G. Kaiser and Loretta Ann Kaiser 10,000
Robyn Wolf 10,000
David N. Freed 10,000
Dusan Miklas 20,000
Shahid Inayai Sheikh 10,000
Riaz Ud Din Ahmed 10,000
Michael Howlett 57,000
Douglas E. Ball 10,000
Firoz B. Master 10,000
Scott E. Walker 10,000
Lawrence J. Rubinstein and Camille S. Rubinstein 10,000
Services Enterprises, Ltd. 50,000
Steve Samuel 10,000
Bernard Wilson 21,000
(d) In May 1998, the company sold 34,000 shares of Common Stock outside the
United States to four individuals (Bernd Papenbrok - 4,000 shares; Ursula
Degatau - 10,000 shares; and Jose and Susanna Alarcon - 20,000 shares) who were
non U.S. persons in reliance upon Regulation S under the 1933 Act.
(e) Between May 11, 1998, and November 30, 1998, the Company received $2,034,000
from the sale of a total of 669,779 shares of Common Stock at prices from $2.50
to $3.50 per share to Cape Properties Corp., a Turks and Cacos Islands, British
West Indies corporation with a principal place of business located at Harbor
House, P.O. Box 120, Grand Turk, Turks and Cacos Islands, British West Indies.
Based upon information furnished to the Company by Cape Properties, the
beneficial owners of these shares are as follows: Wolfgang Baecker, Dietmar
Ballier, Wilhelm Balthasar, Rudlof Balz, Rolf Balz, Hans Beer, Peter Berlieb,
Klaus Berner, Friedhelm Beune, Peter Bibiza, Detlev Blassmann, Fritz
Blumenstock, Karl-Josef Brand, Andreas Brunner, Herbert Burmester, Lothar
Buttler, Mario Cappelletti, Stefan Cappelletti, Josefina Caro-Duran, Ulf
Dannenberg, Dieter Dierkes c/o Cape Property Corporation, Anke Dobler, Josef
Dobler, Werner Eberle, Andreas Engelhardt, Alexandra Enzinger, Marianne Erber,
Malanschy Etabl, Michael Euler, Joerg A. Fiegel, Gerhard Finsterwalder, Peter
Franz, Erika Fuchs, Hubertus Ruchs, Ulrich Gabrecht, Friedrich W. Galle, Peter
Gandert, Ludwig Geller, Rosemarie Brand-Gerhart, Ludwig Goller, Wolfgang Goller,
Stephan Grell, Gert Griesbach, Michael Grieshaber, Elmar Groebner, Reinhard
Guenzel, H.P. Stutz Consulting, Hans-Josef Hagelueken, Elmar Hamers, Werner
Hammer, Erich Handeik, Peter Hannig, Karl-Heinz Hansal, Reinhold Hartlaub,
Norbert Hauser, Barbara Heil, Lothar Heissel, Dr. Rudolf Henssler, Hartmut
Hoffmann, Lutz Holz, Josef Holzheu, James Horst, Hotdog Foundation, Rudolf Jung,
Wolfgang Keiner, Bruno Keis, Walter Kiesel, Peter Kirlat, Dr. H. Georg
Kirschner, Michael Klarmann, Karl-Heinz Klette, Alfred Gerhard Knoll, Friedrich
Koal, Cornelius Koch, Nikolaus Koesler, Josef Kollegger, Johann Kroell, Johannes
Kroell, Petra Kroell, Rosina Kroell, Hartwig Kupfer, Felix Kurz, Heinz Langer,
Manfred Loysa, Heinz Maegerle, Rudolf Maerz, Majudin Foundation, Wolfgang
Maurer, Hubert Mergler, Alfred Messbacher, Martin Moll, Hans-Joachim Nielsson,
Katrin Oestereicher, Ali Oezylimaz, Eckard Osiander, Kai-Simon Patermann, Alfred
Pedrini, Heinz Peinhelt, Franz Poisl, Gerhard Prossegger, Hermann Prossegger,
Bruno-Josef Puetz, Waldemar Ratke, Hans Georg Reder, Dr. Gerhard Roehrig, Dr.
Uwe Roos, Rudi Rothermich, Hans Rueffler, Ruthard Saemann, Gerlind Schaefer,
Hans Juergen Schaefer, Mario Schank, Wolfgang Schmitz, Thomas Schenkel, Rudolf
Schneider, Karl Schneier, Mathias Schulenberg, Jens Schumann, Hermann Schumm,
Peter Schwartz, Drik Schwerdtfeger, Rolf Speckmann, Horst Stahl, Markus
Sternberg, Amaloma Stiftung, Chariva Stiftung, Pianka Stiftung, Rapaman
Stiftung, Bernard Stripp, Dr. Ernst-Dietrich Strueben, Triple Point Foundation,
Klaus Unverzagt, Guenther Vierheilig, Lothar Volz, Stefan Von Busch, Norbert
Vorderbrueggen, Anni Waigand, Anna Waigand, Heiko Waigand, Udo Waigand, Wolfgang
Wallhaeusser, Erike Wamser, Marco Wamser, Thilo Wamser, Hubert Weber, Wema
Foundation, Gisela Wendel, Roland Wendel, Johannes Weskamp, Gerold Wessels,
Helene Wessels, Karl-Juergen Wilhelm, Siegfried Wilkop, Dr. Dietmar Winner,
Franz-Josef Woeber, Helmut Woeber, Claas Wolff, Thomas Wuest.
Based upon information and documents furnished by Cape Properties, each of
the above-named beneficial owners resides outside the United States and has
executed an affidavit, copies of which, together with an English language
translation, were furnished to the Company by Cape Properties, certifying that
he/she/it is a non-U.S. person and will abide by the resale restrictions imposed
on such shares by Regulation S.
36
<PAGE>
(f) In May 1998, the Company entered into a billing arrangement with a
consultant, MQS, Inc., pursuant to which the consultant agreed to accept shares
of the Company's Common Stock in partial payment for consulting services. The
Company is committed to issue 42,168 shares of Common Stock, valued at $2.50 per
share for this purpose, on account of services rendered through September 4,
1998, primarily in connection with establishing the Company's pilot
manufacturing facility, preparing regulatory submissions, and developing the
Company's oral insulin applicator, when the arrangement was terminated. The
shares were issued in reliance upon Rule 506, Regulation D.
(g) In May 1998, the Company issued a warrant to purchase 500,000 shares of
Common Stock at a price of $2.50 per share to a consultant, Gulfstream Capital
Group, L.C., in payment for consulting services relating to the development and
implementation of corporate financing and other business plans, and financial
public relations. The warrants were valued at $250,000 ($.50 per warrant) for
this purpose.
(h) Between September 1, 1998 and January 29, 1999, the Company offered and sold
pursuant to Rule 506 a total of 617,670 shares of Common Stock at prices ranging
from of $4.00 to $5.50 per share to the purchasers named below, for total sales
proceeds of $2,543,953.80. Each such purchaser agreed for a period of five years
from the date of his/her/its purchase (1) to vote such shares in proportion to
the votes cast by all other shareholders of the Company, and (2) not to sell the
shares without first offering to sell the shares to the Company at the then
current market price of the shares (except for sales after the first year of
ownership of a number of shares equal to 1% or less of the total number of
shares outstanding in any continuous 90 day period in routine brokerage
transactions).
In the case of the sale of shares to William Steinbrink (250,000 shares), the
price at which the Company had the right to purchase Dr. Steinbrink's shares
pursuant to the right of first refusal described in the preceding paragraph is
70% of the current market price, and the Company agreed to repurchase from Dr.
Steinbrink after December 31, 1999, at Dr. Steinbrink's option, such portion or
all of his shares as he may elect to tender to the Company at a price equal to
70% of the then current market price. These additional terms were cancelled by
agreement in December 1999.
A copy of the Subscription/Voting/Put Agreement between the Company and Dr.
Steinbrink is attached hereto as Exhibit 4.5.1. A form of the
Subscription/Voting Agreement signed by the remaining purchasers named below is
attached as Exhibit 4.5.2 hereto.
No. of
Investor Shares
- -------- ------
Summers Family Limited Partnership, 1,000
Ardeth Summers General Partner
Robert J. Lowther, Jr. 5,000
Robert J. O'Malley, Custodian for 3,050
Peter J. O'Malley, UTMA/PA
Robert J. O'Malley, Custodian for 3,050
Michael J. O'Malley, UTMA/PA
William H. Peiffer & Leona E. Peiffer 2,000
Dr. And Mrs. Stephen D. Pett 2,500
Charles G. Herbst/Edward E. Engel - 5,000
Co-Trustees, Arthritis Associates P/S
Plan FBO Charles G. Herbst
Stephen or Rebecca Stroul 15,000
William M. and Ellen Leonard 2,000
Thomas and Jill Fessler JTWROS 5,000
James M. Antoun and Jamie M. Antoun 10,000
PNC Bank, National Association, Trustee, 5,000
McDonald Illig Jones & Britton LLP
Pension Plan and Trust, FBO James Antoun
Dario Cipriani and Donna M. Cipriani 2,500
37
<PAGE>
No. of
Investor Shares
- -------- ------
Jan R. & Linda S. VanGorder Ten. Ent. 10,000
Mark J. And Amy E. Amendola 1,500
Michael D. Dunlavey 15,000
Mark Suprock and Sherry Suprock, JTWROS 6,098
Marc A. Flitter and Alice Flitter, JTWROS 12,195
David P. Snell and Kym Snell 10,000
Richard F. Rambaldo 7,318
Michael Alan Scutella and Eileen Ritz Scutella, 10,000
JTWROS
George R. Harrington 6,000
Robert C. Oglevee 5,000
Northcoast Brokerage Agency, Inc. 10,000
William M. Hilbert, Sr. and Martha Hilbert, JTWROS 12,200
John L. Hilbert 10,000
C. John Weber, III and Charles R. Weber,JT 2,439
C. John Weber 1,219
PNC Bank, National Association, Trustee, 7,318
MacDonald Illig Jones & Britton LLP Pension
Plan and Trust FBO James E. Spoden
Mark J. and Karen Salvia 2,200
PNC Bank, Trustee For Knox et al 20,000
Profit Sharing Plan
J. Patrick Karle 2,250
David A. Ciacchini and Mary Therese Ciacchini, JTWROS 2,200
Margaret Damore 2,500
Matthew G. McCormack 1,000
Owen J. McCormick 2,000
Brett Andrew Johnson and Caryn Kadavy Johnson, JTWROS 2,500
Randy R. Nyberg 2,000
John F. Harley and Mary E. Harley, JTWROS 1,000
Industrial Sales & Mfg., Inc. 2,500
Julie M. Ottman and Robert P. Ottman, JTWROS 2,500
Douglas S. And Kathleen M. Fugate 2,000
David S. Giuzik 2,500
Arthur L. Amendola, JTWROS 3,000
RAYWEB c/o Heritage Trust Company 10,000
Jean-Mare Baier and Dafna Baier 1,219
Vincent J. Agostino 5,000
Gerald A. Ryan 5,000
Vincent P. Rogers, M.D. 20,000
Mark A. And Alice W. Flitter 2,439
William Steinbrink 250,000
Paul A. Busch 20,000
Palm & Co. FBO Quinn 401(k) 2,500
Douglas J. and Colleen Cook 1,000
Philip R. Eden 2,000
Vlastimir and Rachelle Zada Zivkov 5,000
Richard H. Penske and Patricia Penske 10,000
38
<PAGE>
No. of
Investor Shares
- -------- ------
James H. Ferguson 5,000
Michael D. Grollman 975
Thomas Amendola 25,000
Ahmed Ellabadidi 15,000
Total 617,670
(i) The Company granted 37,747 shares as a "finder's fee", valued at
$154,762.70, to Michael J. Howlett for services in connection with the placement
of shares referred to in the preceding paragraph. The shares were issued in
reliance upon Rule 506, Regulation D.
(j) In June and September 1998, the Company sold a total of 42,615 shares of
Common Stock, valued at $2.50 per share for this purpose, in payment for legal
services rendered by Brans Lehun Baldwin, a Toronto law firm. The shares were
issued in reliance upon Regulation S and Rule 506, Regulation D.
(k) In October 1998 the Company issued 180,000 shares of Common Stock to
Berckeley Investments Group, LP, a Bahamian partnership, in settlement of an
outstanding claim. The shares were issued in reliance upon Regulation S.
(l) In November 1998, the Company issued a warrant to purchase 300,000 shares of
Common Stock at a price of $10.00 per share to M. H. Meyerson & Co. Inc.
pursuant to a non-exclusive investment banking agreement. Warrants for 150,000
shares are subject to forfeiture if the Company terminates Meyerson's engagement
prior to May 17, 1999. This warrant was issued in reliance upon Section 4(2).
For accounting purposes, the Company assigned a value of $150,000 ($.50 per
warrant) to the warrants.
Item 11. DESCRIPTION OF SECURITIES TO BE REGISTERED
Common Stock
The Company has authorized 50,000,000 shares of Common Stock, par value
$.001, of which 13,341,586 were outstanding, or sold and pending issuance, at
February 12, 1999
Holders of Common Stock are entitled to one vote for each share of Common
Stock owned of record on all matters to be voted on by stockholders, including
the election of directors. Holders of Common Stock do not have cumulative voting
rights and, accordingly, the holders of more than 50% of the outstanding shares
can elect the entire Board of Directors. The holders of Common Stock are
entitled to dividends and when declared by the Board of Directors from funds
legally available therefor, and, upon liquidation or dissolution of the Company,
to receive pro rata all assets remaining available for distribution to
stockholders after payments to creditors and holders of senior securities, if
any. The Common Stock has no preemptive or other subscription rights, and there
are no conversion rights or redemption provisions. All outstanding shares of
Common Stock are validly issued, fully paid, and nonassessable.
39
<PAGE>
The rights of holders of the Company's Common Stock may be affected by
rights of other securities of the Company, as described below.
Special Voting Rights Preferred Stock
The Company has issued 1,000 shares of Special Voting Rights Preferred
Stock ("SVR Preferred"). Pankaj Modi, the Company's Vice President - Research, a
director, and the inventor of substantially all proprietary technology now owned
by the Company, is the owner of the Company's SVR Preferred Stock. The Company's
SVR Preferred has no voting rights except (a) as specifically required by Idaho
law, or (b) if a "Change of Control" occurs, as that term is defined in the
Company's Articles of Incorporation, to elect a number of directors of the
Company equal to a majority of the entire Board of Directors of the Company, or
(c) to approve any transaction that would result in a Change of Control. A
"Change of Control" is deemed to occur if the Company's founders (Anna E.
Gluskin, E. Mark Perri, Rose C. Perri and Pankaj Modi) should cease to
constitute at least sixty (60%) of all directors of the Company, or if any
person becomes either the Chairman of the Board of Directors or Chief Executive
Officer of the Company without the prior approval of these "founders". If a
"Change of Control" were to occur, the holders of SVR Preferred (i.e., Dr. Modi)
would thereafter be able to elect a majority of the directors of the Company so
long as the SVR Preferred were outstanding.
Undesignated Preferred Stock
The Company's Board of Directors has the authority by resolution to issue
up to 1,000,000 shares of "undesignated" preferred stock in one or more series
and fix the number of shares constituting any such series, the voting powers,
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including the
dividend rights, dividend rate, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the stockholders. For example, the Board of Directors is authorized to
issue a series of preferred stock that would have the right to vote, separately
or with any other series of preferred stock, on any proposed amendment to the
Company's Articles of Incorporation or on any other proposed corporate action,
including business combinations and other transactions.
1999 Stock Option Plan
On January 29, 1999, the Company's Board of Directors approved the 1999
Stock Option Plan (the "Plan"), subject to shareholder approval of the Plan, and
reserved 1,000,000 shares of Common Stock for issuance upon options granted
under the Plan. The Plan replaced an identical plan adopted in 1998 which
expired on January 22, 1999.
The purposes of the Plan are to provide incentives and rewards to those
employees who are in a position to contribute to the long-term growth and
profitability of the Company; to assist the Company to attract, retain and
motivate personnel with experience and ability; and to make the Company's
compensation program more competitive with those of other employers. The Company
anticipates it will benefit from the added interest which such personnel will
have in the success of the Company as a result of their proprietary interest.
The Plan presently is administered by the Board of Directors, but the Board
may establish a Stock Option Committee (the "Committee"), which consists of at
least three directors, to administer the Plan. References to the "Committee"
herein include the Board of Directors so long as it continues to administer the
Plan directly.
40
<PAGE>
The Committee is authorized to select from among eligible employees,
directors, advisors and consultants those individuals to whom options are to be
granted and to determine the number of shares to be subject to, and the terms
and conditions of, the options. The Committee also is authorized to prescribe,
amend and rescind terms relating to options granted under the Plan and the
interpretation of options. Generally, the interpretation and construction of any
provision of the Plan or any options granted thereunder is within the discretion
of the Committee.
The Plan provides that options may or may not be Incentive Stock Options
within the meaning of Section 422 of the Internal Revenue Code ("ISOs"). Only
employees of the Company are eligible to receive ISOs, while employees and
non-employee directors, advisors and consultants are eligible to receive options
which are not ISOs, i.e. "Non-Qualified Options." The options granted by the
Board in connection with its adoption of the Plan are Non-Qualified Options.
ISOs granted under the Plan are intended to qualify as "incentive stock
options" under Section 422 of the Code. The acquisition of shares upon exercise
of an ISO will not result in recognition of income at the time. However, the
excess of the fair market value of the shares acquired over the exercise price
will constitute an item of tax preference, to be included in the optionee's
computation of his "alternative minimum tax" for federal income tax purposes. If
the optionee does not dispose of the shares issued to him upon the exercise of
an ISO within one years of such issuance or within two years from the date of
the grant of the ISO, whichever is later, any gain or loss realized by the
optionee on a later sale or exchange of such shares generally will be a
long-term capital gain or long-term capital loss. If the optionee sells the
shares during such period, the optionee will recognize ordinary income for the
year in which disposition occurs equal to the amount, if any, by which the
lesser of the fair market value of such shares on the date of exercise of such
ISO or the amount realized from such sale exceeded the amount paid for such
shares.
The terms of options granted under the Plan are determined by the Committee
at the time the option is granted. Each option is evidenced by a written option
document, which, together with the provisions of the Plan itself determines such
terms as: when options under the Plan become exercisable; the exercise price of
options granted under the Plan, which may not be less than 100% of the fair
market value of the Common Stock on the date of the grant in the case of ISOs
(110% in the case of optionees who own 10% or more of the Company's Common Stock
on the date of grant); the term of the option; vesting provisions; and special
termination provisions.
An option is not transferable by the optionee, other than by will or the
laws of descent and distribution, and is exercisable only by the optionee during
his lifetime or, in the event of his death, by a person who acquires the right
to exercise the option by bequest or inheritance or by reason of the optionee's
death.
Generally, an optionee receiving an option will not have taxable income
upon the grant of the option. In the case of Non-Qualified Options, the optionee
will recognize ordinary income upon exercise of the Non-Qualified Option in an
amount equal to the difference between the option price and the fair market
value of the shares on the date of exercise. When the shares are sold, the
grantee will generally recognize capital gain or loss equal to the difference
between (i) the selling price of the shares, and (ii) the sum of the option
price and the amount included in his income when the option is exercised.
At the present time, options to purchase 50,000 shares have been granted
under the Plan.
41
<PAGE>
Series A Redeemable Warrants
The Company has outstanding 1,153,425 Series A Redeemable Common Stock
Purchase Warrant, each of which is exercisable to purchase one (1) shares of
Common Stock at a price of $5.00 per share. The Warrants are redeemable, at the
option of the Company, at any time after September 1, 1998, upon written notice
of not less than twenty (20) days, at a redemption price of $.025 per Warrant. A
copy of the Form of Series A Warrant has been filed as an exhibit with this
Registration Statement.
Other Warrants
The Company also has outstanding warrants to purchase 500,000 shares at a
price of $2.50 per share (the "GCR Warrants"), 7,937 shares at a price of $21.82
(the "Berckeley Warrants"), and 300,000 shares at a price of $10.00 per share
(the "Meyerson Warrants"). 150,000 of the Meyerson warrants are subject to
forfeiture if the Company terminates its non-exclusive investment banking
relationship with M. H. Meyerson & Co. Inc. prior to May 17, 1999. Forms of the
GCR, Berckeley and Meyerson Warrants have been filed as exhibits to this
Registration Statement.
"Anti-Takeover" Provisions
Although the Board of Directors is not presently aware of any takeover
attempt or interest involving the Company, the Articles of Incorporation and
Bylaws of the Company and the Idaho Business Corporation Act contain certain
provisions which may be deemed to be "anti-takeover" in nature in that such
provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions.
SVR Preferred Stock: As indicated above, the Company's outstanding Special
Voting Rights Preferred Stock prevents a "change of control" of the Company
without the consent of the holders of the SVR Preferred. See "--SVR Preferred"
above.
Authorized but Unissued Shares: The authorized capital stock of the Company
is 50,000,000 shares of Common Stock, and 1,000,000 shares of Preferred Stock in
addition to the SVR Preferred Stock. These shares of capital stock were
authorized for the purpose of providing the Board of Directors of the Company
with as much flexibility as possible to issue additional shares for proper
corporate purposes, including equity financing, acquisitions, stock dividends,
stock splits, employee stock option plans, and other similar purposes which
could include public offerings or private placements. The Company has no
agreements, commitments or immediate plans for the sale or issuance of the
additional shares of Common Stock or Preferred Stock at this time. However,
shares of Preferred Stock could be issued quickly with terms calculated to delay
or prevent a change in control of the Company without any further action by the
stockholders. Stockholders of the Company do not have preemptive rights with
respect to the purchase of these shares. Therefore, such issuance could result
in a dilution of voting rights and book value per share of the Common Stock of
the Company. No shares of "undesignated" Preferred Stock have been issued, and
the Company has no present plan to issue any such shares.
No Cumulative Voting: Neither the Company's Articles of Incorporation nor
its Bylaws contain provisions for cumulative voting. Cumulative voting entitles
each stockholder to as many votes as equal the number of shares owned by him
multiplied by the number of directors to be elected. A stockholder may cast all
these votes for one candidate or distribute them among any two or more
candidates. Thus, cumulative voting for the election of directors allows a
stockholder or group of stockholders who hold less than 50% of the outstanding
shares voting to elect one or more members of a board of directors. Without
cumulative voting for the election of directors, the vote of holders of a
plurality of the shares
42
<PAGE>
voting is required to elect any member of a board of directors and present
stockholders would be able to elect all of the members of the board of
directors.
Control Share Acquisitions: The Idaho Control Share Acquisition Law
provides for notice to shareholders of a "control share acquisition", which is
defined as the acquisition of 20% of the voting power of a Idaho corporation, or
of voting power exceeding one-third of such total voting power by a person who
owns 20% or more of such voting power prior to the acquisition, or a majority or
more of such voting power by a person who already owns one-third or more of the
voting power. Shareholders have the right to demand "fair value" for their
shares if a control share acquisition occurs. Among other things, the "control
share" provisions limit the voting power of the acquiror in a control share
acquisition, and permit a corporation to recover profits resulting from the sale
of control shares in certain situations.
Section 30-1603 of the Control Share Acquisition Law permits an Idaho
corporation to elect not to be subject to such Law by adopting a Bylaw provision
to that effect. At this time, the Company has not made such an election.
Item 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XIV of the Company's Articles of Incorporation provide that,
subject to certain limitations (receipt of improper personal gains, intentional
infliction of harm on the Company or its stockholders, unlawful dividends or
criminal law violations), no director shall be personally liable to the Company
or its stockholders for monetary damages for any breach of fiduciary duty by
such director as a director.
The Bylaws of the Company provide for indemnification of directors and
officers of the Company in accordance with the Idaho Business Corporation Act.
Section 30-1-851 of the Idaho Business Corporation Act (the "Idaho Act")
authorizes the Company to indemnify any director or officer under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director of officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Section 30-1-852 of the Idaho Act makes indemnification
mandatory for such expenses incurred in a successful defense by a director in
any action brought against the director based on his service as a director.
The Company also may purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore unenforceable.
43
<PAGE>
Item 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports F-1 to F-2
Consolidated Balance Sheets
July 31, 1998 and 1997 F-3
Consolidated Statements of Operations
For the Years Ended July 31, 1998 and 1997,
For the Period November 2, 1995 (Date of Inception)
to July 31, 1996, and Cumulative From Inception to July 31, 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity
For the Period November 2, 1995 (Date of Inception)
to July 31, 1998 F-5 to F-7
Consolidated Statements of Cash Flows
For the Years Ended July 31, 1998 and 1997,
For the Period November 2, 1995 (Date of Inception)
to July 31, 1996, and Cumulative From Inception to July 31, 1998 F-8
Notes to Consolidated Financial Statements F-9 to F-24
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
Generex Biotechnology Company:
We have audited the accompanying consolidated balance sheet of Generex
Biotechnology Company and Subsidiaries (a development stage company) as of July
31, 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended and the cumulative
amounts of operations and cash flows for the period November 2, 1995 (date of
inception) to July 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Generex
Biotechnology Company and Subsidiaries as of July 31, 1998 and the consolidated
results of its operations and its cash flows for the year then ended and the
cumulative amounts of operations and cash flows for the period November 2, 1995
(date of inception) to July 31, 1998, in conformity with generally accepted
accounting principles (United States).
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage enterprise and has
suffered recurring losses and net cash outflows from operations since inception
that raise substantial doubt about its ability to continue as a going concern.
As such, the Company is dependent upon future capital infusions from existing
and/or new investors to fund operations. Management's plans with regard to these
matters are also described in Note 2. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Withum, Smith & Brown
New Brunswick, New Jersey
October 15, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORTS
To the Board of Directors and Stockholders,
Generex Biotechnology Company:
We have audited the accompanying consolidated balance sheet of Generex
Biotechnology Company and Subsidiaries (a development stage company) as of July
31, 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended and for the period
November 2, 1995 (date of inception) to July 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Generex Biotechnology Company and Subsidiaries as of July 31, 1997 and the
consolidated results of its operations and its cash flows for the year ended
July 31, 1997 and for the period November 2, 1995 (date of inception) to July
31, 1996, in conformity with generally accepted accounting principles
(United States).
Withum, Smith & Brown Mintz & Partners
New Brunswick, New Jersey Toronto, Ontario
October 15, 1998 October 3, 1997
F-2
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31
----------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,090,827 $ 196,004
Restricted cash 106,527 --
Miscellaneous receivables 209,090 168,234
Notes receivable -- 102,750
Other current assets 131,340 46,790
----------- -----------
Total Current Assets 2,537,784 513,778
Property and Equipment, Net 1,634,447 45,959
Deposits 82,509 --
Due From Related Parties 1,200,968 3,113,038
----------- -----------
TOTAL ASSETS $ 5,455,708 $ 3,672,775
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,253,004 $ 223,939
Current maturities of long-term debt 411,565 --
----------- -----------
Total Current Liabilities 1,664,569 223,939
Long-Term Debt, Less Current Maturities 912,817 --
Due to Related Parties 236,024
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares, issued and
outstanding 1,000 and -0- shares at July 31, 1998
and 1997, respectively 1 --
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 11,971,272 and 9,000,118 shares at
July 31, 1998 and 1997, respectively 11,971 9,000
Additional paid-in capital 9,162,329 5,159,276
Equity adjustment for foreign currency translation (199,433) (474)
Deficit accumulated during the development stage (6,332,570) (1,718,966)
----------- -----------
Total Stockholders' Equity 2,642,298 3,448,836
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,455,708 $ 3,672,775
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-3
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Cumulative
Period From
For the Years Ended November 2, November 2,
July 31, 1995 (Date 1995 (Date
--------------------------------- of Inception) of Inception)
to July 31, to July 31, to July 31,
1998 1997 1996 1998
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
Operating Expenses:
Research and development 707,520 676,145 67,142 1,450,807
Research and development -- related party 168,884 51,334 -- 220,218
General and administrative 3,359,581 628,064 296,281 4,283,926
General and administrative -- related party 314,328 -- -- 314,328
------------ ------------ ------------ ------------
Total Operating Expenses 4,550,313 1,355,543 363,423 6,269,279
------------ ------------ ------------ ------------
Operating Loss (4,550,313) (1,355,543) (363,423) (6,269,279)
Other Expense:
Interest expense 63,291 -- -- 63,291
------------ ------------ ------------ ------------
Net Loss $ (4,613,604) $ (1,355,543) $ (363,423) $ (6,332,570)
============ ============ ============ ============
Basic and Diluted Net Loss Per Common Share $ (.46) $ (.25) $ (.40)
============ ============ ============
Weighted Average Number of Shares of
Common Stock Outstanding 10,078,875 5,512,840 903,972
=========== ============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 1998
<TABLE>
<CAPTION>
Preferred
Common Stock Stock Additional Adjustment for
----------------------- -------------------- Paid-In Foreign Currency
Shares Amount Shares Amount Capital Translation
-------- -------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance - November 2, 1995 (Inception) -- $ -- $-- $ -- $ -- $ --
Issuance of common stock for cash,
February 1996, $.0254 321,429 321 -- -- 7,838 --
Issuance of common stock for cash,
February 1996, $.0510 35,142 35 -- -- 1,757 --
Issuance of common stock for cash,
February 1996, $.5099 216,428 216 -- -- 110,142 --
Issuance of common stock for cash,
March 1996, $10.2428 2,500 3 -- -- 25,604 --
Issuance of common stock for cash,
April 1996, $.0516 489,850 490 -- -- 24,773 --
Issuance of common stock for cash,
May 1996, $.0512 115,571 116 -- -- 5,796 --
Issuance of common stock for cash,
May 1996, $.5115 428,072 428 -- -- 218,534 --
Issuance of common stock for cash,
May 1996, $10.2302 129,818 130 -- -- 1,327,934 --
Issuance of common stock for cash,
July 1996, $.0051 2,606,528 2,606 -- -- 10,777 --
Issuance of common stock for cash,
July 1996, $.0255 142,857 143 -- -- 3,494 --
Issuance of common stock for cash,
July 1996, $.0513 35,714 36 -- -- 1,797 --
Issuance of common stock for cash,
July 1996, $10.1847 63,855 64 -- -- 650,282 --
Costs related to issuance of common stock -- -- -- -- (10,252) --
Equity adjustment for foreign currency
translation -- -- -- -- -- (4,017)
Net loss -- -- -- -- -- --
----------- ----------- --- -------- ----------- -----------
Balance - July 31, 1996 4,587,764 $ 4,588 -- $ -- $ 2,378,476 $ (4,017)
=========== =========== === ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
------------- -------------
<S> <C> <C>
Balance - November 2, 1995 (Inception) $ -- $ --
Issuance of common stock for cash,
February 1996, $.0254 -- 8,159
Issuance of common stock for cash,
February 1996, $.0510 -- 1,792
Issuance of common stock for cash,
February 1996, $.5099 -- 110,358
Issuance of common stock for cash,
March 1996, $10.2428 -- 25,607
Issuance of common stock for cash,
April 1996, $.0516 -- 25,263
Issuance of common stock for cash,
May 1996, $.0512 -- 5,912
Issuance of common stock for cash,
May 1996, $.5115 -- 218,962
Issuance of common stock for cash,
May 1996, $10.2302 -- 1,328,064
Issuance of common stock for cash,
July 1996, $.0051 -- 13,383
Issuance of common stock for cash,
July 1996, $.0255 -- 3,637
Issuance of common stock for cash,
July 1996, $.0513 -- 1,833
Issuance of common stock for cash,
July 1996, $10.1847 -- 650,346
Costs related to issuance of common stock -- (10,252)
Equity adjustment for foreign currency
translation -- (4,017)
Net loss (363,423) (363,423)
----------- -----------
Balance - July 31, 1996 $ (363,423) $ 2,015,624
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 1998
<TABLE>
<CAPTION>
Preferred
Common Stock Stock Additional Adjustment for
----------------------- -------------------- Paid-In Foreign Currency
Shares Amount Shares Amount Capital Translation
-------- -------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance - August 1, 1996 4,587,764 $ 4,588 -- $-- $ 2,378,476 $ (4,017)
Issuance of common stock for cash,
September 1996, $.0509 2,143 2 -- -- 107 --
Issuance of common stock for cash,
December 1996, $10.2421 1,429 1 -- -- 14,635 --
Issuance of common stock for cash,
January 1997, $.0518 1,466 1 -- -- 75 --
Issuance of common stock for cash,
March 1997, $10.0833 12 -- -- -- 121 --
Issuance of common stock for cash,
May 1997, $.0513 4,233 4 -- -- 213 --
Issuance of common stock for cash,
May 1997, $.5060 4,285,714 4,286 -- -- 2,164,127 --
Costs related to issuance of common
stock, May 1997 -- -- -- -- (108,421) --
Issuance of common stock for cash,
May 1997, $10.1194 18,214 18 -- -- 184,297 --
Issuance of common stock for cash,
June 1997, $.0504 10,714 11 -- -- 529 --
Issuance of common stock for cash,
June 1997, $.5047 32,143 32 -- -- 16,190 --
Issuance of common stock for cash,
June 1997, $8.9810 29,579 30 -- -- 265,618 --
Issuance of common stock for cash,
June 1997, $10.0980 714 1 -- -- 7,209 --
Issuance of common stock for cash,
July 1997, $10.1214 25,993 26 -- -- 263,060 --
Costs related to issuance of common stock -- -- -- -- (26,960) --
Equity adjustment for foreign currency
translation -- -- -- -- -- 3,543
Net loss -- -- -- -- -- --
--------- ----------- --- ---- ----------- -----------
Balance - July 31, 1997 9,000,118 $ 9,000 -- $-- $ 5,159,276 $ (474)
========= =========== === ==== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
------------- -------------
<S> <C> <C>
Balance - August 1, 1996 $(363,423) $2,015,624
Issuance of common stock for cash,
September 1996, $.0509 -- 109
Issuance of common stock for cash,
December 1996, $10.2421 -- 14,636
Issuance of common stock for cash,
January 1997, $.0518 -- 76
Issuance of common stock for cash,
March 1997, $10.0833 -- 121
Issuance of common stock for cash,
May 1997, $.0513 -- 217
Issuance of common stock for cash,
May 1997, $.5060 -- 2,168,413
Costs related to issuance of common
stock, May 1997 -- (108,421)
Issuance of common stock for cash,
May 1997, $10.1194 -- 184,315
Issuance of common stock for cash,
June 1997, $.0504 -- 540
Issuance of common stock for cash,
June 1997, $.5047 -- 16,222
Issuance of common stock for cash,
June 1997, $8.9810 -- 265,648
Issuance of common stock for cash,
June 1997, $10.0980 -- 7,210
Issuance of common stock for cash,
July 1997, $10.1214 -- 263,086
Costs related to issuance of common stock -- (26,960)
Equity adjustment for foreign currency
translation -- 3,543
Net loss (1,355,543) (1,355,543)
----------- -----------
Balance - July 31, 1997 $(1,718,966) $ 3,448,836
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 1998
<TABLE>
<CAPTION>
Preferred Equity
Common Stock Stock Additional Adjustment for
----------------------- -------------------- Paid-In Foreign Currency
Shares Amount Shares Amount Capital Translation
-------- -------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance - August 1, 1997 9,000,118 $ 9,000 -- $-- $ 5,159,276 $ (474)
Issuance of warrants in exchange for
services rendered, October 1997, $.50 -- -- -- -- 234,000 --
Exercise of warrants for cash, December
1997, $0.0467 234,000 234 -- -- 10,698 --
Shares issued pursuant to the January 9, 1998
reverse merger between GBT-Delaware, Inc.
and Generex Biotechnology Corporation 1,105,000 1,105 -- -- (1,105) --
Issuance of preferred stock for
services rendered, January 1998, $.1000 -- -- 1,000 1 99 --
Issuance of common stock for cash,
March 1998, $2.50 70,753 71 -- -- 176,812 --
Issuance of common stock for cash,
April 1998, $2.50 60,000 60 -- -- 149,940 --
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 38,172 38 -- -- 95,392 --
Issuance of common stock for cash,
May 1998, $2.50 756,500 757 -- -- 1,890,493 --
Issuance of warrants in exchange for
services rendered, May 1998, $.50 -- -- -- -- 250,000 --
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 162,000 162 -- -- 404,838 --
Issuance of common stock for cash,
June 1998, $2.50 286,000 286 -- -- 714,714 --
Exercise of warrants for cash, June 1998,
$.0667 234,000 234 -- -- 15,373 --
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 24,729 24 -- -- 61,799 --
Equity adjustment for foreign currency
translation -- -- -- -- -- (198,959)
Net loss -- -- -- -- -- --
---------- ------- ----- ------ ----------- -----------
Balance - July 31, 1998 11,971,272 $11,971 1,000 $ 1 $ 9,162,329 $ (199,433)
========== ======= ===== ====== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
------------- -------------
<S> <C> <C>
Balance - August 1, 1997 $(1,718,966) $3,448,836
Issuance of warrants in exchange for
services rendered, October 1997, $.50 -- 234,000
Exercise of warrants for cash, December
1997, $0.0467 -- 10,932
Shares issued pursuant to the January 9, 1998
reverse merger between GBT-Delaware, Inc.
and Generex Biotechnology Corporation -- --
Issuance of preferred stock for
services rendered, January 1998, $.1000 -- 100
Issuance of common stock for cash,
March 1998, $2.50 -- 176,883
Issuance of common stock for cash,
April 1998, $2.50 -- 150,000
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 -- 95,430
Issuance of common stock for cash,
May 1998, $2.50 -- 1,891,250
Issuance of warrants in exchange for
services rendered, May 1998, $.50 -- 250,000
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 -- 405,000
Issuance of common stock for cash,
June 1998, $2.50 -- 715,000
Exercise of warrants for cash, June 1998,
$.066 7 -- 15,607
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 -- 61,823
Equity adjustment for foreign currency
translation -- (198,959)
Net loss (4,613,604) (4,613,604)
----------- -----------
Balance - July 31, 1998 $(6,332,570) $ 2,642,298
=========== ===========
</TABLE>
The Notes to Consolidate Financial Statements are an integral part of these
statements.
F-7
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Cumulative
Period From
November 2, November 2,
For the Years Ended 1995 (Date 1995 (Date
July 31, of Inception) of Inception)
-------------------------------- to July 31, to July 31,
1998 1997 1996 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,613,604) $(1,355,543) $ (363,423) $(6,332,570)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 31,096 10,411 2,578 44,085
Common stock and warrants issued
for services rendered 1,046,253 -- -- 1,046,253
Preferred stock issued for services rendered 100 -- -- 100
Changes in operating assets and liabilities:
Miscellaneous receivables -- (119,967) (50,212) (170,179)
Other current assets (89,268) (37,020) (10,289) (136,577)
Accounts payable and accrued liabilities 1,099,815 226,131 -- 1,325,946
Other, net 110,317 -- -- 110,317
----------- ----------- ----------- -----------
Net Cash Used in Operating Activities (2,415,291) (1,275,988) (421,346) (4,112,625)
Cash Flows from Investing Activities:
Purchases of property and equipment (16,287) (41,987) (17,499) (75,773)
Change in restricted cash (111,250) -- -- (111,250)
Change in deposits (17,601) -- -- (17,601)
Change in notes receivable 104,153 (104,153) -- --
Increase (decrease) in subscriptions receivable -- 1,527,606 (1,527,606) --
Change in due from related parties 154,945 (2,740,260) (389,071) (2,974,386)
Other, net 89,683 -- -- 89,683
----------- ----------- ----------- -----------
Net Cash Provided by (Used in)
Investing Activities 203,643 (1,358,794) (1,934,176) (3,089,327)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 993,149 -- -- 993,149
Repayment of long-term debt (63,389) -- -- (63,389)
Change in due to related parties 236,024 -- -- 236,024
Proceeds from the issuance of common stock, net 2,959,672 2,785,212 2,383,064 8,127,948
----------- ----------- ----------- -----------
Net Cash Provided By Financing Activities 4,125,456 2,785,212 2,383,064 9,293,732
Effect of Exchange Rates on Cash (18,985) 17,251 781 (953)
----------- ----------- ----------- -----------
Net Increase in Cash 1,894,823 167,681 28,323 2,090,827
Cash, Beginning of Period 196,004 28,323 -- --
----------- ----------- ----------- -----------
Cash, End of Period $ 2,090,827 $ 196,004 $ 28,323 2,090,827
=========== =========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-8
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Business:
Generex Biotechnology Corporation (the Company) was incorporated in Idaho
in 1983 as Green Mt. P.S., Inc. Since 1983 and prior to January 9, 1998,
the Company had essentially been inactive. In January 1998, the Company
with a wholly-owned subsidiary which had been recently formed, acquired all
of the outstanding capital stock of GBT - Delaware, Inc., an entity whose
only asset consisted of the stock of Generex Pharmaceuticals, Inc.
("Generex Pharmaceuticals"), a Canadian corporation formed in November 1995
to engage in pharmaceutical and biotechnological research and other
activities. The shareholders of GBT - Delaware, Inc. were the same
shareholders of Generex Pharmaceuticals. As a result of this acquisition,
the former shareholders of GBT - Delaware, Inc. acquired approximately 90
percent of the Company's outstanding capital stock. GBT - Delaware, Inc.
was treated as the acquiror in this transaction for accounting purposes,
and accordingly, the historical financial statements of GBT - Delaware,
Inc., prior to the acquisition date, are deemed to be the historical
financial statements of the Company.
The Company is engaged in the research and development of drug delivery
systems and technology. Since its inception, the Company has devoted its
efforts and resources to the development of a platform technology for the
oral administration of large molecule drugs, including proteins, peptides,
monoclonal antibodies, hormones and vaccines, which historically have been
administered by injection, either subcutaneously or intravenously.
The Company is a development stage company, which has a very limited
history of operations and has not generated any revenues from operations.
The Company has no products approved for commercial sale at the present
time. There can be no assurance that the Company will be successful in
developing any new products, that regulatory clearance for the sale of
future products will be obtained or that any future product will be
commercially viable.
Note 2 - Basis of Preparation:
Since inception, the Company has suffered recurring losses and net cash
outflows from operations. The Company expects to continue to incur
substantial losses to complete the development and testing of its drug
candidates, and does not expect to complete the development stage and begin
commercialization of its products in the foreseeable future. Management is
actively pursuing various options, which include entering into strategic
partnerships with large pharmaceutical companies. Since its inception, the
Company has funded operations through debt and common stock issuances in
order to meet its strategic objectives. Management is also actively
pursuing other financing options, which include securing additional equity
financing, and believes that sufficient funding will be available to meet
its planned business objectives including anticipated cash needs for
working capital, for a reasonable period of time. However, there can be no
assurance that the Company will be able to obtain sufficient funds to
continue the development of, and if successful, to commence the manufacture
and sale of its drug candidates, if and when approved by the applicable
regulatory agencies. As a result of the foregoing, there exists substantial
doubt about the Company's ability to continue as a going concern. These
financial statements do not include any adjustments relating to the
recoverability of the carrying amounts of recorded assets or the amount of
liabilities that might result from the outcome of this uncertainty.
F-9
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Development Stage Company
The accompanying consolidated financial statements have been prepared in
accordance with the provisions of Statement of Financial Accounting
Standard No. 7, "Accounting and Reporting by Development Stage
Enterprises."
Restricted Cash
The Company maintains cash funds held in trust by an attorney for the
future purchase of the Company's stock pursuant to an agreement (see Note
7).
Property and Equipment, Net
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Gains
and losses on depreciable assets retired or sold are recognized in the
statement of operations in the year of disposal. Repairs and maintenance
expenditures are expensed as incurred.
Research and Development Costs
Expenditures for research and development are expensed as incurred and
include, among other costs, those related to the production of experimental
drugs, including payroll costs, and amounts incurred for conducting
clinical trials. Amounts expected to be received from foreign governments
under research and development tax credit arrangements are offset against
the related expenses. Included in miscellaneous receivables is $153,597 and
$168,234 of such a receivable, due from the Canadian government, at July
31, 1998 and 1997, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred income
taxes are recorded for temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.
F-10
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant Accounting Policies (Continued):
Net Loss Per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share" ("FAS 128"),
which requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS") by all entities that have
publicly traded common stock or potential common stock (options, warrants,
convertible securities or contingent stock arrangements). FAS 128 also
requires presentation of earnings per share by an entity that has made a
filing or is in the process of filing with a regulatory agency in
preparation for the sale of securities in a public market.
Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS gives effect to all dilutive potential
common shares outstanding during the period. The computation of Diluted EPS
does not assume conversion, exercise or contingent exercise of securities
that would have an antidilutive effect on earnings. Refer to Note 12 for
methodology for determining net loss per share.
New Accounting Standards
The Company will adopt Statement of Financial Accounting Standard (FAS) No.
130, "Reporting Comprehensive Income" in fiscal 1999. This statement
establishes standards for reporting and displaying comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires the
classification of items of comprehensive income by their nature in a
financial statement and the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of the balance sheet. The Company believes that adoption
of this statement will not have a material effect on its financial
statements.
The Company will also adopt FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal 1999. This statement
supercedes FAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. This statement establishes standards for reporting information
about operating segments in annual financial statements. Operating segments
are defined as components of an enterprise evaluated regularly by the
Company's senior management in deciding how to allocate resources and in
assessing performance. The Company believes that adoption of this statement
will not have a material effect on its financial statements.
In 1998, the FASB issued Statement of Financial Accounting Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133). SFAS No. 133 modifies the accounting for derivative and hedging
activities and is effective for fiscal years beginning after December 15,
1999. The Company believes that the adoption of SFAS No. 133 will not have
a material impact on the Company's financial reporting.
F-11
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant Accounting Policies (Continued):
Concentration of Credit Risk
The Company maintains cash balances, at times, with financial institutions
in excess of amounts insured by the Federal Deposit Insurance Corporation.
Management monitors the soundness of these institutions and considers the
Company's risk negligible. The Company also maintains cash balances with
Canadian legal counsel resulting from transactions which have been
consummated, but final funds have not yet been disbursed. Management
believes their credit risk on these balances to be minimal.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Foreign Currency Translation
Foreign denominated assets and liabilities of the Company are translated
into US dollars at the prevailing exchange rates in effect at the end of
the reporting period. Income statement accounts are translated at a
weighted average of exchange rate which were in effect during the period.
Translation adjustments that arise from translating the foreign
subsidiary's financial statements from local currency to US dollars are
recorded in the cumulative translation adjustment component of
stockholders' equity.
Financial Instruments
The carrying values of accounts payable and accrued expenses approximate
their fair values. The fair value of the Company's long-term debt is
assumed to approximate its book value.
Note 4 - Property and Equipment:
The costs and accumulated depreciation of property and equipment at
July 31, are summarized as follows:
1998 1997
---- ----
Land $ 239,810 $ --
Buildings 1,366,956 --
Furniture and Fixtures 7,998 5,938
Office Equipment 60,850 52,869
---------------- ------------
Total Property and Equipment 1,675,614 58,807
Less: Accumulated Depreciation 41,167 12,848
---------------- ------------
Property and Equipment, Net $ 1,634,447 $ 45,959
================ ============
F-12
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Property and Equipment (Continued):
Depreciation expense amounted to $31,096, $10,411 and $2,578 for the years
ended July 31, 1998 and 1997, and the period November 2, 1995 (date of
inception) to July 31, 1996, respectively.
Note 5 - Income Taxes:
The Company has incurred losses since inception which have generated net
operating loss carryforwards on a consolidated basis of approximately
$4,500,000 at July 31, 1998 which are available to offset future taxable
income. The net operating loss carryforwards arise from both United States
and Canadian sources. The net operating loss carryforwards will expire in
2005 through 2018. These loss carryforwards are subject to limitation on
future years utilization should certain ownership changes occur.
For the years ended July 31, 1998 and 1997 and for the period November 2,
1995 (date of inception) to July 31, 1996, the Company's effective tax rate
differs from the federal statutory rate principally due to net operating
losses and other temporary differences for which no benefit was recorded.
Deferred tax assets consist of the following at July 31:
1998 1997
---- ----
Net operating loss carryforwards $ 2,008,795 $ 750,500
Research and development tax credits 75,705 22,362
Depreciation and amortization 204,755 23,035
Accrued liabilities 118,914 --
----------- ---------
Total deferred tax assets 2,408,169 795,897
Valuation allowance $(2,408,169) $(795,897)
----------- ---------
Net deferred tax assets -- --
=========== =========
Note 6 - Accounts Payable and Accrued Expense:
Accounts payable and accrued expenses consist of the following at July 31:
1998 1997
---- ----
Accounts Payable $ 336,634 $ 223,939
Penalty Arising from Violation
of Financing Agreement (A) 738,000 --
Consulting Accruals 151,945 --
Building Purchase Liability 26,425 --
--------------- -------------
Total $ 1,253,004 $ 223,939
=============== =============
- ----------
(A) See Note 9 for further discussion of underlying debt and penalty amount.
F-13
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities:
Consulting Services
In October 1996, the Company entered into a Consulting Agreement with the
Vice President of Research and Development (the V.P.) pursuant to which,
among other things, the V.P. assigned to the Company his entire right,
title and interest in and to all inventions, ideas, designs and discoveries
made by him during the term of such agreements which relate in any manner
to the development, manufacturing, marketing, distribution and sale of
generic drug products, including, without limitation, controlled release
drugs, topical insulin, intra-nasal insulin and liposome creams.
Concurrently with execution of this Consulting Agreement, the V.P. and the
Company entered into an Assignment and Assumption Agreement pursuant to
which the V.P. assigned to the Company his interests in and to specific
drug delivery systems, controlled release drug delivery systems, controlled
release drug delivery systems and technology patents invented/discovered/
conceived by the V.P. prior to the execution of the Agreement, including
three existing patents covering insulin delivery systems, applicable to
peptides and proteins; drug vaccines and hormones delivery; and controlled
release of drugs and hormones (the "Existing Patents"). In addition to the
Existing Patents, the V.P. assigned to the Company four US and/or Canadian
patent applications and certain abstracts covering, among other things,
liposomes drug delivery for vaccines, drugs, hormones, peptides and
cosmetic delivery; transdermal drug delivery for proteins, peptides,
hormones and small molecules; controlled release drug delivery systems for
capsules, caplets, and liquid suspensions; and DNA technology relating to
insulin preparation (collectively, "Other Existing Technology"). The
Existing Patents are owned of record by a Company, which is 50 percent
owned by the V.P.
Under the terms of the agreement, which expires December 31, 2004, a fee of
$87,204 is paid for each year during the term of this agreement, which
shall be in equal monthly installments of $7,267 each payable on the 30th
day of each month, not in advance; and the sum of $500 per month payable on
the 30th day of each month, not in advance, to offset the expenses and
costs (including expenses and costs incurred in obtaining and operating an
automobile) incurred in connection with the performance of the V.P.'s
services. The Company has also agreed to reimburse the V.P. for $99,095 of
expense incurred in research activities prior to his association with the
Company, all of which was included in accounts payable, at July 31, 1998.
F-14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
Consulting Services (Continued)
On March 17, 1998, the Company entered into separate consulting agreements
with two consultants to assist the Company: to test and evaluate the
therapeutic effects of its formulations; to develop protocols for testing
its formulations; to review and provide suggestions in respect of draft
submissions to regulatory authorities and otherwise assist the Company in
its efforts to obtain regulatory approvals for its formulations in various
jurisdictions, including its efforts to obtain approvals of any Ethics
Committees of institutions with which the Consultants are ordinarily
affiliated; to arrange and in some cases to conduct clinical trials of its
formulations in Canada; and to provide input and assistance with respect
to, and evaluate results of, clinical trials in other jurisdictions. The
Consultants shall also attend meetings with regulators and assist the
Company in making presentations to regulators when reasonably convenient.
Under the terms of the agreement, the Company will pay retainer fees of
$10,000 per consultant each on August 1, 1998, December 1, 1998, March 1,
1999 and July 1, 1999. In addition, the Company will pay an hourly or per
diem amount for all services actually rendered and reimburse reasonable and
necessary travel and lodging expenses incurred incident to services
rendered. The agreement shall terminate on December 31, 2000.
Also on March 17, 1998, the Company entered into separate consulting
agreements with two additional consultants to assist the Company: to test
and evaluate the therapeutic effects of its formulations; to develop
protocols for testing its formulations; to review and provide suggestions
in respect of draft submissions to regulatory authorities and otherwise
assist the Company in its efforts to obtain regulatory approvals for its
formulations in various jurisdictions, including its efforts to obtain
approvals of any Ethics Committees of institutions with which the
Consultants' representatives are ordinarily affiliated; and to provide
input and assistance with respect to, and evaluate results of, clinical
trials in other jurisdictions. The additional Consultants shall also attend
meetings with regulators and assist the Company in making presentations to
regulators when reasonably convenient.
Under the terms of the agreement, the Company will pay an hourly or per
diem fee for all services actually rendered and reimburse reasonable and
necessary travel and lodging expenses incurred incident to services
rendered. The agreement shall terminate on December 31, 2000.
Leases
The Company has entered into various lease agreements for the use of
vehicles and office equipment.
F-15
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
Leases (Continued)
Aggregate minimum annual lease commitments of the Company as of July 31,
1998 are as follows:
Year Amount
---- ------
1999 $ 13,078
2000 10,004
2001 5,990
2002 4,446
Thereafter 253
-----------
Total Minimum Lease Payments $ 33,771
===========
Lease expense amounted to $50,757, $9,206 and $6,946 for the years ended
July 31, 1998 and 1997 and for the period November 2, 1995 (date of
inception) to July 31, 1996, respectively.
The preceding data reflects existing leases and does not include
replacements upon their expiration. In the normal course of business,
operating leases are generally renewed or replaced by other leases.
Rental Operations
The Company leases a portion of the floor that it owns in an office
building located in Toronto, Canada. The Company, pursuant to a debt
agreement with Romspen Investment Corporation, has assigned their interest
in these lease payments to a management company who then also pays certain
expenses related to these rental units. This assignment will end on
December 31, 1998, or when the additional amount of $26,425 (see Note 6) is
paid to the prior owner of the properties. Once the assignment period ends,
the Company will be entitled to the sublease rental income from the other
tenants. Based upon the estimated ending of the assignment period of
December 31, 1998, the following represents the approximate amount of
sublease income to be received in years ending after July 31, 1998:
Year Amount
---- ------
1999 $ 126,000
2000 104,000
2001 6,000
2002 --
2003 --
-------------
Total $ 236,000
=============
F-16
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
Pending Litigation
Sands Brothers & Co., Ltd. (Sands), a New York City-based investment
banking and brokerage firm, initiated arbitration against the Company under
New York Stock Exchange rules in September 1998. This claim is based upon a
claim that Sands has the right to purchase, for nominal consideration,
approximately 1.5 million shares of the Company's common stock. This claim
is based upon an October 1997 letter agreement which purportedly confirmed
the terms of an agreement appointing Sands as the exclusive financial
advisor to Generex Pharmaceuticals, Inc. (GPI) and granting Sands the right
to receive shares representing 17 percent of the outstanding capital stock
of GPI on a fully diluted basis. Following the acquisition of GPI by GBT -
Delaware, Inc., Sands' claimed a right to receive shares of GPI common
stock that would, allegedly, now apply to the Company's common stock. Sands
also claims that it is entitled to additional shares of the Company as a
result of the GBT - Delaware, Inc.'s acquisition of GPI (approximately
460,000 shares), and $144,000 in fees under the terms of the purported
Agreement. Sands has never performed any services for the Company, and the
Company and GPI have denied that the individual who is alleged to have
entered into the purported agreement between Sands and GPI had the
authority to act on GPI's behalf, and accordingly, is defending against
Sands' claim primarily on the basis that no agreement has ever existed
between GPI and Sands. The arbitration process is scheduled to begin in
June 1999 and the Company is unable to predict the outcome at this time.
However, the Company intends to vigorously defend itself in this matter and
does not expect that the ultimate resolution of this matter will have a
material effect on its results of operations and financial condition.
Generex Pharmaceuticals, Inc., is also contesting a claim for wrongful
dismissal in the amount of approximately $300,000 plus special damages,
interest and costs. The Company believes that the plaintiff was never
employed by the Company or any of its subsidiaries and that the case is
without merit.
An action was also commenced against GPI and other companies and
individuals seeking approximately $3,965,000 for allegedly causing certain
adverse consequences of a plaintiff's particular investment in a company.
GPI's only involvement was that at one time there was interest on
its part in buying certain assets from this company. GPI failed to file a
Statement of Defense to the Statement of Claim and GPI was noted in default
on October 1, 1996. An application has been filed to set aside that default
notice, however that application has been adjourned indefinitely. The
Company plans to take action after January 1, 1999 to terminate this action
against itself and GPI.
F-17
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingent Liabilities (Continued):
Stock Redemption
Under the terms of a settlement, determined in an Ontario, Canada Court,
the Company agreed to purchase 15,357 shares from a shareholder for a total
purchase price of $142,035, payable in four equal installments commencing
December 31, 1997, to be held in trust by the shareholder's legal counsel.
Each installment is to be released to the shareholder upon delivery of the
related shares to the Company or its legal counsel (the Company). The
shareholder maintains the right at any time to advise the Company, in
writing, which shall be irrevocable, that the shareholder will forego any
of the four installments, in which case the Company shall have no
obligation to deliver payment for that portion of the shares. As of July
31, 1998, the Company had not been advised that the shareholder would
forego any payments and had not received any of the shares for which funds
were held in trust. The Company's funding for this potential share
repurchase is being maintained in an attorney trust account and has been
labeled "Restricted Cash" on the July 31, 1998 consolidated balance sheet
(See Note 14).
Note 8 - Related Party Transactions:
The amounts due from (to) related parties at July 31, are as follows:
<TABLE>
<CAPTION>
Golden
The Angara Angara Ching Bull
Great Tao Equities Investments, Chew An Estates,
Inc. Inc. Inc. Breweries Inc. EBI, Inc.
---------- -------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, Nov. 2, 1995
(Date of Inception) $ -- $ -- $ -- $ -- $ -- $ --
Company expenses
paid by related parties -- (6,946) -- -- -- --
Related party expenses
paid by the Company 55,127 340,891 -- -- -- --
Other (570) (3,450) -- -- -- --
------------ ---------- ----------- --------- --------- -----------
Ending Balance,
July 31, 1996 54,557 330,495 -- -- -- --
Cash advance -- -- -- -- -- 2,182,294
Company expenses
paid by related parties -- (9,206) -- -- -- --
Related party expenses
paid by the Company 73,067 500,867 -- -- -- --
Other (996) (6,513) -- -- -- (11,527)
------------ ---------- ----------- --------- --------- -----------
Ending Balance,
July 31, 1997 126,628 815,643 -- -- -- 2,170,767
Purchase of properties -- -- -- -- -- (1,204,640)
Cash collection -- (403,639) -- -- -- (441,548)
Company expenses
paid by related parties (352,384) (22,171) (277,962) (29,481) (209,637) --
Related party expenses
paid by the Company 122,338 293,976 136,644 29,381 468,851 --
Other 1,263 (63,928) 7,543 6 (13,837) (188,869)
------------ ---------- ----------- --------- --------- -----------
Ending Balance,
July 31, 1998 $ (102,155) $ 619,881 $ (133,775) $ (94) $ 245,377 $ 335,710
============ ========== =========== ========= ========= ==========
</TABLE>
The above information is summarized and included in the consolidated
balance sheets as follows:
Due From Due To
Related Related
1998 Parties Parties
---- ---------- --------
The Great Tao, Inc. $ -- $102,155
Angara Equities, Inc. 619,881 --
Angara Investments, Inc. -- 133,775
Ching Chew An Breweries -- 94
Golden Bull Estates, Inc. 245,377 --
EBI, Inc. 335,710 --
---------- --------
Total $1,200,968 $236,024
========== ========
1997
----
The Great Tao, Inc. $ 126,628 $ --
Angara Equities, Inc. 815,643 --
Angara Investments, Inc. -- --
Ching Chew An Breweries -- --
Golden Bull Estates, Inc. -- --
EBI, Inc. 2,170,767 --
---------- --------
Total $3,113,038 $ --
========== ========
F-18
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions (Continued):
These amounts are non-interest bearing. There are no fixed terms of
repayment.
Each of the above related parties is owned in whole or in part by the
Company's Chairman of the Board. In addition, EBI, Inc. and Golden Bull
Estates, Inc. are shareholders of the Company.
Management feels that all related party expenses provided by such parties
were transacted at terms and amounts that would have been obtained had the
transactions been consummated with unrelated third parties. The exception
to this is rent expense in 1996 and 1997 and the non-recording of interest
income and expense on the balances due to/from related parties. The Company
estimates the following additional amounts would have been recorded if such
transactions were consummated under arms length agreements:
For the Years Ended For the Period
----------------------- November 2, 1995
July 31, (Date of Inception)
1998 1997 to July 31, 1996
-------- -------- -------------------
Rental Expense $ -- $ 36,826 $27,784
Interest Income $273,429 $ 75,488 $13,382
Interest Expense $113,064 $ 339 $ 132
The interest income/expense amounts were computed at estimated prevailing
rates based on the weighted average receivable/payable balance outstanding
during the periods reflected. The weighted average receivable amount was
$3,621,422, $1,015,783 and $198,679 during the years ended 1998 and 1997
and for the period November 2, 1995 (date of inception) to July 31, 1996.
The weighted average amount payable was $1,043,413, $3,932 and $899 during
the years ended 1998 and 1997 and for the period November 2, 1995 (date of
inception) to July 31, 1996.
As of July 31, 1998, the Company's three senior officers, who are also
shareholders of the Company were compensated indirectly by the Company
through a management services contract between the Company and a management
firm of which they were equal owners. The amounts paid to this management
firm amounted to $280,000, $-0- and $-0- for the years ended July 31, 1998
and 1997 and for the period November 2, 1995 (date of inception) to July
31, 1996.
Prior to December 17, 1997, the Company occupied its executive offices at
Harbour Square Business Center under an Occupancy Agreement between Generex
Pharmaceuticals, Inc. (GPI), Angara Equities, Inc. and 1097346 Ontario,
Inc. (the Angara/1097346 lease) pursuant to which GPI paid Angara a monthly
occupancy fee of approximately $4,200 CAD, which represents the rental and
other charges allocable to it space under Angara's lease for space, which
included the Company's offices, 1097346 Ontario, Inc., the owner of the
space. Angara Equities, Inc. is owned by the Company's Chairman of the
Board. On December 17, 1997, GPI terminated the Angara/1097346 lease.
See Note 7 for discussion of consulting agreement with the Vice President
of Research and Development.
During fiscal year 1998, the Company purchased two buildings from the
father of the Company's Chairman of the Board. The total purchase price was
$984,343.
Note 9 - Long-Term Debt:
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Mortgage payable - Romspen Investment Corporation, interest at 10.5 percent
per annum, monthly payments of interest only, principal due on March 20,
2000, secured by real property located at 33 Harbour Square, Toronto Suites
#202 and #3501, which is owned personally by the Company's Chairman of the
Board, and an assignment of all rents until December 31, 1998 $528,506 $ --
-------- ----
Subtotal $528,506 $ --
</TABLE>
F-19
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Long-Term Debt (Continued):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Subtotal $ 528,506 $ --
Mortgage payable - Laurential Bank, interest at 9.25 percent
per annum, final payment due February 1, 2001, secured by
real property located at 98 Stafford Drive, Brampton and
1740 Sismet Road, Mississauga 402,126 --
Note payable - Berckeley Investment Group, Ltd., inclusive of interest,
balance originally was to be paid in full June 1998 (a) 393,750 --
---------- ------
Total Debt 1,324,382 --
Less Current Maturities 411,565 --
---------- ------
Long-Term Debt, Less Current Maturities $ 912,817 $ --
========== ======
</TABLE>
- -----------
(a) Pursuant to an agreement, The Company originally
agreed that in the event that the common stock, or
their equivalent, were not listed or quoted for
trading on a public market in North America within
ninety (90) days of the agreement, the Company
shall pay the sum of $300,000 as damages within
five (5) days of the end of such ninety (90) day
period. This milestone was not achieved by the Company.
However, upon mutual agreement, the Company issued shares
of its common stock subsequent to year-end. The
value of this settlement is included in accounts
payable and accrued expenses at July 31, 1998.
(See Note 6)
Aggregate maturities of long-term debt of the Company due within the next
five years ending July 31, are as follows:
Year Amount
---- ----------
1999 $ 411,565
2000 548,006
2001 364,811
2002 --
2003 --
----------
$1,324,382
==========
Note 10 - Stockholders' Equity:
Reverse Merger
On January 9, 1998, the Company issued 9,234,118 of common stock to acquire
GBT - Delaware, Inc. (see Note 1). For accounting purposes, the acquisition
of GBT - Delaware, Inc. by the Company has been treated as a reverse
merger. Accordingly, the 9,234,118 shares issued to acquire GBT - Delaware,
Inc. have been treated as outstanding from November 2, 1995 (as adjusted
for historical issuances of GBT - Delaware, Inc. and Generex
Pharmaceuticals, Inc. during the period from November 2, 1995 to January 8,
1998) and the previously outstanding 1,105,000 shares have been treated as
issued on the acquisition date. Since the assets and liabilities acquired
on this date were immaterial, no amounts have been assigned to common stock
as a result of this transaction.
F-20
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Stockholders' Equity (Continued):
Warrants
The Company has outstanding 1,153,425 Series A Redeemable Common Stock
Purchase Warrants, each of which is exercisable to purchase one (1) share
of common stock at a price of $5.00 per share. The warrants are redeemable,
at the option of the Company, at any time after September 1, 1998, upon
written notice of not less than twenty (20) days, at a redemption price of
$.025 per warrant. These warrants expire December 31, 2000.
The warrants were sold between March 1, 1998 and June 30, 1998, in units,
with each unit consisting of one warrant and one share of common stock, in
a private placement effected by the Company pursuant to Rule 506,
Regulation D, under the Act, and applicable Canadian securities laws.
Included in these transactions were 993,253 units sold for cash at $2.50,
and 160,172 units issued in payment for various services rendered and
valued at $2.50 per unit.
The Company also has outstanding warrants to purchase 500,000 shares of
Common Stock at a price of $2.50 which expire on March 31, 2003, and
warrants to purchase 7,937 shares at a price of $21.82 per share which
expire on September 6, 2002.
Preferred Stock
The Company has authorized 1,000,000 shares with a par value of one-tenth
of a cent ($.001) per share of preferred stock. The preferred stock may be
issued in various series and shall have preference as to dividends and to
liquidation of the Company. The Company's Board of Directors is authorized
to establish the specific rights, preferences, voting privileges and
restrictions of such preferred stock, or any series thereof. Other than the
Special Voting Rights Preferred Stock, described below, there are no shares
of preferred stock currently issued and outstanding.
Special Voting Rights Preferred Stock
The Company has issued 1,000 shares of Special Voting Rights Preferred
Stock (SVR) with a par value of $.001. The Company has the right at any
time after December 31, 2000, upon written notice to all holders of
preferred shares, to redeem SVR Shares at $.10 per share. Holders of SVR
Shares are not entitled to vote, except as specifically required by Idaho
law or in the event of change in control, as defined. In addition, holders
of SVR Shares are entitled to receive a dividend per share equal to the
dividend declared and paid on shares of the Company's common stock as and
when dividends are declared and paid on the Company's common stock.
Note 11 - Stock Based Compensation:
The Company intends to apply Accounting Principles board Opinion No. 25,
"Accounting for Stock issued to Employees," and related interpretations in
accounting for options as allowed by Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation." During the
years ended July 31, 1998 and 1997 and for the period November 2, 1995
(date of inception) to July 31, 1996, the Company did not grant options;
thus no compensation expense was recorded in these years.
F-21
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Based Compensation (Continued):
1998 Stock Option Plan
On January 22, 1998, the Company's Board of Directors approved the 1998
Stock Option Plan (the Plan), subject to shareholder approval of the Plan,
and reserved 1,000,000 shares of Common Stock for issuance upon options
granted under the Plan. As of July 31, 1998, no options have been issued
under the Plan.
The Plan presently is administered by the Board of Directors, but the Board
may establish a Stock Option Committee (the Committee), which consists of
at least three directors, to administer the Plan. References to the
Committee herein include the Board of Directors so long as it continues to
administer the Plan directly.
The Committee is authorized to select from among eligible employees,
directors, advisors and consultants those individuals to whom options are
to be granted and to determine the number of shares to be subject to, and
the terms and conditions of, the options. The Committee also is authorized
to prescribe, amend and rescind terms relating to options granted under the
Plan and the interpretation of options. Generally, the interpretation and
construction of any provision of the Plan or any options granted thereunder
is within the discretion of the Committee.
The Plan provides that options may or may not be Incentive Stock Options
within the meaning of Section 422 of the Internal Revenue Code (ISOs). Only
employees of the Company are eligible to receive ISOs, while employees and
non-employee directors, advisors and consultants are eligible to receive
options which are not ISOs, i.e. "Non-Qualified Options." The options
granted by the Board in connection with its adoption of the Plan are
Non-Qualified Options.
Note 12 - Net Loss Per Share:
Basic EPS and Diluted EPS for the years ended July 31, 1998, 1997 and for
the period November 2, 1995 (date of inception) to July 31, 1996 have been
computed by dividing the net loss for each respective period by the
weighted average shares outstanding during that period. All outstanding
warrants have been excluded from the computation of Diluted EPS as they are
antidilutive.
F-22
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Supplemental Disclosure of Cash Flow Information:
<TABLE>
<CAPTION>
For the
Period
For the Years Ended November 2,
July 31, 1995 (Date
------------------- of Inception)
1998 1997 1996
-------- ------- --------------
<S> <C> <C>
Cash paid during the year for:
Interest $ 63,291 $ -- --
Income taxes -- -- --
</TABLE>
Disclosure of non-cash investing and financing activities:
<TABLE>
<S> <C>
Year ended July 31, 1998
Miscellaneous receivable acquired with long-term debt $ 58,516
Long-term debt was assumed in conjunction with acquisition of
property and equipment $ 402,126
Acquisition of property and equipment with collection of
related party receivables $ 1,204,640
Acquisition of a deposit on property and equipment with
collection of related party receivables $ 68,000
</TABLE>
Note 14 - Segment Information:
The regions to which the Company had identifiable assets and operating
losses are presented in the following table. Identifiable assets are those
that can be directly associated with a geographic area. Corporate assets
include cash, restricted cash, other current assets, and due from related
parties. Operating loss by geographic segment does not include an
allocation of general corporate expenses.
Identifiable Operating
Assets Loss
------------ ----------
1998
----
United States $ -- $ --
Canada 1,926,046 3,565,378
Corporate 3,529,662 984,935
---------- ----------
Total $5,455,708 $4,550,313
========== ==========
1997
----
United States $ -- $ --
Canada 316,943 1,355,543
Corporate 3,355,832 --
---------- ----------
Total $3,672,775 $1,355,543
========== ==========
1996
----
United States $ -- $ --
Canada 473,251 363,423
Corporate 14,767 --
---------- ----------
Total $ 488,018 $ 363,423
========== ==========
Note 15 - Subsequent Events (Unaudited):
Subsequent events occurring after July 31, 1998 consist of the following:
The Company entered into a consulting agreement with an individual. As
part of the consultant's compensation, the Company granted the
consultant options to purchase 50,000 shares of the Company's common
stock at an exercise price of $8.00 per share under the 1998 stock
option plan.
The stock option plan adopted in January 1998 was not submitted for
shareholder approval and terminated in January 1999. A new plan,
substantially identical to the old, has been adopted. Options
granted under the old plan are not affected by the termination.
The debt as discussed in Note 9 with Berckeley Investment Group, Ltd.
was paid off in cash.
For consideration of financial consulting services provided, the
Company issued warrants to purchase 300,000 shares of common stock at
$10 per share.
F-23
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Subsequent Events (Unaudited) (Continued):
The Company received a total of $4,243,506 from the sale of 1,147,353
shares of common stock at prices ranging from $2.50 to $5.50. Of this
amount 250,000 shares were issued to an individual from which the
Company has the right of first refusal to purchase the shares at 70
percent of the current market price. The Company also has agreed to
repurchase from the individual after December 31, 1999, at the
individual's option, such portion or all of his shares as he may elect
to tender to the Company at a price equal to 70 percent of the then
current market price. The individual also had the right to purchase an
additional 250,000 shares of the Company's common stock until December
23, 1998, on the same terms and conditions as the first 250,000 shares
purchased, which was not exercised.
The Company acquired 15,357 shares for $142,036 under the terms of the
arrangement described in Note 7. The Company utilized their restricted
cash balance for this transaction.
The Company purchased property to be used as a manufacturing facility
in Toronto, Canada for approximately $25,000 in cash and approximately
$82,250 of long-term debt.
The Company acquired land in Ecuador, South America. Under the terms
of the agreement, a facility will be constructed for a research and
development pilot plant. To acquire this facility, the Company
utilized $68,000 in deposit money and $350,000 from the proceeds
received from the collection of a related party receivable.
The Company settled the liability arising from the violation of a
financing agreement, as described in Note 6, by the issuance of
180,000 shares of common stock valued at $738,000.
In February 1999, MQS, Inc., a former consultant to the Company,
commenced a civil action against the Company in the United States
District Court for the District of New Jersey claiming that 242,168
shares of the Company's common stock and $243,066 are due to it
for services which it rendered through December 22, 1998. MQS also
claims compensation on a quantum merit basis for the value of its
services, and for punitive damages. The Company has not yet responded
to the Complaint in this action.
F-24
<PAGE>
Item 14. CHANGES IN, AND DISAGREEMENTS WITH ACCOUNTANTS
Prior to the Company's "reverse acquisition" of Generex Pharmaceuticals,
Inc. in January 1998, its financial statements were audited by Jack F. Burke,
Jr. Since, under "reverse acquisition" accounting rules, the financial
statements of the Company represent the historical financial statements of
Generex Pharmaceuticals, Inc. ("GPI"), the Company dismissed Mr. Burke and
engaged new auditors, Withum Smith & Brown, to perform the audit on the
Company's financial statements as of and for the year ended July 31, 1998. The
Company also engaged Withum, Smith & Brown and Mintz & Partners to perform a
joint audit on the Company's financial statements as of July 31, 1997 and for
the year then ended and for the period November 2, 1995 (date of inception) to
July 31, 1996. Mintz & Parnters had been the auditors for GPI prior to the
Company's acquisition of GPI in January 1998. Mintz & Partners was not engaged
by the Company to audit the Company's Financial Statements as of and for the
year ended January 31, 1998, and was dismissed as auditor for GPI for that
period.
Mr. Burke's reports on the Company's financial statements for the fiscal
years ending prior to July 31, 1998, did not contain an adverse opinion, a
disclaimer of opinion, or any qualification or modification as to uncertainty,
audit scope or accounting principles, nor is current management aware of any
disagreements between the Company and Mr. Burke about any accounting or audit
issues.
The change in auditors was recommended and approved by the Company's Board
of Directors.
Prior to its engagement of Withum, Smith & Brown and Mintz & Partners (the
latter through July 31, 1997 only) as auditors, the Company had no consultations
with such auditors, and is unaware of any such consultation by anyone on its
behalf, concerning any specific accounting matter or transaction other than the
need to prepare the historical financial statements at GPI in accordance with US
GAAP, and that such financial statements would be required to be prepared in
accordance with and conform to Regulation S-X requirements.
Item 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements have been filed with this Registration
Statement:
Consolidated Balance Sheets of Generex Biotechnology Corporation and
Subsidiaries (a Development Stage Company) as of July 31, 1998 and 1997.
Consolidated Statement of Changes in Stockholders' Equity of Generex
Biotechnology Corporation and Subsidiaries (a Development Stage Company) for the
period November 2, 1995 (date of inception) to July 31, 1998.
Consolidated Statement of Operations and Cash Flows of Generex
Biotechnology Corporation and Subsidiaries (a Development Stage Company) for the
fiscal years ended July 31, 1998 and 1997, and for the period November 2, 1995
(date of inception) to July 31, 1996 and the cumulative amounts of operations
and cash flows for the period November 2, 1995 (date of inception) to July 31,
1996.
44
<PAGE>
(b) Exhibits
The following exhibits have been filed with this Registration Statement:
Exhibit No.
- -----------
3.1 Articles of Incorporation of the Company and all amendments thereto
3.2 Bylaws of the Company
4.1 Form of Common Stock Certificate
4.2 Form of Special Voting Rights Preferred Stock Certificate
4.3 1998 Incentive Stock Option Plan
4.3.1* 1999 Incentive Stock Option Plan
4.4.1 Form of Series A Warrant
4.4.2 Form of GCR Warrant
4.4.3 Form of Berckeley Warrant
4.4.4 Form of Meyerson Warrant
4.5.1 Form of Subscription/Voting/Put Agreement between the Company and
Dr. William Steinbrink
4.5.2 Form of Subscription/Voting Agreement executed by purchasers of 337,670
shares of Common Stock
10.1.1 Consulting Agreement with Pankaj Modi
10.1.2* Assignment and Assumption Agreement with Pankaj Modi
16.1.1* Letter from former accountant Jack F. Burke, Jr.
16.1.2* Letter from former accountant Mintz & Partners
21 Subsidiaries of the Company
23.1.1 Consent of Withum, Smith & Brown, independent certified public
accountants
23.1.2 Consent of Mintz & Partners, independent chartered public accountants
27* Financial Data Schedules (Revised)
- ----------
* Filed with Amendment No. 1
45
<PAGE>
The Company has caused this Registration Statement to be executed on its
behalf this 24th day of February, 1999, by the undersigned officers.
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ E. Mark Perri
-----------------------------
E. MARK PERRI, Chairman
By: /s/ Anna E. Gluskin
-----------------------------
ANNA E. GLUSKIN, President
46
GENEREX BIOTECHNOLOGY CORPORATION
1999 STOCK OPTION PLAN
1. Purpose. The Plan is intended as an additional incentive to key
employees, consultants, advisors and members of the Board of Directors
(together, the "Optionees") to enter into or remain in the service or employ of
Generex Biotechnology Corporation, an Idaho corporation (the "Company"), or any
Affiliate (as defined below) of the Company, and to devote themselves to the
Company's success by providing them with an opportunity to acquire or increase
their proprietary interest in the Company through receipt of rights (the
"Options") to acquire the Company's Common Stock, par value $.001 per share (the
"Common Stock"). Each Option granted under the Plan to a person who is employed
by the Company or an Affiliate is intended to be an incentive stock option
("ISO") within the meaning of section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code"), for federal income tax purposes, except to the
extent (i) any such ISO grant would exceed the limitation of subsection 6(a)
below, or (ii) any Option is specifically designated at the time of grant (the
"Grant Date") as not being an ISO. No Option granted to a person who is not an
employee of the Company or any Affiliate on the Grant Date, or is not identified
as an ISO in the Option Documents (as hereinafter defined), shall be an ISO.
For purposes of the Plan, the term "Affiliate" shall mean a corporation
which is a parent corporation or a subsidiary corporation with respect to the
Company within the meaning of section 424(e) or (f) of the Code.
2. Administration. The Plan shall be administered by the Board of Directors
of the Company, without participation by any director on any matter pertaining
to him, provided that any director may join in a written consent to action
signed by all directors notwithstanding that such action pertains to such
director, in whole or in part. The Board of Directors may appoint a Stock Option
Committee composed of three or more of its members to operate and administer the
Plan in its stead. The Stock Option Committee or the Board of Directors in its
administrative capacity with respect to the Plan is referred to herein as the
"Committee."
The Committee shall hold meetings at such times and places as it may
determine. Acts approved at a meeting by a majority of the members of the
Committee or acts approved in writing by the unanimous consent of the members of
the Committee shall be the valid acts of the Committee.
The Committee shall from time to time at its discretion grant Options
pursuant to the terms of the Plan. The Committee shall have plenary authority to
determine the Optionees to whom and the times at which Options shall be granted,
the number of Option Shares (as defined in Section 4 below) to be covered by
<PAGE>
such Options and the price and other terms and conditions thereof, including a
specification with respect to whether an Option is intended to be an ISO,
subject, however, to the express provisions of the Plan. In making such
determinations the Committee may take into account the nature of the Optionee's
services and responsibilities, the Optionee's present and potential contribution
to the Company's success and such other factors as it may deem relevant. The
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted under it shall be final, binding and conclusive.
No member of the Board of Directors or the Committee shall be personally
liable for any action or determination made in good faith with respect to the
Plan or any Option granted under it, nor shall any member of the Board of
Directors or Committee be liable for any act or omission of any other member of
the Committee or for any omission on his own part, including but not limited to
the exercise of or the failure to exercise any power or discretion given to him
under the Plan, except that this section shall not absolve any member of
personal responsibility for liabilities which arises out of or result from (i)
an intentional infliction of harm on the Company or its shareholders, (ii)
intentional violation of criminal law, (iii) acts or omissions that would result
in liability under Section 30-1-833 of Idaho Business Corporation Act, and (iv)
the receipt of an improper personal financial benefit, to the extent of the
amount of such benefit.
In addition to such other rights of indemnification as he may have as a
member of the Board of Directors or the Committee, and with respect to the
administration of the Plan and the granting of Options under it, each member of
the Board of Directors and of the Committee shall be entitled without further
action on his part to indemnity from the Company for all expenses (including the
amount of judgment and the amount of approved settlements made with a view to
the curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of any
action, suit or proceeding with respect to the administration of the Plan or the
granting of Options under it in which he may be involved by reason of his being
or having been a member of the Board of Directors or the Committee, whether or
not he continues to be such member of the Committee at the time of the incurring
of such expenses; provided, however, that such indemnity shall not include any
expenses incurred by such member of the Board of Directors or Committee: (i) in
respect of matters as to which he shall be finally adjudged in such action, suit
or proceeding to have been guilty of gross negligence or willful misconduct in
the performance of his duties as a member of the Board of Directors or the
Committee; or (ii) in respect of any settlement amount in excess of an amount
approved by the Company on the advice of its legal counsel; and provided further
that no right of indemnification hereunder shall be available to or accessible
by any such member of the Committee unless within a reasonable time after
institution of any such action, suit or proceeding (which shall be no later than
the earlier of ten (10) days prior to the date that any responsive pleading or
other action in response to the institution of any such proceeding is due, or
ten (10) days after he has actual notice of the institution of such proceeding)
he shall have offered the Company in writing the opportunity to handle and
defend such action, suit or proceeding at its own expense. The foregoing right
of indemnification shall inure to the benefit of the heirs, executors or
administrators of each such member of the Board of Directors or the Committee
and shall be in addition to all other rights to which such member of the Board
of Directors or the Committee would be entitled to as a matter of law, contract
or otherwise.
-2-
<PAGE>
3. Eligibility. All key employees of the Company or its Affiliates (who may
also be directors of the Company or its Affiliates) shall be eligible to receive
Options hereunder, and such Options may be either ISOs or Options which are not
ISOs (hereinafter, "Nonqualified Options"). Consultants, advisors and directors
of the Company shall be eligible to receive Nonqualified Options hereunder. The
Committee, in its sole discretion, shall determine whether an individual
qualifies as an employee or an Optionee. An Optionee may receive more than one
Option.
4. Option Shares. The aggregate maximum number of shares of the Common
Stock for which Options may be granted under the Plan is One Million Five
Hundred Thousand (1,500,000) shares (the "Option Shares"), which number is
subject to adjustment as provided in Section 8(b). Option Shares shall be issued
from authorized and unissued Common Stock or Common Stock held in or hereafter
acquired for the treasury of the Company. If any outstanding Option granted
under the Plan expires, lapses or is terminated for any reason, the Option
Shares allocable to the unexercised portion of such Option may again be the
subject of an Option granted pursuant to the Plan.
5. Term of Plan. The Plan is adopted by the Board of Directors effective on
February 1, 1999, but shall terminate (a) on the first anniversary of the
Effective Date unless the Plan is approved by the stockholders of the Company as
set forth in section 422(b)(1) of the Code, and (b) if the Plan is so approved,
on the tenth anniversary of the Effective Date. Notwithstanding anything to the
contrary herein or in any Option Document (as hereinafter defined), all Options
granted hereunder shall be Nonqualified Options if the Plan is not approved by
shareholders of the Company prior to the first anniversary of the Effective
Date.
6. Terms and Conditions of Options. Options granted pursuant to the Plan
shall be evidenced by written documents (the "Option Documents") in such form as
the Committee shall from time to time approve, which Option Documents shall
comply with and be subject to the following terms and conditions and with any
other terms and conditions (including vesting schedules for the exercisability
of Options) which the Committee shall from time to time provide which are not
inconsistent with the terms of the Plan.
a. Number of Option Shares. Each Option Document shall state the number
of Option Shares to which it pertains. In no event shall the aggregate fair
market value, as of the Grant Date, of Option Shares with respect to which an
ISO is exercisable for the first time by the Optionee during any calendar year
(under all incentive stock option plans of the Company or its Affiliates) exceed
$100,000.
b. Option Price. Each Option Document shall state the price at which
Option Shares may be purchased (the "Option Price"), which, for any ISO, shall
be at least 100% of the fair market value of the Common Stock on the date the
option is granted as determined by the Committee; provided, however, that if an
ISO is granted to an Optionee who then owns, directly or by attribution under
section 424(b) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliate,
then the ISO Option Price shall be at least 110% of the fair market value of the
-3-
<PAGE>
Option Shares on the Grant Date. The Option Price of Nonqualified Options may be
below 100% of the fair market value of the Common Stock on the Grant Date. The
fair market value of the Common Stock shall be as determined by the Committee,
provided that the fair market value of the Common Stock on the Grant Date in
respect of the grant of an ISO shall be determined in accordance with Section
422(b)(4) of the Code and Regulations hereunder.
c. Medium of Payment. An Optionee shall pay for Options Shares (i) in
cash, (ii) by certified check payable to the order of the Company, or (iii) by
such other mode of payment as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board.
d. Termination of Options. No Option shall be exercisable after the
first to occur of the following:
(i) Expiration of the Option term specified in the Option Documents
pertaining thereto, which shall not exceed ten years from the date of grant (or
five years from the date of grant in the case of an ISO if, on such date the
Optionee owns, directly or by attribution under section 424(b) of the Code,
shares possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or an Affiliate);
(ii) If the Optionee is an employee of the Company or an Affiliate,
expiration of three months (or such shorter period as the Committee may select)
from the date the Optionee's employment with the Company or its Affiliates
terminates for any reason other than (A) disability (within the meaning of
section 22(e)(3) of the Code) or death, or (B) circumstances described by
subsection (d)(v), below; or expiration of one year from the date the Optionee's
employment with the Company or its Affiliates terminates by reason of the
Optionee's disability (within the meaning of section 22(e)(3) of the Code) or
death;
(iii) The date, if any, fixed by the Committee as an accelerated
expiration date in the event of a "Change in Control" described in sub-Section
6(e)(i) and (ii) below, provided an Optionee who holds an Option affected by
such acceleration of expiration date is given written notice at least sixty (60)
days before the date so fixed;
(iv) The date set by the Committee to be an accelerated expiration
date after a finding by the Committee that a change in the financial accounting
treatment for Options from that in effect on the date the Plan was adopted
adversely affects or, in the determination of the Committee, may adversely
affect in the foreseeable future, the Company, provided that (A) an Optionee who
holds an Option affected by such acceleration of expiration date is given
written notice at least sixty (60) days before the date so fixed, and (B) the
Committee may take whatever other action, including acceleration of any exercise
provisions, it deems necessary or appropriate should it make the determination
referred to hereinabove; or
-4-
<PAGE>
(v) A finding by the Committee, after full consideration of the facts
presented on behalf of both the Company and the Optionee, that the Optionee has
been discharged from employment or service with the Company or an Affiliate for
Cause. For purposes of this Section, "Cause" shall mean: (A) a breach by
Optionee of his employment or service agreement with the Company or an
Affiliate, (B) a breach of Optionee's duty of loyalty to the Company or an
Affiliate, including without limitation any act of dishonesty, embezzlement or
fraud with respect to the Company or an Affiliate, (C) the commission by
Optionee of a felony, a crime involving moral turpitude or other act causing
material harm to the Company's or an Affiliate's standing and reputation,
(D) Optionee's continued failure to perform his duties to the Company or an
Affiliate or (E) unauthorized disclosure of trade secrets or other confidential
information belonging to the Company or an Affiliate. In the event of a finding
that the Optionee has been discharged for Cause, in addition to immediate
termination of the Option, the Optionee shall automatically forfeit all Option
Shares for which the Company has not yet delivered the share certificates upon
refund of the Option Price; provided, however, that, with respect to any
Non-Qualified Option, the Committee may provide other and additional terms and
conditions in the Option Document which are expressly or by implication at
variance with the above terms and conditions, in which case the terms and
conditions set forth in the Option Documents shall be controlling.
e. Change of Control. In the event of a Change in Control (as defined
below), the Committee may take whatever action with respect to the Options
outstanding it deems necessary or desirable, including, without limitation,
accelerating the vesting, expiration or termination dates in the respective
Option Documents to a date no earlier than thirty (30) days after notice of such
acceleration is given to the Optionee; provided, however, that (x) the Committee
shall not accelerate the expiration or termination date of any outstanding
option except in the case of a Change in Control as described in sub-Sections
(i) or (ii) below, and (y) the Committee may provide in the Option Documents
other and additional terms and conditions of such Option which are applicable if
a Change of Control occurs, including terms and conditions which limit the
Committee's discretion under this section. A Change of Control shall be deemed
to have occurred upon the earliest to occur of the following events:
(i) the date the stockholders of the Company (or the Board of
Directors, if stockholder action is not required) approve a plan or other
arrangement pursuant to which the Company will be dissolved or liquidated;
(ii) the date the stockholders of the Company (or the Board of
Directors, if stockholder action is not required) approve a definitive agreement
to sell or otherwise dispose of substantially all of the assets of the Company;
(iii) the date the stockholders of the Company (or the Board of
Directors, if stockholder action is not required) and the stockholders of the
other constituent corporation (or its board of directors if stockholder action
is not required) have approved a definitive agreement to merge or consolidate
the Company with or into such other corporation, other than, in either case, a
merger or consolidation of the Company in which holders of shares of the Common
-5-
<PAGE>
Stock immediately prior to the merger or consolidation will hold at least a
majority of the ownership of common stock of the surviving corporation (and, if
one class of common stock is not the only class of voting securities entitled to
vote on the election of directors of the surviving corporation, a majority of
the voting power of the surviving corporation's voting securities) immediately
after the merger or consolidation, which common stock (and, if applicable,
voting securities) is to be held in the same proportion as such holders'
ownership of Common Stock immediately before the merger or consolidation;
(iv) the date any entity, person or group, (within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as
amended), other than (A) the Company or any of its subsidiaries or any employee
benefit plan (or related trust) sponsored or maintained by the Company or any of
its subsidiaries or (B) any person who, on the date the Plan is effective, shall
have been the beneficial owner of at least twenty percent (20%) of the
outstanding Common Stock, shall have become the beneficial owner of, or shall
have obtained voting control over, more than fifty percent (50%) of the
outstanding shares of the Common Stock; or
(v) the first day after the first anniversary of the adoption of this
Plan by the Board of Directors a majority of the directors comprising the Board
of Directors shall have been members of the Board of Directors for less than
twenty-four (24) months, unless each director who was not a director at the
beginning of such twenty-four (24) month period was either appointed or
nominated for election with the approval of at least two-thirds of the directors
then still in office who were directors at the beginning of such period.
f. Transfers. No Option granted under the Plan may be transferred,
except by will or by the laws of descent and distribution and, in the case of a
Non-Qualified Option, as expressly set forth in the Option Documents. During the
lifetime of the person to whom an Option is granted, such Option may be
exercised only by the Optionee.
g. Other Provisions. The Option Documents shall contain such other
provisions including, without limitation, additional restrictions upon the
exercise of the Option or additional limitations upon the term of the Option, as
the Committee shall deem advisable.
h. Amendment. Subject to the provisions of the Plan, the Committee shall
have the right to amend Option Documents issued to such Optionee, subject to the
Optionee's consent if such amendment is not favorable to the Optionee except
that the consent of the Optionee shall not be required for any amendment made
under subsection 6(e) above.
7. Exercise. No Option shall be deemed to have been exercised prior to the
receipt by the Company of written notice of such exercise and of payment in full
of the Option Price for the Option Shares to be purchased. Each such notice
shall specify the number of Option Shares to be purchased and shall satisfy the
securities law requirements set forth in this Section 7.
-6-
<PAGE>
Each exercise notice shall (unless the Option Shares are covered by a then
current registration statement or a Notification under Regulation A under the
Securities Act of 1933 (the "Act")), contain the Optionee's acknowledgment in
form and substance satisfactory to the Company that (i) such Option Shares are
being purchased for investment and not for distribution or resale (other than a
distribution or resale which, in the opinion of counsel satisfactory to the
Company, may be made without violating the registration provisions of the Act),
(ii) the Optionee has been advised and understands that (A) the Option Shares
have not been registered under the Act and are "restricted securities" within
the meaning of Rule 144 under the Act and are subject to restrictions on
transfer and (B) the Company is under no obligation to register the Option
Shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (iii) such Option Shares may not
be transferred without compliance with all applicable federal and state
securities laws, and (iv) an appropriate legend referring to the foregoing
restrictions on transfer and any other restrictions imposed under the Option
Documents may be endorsed on the certificates. Notwithstanding the above, should
the Company be advised by counsel that the issuance of Option Shares upon the
exercise of an Option should be delayed pending (A) registration under federal
or state securities laws or (B) the receipt of an opinion that an appropriate
exemption therefrom is available, (C) the listing or inclusion of the shares on
any securities exchange or in an automated quotation system or (D) the consent
or approval of any governmental regulatory body whose consent or approval is
necessary in connection with the issuance of such Option Shares, the Company may
defer the exercise of any Option granted hereunder until either such event in A,
B, C or D has occurred.
8. Adjustments on Changes in Common Stock.
a. In case the Company shall (i) declare a dividend or make a
distribution on outstanding shares of its Common Stock in shares of Common
Stock, (ii) subdivide or reclassify the outstanding shares of its Common Stock
into a greater number of shares, or (iii) combine or reclassify the outstanding
shares of its Common Stock into a lesser number of shares, the number of Option
Shares subject to outstanding Options shall be increased or decreased in
proportion to the increase or decrease, as the case may be, in the total number
of outstanding shares of Common Stock of the Company as a result of such
subdivision, combination or reclassification. Such adjustment shall be effective
as of the record date of such subdivision, combination or reclassification.
Adjustments hereunder shall be made successively whenever any event specified
above shall occur.
b. The aggregate number of shares of Common Stock as to which Options
may be granted hereunder shall be adjusted in proportion to any adjustment made
in the number of Option Shares covered by outstanding Options pursuant to
Section 8(a) above.
c. In case of any reclassification, recapitalization or other change in
the capital structure of the Company affecting its Common Stock, other than a
change in par value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in the Common Stock into
-7-
<PAGE>
two or more classes or series of shares), the Optionee shall have the right
thereafter to receive upon exercise of this Option solely the kind and amount of
shares of stock and other securities, property, cash or any combination thereof
receivable in connection with such reclassification, recapitalization or other
change by a holder of a number of shares of Common Stock equal to the number of
Option Shares for which this Option might have been exercised immediately prior
to such event.
d. In case of a Change of Control of the Company involving a
consolidation with or merger of the Company into another corporation (other than
a merger of consolidation in which the Company is the continuing or surviving
corporation), the Optionee shall have the right thereafter to receive upon
exercise of the Option solely the kind and amount of shares of stock and other
securities, property, cash or any combination thereof receivable upon such
consolidation, merger, sale, lease or conveyance by a holder of a number of
shares of Common Stock equal to the number of Option Shares for which this
Option might have been exercised immediately prior to such consolidation or
merger.
9. Amendment of the Plan. The Board of Directors may amend the Plan from
time to time in such manner as it may deem advisable, subject to compliance with
applicable corporate laws, securities laws and exchange requirements.
Notwithstanding the foregoing, any amendment which would change the class of
individuals eligible to receive an ISO, extend the expiration date of the Plan,
decrease the Option Price of an ISO granted under the Plan or increase the
maximum number of shares as to which Options may be granted will only be
effective if such action is approved by a majority of the outstanding voting
stock of the Company within twelve months before or after such action.
10. Continued Employment. The grant of an Option pursuant to the Plan shall
not be construed to imply or to constitute evidence of any agreement, express or
implied, on the part of the Company or any Affiliate to retain the Optionee in
the employ of the Company or an Affiliate, as a member of the Board of
Directors, as an independent contractor or in any other capacity.
11. Withholding of Taxes. Whenever the Company proposes or is required to
issue or transfer Option Shares, the Company shall have the right to (a) require
the recipient or transferee to remit to the Company an amount sufficient to
satisfy any federal, state and/or local withholding tax requirements prior to
the delivery or transfer of any certificate or certificates for such Option
Shares or (b) take whatever action it deems necessary to protect its interests.
12. Assumption by Successors. Any agreement providing for a Change of
Control involving a consolidation with or merger into another corporation (other
than a merger or consolidation in which the Company is the continuing or
surviving corporation) shall make express, effective provisions for the
assumption of the Company's obligations under this Plan by the surviving or
continuing corporation, and/or by the parent of the surviving or continuing
corporation in the case of a "triangular" merger in which holders of the
Company's Common Stock receive securities of such parent corporation in exchange
for or in conversion of the Company's Common Stock.
-8-
I. ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS AGREEMENT made as of the 1st day of October, 1996
B E T W E E N:
DR. PANKAJ MODI, an individual residing in the City of
Hamilton, in the Province of Ontario,
(hereinafter called the "Assignor")
OF THE FIRST PART
- and -
GENEREX PHARMACEUTICALS, INC., a corporation
Incorporated under the laws of the Province of Ontario
(hereinafter called the "Assignee")
OF THE SECOND PART
WHEREAS the Assignee and the Assignor entered into a Consulting
Agreement dated as of the 1st day of October, 1996 (the "Agreement") pertaining
to the provision of consulting services by the Assignor to the Assignee
regarding certain technologies relating to the Business (as defined in the
Agreement attached hereto as Schedule "A");
AND WHEREAS the Assignor has agreed to assign to the Assignee and
the Assignee has agreed to assume the benefits, advantages and obligations
arising under the drug delivery systems, controlled release drug delivery
systems and technology patents referred to in Schedule "B" hereto (collectively,
the "Technologies");
AND WHEREAS terms with initial capital letters used in the Agreement
and not conventionally capitalized shall have the same meaning in this agreement
unless the context herein indicated otherwise;
<PAGE>
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of
other good and valuable consideration and the sum of TWO ($2.00) DOLLARS (the
receipt and sufficiency of which are hereby acknowledged), the parties hereto
agree as follows:
1. The Assignor hereby assigns, transfers and sets over to the Assignee all of
his respective rights, titles and interests in the Technologies and in and to
all warranties, guarantees and similar rights which the Assignor may have in
relation to the Technologies together with all benefits, advantages and
obligations to be derived therefrom.
2. The Assignor covenants and agrees with the Assignee that he has (subject to
the prior consent, where required, of other parties) full right to assign and
has done no act to inhibit his right or authority to assign his interest in
the Technologies.
3. To the extent that any Technology is not assignable without the consent of
another party or parties, this agreement shall not constitute a grant,
transfer or assignment of, or an attempt to grant, transfer or assign, any
such Technology, if such would constitute a breach of contract or regulation
and the Assignor shall be deemed to hold, as bare trustee, such Technology
and the Assignor's right, title and interest in and to all warranties,
guarantees and similar rights which the Assignor may have in relation to such
Technologies together with all benefits, advantages and obligations to be
derived therefrom in trust for the Assignee until such consent is obtained.
This Paragraph 3 shall apply notwithstanding any other provision of this
agreement to the contrary.
4. If any requisite consent cannot be obtained, the Assignor and the Assignee
shall cooperate with each other in any mutually satisfactory arrangement
which will provide the Assignee with the benefit of any Technology not so
assigned and will ensure that the liabilities and obligations thereunder are
ultimately the responsibility of the Assignee. The Assignor acknowledges that
it shall not have discretion to deal with any such Technology not so
assigned, except as may be authorized by the Assignee. The Assignor agrees
that, upon written direction of the Assignee, it will execute all documents
and do all acts and things reasonably required by the Assignee in respect of
any Technology not so assigned. The Assignee agrees to indemnify and save the
Assignor harmless from and against all claims, charges, encumbrances,
obligations, responsibilities, acts or omissions pertaining to any such
Technology not so assigned throughout the period from and after the date
hereof during which any interest in the Technologies are held by the Assignor
as bare trustee, including without limiting the generality of the foregoing,
all demands and liability for payment.
5. The Assignor will from time to time, at the request of the Assignee, do and
perform every act and execute such further assurances and other documents
necessary to give full effect to this agreement.
6. This agreement shall extend to and be binding upon and enure to the benefit
of the respective successors and assigns of the parties hereto.
2
<PAGE>
7. This agreement shall be governed by and interpreted in accordance with the
laws of the Province of Ontario.
IN WITNESS WHEREOF the parties hereto have executed this assignment
as of the date first written above.
/s/ Pankaj Modi
--------------------------------
DR. PANKAJ MODI
GENEREX PHARMACEUTICALS INC.
/s/ Anna Gluskin
--------------------------------
By: Anna Gluskin, President
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
I. DRUG DELIVERY SYSTEM
Description Patent Application # Patent # Date
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 ORAL AND INTRANASAL DRUG DELIVERY Insulin delivery US 08/442358 issued US# 5 653 987* Aug 5/97 *
*LIQUID FORMULATION FOR PROTEINIC systems: applicable to PCT CA 96/00305* * July 18/97 *
PHARMACEUTICALS peptides and proteins EP PCT 96913411.3* *May 16/96
- -------------------------------------------------------------------------------------------------------------------------
2 BIODEGRADABLE POLYMER Drug vaccines and US 08/197754 issued US# 5 569 468 Oct 29/96
MICROSPHERES DRUG DELIVERY hormones delivery EP 95/908842.8 * Feb 14/95 *
JP 52/1481/95 * Feb 14/95 *
CA 2 180 424 * Feb 14/95 *
- -------------------------------------------------------------------------------------------------------------------------
3 Controlled release of US 08/197756 issued US# 5 417 982 May 23/95
drugs and hormones
- -------------------------------------------------------------------------------------------------------------------------
4 LIPOSOMES DRUG DELIVERY For vaccines, drugs, US 08/680826 * July 16/96 *
hormones, peptides and CA 2 181 390 * July 17/96 *
cosmetic delivery
- -------------------------------------------------------------------------------------------------------------------------
5 TRANSDERMAL DRUG DELIVERY For proteins, peptides, Abstract*
hormones and small
molecules
- -------------------------------------------------------------------------------------------------------------------------
6 Oral Delivery Abstract*
- -------------------------------------------------------------------------------------------------------------------------
II I. CONTROLLED RELEASE DRUG DELIVERY SYSTEMS
- -------------------------------------------------------------------------------------------------------------------------
7 CAPSULES CONTROLLED RELEASE DRUG Controlled release US 08/749057 * Nov 14/96 *
DELIVERY SYSTEMS capsules
- -------------------------------------------------------------------------------------------------------------------------
8 TABLETS CONTROLLED RELEASE DRUG Controlled release US 08/680825 * July 16/96 *
DELIVERY SYSTEMS tabeletted medicines CA 2 181 391 * July 17/96 *
- -------------------------------------------------------------------------------------------------------------------------
9 LIQUID SUSPENSION CONTROLED Controlled release oral US# * *
RELEASE DRUG DELIVERY SYSTEMS liquid suspension CAN# * *
pharmaceutical formulation
- -------------------------------------------------------------------------------------------------------------------------
10 SPORT DRINK CONTROLLED RELEASE Controlled release oral US# * *
DRUG DELIVERY SYSTEMS liquid suspension 60/002124 Aug 10/95
pharmaceutical formulation
- -------------------------------------------------------------------------------------------------------------------------
III I. TECHNOLOGY PATENTS
- -------------------------------------------------------------------------------------------------------------------------
11 DNA TECHNOLOGY Insulin preparation Abstract *
using recombinant
DNA technology
- -------------------------------------------------------------------------------------------------------------------------
12 MYOCARDIAL INFRACTION - One step Diagnostic kit Abstract *
DIAGNOSTIC KIT for early detection of
Myocardial Injury
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 16.1
JACK F. BURKE, JR.
CERTIFIED PUBLIC ACCOUNTANT
2010 OAK GROVE ROAD MEMBER
BLDG. 3, SUITE 3 MISSISSIPPI SOCIETY OF
P. O. BOX 15728 CERTIFIED PUBLIC ACCOUNTANTS
HATTIESBURG, MS 39404-5728
AMERICAN INSTITUTE OF
TELEPHONE 601-264-1988 CERTIFIED PUBLIC ACCOUNTANTS
FAX 601-264-1801
DIVISION FOR CPA FIRMS
SEC PRACTICE SECTION
TAX DIVISION
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
I have read and agree with the comments in Item 14 of Form 10 for Generex
Biotechnology Corporation (formerly known as Green MT P.S. Inc.) dated December
14, 1998.
/s/ Jack F. Burke, Jr.
- ----------------------
Jack F. Burke, Jr.
Hattiesburg, Mississippi
February 17, 1999
EXHIBIT 16.2
MINTZ & PARTNERS
Chartered Accountants
NEXIA
International
February 17, 1999
By Fax: 215-851-8383
PRIVATE AND CONFIDENTIAL
- ------------------------
The Securities and Exchange Commission
c/o Connolly Epstein Chicco Foxmax Oxholm & Ewing
1515 Market Street, 9th Floor
Philadelphia, PA
10102-1009
Attention: Mr. Joseph Chicco
- ----------------------------
Dear Sir/Madam:
We are joint auditors with Withum, Smith & Brown for the above-named company for
the financial statement periods ending July 31, 1996 and 1997. We concur with
the statements made by the Company in its Form 10 relative to its change of
auditors.
Very truly yours,
MINTZ & PARTNERS
/s/ Allan Cheskes
- -----------------
Allan Cheskes, CA
Partner
AC/am
O:\DATA\WP51\AMCDONALD\ALLAN\Generex\Joseph Chicco-L01.doc
1446 Don Mills Road, Suite 100, Toronto, Ontario M3B 3N6
Tel: (416) 391-2900 Fax: (416) 391-2748 E-Mail: [email protected]
Internet: www.mintzca.com
MINTZ & PARTNERS IS A MEMBER OF NEXIS INTERNATIONAL, A WORLD-WIDE NETWORK OF
INDEPENDENT ACCOUNTING FIRMS
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