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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission file number 000-25169
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GENEREX BIOTECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 82-049021
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
33 Harbour Square, Suite 202, Toronto, Canada M5J 2G2
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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 registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at October 18, 2000, was approximately
$149,700,000.
At October 18, 2000, the registrant had 18,765,037 shares of Common Stock
outstanding.
Documents incorporated by reference: None
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FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Business" and
elsewhere in this Report that are forward-looking statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934. Forward-looking
statements do not describe historical events or other facts but, rather, convey
our management's current expectations. Such statements usually are prefaced with
forward-looking words such as "may", "will", "expect", "anticipate", "believe,"
"estimate" and similar terminology. Our forward-looking statements address,
among other things:
o implementing our clinical programs and other aspects of our business
plans;
o our financing goals, plans and future needs; and
o our expectations of when regulatory approvals will be received or other
actions will be taken by parties other than us.
Management's current expectations are subject to a number of factors
and uncertainties that could cause actual results or future conditions to differ
materially from those expressed in or implied by our forward-looking statements.
Thus, we caution investors that the forward-looking statements contained in this
Report must be interpreted and understood in light of conditions and
circumstances that exist as of the date of this Report. We expressly disclaim
any obligation or undertaking to update or revise forward-looking statements
made in this Report to reflect any changes in management's expectations
resulting from future events or changes in the conditions or circumstances upon
which such expectations are based.
PART I
Item 1. Business.
Overview
Generex Biotechnology Corporation is engaged in the research and
development of drug delivery technology primarily involving the administration
of proprietary formulations of large molecule drugs to the oral (buccal) cavity
using a hand-held aerosol applicator.
More than 150 large molecule drugs (i.e., drugs composed of molecules
with a higher than specified molecular weight) have been approved for sale in
the United States or are presently undergoing clinical trials as part of the
process to obtain such approval, including various proteins, peptides,
monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which
generally can be administered through the digestive tract (e.g., by capsule or
tablet), the skin (e.g., transdermal patches), the mucosal surfaces of the mouth
and nose, or by injection, large molecule drugs historically have been
administered only by injection. The principal reasons for this have been the
vulnerability of large molecule drugs to digestion, which has virtually ruled
out the use of capsules or pills for delivery, and the size of the molecule
itself which makes absorption through the skin or mucosa inefficient or
ineffective.
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All injection therapies involve varying degrees of discomfort and
inconvenience. With chronic and sub-chronic diseases, the discomfort and
inconvenience associated with injection therapies frequently results in less
than optimal patient acceptance of and compliance with the prescribed treatment
plan. Poor acceptance and compliance can lead to medical complications and
higher disease management costs. Also, elderly, infirm and pediatric patients
with chronic or sub-chronic conditions may not be able to self-inject their
medications. In such cases assistance is required which increases both the cost
and inconvenience of the therapy.
Our goal is to develop proprietary formulations of large molecule drugs
that can be administered through the buccal mucosa, primarily the inner cheek
walls, thereby eliminating or reducing the need for injections. We believe that
our buccal delivery technology is a platform technology that has application to
many large molecule drugs, and provides a convenient, non-invasive, accurate and
cost effective way to administer such drugs. We have identified several large
molecule drugs as primary candidates for development, but to date have focused
our development efforts on a buccal insulin product.
Between January 1999 and September 2000, we conducted Phase II clinical
trials of our buccal insulin product in the United States, Canada and Europe. In
September 2000, we entered into a Development and License Agreement with Eli
Lilly and Company to develop this product. Prior to entering into the agreement
with Lilly, we had not reached a point in our clinical program at which we were
prepared to apply for regulatory approvals to market the product in any country,
and we did not anticipate receiving any such approvals until 2003 at the
earliest. Under the terms of our agreement with Lilly, Lilly, generally, will be
responsible for conducting clinical trials and securing regulatory approvals on
a worldwide basis for all products developed under the Agreement. Lilly also
will have the exclusive right to market the products worldwide. Our principal
responsibilities under the Lilly agreement will be to continue development, as
required, of our proprietary formulation and on our RapidMist(TM) device, which
is described below.
We are a development stage company, and prior to the first quarter of
the current fiscal year had not received any revenues from operations. We have
no products approved for commercial sale by drug regulatory authorities and only
one product, our oral insulin formulation, for which we have begun the
regulatory approval process. Notwithstanding our agreement with Lilly and the
support that we expect to receive from Lilly, successful development of our
insulin product is by no means assured. In order to obtain regulatory approvals
for our insulin product, it will be necessary to demonstrate, among other
things, that:
o the product is physically and chemically stable under a range of storage,
shipping and usage conditions;
o the results of administering the product to patients are reproducible in
terms of the amounts of insulin delivered to the oral cavity and absorbed in
the bloodstream; and
o that there are no serious adverse safety issues associated with use of the
product.
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The levels of uncertainty and risk related to the regulatory approval
process for other products that may be developed under our agreement with Lilly,
or independently of Lilly, are even greater than with our insulin product since
no other product candidate has progressed to the point of development of the
insulin product.
Buccal Delivery Technology
Our buccal delivery technology involves the preparation of a
proprietary formulation in which an active pharmaceutical agent is placed in
solution with a combination of absorption enhancers and other excipients
classified generally recognized as safe ("GRAS") by FDA when used in accordance
with specified quantity and other limitations. The resulting formulation, which
is stable at room temperature, is aerosolized with a pharmaceutical grade
chemical propellant and is administered to the patient using our proprietary
RapidMist(TM) device. The RapidMist device is a small, light weight, hand held,
easy to use aerosol applicator comprised of a container for the formulation, a
metering valve, an actuator and dust cap. Using the Device, the patient
self-administers the formulation by spraying it into the mouth. The device
contains multiple applications, the number being dependent, among other things,
on the concentration of the formulation. Absorption of the pharmaceutical agent
occurs in the buccal cavity, principally through the inner cheek walls. In the
clinical program for our insulin product, insulin absorption in the buccal
cavity has been shown to be very rapid.
In September 2000, we entered into a Development and License Agreement
with Eli Lilly and Company to develop and market an insulin product based upon
our buccal delivery technology. As noted above, however, we believe that our
buccal delivery technology is a platform technology that has application to a
large number of large molecule drugs in addition to insulin. Fentanyl, morphine,
estrogen and heparin are among the compounds that we have identified as
candidates for product development. We expect to begin development of three
products involving large molecule drugs other than insulin in the current fiscal
year.
Buccal Insulin Product
Insulin is a hormone that is naturally secreted by the pancreas to
regulate the level of glucose, a type of sugar, in the bloodstream. The term
diabetes refers to a group of disorders that are characterized by the inability
of the body to properly regulate blood glucose levels. When glucose is abundant,
it is converted into fat and stored for use when food is not available. When
glucose is not available from food, these fats are broken down into free fatty
acids that stimulate glucose production by the liver. Insulin acts by
stimulating the use of glucose as fuel and by inhibiting the production of
glucose in the liver. In a healthy individual, a balance is maintained between
insulin secretion and glucose metabolism.
There are two major types of diabetes. Type 1 diabetes (juvenile onset
diabetes or insulin dependent diabetes) refers to the condition where the
pancreas produces little or no insulin. Type 1 diabetes accounts for 5-10
percent of diabetes cases. It often occurs in children and young adults. Type 1
diabetics must take daily insulin injections, typically three to five times per
day, to regulate blood glucose levels.
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In Type 2 diabetes (adult onset or non-insulin dependent diabetes
mellitus), the body does not produce enough insulin, or cannot properly use the
insulin produced. Type 2 diabetes is the most common form of the disease and
accounts for 90-95 percent of diabetes cases. In addition to insulin therapy,
Type 2 diabetics may take oral drugs that stimulate the production of insulin by
the pancreas or that help the body to more effectively use insulin.
If not treated, diabetes can lead to blindness, kidney disease, nerve
disease, amputation, heart disease and stroke. Each year, from 12,000 to 24,000
people lose their sight because of diabetes. Diabetes is also the leading cause
of end-stage renal disease (kidney failure), accounting for about 40% of new
cases. In addition, about 60-70 percent of people with diabetes have mild to
severe forms of diabetic nerve damage, which, in severe forms, can lead to lower
limb amputations. Diabetics are also 2 to 4 times more likely to have heart
disease, which is present in 75 percent of diabetes-related deaths, and are 2 to
4 times more likely to suffer a stroke.
There is no known cure for diabetes. The World Health Organization
estimates that there are currently over 1.5 billion diabetics worldwide. It is
further estimated that this number will almost double by the year 2025. There
are estimated to be 17 million people suffering from diabetes in North America
alone, approximately 5 million of whom are undiagnosed, and diabetes is the
second largest cause of death by disease in North America.
We conducted the first clinical trials of our buccal insulin
formulation with human subjects in Ecuador in January 1998. We ultimately
conducted a number of studies in Ecuador in 1998, each of which involved a
selection of between 8 and 10 patients. The principal purpose of these studies
was to evaluate the effectiveness of our oral insulin formulation in humans
compared with injected insulin and placebos. The studies were conducted over
periods of from 4 to 5 days. In these studies, oral formulations containing 30,
40 and 50 units of insulin provided glucose lowering results similar to 10 units
of injected insulin. The oral insulin formulations also provided average insulin
absorption equivalent to the injected insulin.
Concurrently with these studies, we experimented with a number of
devices and techniques to "administer" our formulation to the buccal cavity. In
our initial studies in Ecuador, we administered our formulation with a
calibrated dropper. The patient "swished" the formulation in the mouth to bring
the formulation into contact with the inner cheek walls, and then either spit
out or swallowed the formulation. Because of risks of contamination associated
with a delivery system that was not closed, and the need for precise dosage
control, we decided to use a hand held aerosol sprayer to administer our
formulation following the initial trials in Ecuador.
On the basis of the test results in Ecuador and other pre-clinical
data, we made an Investigatory New Drug submission to the Health Protection
Branch in Canada (Canada's equivalent to the United States' Food and Drug
Administration) in July 1998, and received permission from the Canadian
regulators to proceed with clinical trials in September 1998. We filed an
Investigative New Drug Submission with the Food and Drug Administration in
October 1998, and received FDA approval to proceed with human trials in November
1998.
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We began our Phase II clinical trial programs in Canada and the United
States in January 1999. The distinctions between various stages of the clinical
process required for regulatory approval of a new drug product in the United
States (e.g., Phase II versus Phase III trials) are described in "Government
Regulation" below. Between January 1999 and September 2000 we conducted Phase II
clinical trials of our insulin formulation involving approximately 200 Type 1
and Type 2 diabetic patients and healthy volunteers. The study protocol in most
trials involved administration of two different doses of our insulin formulation
following either a liquid sustacal meal or a standard meal challenge. The
objective of these studies was to evaluate our insulin formulation's efficacy in
controlling post-prandial (meal related) glucose levels. These trials
demonstrated that our insulin formulation controlled post-prandial hyperglycemia
in a manner comparable to injected insulin.
As noted above, in September 2000 we entered into a Development and
License Agreement with Eli Lilly and Company covering an insulin product based
upon our buccal delivery technology. Under this agreement, Lilly is responsible
for conducting clinical trials and securing regulatory approvals for this
product on a worldwide basis. The agreement with Lilly also gives Lilly the
right to develop a number of non-insulin products based upon our buccal delivery
technology depending on the success of the initial insulin product.
Other Large Molecule Drug Projects
We have had numerous discussions of possible research collaborations
with pharmaceutical companies concerning use of our large molecule drug delivery
technology with compounds other than insulin. These compounds include monoclonal
antibodies, human growth hormone, fertility hormone, and others. Fentanyl,
morphine, estrogen and heparin are among the compounds that we have identified
as candidates for product development.
Prior to entering into our agreement with Lilly covering the insulin
product, we had not aggressively pursued development opportunities apart from
insulin because we believed it was more advantageous to concentrate our
resources, particularly our financial resources, on developing the insulin
product. While the insulin product remains our first priority, we believe that
Lilly's involvement will relieve us of most of the costs associated with
conducting the clinical program for the insulin product. We also raised
approximately $30 million of additional equity capital in the last quarter of
our fiscal year ended July 31, 2000, and in the first quarter of the current
year. Based on this funding, and the financial structure of the Lilly agreement,
we believe we now have sufficient financial resources to aggressively pursue
development of additional products. We expect to begin development of three
products involving large molecule drugs other than insulin in the current fiscal
year.
Government Regulation
Our research and development activities, and the eventual manufacture
and marketing of our products, are subject to extensive regulation by the Food
and Drug Administration in the United States and comparable regulatory
authorities in other countries. Among other things, extensive regulation puts a
burden on our ability to bring products to market. While these regulations apply
to all competitors in our industry, many of our competitors have extensive
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experience in dealing with FDA and other regulators while we do not. Also, other
companies in our industry do not depend completely on products which still need
to be approved by government regulators, as we now do.
If requisite regulatory approvals are not obtained and maintained, our
business will be substantially harmed. In many if not all cases, we expect that
our development partners will control or participate extensively in the
regulatory approval process once a development agreement is in place. The
following discussion summarizes the principal features of food and drug
regulation in the United States and other countries as they affect our business.
United States. All aspects of our research, development and foreseeable
commercial activities are subject to extensive regulation by the FDA and other
regulatory authorities in the United States. United States federal and state
statutes and regulations govern, among other things, the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of pharmaceutical products. The regulatory approval process, including
clinical trials, usually takes several years and requires the expenditure of
substantial resources. If regulatory approval of a product is granted, the
approval may include significant limitations on the uses for which the product
may be marketed.
The steps required before a pharmaceutical product may be marketed in
the United States include:
o preclinical tests;
o the submission to FDA of an Investigational New Drug application, which
must become effective before human clinical trials commence;
o human clinical trials to establish the safety and efficacy of the drug;
o the submission of a New Drug Application to FDA; and
o FDA approval of the New Drug Application, 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 assess the potential
safety and efficacy of each product. The results of the preclinical tests are
submitted to FDA as part of the Investigational New Drug Application and are
reviewed by FDA before the commencement of human clinical trials. Unless FDA
objects to the Investigatory New Application Drug, the Investigational New Drug
Application becomes effective 30 days following its receipt by FDA. The
Investigational New Drug Application for our oral insulin formulation became
effective in November 1998.
Clinical trials involve the administration of the new drug to humans
under the supervision of a qualified investigator. The protocols for the trials
must be submitted to FDA as part of the Investigational New Drug Application.
Also, each clinical trial must be approved and conducted under the auspices of
an Institutional Review Board, which considers, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
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Clinical trials are typically conducted in three sequential phases
(Phase I, Phase II, and Phase III), but the phases may overlap. Phase I clinical
trials test the drug on healthy human subjects for safety and other aspects, but
not effectiveness. Phase II clinical trials are conducted in a limited patient
population to gather evidence about the efficacy of the drug for specific
purposes to determine dosage tolerance and optimal dosages, and to identify
possible adverse effects and safety risks. We began Phase II clinical tests of
our insulin formulation in the United States in January 1999. In September 2000,
we entered into a Development and License Agreement with Lilly to develop and
market an insulin product based on our buccal delivery technology. Under the
Agreement, Lilly is responsible for conducting clinical trials, securing
regulatory approvals and marketing on a worldwide basis. Lilly will also have
the option to develop a number of additional products depending upon the success
of the initial insulin product.
When a compound has shown evidence of efficacy and acceptable safety in
Phase II evaluations, Phase III clinical trials are undertaken to evaluate
clinical efficacy and to test for safety in an expanded patient population at
clinical trial sites in different geographical locations. FDA and other
regulatory authorities require that the safety and efficacy of therapeutic
product candidates be supported through at least two adequate and
well-controlled Phase III clinical trials.
In the United States, the results of preclinical studies and clinical
trials, if successful, are submitted to FDA in a New Drug Application to seek
approval to market and commercialize the drug product for a specified use. FDA
may deny a New Drug Application if it believes that applicable regulatory
criteria are not satisfied. FDA also may require additional testing for safety
and efficacy of the drug. We cannot be sure that any of our proposed products
will receive FDA approval. Even if approved by FDA, our products and the
facilities used to manufacture our products will remain subject to review and
periodic inspection by FDA.
To supply drug products for use in the United States, foreign and
domestic manufacturing facilities must comply with FDA's Good Manufacturing
Practices. Domestic facilities are subject to periodic inspection by FDA.
Products manufactured outside the United States are inspected by regulatory
authorities in those countries under agreements with FDA. To comply with Good
Manufacturing Practices, manufacturers must expend substantial funds, time and
effort in the area of production and quality control. FDA stringently applies
its regulatory standards for manufacturing. Discovery of previously unknown
problems with respect to a product, manufacturer or facility may result in
consequences with commercial significance. These include restrictions on the
product, manufacturer or facility, suspensions of regulatory approvals,
operating restrictions, delays in obtaining new product approvals, withdrawals
of the product from the market, product recalls, fines, injunctions and criminal
prosecution.
Foreign Countries. Before we are permitted to market any of our
products outside of the United States, those products will be subject to
regulatory approval by foreign government agencies similar to the FDA. These
requirements vary widely from country to country. Generally, however, no action
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can be taken to market any drug product in a country until an appropriate
application has been approved by the regulatory authorities in that country. FDA
approval does not assure approval by other regulatory authorities. The current
approval process varies from country to country, and the time spent in gaining
approval varies from that required for FDA approval. We obtained regulatory
approval to begin clinical trials in Canada in November 1998. In Ecuador,
regulatory authorities approved the limited non-commercial distribution of our
oral insulin formulation in September 1998.
Marketing
We intend to rely on collaborative arrangements with one or more other
companies which possess strong pharmaceutical marketing and distribution
resources to perform these functions. Accordingly, we will not have the same
control over marketing and distribution that we would have if we conducted these
functions ourselves.
With respect to our insulin product, Eli Lilly and Company has
exclusive, worldwide marketing rights to the product. Except for our agreement
with Lilly with respect to our oral insulin product, we do not have any
agreements with any other companies for marketing or distributing our products.
Manufacturing
To date, we have produced our oral insulin formulation only under
laboratory conditions on a small scale. We are in the process of completing and
obtaining regulatory approvals for a pilot manufacturing facility in Toronto in
the same commercial complex in which our original laboratory is located. We
believe that these facilities, when placed in operation, will be capable of
producing our insulin product at levels necessary to supply our needs for late
stage human clinical trials of the product and for initial commercial sales
outside the United States. However, we have not yet actually produced product at
those levels.
Under our agreement with Lilly, Lilly may select us, but is not
required to select us, to manufacture products developed under that agreement.
In order to qualify for consideration in this role, we will have to satisfy
Lilly that we can supply such products at the requisite levels of quality, cost
and reliability in compliance with all applicable regulatory requirements. We
have no experience in resolving the staffing, manufacturing, regulatory and
quality control problems that are likely to come up in developing and running a
large scale manufacturing operation. Our failure to solve problems of this
nature would lead to loss of any opportunity to manufacture products developed
under our agreement with Lilly, and could delay or prevent our ability to bring
other products to market and inhibit sales after a product comes to market. In
any event, we will need to significantly increase our manufacturing capability
in order to manufacture any product in commercial quantities.
We own facilities in Brampton, Ontario, and Mississauga, Ontario, both
within 25 miles from downtown Toronto, that were purchased with the intention of
improving and equipping them for manufacturing. We believe we can place these
facilities into production of our insulin product or other products within 12 to
18 months lead time.
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Raw Material Supplies
The excipients used in our formulation are available from numerous
sources in sufficient quantities for clinical purposes, and we believe that they
will be available in sufficient quantities for commercial purposes when
required, although we have not yet attempted to secure a commercial supply of
any such products.
Components suitable for our RapidMist device are available from a
limited number of potential suppliers, as is the chemical propellant used in the
device. We believe that the components which now comprise the device will be
utilized with the commercial version of our insulin product irrespective of what
manufacturing arrangements are ultimately chosen by Lilly, i.e., whether or not
we perform the formulating and filling function. We have secured supply
arrangements with the manufacturers of all components and the propellant that we
presently use in our RapidMist device for commercial quantities of such
components and propellant. All such suppliers are prominent, reputable and
reliable suppliers to the pharmaceutical industry. Because we now have a single
supplier for each of these components and propellant, however, we are more
vulnerable to supply interruptions than would be the case if we had multiple
suppliers for each component. We do not believe that the risk of a single source
of supply for proprietary raw materials or device components is unusual in the
pharmaceutical industry.
Lilly will supply the pharmaceutical compounds that are used in
products developed under our agreement with Lilly. We expect that similar
arrangements will be made with future development and marketing partners under
licensing and development agreements covering other products.
Intellectual Property
Our long-term success will substantially depend upon protecting our
technology from infringement, misappropriation, discovery and duplication. The
first patent applicable to our large molecule delivery technology was issued in
the US on January 25, 2000. We also have thirteen patent applications pending in
the US and foreign jurisdictions, one Canadian patent and one Canadian patent
application for which there is no US counterpart which cover our drug delivery
technologies, and an indirect interest in three drug delivery patents held by
another company which is fifty (50%) percent owned by us.
We also rely on trade secrets and other unpatented proprietary
information. We seek to protect this information, in part, by confidentiality
agreements with our employees, consultants, advisors and collaborators. These
agreements may be breached, however, in which case the remedies available to us
may not adequately compensate us for our loss. Furthermore, trade secrets
protection does not protect us against a competitor's independent development of
the same technology.
Our technology is primarily the result of original research and
discoveries by Pankaj Modi, our Vice President, Research and Development. Under
an October 1996 Consulting Agreement, Dr. Modi assigned to us his entire
interest in all inventions, ideas, designs and discoveries made by him during
the term of his agreement which relate to our actual or demonstrably anticipated
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business, work, undertakings or research and development. That agreement, as
amended and supplemented, remains in place. Dr. Modi also assigned to us his
interests in specific drug delivery systems and technology patents
invented/discovered/conceived by him prior to the execution of his consulting
agreement. This included all of his interests in three patents that he
previously had assigned to Centrum Biotechnologies, Inc., a Canadian company
which was then 50% owned by Dr. Modi. We have since acquired Dr. Modi's interest
in Centrum Biotechnologies for no additional consideration. Since joining us,
Dr. Modi has developed formulations and procedures, including our oral insulin
formulation, that we believe are not covered by the claims of patents previously
assigned to Centrum.
We cannot be sure that any of our pending patent applications will be
granted, or that any patents which we own or obtain in the future will fully
protect our position. Our patent rights, and the patent rights of biotechnology
and pharmaceutical companies in general, are highly uncertain and include
complex legal and factual issues. We believe that our existing technology and
the patents which we hold or have applied for do not infringe any one else's
patent rights, and that they will provide meaningful protection against others
duplicating our proprietary technologies. We cannot be sure of this, however,
because of the complexity of the legal and scientific issues that could rise in
litigation over these issues. Furthermore, patent applications are maintained in
secrecy in the United States until the patents are approved, and in most foreign
countries for a period of time following the date from which priority is
claimed. Thus, we cannot be sure that any technology that we currently are
developing is not covered already by a third party's pending patent
applications.
We presently are involved in litigation with a former consultant in
which the former consultant has claimed that we misappropriated proprietary
information belonging to the consultant in developing our insulin product. We
also have been threatened with litigation by an individual named as a
co-inventor of a patented buccal delivery technology in which we now hold a 50%
interest. We do not believe that any of our existing or planned products or
technology incorporates or infringes upon any intellectual proprietary interests
of these claimants.
Competition
We expect that products based upon our buccal delivery technology and
any other products that we may develop will compete directly with products
developed by pharmaceutical companies, universities, government agencies and
public and private research organizations.
Products developed by our competitors may provide for the delivery of
substantially the same active pharmaceutical ingredient as our products using
different methods of administration (e.g., pulmonary rather than buccal) or use
a different active pharmaceutical agent to treat the same medical condition or
indication as our product. For example, a number of pharmaceutical and
biotechnology companies are engaged in various stages of research, development
and testing of alternatives to insulin therapy for the treatment of diabetes, as
well as new means of administering insulin. Many of our competitors and
potential competitors in both categories have substantially greater scientific
research and product development capabilities, as well as financial, marketing
and human resources, than we do.
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Where the same or substantially the same active ingredient is available
using alternative delivery means, we expect that competition among products will
be based, among other things, on product safety, efficacy, ease of use,
availability, price, marketing and distribution. When different active
pharmaceutical ingredients are involved, these same competitive factors will
apply to both the active agent and the delivery method.
We consider other drug delivery companies to be direct competitors for
the cooperation and support of major drug and biotechnology companies that own
or market proprietary pharmaceutical compounds, as well as for the ultimate
patient market. Among drug delivery companies, those that are known to be
developing delivery systems for insulin and other pharmaceutical agents that we
have identified as product candidates using our technology are of primary
concern. Within this category, we consider Inhale Therapeutics, Inc. to be our
principal competitor for our insulin product.
Inhale Therapeutics, Inc. is developing a customized insulin
formulation that is processed into a fine, dry powder and administered to the
deep lung using a proprietary inhalation device developed for this purpose.
Inhale has announced successful results using its inhaled product in Phase II
clinical trials, and is now engaged in Phase III trials. Inhale is developing
its insulin product in collaboration with Pfizer, Inc., which in turn has
announced agreements to co-develop and co-promote the use of inhaled insulin
with Aventis, a leading pharmaceutical company which presently manufactures
insulin for sale primarily in Europe. Inhale is also developing pulmonary
products with large molecule drugs other than insulin, and has stated that it is
investigating the use of its inhalation technology with small molecule drugs.
Aradigm Corporation, which has announced a joint development agreement
with Novo Nordisk A/S to jointly develop a pulmonary delivery system for insulin
by inhalation, also may be considered a direct competitor of ours in the insulin
area. Novo Nordisk is one of the two leading manufacturers of insulin in the
world, the other being Eli Lilly and Company. Aradigm began Phase II testing of
its inhalation product in the second half of 1998.
Other companies have announced development efforts relating to
alternative (to injection) means of delivering insulin or other large molecule
drugs, including Dura Pharmaceuticals which announced a collaboration with Eli
Lilly and Company in 1998 to develop a pulmonary method of administering
insulin, and Endorex Corporation which has announced receipt of a patent
covering an oral vaccine delivery technology that it is developing with Elan
Pharmaceutical Technologies.
In addition to other delivery systems for insulin, there are numerous
products which have been approved for use in the treatment of Type 2 diabetics
in place of or in addition to insulin therapy. These products may be considered
competitive with insulin products.
Environmental Compliance
Our manufacturing, research and development activities involve the
controlled use of hazardous materials and chemicals. We believe that our
procedures for handling and disposing of these materials comply with all
11
<PAGE>
applicable government regulations. However, we cannot eliminate the risk of
accidental contamination or injury from these materials. If an accident
occurred, we could be held liable for damages, and these damages could severely
impact our financial condition. We are also subject to many environmental,
health and workplace safety laws and regulations, particularly those governing
laboratory procedures, exposure to blood-borne pathogens, and the handling of
hazardous biological materials. Violations and the cost of compliance with these
laws and regulations could adversely affect us. However, we do not believe that
compliance with the United States, Canadian or other environmental laws will
have a material effect on us in the foreseeable future.
Research and Development Expenditures
A substantial portion of our activities to date have been in research
and development. In the period from inception to July 31, 2000, our expenditures
on research and development were $7,166,254. These included $3,476,436 in the
year ended July 31, 2000, $1,853,108 in the year ended July 31, 1999, and
$876,404 in the year ended July 31, 1998.
Employees
At September 30, 2000, we had 25 full-time employees, including our
executive officers and other individuals who work for us full time but are
employed by management companies that provide their services. Sixteen of our
employees are executive and administrative, five are scientific and technical
personnel who engage primarily in development activities and in preparing
formulations for testing and clinical trials, and four are engaged in corporate
and product promotion, public relations and investor relations. We believe our
employee relations are good. None of our employees is covered by a collective
bargaining agreement.
We will continue to need qualified scientific personnel and personnel
with experience in clinical testing, government regulation and manufacturing. We
may have difficulty in obtaining qualified scientific and technical personnel as
there is strong competition for these people from other pharmaceutical and
biotechnology companies as well as universities and research institutions. Our
business could be materially harmed if we are unable to recruit and retain
qualified scientific, administrative and executive personnel to support our
expanding activities, or if one or more members of our limited scientific and
management staff were unable or unwilling to continue their association with us.
We do not have fixed term agreements with any of our key management or
scientific staff, other than Dr. Pankaj Modi. The fact that we have a fixed term
contract with Dr. Modi, however, does not guarantee his continued availability.
We also use non-employee consultants to assist us in formulating
research and development strategy, in preparing regulatory submissions, in
developing protocols for clinical trials, and in designing, equipping and
staffing our manufacturing facilities. These consultants and advisors usually
have the right to terminate their relationship with us on short notice. Loss of
some of these key advisors could interrupt or delay development of one or more
of our products or otherwise adversely affect our business plans.
12
<PAGE>
Item 2. Properties.
Our executive and principal administrative offices occupy approximately
5,000 square feet of office space in the Business Centre at 33 Harbour Square in
downtown Toronto, Ontario, Canada. We own the Business Centre, which comprises
approximately 9100 square feet of usable space. The space in the Centre that is
not used by us is leased to third parties. Rental income is accounted for as a
reduction of our occupancy costs.
We also own a laboratory facility in Toronto that we have used for
limited production of our oral insulin formulation for clinical purposes, and
are in the process of completing a pilot manufacturing facility for our insulin
product in the same commercial complex. Our laboratory facility is approximately
2,650 square feet, and our pilot manufacturing facility, which also will include
laboratory facilities is approximately 3,200 square feet. We expect to receive
regulatory approvals for both facilities in the current calendar year.
We have first mortgages on our Toronto properties totaling $721,963 at
July 31, 2000. Our mortgages require the payment of interest, with minimal
principal reduction, prior to their due date (November 1, 2002 with respect to
$180,302, and May 25, 2005 with respect to $541,661).
At this time, we do not expect to need manufacturing capabilities
beyond our pilot facility before the end of calendar year 2001. We have
acquired, however, an 11,625 square foot building in Brampton, Ontario, which is
approximately 25 miles outside Toronto, and a 13,500 square foot building in
Mississauga, Ontario, which is about 20 miles from downtown Toronto, for
ultimate use in manufacturing. We have done preliminary work on these
facilities, but we do not expect to make a substantial investment in improving
and equipping them for manufacturing operations until our requirements in this
area are better defined.
Item 3. Legal Proceedings.
Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against us under New York Stock
Exchange rules on October 2, 1998. Sands alleged that it had the right to
receive, for nominal consideration, approximately 1.5 million shares of our
common stock. This claim was based upon an October 1997 letter agreement which
purported to confirm an agreement appointing Sands Brothers as the exclusive
financial advisor to Generex Pharmaceuticals, Inc., our subsidiary. In exchange
for agreeing to act in that capacity, the letter agreement purported to grant
Sands the right to acquire 17% of Generex Pharmaceuticals common stock for
nominal consideration. Following our acquisition of Generex Pharmaceuticals,
Sands claimed its right to receive shares of Generex Pharmaceuticals common
stock applies to our common stock since outstanding shares of Generex
Pharmaceuticals were converted into our shares in the acquisition. Sands' claims
also included additional shares as a fee related to that acquisition, and
$144,000 in monthly fees due under the terms of the purported agreement.
On October 1, 1999, we were informed that the arbitration panel that
heard this case had awarded Sands $14,070 and issued a declaratory judgment to
the effect that we are required to issue to Sands a warrant to purchase
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<PAGE>
1,530,020 shares of our common stock pursuant to and in accordance with the
terms of the October 1997 letter agreement. On March 20, 2000, the Supreme
Court of the State of New York, County of New York, granted the petition of
Sands Brothers & Co., Ltd. to confirm the award. We have appealed this decision
to the Appellate Division of the New York Supreme Court. While the appeal will
attempt to overturn the decision to uphold the award, our ultimate legal and
financial liability, including a range of possible losses with respect to the
award, cannot be estimated at this time.
We also are involved in, or have recently settled, the following
litigations:
o In June 1996, "Generex Inc." was named as an additional defendant
in a pending action in The Court of Queen's Bench of Alberta in
Calgary, Alberta (Elbourne, et al. v. Acepharm, Inc., et al.)
seeking equitable relief, damages (approximately $680,000 U.S.)
and punitive damages (approximately $3.4 million U.S.). The case
arose out of plaintiffs' unsuccessful attempt to acquire Acepharm,
Inc. In September of this year we settled this case for $100,000.
o In February 1999, MQS, Inc., a former consultant, commenced a civil
action against us in the United States District Court for the
District of New Jersey claiming that 242,168 shares of our Common
Stock and $243,066 are due to it for services which it rendered
through December 22, 1998. MQS also claims that we have used
proprietary technology of MQS in developing our aerosol applicator
and in formulating our oral insulin product for aerosol
application. We filed our answer to MQS's claims in May 1999, in
which we deny that MQS is entitled to the relief that it seeks, or
that any of our products or technology incorporates any proprietary
technology belonging to MQS. We also filed a counterclaim against
MQS for breach of contract.
In December 1999, we filed a motion with the court to amend our
answer and counterclaim to add additional claims against MQS,
including claims based upon unauthorized use and misappropriation
of our trade secrets and technology, and to add additional parties
as counterclaim defendants. MQS then filed a motion to amend its
complaint to add certain of our officers as individual defendants
on the claims previously made against us. We and MQS each agreed to
allow the other to amend its pleadings in the manner sought, and
the pleadings were completed in May of this year. Discovery in the
case is expected to continue into early 2001. At this time, we are
unable to predict the outcome of this litigation.
We maintain product liability coverage for claims arising from the use
of our products in clinical trials, etc., but do not have any insurance that
covers our potential liability in any of the legal proceedings described above.
Except as described above, we are not involved in any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to a vote of stockholders in the last
quarter of the year ended July 31, 2000.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
"Bid" and "asked" prices for our common stock were quoted on the Nasdaq
OTC Electronic Bulletin Board from February 1998 to May 2000. On May 5, 2000,
our common stock began trading on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market"). Prior to February 1998, there was no public market
for our common stock.
The table below sets forth the high and low inter-dealer bid quotations
for our common stock for certain periods prior to May 5, 2000, as furnished by
the Nasdaq OTC Bulletin Board, and by the Nasdaq National Market beginning May
5, 2000. These are "inter-dealer" quotations, without retail mark-up, mark-down
or commissions, and may not represent actual transactions. The table also sets
forth the high and low sales prices of our common stock reported by The Nasdaq
Stock Market for these periods beginning May 5, 2000.
<TABLE>
<CAPTION>
Interdealer Bid Quotations Sales Prices
(not actual transactions) (actual transactions)
-------------------------- -----------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1998
----
First quarter $6.38 $5.75 __ __
Second quarter $9.00 $6.00 __ __
Third quarter $8.125 $5.75 __ __
Fourth quarter $18.88 $7.38 __ __
1999
----
First quarter $13.75 $7.00 __ __
Second quarter $9.375 $6.56 __ __
Third quarter $8.06 $5.50 __ __
Fourth quarter $7.56 $4.12 __ __
2000
----
First quarter $9.88 $4.62 __ __
Second quarter $13.88 $1.06 $11.38 $4.78
Third quarter $24.75 $4.00 $24.88 $7.56
Fourth quarter (through $14.69 $.03 $14.75 $10.00
October 15, 2000)
</TABLE>
15
<PAGE>
The closing sales price for our common stock reported on October 25, 2000, was
$10.69.
At October 26, 2000, there were 758 holders of record of our common
stock.
Dividends
We have not paid dividends on our common stock in the past and have no
present intention of paying dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In the period from August 1, 1999 until July 31, 2000, we have offered
and sold common stock and other securities in a number of transactions,
including the transactions described below, in reliance upon exemptions from the
registration requirements of the Securities Act of 1933. In the transactions
described below, unless otherwise indicated, we relied upon the exemptions from
registration provided in Section 4(2) of the Securities Act, and Rule 506 of
Regulation D thereunder. No "public solicitation", as that term is defined in
Rule 502(c), was employed by or in connection with the sale of these securities.
All purchasers were, to our reasonable belief, accredited investors who
purchased for investment. All disclosures required under Rule 502(d) of
Regulation D were made by us, and all other conditions to the availability of
the Rule 506 exemption were, to our knowledge and belief, complied with by us.
In order to assure that resale restrictions applicable to restricted
securities are complied with, we placed a legend evidencing the restrictions on
all certificates representing the shares, and issued "stop transfer"
instructions to our transfer agent to prevent unapproved transfers.
Transactions in the year ended July 31, 2000, and not previously
reported on a Quarterly Report on Form 10-Q were as follows:
(a) Between May 26, 2000 and July 31, 2000, we issued 19,700 shares of
our common stock upon the exercise of outstanding warrants. These shares were
registered for resale on Form S-3 (Registration No. 333-33556) and were resold
by the purchasers pursuant to that registration statement. In these
transactions, Teddy Ishak purchased 3,000 shares at $6.00 per share and Coleman
and Company Securities, Inc. purchased 16,700 shares at $7.50 per share.
(b) In June 2000, we issued a total of 4,300 shares of common stock
valued for this purpose at $6.00 per share to four advisors in compensation for
their services, as follows: William Lehun - 892 shares; Dennis Brans - 158
shares; Michael Howlett - 1,250 shares; and Robert Savage - 2,000 shares.
(c) In January 2000, we issued a total of 8,100 shares of common stock
valued for this purpose at $5.00 per share to 20 employees as a holiday bonus.
None of the recipients of these bonuses are affiliates, and the maximum number
of shares awarded to any individual employee was 1,000 shares. We issued these
bonus shares without registration under the Securities Act in reliance upon our
counsel's opinion that no sale of shares was involved.
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<PAGE>
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
The following selected financial data is derived from and should be read in
conjunction with our financial statements and related notes, which appear
elsewhere in this annual report. Our financial statements as of July 31, 2000
and 1999, and for the years ended July 31, 2000, 1999 and 1998, have been
audited by WithumSmith+Brown, independent auditors'.
<TABLE>
<CAPTION>
Cumulative
From
November 2,
1995
(Date of
YEARS ENDED JULY 31, Inception)
--------------------------------------------------- To July 31,
2000 1999 1998 2000
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data):
Revenues $ -- $ -- $ -- $ --
Net Loss $ (8,841) $ (6,240) $ (4,664) $ (21,817)
Basic and diluted net loss per
common share $ (.58) $ (.47) $ (.46) --
Weighted average number of
common shares outstanding 15,190 13,260 10,079 --
Cash dividends per share -- -- -- --
</TABLE>
JULY 31,
-------------------------
2000 1999
-------- -------
BALANCE SHEET DATA (In thousands):
Working capital $ 6,073 $ 5,188
Total assets $ 10,341 $ 8,890
Total long-term debt (less current maturities) $ 713 $ 445
Total stockholders' equity $ 8,415 $ 7,310
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
General
Corporate History. We were incorporated in Delaware in September 1997
for the purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian
corporation formed in November 1995 to engage in pharmaceutical and
biotechnological research and other activities. Our acquisition of Generex
Pharmaceuticals was completed in October 1997 in a transaction in which the
holders of all outstanding shares of Generex Pharmaceuticals exchanged their
shares for shares of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green
Mt. P. S., Inc., a previously inactive Idaho corporation formed in 1983. As a
result of this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with
Generex Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
Business History. We are engaged in the development of proprietary drug
delivery technology. Our principal business focus has been to develop a
technology for buccal delivery (absorption through the inner cheek walls) of
large molecule drugs, i.e., drugs composed of molecules with molecular weights
above a specified level. Large molecule drugs historically have been
administered only by injection because their size inhibits or precludes
absorption if administered by oral, transdermal, transnasal or other means.
Our first product is an insulin formulation that is administered as a
fine spray into the oral cavity using a hand-held aerosol spray applicator.
Between January 1999 and September 2000, we conducted clinical trials on this
product in the US, Canada and Europe. In September 2000, we entered into an
agreement to develop this product with Eli Lilly and Company. Under this
agreement, Lilly is responsible for conducting clinical trials of the product,
securing regulatory approvals and marketing on a worldwide basis. We will
receive certain initial fees and milestone payments, and royalty payments based
on product sales. Lilly also has the option to develop certain additional
products using our buccal delivery technology depending on the success of the
initial product.
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<PAGE>
Our buccal delivery technology is a platform technology that we believe
has application to a significant number of large molecule drugs in addition to
insulin. During our current fiscal year, we expect to begin development of three
additional products based on this technology that are not covered by our
agreement with Lilly.
We do not expect to receive significant revenue from product sales in
the current fiscal year or in the next fiscal year. We do anticipate licensing
income or income in the nature of licensing income (e.g., "signing bonuses" or
"advance royalties") in the current fiscal year, and received our first income
from such sources in Q1 of this year. We expect, however, to satisfy a
substantial majority of our cash needs during the current year from capital
raised through prior equity financing.
Results of Operations -- 2000 Compared With 1999
We had a net loss of $8,841,047 in the year ended July 31, 2000 (FY
2000) compared to a loss of $6,239,602 in the year ended July 31, 1999 (FY
1999). The increase in our FY 2000 net loss resulted from increases in research
and development expenses (to $3,476,436 from $1,853,108) and in general and
administrative expenses (to $5,567,520 from $4,374,523). Our net interest and
miscellaneous income in FY 2000 increased to $202,909 from a net expense of
$11,971 in FY 1999, primarily as a result of increased interest income in FY
2000.
The principal reasons for the increase in our research and development
expense in FY 2000 were:
o increased expenditures relating to clinical trials of our oral
insulin formulation primarily attributable to the expanded scope of
these trials in FY 2000 to include additional sites in the United
States and Europe, and the fact that trials did not commence in FY
1999 until the second quarter; and
o costs associated with operations of our pilot manufacturing
facility in Toronto which supports our clinical program.
The principal reasons for the increase in our general and
administrative expenses in FY 2000 were:
o an increase of $684,344 in legal and accounting fees and expenses
(to $1,520,726 from $836,382) related primarily to legal and
accounting services in connection with reporting requirements under
the Securities and Exchange Act of 1934, litigation defense costs
and increased legal activity necessitated by increased business
activity;
o increased personnel costs of $198,122 (to $369,007 from $170,885)
related primarily to additions to our technical and administrative
staff during FY 2000; and
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<PAGE>
o increased travel and other costs of $93,298 (to $538,062 from
$444,764) associated with attendance at and sponsorship of industry
seminars and exhibitions and other promotional activities.
In both of the last two fiscal years, we incurred substantial expenses
for financial advisory and other financing services that were not related to a
specific financing and, therefore, were accounted for as general and
administrative expenses. These expenses ($1,845,408 in FY 2000 and $1,573,604 in
FY 1999) were paid primarily through the issuance of shares of common stock
and/or warrants and options to purchase common stock. We believe that any
similar expenses incurred in the current fiscal year will not exceed the level
of such expenses in FY 2000.
Results of Operations -- 1999 Compared With 1998
We had a net loss of $6,239,602 in FY 1999, compared to a loss of
$4,663,604 in the year ended July 31, 1998 (FY 1998). The increase in our net
loss resulted from increases in research and development expenses (to $1,853,108
from $876,404) and in general and administrative expenses (to $4,374,523 from
$3,723,909).
The principal reasons for the increase in our research and development
expense in FY 1999 over FY 1998 were:
o commencement of clinical trials of our oral insulin formulation
during Q2 of FY 1999;
o preparations for our clinical program in Q1 of FY 1999, including
preparation of our IND application to FDA;
o development work associated with our oral insulin applicator; and
o costs associated with starting up our pilot manufacturing facility
in Toronto which supports our clinical programs.
The principal reason for the increase in our general and administrative
expenses in FY 1999 versus FY 1998 was an increase of $455,152 in legal and
accounting fees and expenses ($836,382 in the year ended July 31, 1999, compared
to $381,230 in the prior year). This increase was related principally to legal
and accounting services in connection with the registration of our common stock
under the Securities Exchange Act of 1934, compliance with the reporting
requirements of that Act, legal services related to patents, litigation defense
costs and increased legal activity necessitated by increased business activity.
A significant portion of the increase in our general and administrative
expenses in FY 1999 compared with FY 1998 ($170,198) was the result of increased
travel and other costs associated with attendance at and, in one case
co-sponsorship of, industry seminars and exhibitions.
20
<PAGE>
In each of FY 1999 and FY 1998, we incurred substantial expenses for
financial advisory and other financing services that were not related to a
specific financing and, therefore, were accounted for as general and
administrative expenses. These expenses were paid primarily through the issuance
of shares of common stock and/or warrants to purchase common stock ($1,573,604
in FY 1999 and $1,758,166 in FY 1998).
Results of Operations -- Years Ended July 31, 1998 and 1997
Through July 31, 1998, we accumulated a substantial operating deficit
as a result of research, development and general and administrative expenses.
These expenses increased year to year, and increased substantially in FY 1998,
primarily because of large increases in general and administrative expenses
($3,723,909 in FY 1998 versus $651,545 in FY 1997).
The increase in our general and administrative expenses in FY 1998 was
attributable primarily to:
o increase in salaries ($570,230 in FY 1998 versus $77,806 in the
prior fiscal year);
o professional fees ($527,941 versus $98,078);
o consulting services paid for through the issuance of securities
valued at $110,000, versus zero in the prior year; and
o settlement of a liquidated damage claim by a former lender
($738,000) based upon our failure to become a "public company"
prior to December 7, 1997.
Liquidity and Capital Resources
To date we have financed our development stage activities primarily
through private placements of common stock. In FY 2000, we issued approximately
1.59 million shares of common stock for cash proceeds of approximately $8.05
million (net of financing costs of approximately $606,000) and non-cash proceeds
(services) of approximately $66,288. Additionally, we granted stock options and
warrants to consultants and advisors, with a value of $1.42 million, for
services rendered. As a result of our sales of common stock for cash and our use
of stock options and warrants to pay for certain services during FY 2000, our
stockholders' equity increased to approximately $8.42 million at July 31, 2000,
versus approximately $7.31 million at July 31, 1999, notwithstanding our net
loss during the year.
At July 31, 2000, we had on hand cash and short term investments
(primarily notes of US corporations) of approximately $7.17 million versus $5.87
million at July 31, 1999. In the first quarter of our current fiscal year (from
August 1, 2000, through October 18, 2000), we received additional equity capital
of approximately $ 1.9 million from the sale of 256,504 shares of common stock
upon exercise of outstanding warrants, and approximately $22 million (net of
financing costs of approximately $1.66 million) from a private placement of
units of securities consisting of 2,151,093 shares of common stock and warrants
to purchase an additional 322,065 shares of common stock at a price of $13.20
per share. We believe that our current cash position is sufficient to meet all
21
<PAGE>
of our working capital needs for at least the next 12 months. Beyond that, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise funds through private or public equity
financing or from other sources. If we were unable to raise additional capital
as needed, we could be required to "scale back" or otherwise revise our business
plan. Any significant scale back of operations or modification of our business
plan due to a lack of funding could be expected to materially and adversely
affect our prospects.
In the past we have funded most of our development and other costs with
equity financing. While we have been able to raise equity capital as required,
unforeseen problems with our clinical program or materially negative
developments in general economic conditions could interfere with our ability to
raise additional equity capital as needed, or materially adversely affect the
terms upon which such capital is available. We presently have a $50 million
equity "draw down" commitment from an investor pursuant to which, subject to
certain limitations and the satisfaction of certain conditions, we have the
right to require the investor to purchase up to $50 million of our common stock
at a 10% discount to the then current market price of the common stock. We do
not now foresee a need to draw upon this facility in the current fiscal year.
Transactions with Affiliates
Prior to January 1, 1999, a portion of our general and administrative
expenses resulted from transactions with affiliated persons, and a number of
capital transactions also involved affiliated persons. Although these
transactions were not the result of "arms-length" negotiations, we do not
believe that this fact had a material impact on our results of operations or
financial position. Prior to December 31, 1998, we classified certain payments
to executive officers for compensation and expense reimbursements as "Research
and development - related party" because the executive officers received such
payments through personal services corporations rather than directly. After
December 31, 1998, these payments have been and will continue to be accounted
for as though the payments were made directly to the officers, and not as a
related party transaction. We do not foresee a need for, and therefore do not
anticipate, any related party transactions in the current fiscal year.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes new
accounting and reporting standards for derivative financial instruments and for
hedging activities. SFAS 133 requires a company to measure all derivatives at
fair value and to recognize them in the balance sheet as an asset or liability,
depending on the company's rights or obligations under the applicable derivative
contract. In June 2000 the FASB issued SFAS 138 which amended certain provisions
of SFAS 133. The amendments, among other things, allow foreign-currency
denominated assets and liabilities to qualify for hedge accounting, permit the
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<PAGE>
offsetting of selected inter-entity foreign currency exposures that reduce the
need for third party derivatives and redefine the nature of interest rate risk
to avoid sources of ineffectivenes. We adopted SFAS 133 and the corresponding
amendments of SFAS 138 in the first quarter of the current fiscal year. Adoption
of SFAS 133, as amended by SFAS 138, is not expected to have a material impact
on our results of operations, financial position or cash flows.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements and requires adoption no later than the
fourth quarter of the Company's fiscal year 2001. We currently are evaluating
the impact of SAB 101 to determine what effect, if any, it may have on our
financial position and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Price
We have neither issued nor own any long term debt instruments, or any
other financial instruments as to which we would be subject to material risks,
including market risks, related to interest rate movements.
At the present time, we maintain our cash in short term government or
government guaranteed instruments, short term commercial paper, interest bearing
bank deposits or demand bank deposits which do not earn interest. A substantial
majority of these instruments and deposits are denominated in US dollars, with
the exception of funds denominated in Canadian dollars on deposit in Canadian
banks to meet short term operating needs in Canada. At the present time, with
the exception of professional fees and costs associated with the conduct of
clinical trials in the United States and Europe, substantially all of our
operating expense obligations are denominated in Canadian dollars. We do not
presently employ any hedging or similar strategy intended to mitigate against
losses that could be incurred as a result of fluctuations in the exchange rates
between US and Canadian currencies.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------
Independent Auditors' Report F- 1
Consolidated Balance Sheets
July 31, 2000 and 1999 F-2
Consolidated Statements of Operations
For the Years Ended July 31, 2000, 1999 and 1998
and Cumulative From Inception to July 31, 2000 F-3
Consolidated Statements of Changes in Stockholders' Equity
For the Period November 2, 1995 (Date of Inception)
to July 31, 2000 F-4-9
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2000, 1999 and 1998
and Cumulative From Inception to July 31, 2000 F-10
Notes to Consolidated Financial Statements F-11-29
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
Generex Biotechnology Corporation:
We have audited the accompanying consolidated balance sheets of Generex
Biotechnology Corporation and Subsidiaries (a development stage company) as of
July 31, 2000 and 1999, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended July 31, 2000, and the cumulative amounts of operations
and cash flows for the period November 2, 1995 (date of inception) to July 31,
2000. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Generex
Biotechnology Corporation and Subsidiaries as of July 31, 2000 and 1999 and the
consolidated results of their operations, and their cash flows for each of the
years in the three-year period ended July 31, 2000, and the cumulative amounts
of operations and cash flows for the period November 2, 1995 (date of inception)
to July 31, 2000 in conformity with generally accepted accounting principles
(United States).
/s/ WithumSmith+Brown
---------------------
WithumSmith+Brown
New Brunswick, New Jersey
September 14, 2000 except as to Note 16(D), for which the date is September 29,
2000, and Note 16(E), for which the date is October 5, 2000
F-1
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
------------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,204,905 $ 5,633,201
Short-term investments 3,966,263 232,345
Miscellaneous receivables 16,138 182,413
Other current assets 99,041 119,010
---------------- --------------
Total Current Assets 7,286,347 6,166,969
Property and Equipment, Net 2,395,867 1,879,547
Patents, Net 267,369 --
Deposits 47,914 66,159
Due From Related Parties 343,773 776,991
---------------- --------------
TOTAL ASSETS $ 10,341,270 $ 8,889,666
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,204,282 $ 428,874
Current maturities of long-term debt 9,404 550,589
---------------- --------------
Total Current Liabilities 1,213,686 979,463
Long-Term Debt, Less Current Maturities 712,559 444,971
Due to Related Parties -- 155,383
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares,
no shares issued and outstanding at July 31, 2000 and 1999 -- --
Special Voting Rights Preferred stock, $.001 par value; authorized,
issued and outstanding 1,000 shares at July 31, 2000 and 1999 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 16,326,333 and 14,740,683 shares
at July 31, 2000 and 1999, respectively 16,327 14,741
Additional paid-in capital 30,435,066 20,903,728
Notes receivable - common stock (54,118) (434,903)
Deficit accumulated during the development stage (21,816,725) (12,975,678)
Accumulated other comprehensive loss (165,526) (198,040)
---------------- --------------
Total Stockholders' Equity 8,415,025 7,309,849
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,341,270 $ 8,889,666
================ ==============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-2
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
For the Years Ended November 2,
July 31, 1995 (Date of
--------------------------------------------------- Inception) to
2000 1999 1998 July 31, 2000
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
Operating Expenses:
Research and development 3,476,436 1,853,108 707,520 6,946,036
Research and development - related party -- -- 168,884 220,218
General and administrative 5,567,520 4,374,523 3,409,581 14,463,790
General and administrative- related party -- -- 314,328 314,328
------------- ------------- ------------- --------------
Total Operating Expenses 9,043,956 6,227,631 4,600,313 21,944,372
------------- ------------- ------------- --------------
Operating Loss (9,043,956) (6,227,631) (4,600,313) (21,944,372)
Other Income (Expense):
Miscellaneous income 7,906 -- -- 7,906
Interest income 272,808 55,190 -- 327,998
Interest expense (77,805) (67,161) (63,291) (208,257)
------------- ------------- ------------- --------------
Net Loss $ (8,841,047) $ (6,239,602) $ (4,663,604) $ (21,816,725)
============= ============= ============= ==============
Basic and Diluted Net Loss Per Common
Share $ (.58) $ (.47) $ (.46)
============= ============= =============
Weighted Average Number of Shares of
Common Stock Outstanding 15,189,781 13,260,260 10,078,875
============= ============= =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-3
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2000
<TABLE>
<CAPTION>
Special
Voting Rights
Preferred Notes
Common Stock Stock Additional Receivable
----------------------- ------------------- Paid-In - Common
Shares Amount Shares Amount Capital Stock
--------- ------- -------- ------ ----------- ----------
<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) --
Founders' shares transferred for services
rendered -- -- -- -- 330,025 --
Comprehensive Income (Loss):
Net loss -- -- -- -- -- --
Other comprehensive income (loss):
Currency translation adjustment -- -- -- -- -- --
--------
Total Comprehensive Income (Loss)
--------- -------- ------- ------ ----------- -------
Balance -July 31, 1996 4,587,764 4,588 -- -- 2,708,501 --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Stockholder
Income (Loss) Stage Equity
-------------- -------------- ------------
<S> <C> <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)
Founders' shares transferred for services
rendered -- -- 330,025
Comprehensive Income (Loss):
Net loss -- (693,448) (693,448)
Other comprehensive income (loss):
Currency translation adjustment (4,017) -- (4,017)
----------
Total Comprehensive Income (Loss) (697,465)
--------- ---------- ----------
Balance -July 31, 1996 (4,017) (693,448) 2,015,624
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2000
<TABLE>
<CAPTION>
Special
Voting Rights
Preferred Notes
Common Stock Stock Additional Receivable
----------------------- ------------------- Paid-In - Common
Shares Amount Shares Amount Capital Stock
--------- ------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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) --
Founders' shares transferred for services
rendered -- -- -- -- 23,481 --
Comprehensive Income (Loss):
Net loss -- -- -- -- -- --
Other comprehensive income (loss):
Currency translation adjustment -- -- -- -- -- --
Total Comprehensive Income (Loss)
--------- -------- ------- ------ ----------- -------
Balance - July 31, 1997 9,000,118 9,000 -- -- 5,512,782 --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Stockholders'
Income (Loss) Stage Equity
-------------- -------------- --------------
<S> <C> <C> <C>
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)
Founders' shares transferred for services
rendered -- -- 23,481
Comprehensive Income (Loss):
Net loss -- (1,379,024) (1,379,024)
Other comprehensive income (loss):
Currency translation adjustment 3,543 -- 3,543
----------
Total Comprehensive Income (Loss) (1,375,481)
--------- ---------- ----------
Balance - July 31, 1997 (474) (2,072,472) 3,448,836
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2000
<TABLE>
<CAPTION>
Special
Voting Rights
Preferred Notes
Common Stock Stock Additional Receivable
------------------------ ------------------- Paid-In - Common
Shares Amount Shares Amount Capital Stock
---------- ------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 GBC-Delaware,Inc.
and Generex Biotechnology Corporation 1,105,000 1,105 -- -- (1,105) --
Issuance of preferred stock for
services rendered, January 1998, $.001 -- -- 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, $.60 -- -- -- -- 300,000 --
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 -- -- 15,374 --
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 24,729 24 -- -- 61,799 --
Comprehensive Income (Loss):
Net loss -- -- -- -- -- --
Other comprehensive income (loss):
Currency translation adjustment -- -- -- -- -- --
Total Comprehensive Income (Loss)
---------- -------- ------- ------ ----------- -------
Balance - July 31, 1998 11,971,272 11,971 1,000 1 9,565,836 --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Stockholders'
Income (Loss) Stage Equity
-------------- -------------- --------------
<S> <C> <C> <C>
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 GBC-Delaware,Inc.
and Generex Biotechnology Corporation -- -- --
Issuance of preferred stock for
services rendered, January 1998, $.001 -- -- 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, $.60 -- -- 300,000
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,
$.0667 -- -- 15,608
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 -- -- 61,823
Comprehensive Income (Loss):
Net loss -- (4,663,604) (4,663,604)
Other comprehensive income (loss):
Currency translation adjustment (198,959) -- (198,959
----------
Total Comprehensive Income (Loss) (4,862,563)
--------- ---------- ----------
Balance - July 31, 1998 (199,433) (6,736,076) 2,642,299
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2000
<TABLE>
<CAPTION>
Special
Voting Rights
Preferred Notes
Common Stock Stock Additional Receivable
----------------------- ------------------- Paid-In - Common
Shares Amount Shares Amount Capital Stock
--------- ------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash,
August 1998, $3.00 100,000 100 -- -- 299,900 --
Issuance of common stock for cash,
August 1998, $3.50 19,482 19 -- -- 68,168 --
Redemption of common stock for cash,
September 1998, $7.75 (15,357) (15) -- -- (119,051) --
Issuance of common stock for cash,
September - October 1998, $3.00 220,297 220 -- -- 660,671 --
Issuance of common stock for cash,
August - October 1998, $4.10 210,818 211 -- -- 864,142 --
Issuance of common stock in exchange
for services rendered, August -
October 1998, $2.50 21,439 21 -- -- 53,577 --
Issuance of common stock in exchange
for services rendered, August -
October 1998, $4.10 18,065 18 -- -- 74,048 --
Issuance of common stock to satisfy
accrued liability, September 1998, $4.10 180,000 180 -- -- 737,820 --
Issuance of warrants in exchange for
services rendered, October 1998, $.26 -- -- -- -- 2,064 --
Issuance of stock options in exchange for
services rendered, November 1998, $1.85 -- -- -- -- 92,500 --
Issuance of warrants in exchange for
services rendered, November 1998, $1.64 -- -- -- -- 246,000 --
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 180,000 180 -- -- 629,820 --
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 275,000 275 -- -- 1,099,725 --
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 96,852 97 -- -- 397,003 --
Issuance of common stock in exchange for
services rendered, November 1998 -
January 1999, $4.10 28,718 29 -- -- 117,715 --
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 20,000 20 -- -- 99,980 --
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 15,000 15 -- -- 82,485 --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Stockholders'
Income (Loss) Stage Equity
-------------- -------------- --------------
<S> <C> <C> <C>
Issuance of common stock for cash,
August 1998, $3.00 -- -- 300,000
Issuance of common stock for cash,
August 1998, $3.50 -- -- 68,187
Redemption of common stock for cash,
September 1998, $7.75 -- -- (119,066)
Issuance of common stock for cash,
September - October 1998, $3.00 -- -- 660,891
Issuance of common stock for cash,
August - October 1998, $4.10 -- -- 864,353
Issuance of common stock in exchange
for services rendered, August -
October 1998, $2.50 -- -- 53,598
Issuance of common stock in exchange
for services rendered, August -
October 1998, $4.10 -- -- 74,066
Issuance of common stock to satisfy
accrued liability, September 1998, $4.10 -- -- 738,000
Issuance of warrants in exchange for
services rendered, October 1998, $.26 -- -- 2,064
Issuance of stock options in exchange for
services rendered, November 1998, $1.85 -- -- 92,500
Issuance of warrants in exchange for
services rendered, November 1998, $1.64 -- -- 246,000
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 -- -- 630,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 -- -- 1,100,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 -- -- 397,100
Issuance of common stock in exchange for
services rendered, November 1998 -
January 1999, $4.10 -- -- 117,744
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 -- -- 100,000
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 -- -- 82,500
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-7
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2000
<TABLE>
<CAPTION>
Special
Voting Rights
Preferred Notes
Common Stock Stock Additional Receivable
----------------------- ------------------- Paid-In - Common
Shares Amount Shares Amount Capital Stock
--------- ------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in exchange for
services rendered, January 1999, $5.00 392 -- -- -- 1,960 --
Issuance of common stock for cash,
February 1999, $5.00 6,000 6 -- -- 29,994 --
Issuance of common stock in exchange for
services rendered, February 1999, $6.00 5,000 5 -- -- 29,995 --
Issuance of common stock for cash,
March 1999, $6.00 11,000 11 -- -- 65,989 --
Issuance of common stock for cash,
April 1999, $5.50 363,637 364 -- -- 1,999,640 --
Issuance of warrants in exchange for
services rendered, April 1999, $3.21 -- -- -- -- 160,500 --
Issuance of warrants in exchange for
services rendered, April 1999, $3.17 -- -- -- -- 317,000 --
Issuance of warrants in exchange for
services rendered, April 1999, $2.89 -- -- -- -- 144,500 --
Issuance of warrants in exchange for
services rendered, April 1999, $3.27 -- -- -- -- 184,310 --
Stock adjustment 714 1 -- -- (1) --
Issuance of common stock for cash,
May 1999, $5.50 272,728 273 -- -- 1,499,731 --
Issuance of common stock in exchange for
services rendered, May - June 1999, $5.50 60,874 61 -- -- 334,746 --
Exercise of warrants for cash, June 1999, $5.00 388,375 389 -- -- 1,941,484 --
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 94,776 95 -- -- 473,787 (473,882)
Exercise of warrants in exchange for services
rendered, June 1999, $5.00 13,396 13 -- -- 66,967 --
Reduction of note receivable in exchange for
services rendered -- -- -- -- -- 38,979
Shares tendered in conjunction with warrant
exercise, June 1999, $7.8125 (323,920) (324) -- -- (2,530,301) --
Exercise of warrants for shares tendered,
June 1999, $5.00 506,125 506 -- -- 2,530,119 --
Cost of warrants redeemed for cash -- -- -- -- (3,769) --
Cost related to warrant redemption, June 1999 -- -- -- -- (135,431) --
Cost related to issuance of common stock -- -- -- -- (1,179,895) --
Comprehensive Income (Loss):
Net loss -- -- -- -- -- --
Other comprehensive income (loss):
Currency translation adjustment -- -- -- -- -- --
Total Comprehensive Income (Loss)
---------- -------- ------- ------ ----------- --------
Balance - July 31, 1999 14,740,683 14,741 1,000 1 20,903,728 (434,903)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Stockholders'
Income (Loss) Stage Equity
-------------- -------------- --------------
<S> <C> <C> <C>
Issuance of common stock in exchange for
services rendered, January 1999, $5.00 -- -- 1,960
Issuance of common stock for cash,
February 1999, $5.00 -- -- 30,000
Issuance of common stock in exchange for
services rendered, February 1999, $6.00 -- -- 30,000
Issuance of common stock for cash,
March 1999, $6.00 -- -- 66,000
Issuance of common stock for cash,
April 1999, $5.50 -- -- 2,000,004
Issuance of warrants in exchange for
services rendered, April 1999, $3.21 -- -- 160,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.17 -- -- 317,000
Issuance of warrants in exchange for
services rendered, April 1999, $2.89 -- -- 144,500
Issuance of warrants in exchange for
services rendered, April 1999, $3.27 -- -- 184,310
Stock adjustment -- -- --
Issuance of common stock for cash,
May 1999, $5.50 -- -- 1,500,004
Issuance of common stock in exchange for
services rendered, May - June 1999, $5.50 -- -- 334,807
Exercise of warrants for cash, June 1999, $5.00 -- -- 1,941,873
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 -- -- --
Exercise of warrants in exchange for services
rendered, June 1999, $5.00 -- -- 66,980
Reduction of note receivable in exchange for
services rendered -- -- 38,979
Shares tendered in conjunction with warrant
exercise, June 1999, $7.8125 -- -- (2,530,625)
Exercise of warrants for shares tendered,
June 1999, $5.00 -- -- 2,530,625
Cost of warrants redeemed for cash -- -- (3,769)
Cost related to warrant redemption, June 1999 -- -- (135,431)
Cost related to issuance of common stock -- -- (1,179,895)
Comprehensive Income (Loss):
Net loss -- (6,239,602) (6,239,602)
Other comprehensive income (loss):
Currency translation adjustment 1,393 -- 1,393
----------
Total Comprehensive Income (Loss) (6,238,209)
--------- ---------- ----------
Balance - July 31, 1999 (198,040) (12,975,678) 7,309,849
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-8
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2000
<TABLE>
<CAPTION>
Special
Voting Rights
Preferred Notes
Common Stock Stock Additional Receivable
----------------------- ------------------- Paid-In - Common
Shares Amount Shares Amount Capital Stock
--------- ------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Adjustments for exercise of warrants recorded
June 1999 (2,300) (2) -- -- 2 --
Issuance of common stock for cash, September
1999, $6.00 2,500 2 -- -- 14,998 --
Issuance of common stock for cash pursuant to
private placement, January 2000, $4.25 470,590 471 -- -- 1,999,537 --
Financing costs associated with private
placement, January 2000 -- -- -- -- (220,192) --
Issuance of common stock in exchange for services
rendered, January 2000, $5.00 8,100 8 -- -- 40,492 --
Granting of 280,000 stock options for
services rendered, January 2000 -- -- -- -- 568,850 --
Granting of 150,000 stock warrants for
services rendered, January 2000 -- -- -- -- 355,500 --
Exercise of stock warrants for cash,
February 2000, $5.50 2,000 2 -- -- 10,998 --
Exercise of stock warrants for cash,
March 2000, $5.50 29,091 29 -- -- 159,972 --
Exercise of stock warrants for cash,
March 2000, $6.00 2,000 2 -- -- 11,998 --
Exercise of stock warrants for cash,
March 2000, $7.50 8,000 8 -- -- 59,992 --
Issuance of common stock for cash pursuant
to private placement, June 2000, $6.00 1,041,669 1,042 -- -- 6,248,972 --
Financing costs associated with private
placement, June 2000 -- -- -- -- (385,607) --
Issuance common of stock in exchange for services
rendered, June 2000, $6.00 4,300 4 -- -- 25,796 --
Exercise of warrants for cash, July 2000, $6.00 3,000 3 -- -- 17,997 --
Exercise of warrants for cash, July 2000, $7.50 16,700 17 -- -- 125,233 --
Granting of 115,000 stock options for services
rendered, July 2000 -- -- -- -- 496,800 --
Reduction of note receivable in exchange for
services rendered -- -- -- -- -- 384,903
Accrued interest on note receivable -- -- -- -- -- (4,118)
Comprehensive Income (Loss):
Net loss -- -- -- -- -- --
Other comprehensive income (loss):
Currency translation adjustment -- -- -- -- -- --
Total Comprehensive Income (Loss)
---------- -------- ------- ------ ------------ ---------
Balance - July 31, 2000 16,326,333 $ 16,327 1,000 $ 1 $ 30,435,066 $ (54,118)
========== ======== ======= ====== ============ =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Stockholders'
Income (Loss) Stage Equity
-------------- -------------- --------------
<S> <C> <C> <C>
Adjustments for exercise of warrants recorded
June 1999 -- -- --
Issuance of common stock for cash, September
1999, $6.00 -- -- 15,000
Issuance of common stock for cash pursuant to
private placement, January 2000, $4.25 -- -- 2,000,008
Financing costs associated with private
placement, January 2000 -- -- (220,192)
Issuance of common stock in exchange for services
rendered, January 2000, $5.00 -- -- 40,500
Granting of 280,000 stock options for
services rendered, January 2000 -- -- 568,850
Granting of 150,000 stock warrants for
services rendered, January 2000 -- -- 355,500
Exercise of stock warrants for cash,
February 2000, $5.50 -- -- 11,000
Exercise of stock warrants for cash,
March 2000, $5.50 -- -- 160,001
Exercise of stock warrants for cash,
March 2000, $6.00 -- -- 12,000
Exercise of stock warrants for cash,
March 2000, $7.50 -- -- 60,000
Issuance of common stock for cash pursuant
to private placement, June 2000, $6.00 -- -- 6,250,014
Financing costs associated with private
placement, June 2000 -- -- (385,607)
Issuance common of stock in exchange for services
rendered, June 2000, $6.00 -- -- 25,800
Exercise of warrants for cash, July 2000, $6.00 -- -- 18,000
Exercise of warrants for cash, July 2000, $7.50 -- -- 125,250
Granting of 115,000 stock options for services
rendered, July 2000 -- -- 496,800
Reduction of note receivable in exchange for
services rendered -- -- 384,903
Accrued interest on note receivable -- -- (4,118)
Comprehensive Income (Loss):
Net loss -- (8,841,047) (8,841,047)
Other comprehensive income (loss):
Currency translation adjustment 32,514 -- 32,514
-----------
Total Comprehensive Income (Loss) (8,808,533)
----------- ---------- -----------
Balance - July 31, 2000 $ (165,526) $(21,816,725) $ 8,415,025
=========== ============ ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-9
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
For the Years Ended November 2,
July 31, 1995 (Date of
------------------------------------------------ Inception) to
2000 1999 1998 July 31, 2000
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash Flows Used in Operating Activities:
Net loss $(8,841,047) $(6,239,602) $(4,663,604) $(21,816,725)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 86,808 79,784 31,096 210,677
Reduction of notes receivable - common stock
in exchange for services rendered 384,903 38,979 -- 423,882
Common stock issued for services rendered 66,300 612,175 562,253 1,240,728
Stock options and warrants issued for services
rendered 1,421,150 1,146,874 534,000 3,102,024
Preferred stock issued for services rendered -- -- 100 100
Founders' shares transferred for services
rendered -- -- -- 353,506
Changes in operating assets and liabilities:
Miscellaneous receivables 170,481 27,571 -- 27,873
Other current assets 21,219 12,610 (89,268) (102,748)
Accounts payable and accrued expenses 773,506 (87,134) 1,099,815 2,012,318
Other, net -- -- 110,317 110,317
----------- ----------- ----------- ------------
Net Cash Used in Operating Activities (5,916,680) (4,408,743) (2,415,291) (14,438,048)
Cash Flows Used in Investing Activities:
Purchase of property and equipment (381,163) (217,018) (16,287) (673,954)
Costs incurred for patents (269,499) -- -- (269,499)
Change in restricted cash -- 105,655 (111,250) (5,595)
Purchase of short-term investments (3,733,918) (232,345) -- (3,966,263)
Change in deposits 19,720 -- (17,601) 2,119
Change in notes receivable - common stock (4,118) -- 104,153 (4,118)
Change in due from related parties 290,973 428,216 154,945 (2,255,197)
Other, net -- -- 89,683 89,683
----------- ----------- ----------- ------------
Net Cash Provided By (Used in)
Investing Activities (4,078,005) 84,508 203,643 (7,082,824)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 993,149 993,149
Repayment of long-term debt (480,738) (416,649) (63,389) (960,776)
Change in due to related parties -- (81,483) 236,024 154,541
Proceeds from issuance of common stock, net 8,045,474 8,488,798 2,959,672 24,662,220
Purchase and retirement of common stock -- (119,066) -- (119,066)
----------- ----------- ----------- ------------
Net Cash Provided By Financing Activities 7,564,736 7,871,600 4,125,456 24,730,068
Effect of Exchange Rates on Cash 1,653 (4,991) (18,985) (4,291)
----------- ----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents (2,428,296) 3,542,374 1,894,823 3,204,905
Cash and Cash Equivalents, Beginning of Year 5,633,201 2,090,827 196,004 --
----------- ----------- ----------- ------------
Cash and Cash Equivalents, End of Year $ 3,204,905 $ 5,633,201 $ 2,090,827 $ 3,204,905
=========== =========== =========== ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-10
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Business:
Generex Biotechnology Corporation (the Company) was incorporated in
Delaware in September 1997 for the purpose of acquiring Generex
Pharmaceuticals, Inc. (Generex Pharmaceuticals), a Canadian corporation
formed in November 1995 to engage in pharmaceutical and
biotechnological research and other activities. The Company's
acquisition of Generex Pharmaceuticals was completed in October 1997 in
a transaction in which the holders of all outstanding shares of Generex
Pharmaceuticals exchanged their shares for shares of the Company's
common stock.
In January 1998, the Company participated in a "reverse acquisition"
with Green Mt. P.S., Inc., a previously inactive Idaho corporation
formed in 1983. As a result of this transaction, the Company's
shareholders (the former shareholders of Generex Pharmaceuticals)
acquired a majority (approximately 90%) of the outstanding capital
stock of Green Mt. P.S., Inc., the Company became a wholly-owned
subsidiary of Green Mt. P. S., Inc., Green Mt. P.S., Inc. changed its
corporate name to Generex Biotechnology Corporation (Generex Idaho),
and the Company changed its corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in the Company's shareholders
becoming the majority holders of Generex Idaho, the Company was treated
as the acquiring corporation in the transaction for accounting
purposes. Thus, the Company's historical financial statements, which
essentially represented the historical financial statements of Generex
Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, the Company completed a reorganization in which the
Company merged with Generex Idaho. In this transaction, all outstanding
shares of Generex Idaho were converted into the Company's shares,
Generex Idaho ceased to exist as a separate entity, and the Company
changed its corporate name back to Generex Biotechnology Corporation.
This reorganization did not result in any material change in the
Company's historical financial statements or current financial
reporting.
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 obtaining regulatory clearance for the sale of existing
or any future products or that any of the Company's products will be
commercially viable.
F-11
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Since its inception, the Company has funded operations primarily
through common stock issuances in order to meet its strategic
objectives. Management believes that sufficient funding has now been
raised, as demonstrated by the completion of fund raising events
occurring after July 31, 2000, (see note 16) to meet its planned
business objectives including anticipated cash needs for working
capital, for a reasonable period of time.
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 Corporation
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."
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Short-Term Investments
At July 31, 2000 and 1999, short-term investments consisted of
short-term notes of U.S. corporations with original maturities of
between four and five months. At July 31, 2000 and 1999, the cost of
the investments approximated market value.
Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on the straight-line method over
the estimated useful lives of the assets, which range from three to
thirty years. Gains and losses on depreciable assets retired or sold
are recognized in the statement of operations in the year of disposal.
Repairs and maintenance expenditures are expensed as incurred.
Patents
Legal costs incurred to establish patents are capitalized. Capitalized
costs are amortized on the straight-line method over the related patent
term.
F-12
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant Accounting Policies (Continued):
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 local
governments under research and development tax credit arrangements are
offset against the related expenses. Included in miscellaneous
receivables is $16,138 and $178,763 of such a receivable due from the
Canadian government at July 31, 2000 and 1999, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded for
temporary differences between financial statement carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets and
liabilities reflect the tax rates expected to be in effect for the
years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of
the deferred tax asset will not be realized.
Stock-Based Compensation
As permitted by the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock option plans.
Under APB 25, if the exercise price of the Company's employee stock
options equals or exceeds the fair market value of the underlying stock
on the date of grant, no compensation expense is recognized. Stock
options and warrants issued to non employees are accounted for based on
the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 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). SFAS 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 13 for methodology for determining net loss per
share.
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Other comprehensive income
(loss), which includes only foreign currency translation adjustments,
is shown in the Statement of Stockholders' Equity.
F-13
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant Accounting Policies (Continued):
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes
new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS 133 requires the Company
to measure all derivatives at fair value and to recognize them in the
balance sheet as an asset or liability, depending on the Company's
rights or obligations under the applicable derivative contract.
Subsequent to the issuance of SFAS 133, the FASB has received many
requests to clarify certain issues causing difficulties in
implementation. In June 2000, the FASB issued SFAS 138, which responds
to those requests by amending certain provisions of SFAS 133. These
amendments include allowing foreign-currency denominated assets and
liabilities to qualify for hedge accounting, permitting the offsetting
of selected inter-entity foreign currency exposures that reduce the
need for third party derivatives and redefining the nature of interest
rate risk to avoid sources of ineffectiveness. The Company expects to
adopt SFAS 133 and the corresponding amendments of SFAS 138 in the
first quarter of fiscal year 2001. SFAS 133, as amended by SFAS 138, is
not expected to have a material impact on the Company's combined
results of operations, financial position and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 provides guidance on the recognition, presentation
and disclosure of revenue in financial statements and requires adoption
no later than the fourth quarter of the Company's fiscal year 2001. The
Company is currently evaluating the impact of SAB 101 to determine what
effect, if any, it may have on the Company's combined financial
position and results of operations.
Concentration of Credit Risk
The Company maintains cash balances, at times, with financial
institutions in the amount which are more than amounts insured by the
Canada Deposit Insurance Corporation and the Federal Deposit Insurance
Corporation. Management monitors the soundness of these institutions
and considers the Company's risk negligible.
The Company places its short-term investments in short-term debt
instruments of high quality U.S. corporations. The Company does not
believe there is a significant credit risk relating to these
investments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
Foreign Currency Translation
Foreign denominated assets and liabilities of the Company are
translated into 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 rates which were in effect
during the period. Translation adjustments that arise from translating
the foreign subsidiary's financial statements from local currency to US
currency 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.
F-14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Property and Equipment:
The costs and accumulated depreciation of property and equipment are
summarized as follows:
July 31,
--------------------------------
2000 1999
----------- -----------
Land $ 304,060 $ 258,560
Buildings and Improvements 1,814,724 1,555,162
Furniture and Fixtures 8,190 8,036
Office Equipment 62,311 61,137
Lab Equipment 415,753 113,550
Construction in Progress -- 4,513
----------- -----------
Total Property and Equipment 2,605,038 2,000,958
Less: Accumulated Depreciation 209,171 121,411
----------- -----------
Property and Equipment, Net $ 2,395,867 $ 1,879,547
=========== ===========
Depreciation expense amounted to $85,781, $79,784 and $31,096 for the
years ended 2000, 1999 and 1998, respectively.
Note 5 - Patents:
The costs and accumulated amortization of patents are summarized as
follows:
July 31,
--------------------------------
2000 1999
----------- -----------
Patents $ 268,392 $ --
Less Accumulated Amortization 1,023 --
----------- -----------
Patents, Net $ 267,369 $ --
=========== ===========
Amortization expense amounted to $1,023 for the year ended July 31,
2000.
Note 6 - Income Taxes:
The Company has incurred losses since inception which have generated
net operating loss carryforwards on a consolidated basis of
approximately $14,600,000 at July 31, 2000 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 2020. These loss
carryforwards are subject to limitation in future years should certain
ownership changes occur.
For the years ended July 31, 2000, 1999 and 1998, 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:
July 31,
--------------------------------
2000 1999
----------- ------------
Net operating loss carryforwards $ 5,679,862 $ 3,404,374
Research and development tax credits -- 69,119
Amortization 697,311 169,417
----------- ------------
Total deferred tax assets 6,377,173 3,642,910
Valuation allowance (6,377,173) (3,642,910)
----------- ------------
Net deferred tax assets $ -- $ --
======== == ============
F-15
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Accounts Payable and Accrued Expense:
Accounts payable and accrued expenses consist of the following:
July 31,
-----------------------------
2000 1999
----------- ---------
Accounts Payable $ 853,428 $ 366,927
Litigation Accruals 167,650 --
Consulting Accruals 77,086 61,947
Accrued Legal Fees 106,118 --
----------- ---------
Total $ 1,204,282 $ 428,874
=========== =========
Note 8 - Commitments and Contingent Liabilities:
Consulting Services
In October 1996, the Company entered into a Consulting Agreement with
its 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 actual or demonstratably anticipated business,
work, undertaking or research and development of the Company.
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, 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 his interest in 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"). At the time of this assignment, the
Existing Patents were owned of record by a Canadian corporation which
was 50 percent owned by the V.P. The Company subsequently acquired the
V.P.'s interest in this corporation for no additional consideration.
Under the terms of the agreement, which expires December 31, 2004, the
Company will pay a fee of $93,204 for each year during the term of this
agreement, including expense reimbursement.
In November 1998, the Company entered into a consulting agreement with
an individual to assist the Company in testing and evaluating the use
of the Company's oral insulin formulation to reduce fibroid tissue and
serve on the Company's Scientific Advisory Board. 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. The agreement shall terminate on December 31,
2000.
In February 1999, the Company entered into an agreement, which was
amended and replaced by an April 1999 agreement, with an investment
banker. Under the terms of the amended agreement, the investment banker
will act as the Company's exclusive investment advisor, exclusive
private placement agent and exclusive investment banker for a period of
five months. In conjunction with the February agreement, the investment
banker received warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $6.00 per share during a five-year
period.
F-16
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Consulting Services (Continued)
Under the April 1999 agreement, the investment banker received warrants
to purchase 50,000 shares of the Company's common stock at an exercise
price of $6.00 per share during a five-year period. The amended
agreement also provided for the grant of an additional warrant to
purchase 50,000 shares of the Company's common stock at an exercise
price of $7.50 per share during a five-year period for assisting in
obtaining financing in an agreed upon and stated amount. The warrant
was earned in the quarter ended April 30, 1999. In the event of a
private placement of the Company's securities, the investment banker is
entitled to (i) a transaction fee, (ii) expense allowance and (iii)
placement agent warrants equal to 10 percent of the ownership given to
any equity raised. Finally in the event that the Company enters into a
merger, acquisition, or sale transaction with a party introduced by the
investment banker, cash compensation will be paid based on an agreed
upon formula.
Leases
The Company has entered into various lease agreements for the use of
vehicles and office equipment.
Aggregate minimum annual lease commitments of the Company as of July
31, 2000 are as follows:
Year Amount
---- ------
2001 $ 10,901
2002 5,159
2003 259
Thereafter --
--------
Total Minimum Lease Payments $ 16,319
========
Lease expense amounted to $20,175, $19,240 and $50,757 for the years
ended July 31, 2000, 1999 and 1998, respectively.
The preceding data reflects existing leases and does not include
replacements upon their expiration. In the normal course of business,
operating leases are generally renewed or replaced by other leases.
Rental Operations
The Company leases a portion of the floor that it owns in an office
building located in Toronto, Canada, as well as two commercial
buildings. The following represents the approximate minimum amount of
sublease income to be received in years ending after July 31, 2000:
Year Amount
---- ------
2001 $ 47,047
2002 25,277
Thereafter --
---------
Total $ 72,324
========
F-17
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Supply Agreement
The Company entered into a supply agreement with Valois, S.A. and
Valois of America, Inc. (collectively Valois), to supply the Company
with certain products developed and manufactured by Valois. Upon
execution of the exclusive supply agreement, the Company delivered
35,000 shares of its common stock to Valois. Pursuant to the agreement,
the Company shall pay milestone payments to Valois within 30 days of
July 19 beginning in fiscal 2001 for the next five years. If the
milestone obligations are not met, the Company shall pay Valois an
annual payment of $50,000. In the event the Company chooses to end the
agreement after the fifth anniversary, the Company shall pay Valois a
one-time payment of $350,000.
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 October 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 GBC - 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 GBC - 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.
During a series of hearings before a NYSE arbitration panel commencing
June 8, 1999, Sands amended its claim to include, in the alternative,
an entitlement in the form of an order of specific performance with
regard to the issuance of the warrant as discussed in the October 1997
letter.
F-18
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Pending Litigation (Continued)
By an award dated September 24, 1999, the panel awarded Sands $12,000
plus $2,070 in interest, a declaratory judgment that the Company is
required to issue Sands a warrant for 1,530,020 shares in accordance
with the October 1997 letter, and denied all other relief and split the
$22,800 in forum fees equally between Sands and the Company. On October
13, 1999, Sands Brothers commenced a special proceeding to confirm the
Arbitration Award in New York State Supreme Court, New York County. On
November 10, 1999, the Company moved to vacate the Arbitration Award on
the grounds that the Arbitration Panel had exceeded its authority and
had manifestly disregarded the relevant law of agency in issuing the
Award. On March 20, 2000, the New York State Supreme Court granted
Sands Brother's petition to confirm the Award and denied the Company's
motion to vacate the Award. The Court entered Judgment against the
Company. The Company has appealed the lower court's Judgment to the New
York State Appellate Division, First Department. The Company's appeal
to the First Department is presently fully briefed and pending, with
oral argument scheduled for October 20, 2000. The Company believes that
the ultimate legal and financial liability of the Company, including a
range of possible losses with respect to the award, cannot be estimated
at this time. Therefore, no provision has been recorded in the
accompanying financial statements. Furthermore, it is management's
belief that the final outcome is not reasonably likely to have a
material adverse effect on the Company's consolidated financial
position.
In February 1997, a claim of wrongful dismissal by a former employee
seeking damages of approximately $311,245 was brought in Ontario Court
in Toronto, Ontario. This case was tried without a jury in October
1999, and a decision in favor of the plaintiff in the amount of
approximately $131,908, plus interest and costs was rendered against
the Company in December 1999. The Company has appealed this decision.
The Company's management, after consultation with its legal counsel,
has determined the range of likely loss to be approximately $67,650 to
$190,901 and therefore has recorded a charge to operations in the
amount of $67,650 for the fiscal year-ended July 31, 2000.
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 investment in a
particular 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. On December 9, 1998 an
application was filed to set aside the notice of default and permit the
Company to enter a statement of defense. This matter was settled
subsequent to year end. See Note 16(D).
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. On May 11, 1999, the Company responded to the
complaint in this action. The Company has also filed a counterclaim
against MQS, Inc. for breach of contract. Discovery is expected to
continue into 2001. The Company is unable to predict the outcome of
this litigation at this time.
F-19
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Pending Litigation (Continued)
An action was commenced against the Company seeking $124,342 plus
interest and costs, and 1,465 shares of the Company's common stock for
breach of contract. The Company counterclaimed for amounts due. The
plaintiff amended his Statement of Claim to add individuals as parties
and is seeking punitive damages in the amount of $500,000. The motion
is scheduled to be heard on January 10, 2001. The Company is unable to
predict the outcome of this litigation at this time.
With respect to all litigation, as additional information concerning
the estimates used by the Company become known, the Company reassesses
its position both with respect to accrued liabilities and other
potential exposures. Estimates that are particularly sensitive to
future change relate to legal matters, which are subject to change as
events evolve and as additional information becomes available during
the administration and litigation process.
Note 9 - 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>
Beginning Balance,
August 1, 1998 $ (102,155) $ 619,881 $ (133,775) $ (94) $ 245,377 $ 335,710
Cash advance -- (83,016) -- -- -- --
Company expenses
paid by related parties -- (264,091) (60,810) -- (81,265) --
Related party expenses
paid by the Company -- 155 142,294 -- -- --
Other (483) 1,771 (360) -- 886 1,583
---------- --------- ----------- ----- --------- ---------
Ending Balance,
July 31, 1999 (102,638) 274,700 (52,651) (94) 164,998 337,293
Cash advance -- (213,871) -- -- (30,300) --
Company expenses
paid by related parties -- -- -- -- (46,953) --
Other (2,457) 6,578 (1,261) (3) 3,952 6,480
Transfer/assumption
of related party
liabilities (a) 105,095 (67,407) 53,912 97 (91,697) --
---------- --------- ---------- ----- --------- ---------
Ending Balance,
July 31, 2000 $ -- $ -- $ -- $ -- $ -- $ 343,773
========== ========= ========== ===== ======== =========
</TABLE>
(a) Officers of the Company are also shareholders in the related
companies and have agreed to the transfer/assumption of the offsetting
amounts which were due from (to) related parties.
F-20
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions (Continued):
The above information is summarized and included in the consolidated
balance sheets as follows:
Due From Due To
Related Related
Parties Parties
---------- ----------
July 31, 2000
The Great Tao, Inc. $ -- $ --
Angara Equities, Inc. -- --
Angara Investments, Inc. -- --
Ching Chew An Breweries -- --
Golden Bull Estates, Inc. -- --
EBI, Inc. 343,773 --
---------- ----------
Total $ 343,773 $ --
========== ==========
July 31, 1999
The Great Tao, Inc. $ -- $ 102,638
Angara Equities, Inc. 274,700 --
Angara Investments, Inc. -- 52,651
Ching Chew An Breweries -- 94
Golden Bull Estates, Inc. 164,998 --
EBI, Inc. 337,293 --
---------- ----------
Total $ 776,991 $ 155,383
========== ==========
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 related party expenses provided in 1998 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 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 July 31,
-------------------------------------
2000 1999 1998
-------- -------- ---------
Interest Income $ 60,962 $ 79,118 $ 273,429
Interest Expense $ 14,938 $ 18,117 $ 113,064
F-21
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions (Continued):
The interest income/expense amounts were computed at estimated
prevailing rates based on the average receivable/payable balance
outstanding during the periods reflected. The average receivable amount
was $639,560 and $988,980 during the years ended 2000 and 1999,
respectively. The average amount payable was $156,870 and $190,704
during the years ended 2000 and 1999, respectively.
As of July 31, 2000, 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 $343,594, $388,420 and $280,000 for
the years ended July 31, 2000, 1999 and 1998 respectively.
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 $2,900, 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 8 for discussion of consulting agreement with the Company's
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.
F-22
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31,
------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Mortgage payable - 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, Canada, Suite
3501, which is owned personally by the Company's Chairman of the
Board, and Suite 202. This loan was refinanced with a new loan in May
2000. $ -- $ 530,997
Mortgage payable - interest at 9.25 percent per annum, final payment
due February 1, 2001, secured by real property located at 98 Stafford
Drive, Brampton, Canada and 1740 Sismet Road, Mississauga, Canada.
This loan was paid off in October 1999. -- 381,595
Mortgage payable - interest at 12 percent per annum, monthly payments
of interest only, principal originally due on September 9, 1999, due
date extended until September 9, 2000, secured by real property
located at 17 Carlaw Avenue, Toronto, Canada. This loan was paid off
in May 2000. -- 82,968
Mortgage payable - interest at 9.7 percent per annum, monthly payments
of principal and interest of $4,745, final payment due May 25, 2005,
secured by all assets of the Company 541,661 --
Mortgage payable - interest at 10 percent per annum, monthly payments
of principal and interest of $1,770, final payment due November 1,
2002, secured by real property located at 11 Carlaw Avenue, Toronto,
Canada 180,302 --
--------- ---------
Total Debt 721,963 995,560
Less Current Maturities 9,404 550,589
--------- ---------
Long-Term Debt, Less Current Maturities $ 712,559 $ 444,971
========= =========
</TABLE>
Aggregate maturities of long-term debt of the Company due within the
next five years ending July 31, are as follows:
Year Amount
---- ------
2001 $ 9,404
2002 182,766
2003 6,840
2004 7,519
2005 515,434
---------
Total $ 721,963
=========
F-23
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stockholders' Equity:
Reverse Merger
On January 9, 1998, the Company issued 9,234,118 of common stock to
acquire GBC - Delaware, Inc. (see Note 1). For accounting purposes,
the acquisition of GBC - Delaware, Inc. by the Company has been
treated as a reverse merger. Accordingly, the 9,234,118 shares issued
to acquire GBC - Delaware, Inc. have been treated as outstanding from
November 2, 1995 (as adjusted for historical issuances of GBC -
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.
Warrants
As of July 31, 2000, the Company has the following warrants to
purchase common stock outstanding:
Number of Shares Warrant Exercise Warrant
To be Purchased Price Per Share Expiration Date
---------------- ---------------- ---------------
7,937 $ 21.82 September 6, 2002
352,943 $ 7.00 January 7, 2003
500,000 $ 2.50 March 31, 2003
150,000 $ 10.00 November 17, 2003
150,000 $ 7.50 January 31, 2004
50,000 $ 6.00 February 16, 2004
95,000 $ 6.00 April 6, 2004
25,300 $ 7.50 April 6, 2004
25,273 $ 5.50 April 26, 2004
47,056 $ 4.25 January 7, 2005
1,041,669 $ 8.66 May 17, 2005
39,168 $ 10.00 May 17, 2005
Notes Receivable - Common Stock
In conjunction with the redemption of Series A Redeemable Common Stock
Purchase Warrants, in June 1999, the Company accepted two separate
promissory notes for $50,000 and $423,882. These notes bear interest
at 7.0 percent per annum. The payment of principal and accrued
interest were originally due on October 1, 2000 and June 4, 2001,
respectively. As of July 31, 2000, the notes receivable including
interest amounted to $54,118 and $-0-.
Preferred Stock
The Company has authorized 1,000,000 shares with a par value of
one-tenth of a cent ($.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.
F-24
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stockholders' Equity (Continued):
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 12 - Stock Based Compensation:
Stock Option Plans
On January 22, 1998, the Company's Board of Directors approved the
1998 Stock Option Plan (the 1998 Plan), subject to shareholder
approval, and reserved 1,000,000 shares of common stock for issuance
upon exercise of options granted under the 1998 Plan.
The 1998 Plan was not submitted for shareholder approval and
terminated on February 1, 1999. A new plan, the 1999 Stock Option
Plan, (the 1999 Plan) substantially identical to the 1998 Plan, has
been adopted. In addition, the number of shares of common stock
reserved for issuance upon the exercise of options granted was
increased from 1,000,000 to 1,500,000. All options granted under the
1998 Plan are considered to have been issued pursuant to the 1999
Plan.
On April 27, 2000, the Company's Board of Directors approved the 2000
Stock Option Plan (the 2000 Plan), subject to shareholder approval,
and reserved 2,000,000 shares of common stock for issuance upon
exercise of options granted under the 2000 Plan.
The 2000 and 1999 Stock Option Plans (the Plans) presently are
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 Plans. References to the Committee
herein include the Board of Directors so long as it continues to
administer the Plans 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 Plans and the interpretation of options.
Generally, the interpretation and construction of any provision of the
Plans or any options granted thereunder is within the discretion of
the Committee.
The Plans provide that options may or may not be Incentive Stock
Options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive
ISOs, while employees and non-employee directors, advisors and
consultants are eligible to receive options which are not ISOs, i.e.
"Non-Qualified Options." The options granted by the Board in
connection with its adoption of the Plans are Non-Qualified Options.
F-25
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stock Based Compensation (Continued):
The following is a summary of the common stock options granted,
canceled or exercised under the Plan:
Weighted Average
Exercise Price Per
Shares Share
------ ------------------
Outstanding - August 1, 1998 -- --
Granted 50,000 $ 8.00
Canceled -- --
Exercised -- --
---------
Outstanding - July 31, 1999 50,000 8.00
Granted 2,954,500 6.33
Canceled -- --
Excercised -- --
---------
Outstanding - July 31, 2000 3,004,500 6.36
=========
The following table summarizes information on stock options
outstanding at July 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Contractual Average Exercisable Average
Range of at Life Exercise at Exercise
Exercise Price July 31, 2000 (Years) Price July 31, 2000 Price
-------------- --------------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$5.00 - $5.50 1,450,000 4.42 $ 5.01 1,135,000 $ 5.01
$7.56 - $8.00 1,554,500 4.86 $ 7.61 175,000 $ 8.00
</TABLE>
Options exercisable at July 31 are as follows:
1998 --
1999 50,000
2000 1,310,000
Had compensation cost for the Company's options granted to employees
been determined consistent with SFAS 123, the Company's net loss and
loss per share would be affected as follows:
For the Years Ended July 31,
-----------------------------------
2000 1999 1998
------------- ------- -------
Net Loss:
As reported $ 8,841,047 $ -- $ --
============ ======= =======
Pro forma $ 16,448,287 $ -- $ --
============ ======= =======
Loss Per Share:
As reported $ (.58) $ -- $ --
============ ======= =======
Pro forma $ (1.08) $ -- $ --
============ ======= =======
F-26
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stock Based Compensation (Continued):
The fair value of each option granted is estimated on grant date using
the Black-Scholes option pricing model which takes into account as of
the grant date the exercise price and expected life of the option, the
current price of the underlying stock and its expected volatility,
expected dividends on the stock and the risk-free interest rate for
the term of the option. The following is the average of the data used
to calculate the fair value:
<TABLE>
<CAPTION>
Risk-Free Expected Expected Expected
Interest Rate Life (Years) Volatility Dividends
------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
July 31, 2000 4.8% 5 62% 0%
</TABLE>
Note 13 - Net Loss Per Share:
Basic EPS and Diluted EPS for the years ended July 31, 2000, 1999 and
1998 have been computed by dividing the net loss for each respective
period by the weighted average shares outstanding during that period.
All outstanding warrants and options have been excluded from the
computation of Diluted EPS as they are antidilutive due to the losses
generated in each year.
Note 14 - Supplemental Disclosure of Cash Flow Information:
For the Years Ended July 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Cash paid during the year for:
Interest $ 73,687 $ 67,161 $ 63,291
Income taxes $ -- $ -- $ --
<TABLE>
<CAPTION>
<S> <C>
Disclosure of non-cash investing and financing activities:
Year Ended July 31, 2000
Long-term debt was assumed in conjunction with acquisition
of property $ 186,805
Long-term debt was refinanced with new long-term debt $ 541,200
Amounts due from related parties were transfered in conjunction
with the assumption of amounts due to related parties $ 159,022
Year Ended July 31, 1999
Long-term debt was assumed in conjunction with acquisition
of property $ 82,968
Settlement of liability arising from the violation of financing
agreement with issuance of common stock $ 738,000
Deposit was utilized to acquire property and equipment $ 16,740
Notes receivable were accepted in conjunction with issuance
of common stock $ 473,882
</TABLE>
F-27
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Segment Information:
The Company follows Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information: (SFAS 131). SFAS 131 superseded Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 establishes standards for the way that
public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers.
The Company has two reportable operating segments, United States and
Canada, which are organized, managed and analyzed geographically and
operate in one industry segment: the development of proprietary drug
delivery technology focused on formulations to administer large
molecule drugs by mouth. The Company evaluates operating segment
performance based primarily on certain operating expenses.
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
------------ -----------
2000
----
United States $ -- $ --
Canada 2,459,919 4,416,349
General Corporate 7,881,351 4,627,607
------------ -----------
Total $ 10,341,270 $ 9,043,956
============ ===========
1999
----
United States $ -- $ --
Canada 2,128,611 2,846,662
General Corporate 6,761,055 3,380,969
------------ -----------
Total $ 8,889,666 $ 6,227,631
============ ===========
1998
----
United States $ -- $ --
Canada 1,926,046 3,565,378
General Corporate 3,529,662 1,034,935
------------ -----------
Total $ 5,455,708 $ 4,600,313
============ ===========
F-28
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Subsequent Events:
Subsequent events occurring after July 31, 2000 consist of the
following:
(A) On August 14, 2000, the Company entered into a Common Stock
Purchase Agreement with Tradersbloom Limited, a British Virgin
Islands corporation. The Company may sell to Tradersbloom, from
time to time, shares of their common stock up to a maximum sale of
$50,000,000. Tradersbloom's commitment to purchase the shares is
conditioned upon the shares being registered for resale under the
Securities Act. Additionally, Tradersbloom may not be required to
purchase more than $5,000,000 of common stock during any
investment period of 22 consecutive trading days. Warrants to
purchase 568,647 shares of common stock at an exercise price of
$12.15 per share which expire on August 14, 2003 have been granted
for services rendered in connection with this agreement.
(B) On August 29, 2000, the Company entered into a supply agreement
with Presspart Manufacturing Limited, whereby the Company will
purchase its entire requirements for products to use in the
administration of insulin through the buccal mucosa and shall not
purchase the products or any metal containers competitive to the
products from any other person in exchange for an exclusive
non-transferable royalty free irrevocable license to use the
products. The contract shall continue for a minimum period of four
contract years from the end of the first contract year in which
the quantity of products purchased by the Company from Presspart
exceeds 10,000,000, and thereafter, shall continue until
terminated by either party by giving twelve months written notice.
(C) On September 5, 2000, the Company entered into a Development and
License Agreement with Eli Lilly and Company to develop a buccal
formulation of insulin that is administered as a fine spray into
the buccal (oral) cavity using Generex proprietary technology.
Under the terms of the agreement, Generex will receive certain
initial fees and milestone payments and will be entitled to
receive royalties based on product sales.
(D) On September 29, 2000, the Company entered into a settlement of a
legal action against the Company (see note 8) whereby the Company
paid the plaintiffs $100,000 and received a release against all
actions.
(E) On October 5, 2000, the Company completed a private placement of
its common stock at $11.00 per common share, which generated net
proceeds of approximately $21,800,000. Each investor also received
a warrant to purchase 1 share of common stock for every 15 shares
of common stock purchased. The warrants are exercisable over a
five year period and have an exercise price of $13.20 per share.
F-29
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers and Directors
Our current executive officers and directors are:
<TABLE>
<CAPTION>
Name Age Position
---- --- ---------
<S> <C> <C>
E. Mark Perri 39 Chairman, Chief Financial Officer and a Director
Anna E. Gluskin 49 President, Chief Executive Officer and a Director
Pankaj Modi, Ph.D. 46 Vice President of Research & Development and a
Director
Rose C. Perri 33 Chief Operating Officer, Secretary, Treasurer and a
Director
William M. Hawke, M.D. 59 Director
Jan Michael Rosen 49 Director
</TABLE>
Mark Perri and Rose Perri are siblings. There are no other family
relationships among our officers and directors.
E. Mark Perri - Mr. Perri has served as the our Chairman and Chief
Financial Officer since the acquisition of Generex Pharmaceuticals in January
1998. He has held comparable positions with Generex Pharmaceuticals since its
organization in 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 our
officer and director, other members of the Perri family and, in some cases, Anna
Gluskin, who also is our officer and director. 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. They also include Angara
Investments, Inc., Angara Equities, Inc. and Ching Chew An Breweries, Inc. which
are engaged in the distribution of chemicals, generic prescription and
non-prescription drugs, beer, vodka and other products in Central America, South
America, China and republics of the former Soviet Union. Mr. Perri's interests
25
<PAGE>
also include Perri International, Inc., which holds interest in biotechnological
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 Generex Pharmaceuticals in
November 1995, Mr. Perri devoted one hundred percent (100%) of his time to the
investments and business interests described in this paragraph, as well as to
pre-incorporation activities on behalf of Generex Pharmaceuticals.
Mr. Perri holds a Bachelor of Arts degree from the University of
Waterloo.
Anna E. Gluskin - Ms. Gluskin has served as our President and Chief
Executive Officer since the acquisition of Generex Pharmaceuticals. Prior to
that time, she held comparable positions with Generex Pharmaceuticals. Prior to
her association with Generex Pharmaceuticals, 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 Generex Pharmaceuticals. Ms.
Gluskin has, since August 1997, served as Chairman and Chief Executive Officer
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., Angara
Investments, Inc., Angara Equities, Inc. and Ching Chew An Breweries, Inc.,
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 served as our Vice President, Research
and Development, since December 1997. Prior to that time, Dr. Modi was Director
of Insulin Research for Generex Pharmaceuticals, a position he assumed in
October 1996. Prior to joining Generex Pharmaceuticals, Dr. Modi was engaged in
independent research and was employed as a senior research assistant at McMaster
University from February 1994 through October 1996. Dr. Modi is our chief
scientific officer and substantially all of our intellectual property is based
upon discoveries and other work product by Dr. Modi.
Dr. Modi was educated at the University of Bombay, India, and 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 our Secretary and Treasurer
since January 1998, and as our Chief Operating Officer since August 1998. She
was secretary of Generex Pharmaceutical since its inception. Ms. Perri devotes
less than ten percent (10%) of her time to business interests controlled by the
Perri family, principally Perri Rentals, Inc. Between February 1994 and the
organization of Generex Pharmaceuticals in November 1995, Ms. Perri devoted one
hundred percent (100%) of her time to business interests controlled by the Perri
family as well as pre-incorporation activities on behalf of Generex
Pharmaceuticals.
26
<PAGE>
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.
William M. Hawke, M.D. - Dr. Hawke has served as a director since March
2000. Dr. Hawke has approximately thirty years experience as a medical
researcher, educator and practitioner. Dr. Hawke presently is a Professor in the
Departments of Otolaryngology and Pathology at the University of Toronto, and is
on the staff of the Departments of Otolaryngology at St. Joseph's Health Center,
The Toronto Hospital and Mount Sinai Hospital, all located in Toronto.
Jan Michael Rosen - Mr. Rosen has served as a director since August
2000. Mr. Rosen has been a principal in a number of related travel management
and hotel marketing businesses specializing in serving the casino industry since
1978. The principal companies in this group, all of which are headquartered in
Willowdale, Ontario, are Uniworld Travel & Tours, Inc., Nevada Vacations, Inc.,
Casino Vacations, Inc. and Casino Tours, Inc. Mr. Rosen presently serves as the
President or a Vice President, and the Chief Financial Officer, of each of these
companies. Mr. Rosen is an accountant by training, and was engaged in the
private practice of accounting prior to 1978.
Other Key Employees and Consultants
Slava Jarnitskii is our Financial Controller. He began his employment
with Generex Pharmaceuticals in September 1996. Before his employment with
Generex Pharmaceuticals, Mr. Jarnitskii was a graduate student at York
University. He received an MBA degree from York University in September 1996.
Section 16(a) Beneficial Ownership Reporting Compliance
During the fiscal year ended July 31, 2000, all Section 16 reports
required to be filed by our officers and directors and, based solely on a review
of Forms 3 and 5 furnished to us, beneficial owners of ten percent or more of
our common stock and other persons required to file such reports, were filed on
a timely basis except that Mark Perri, Anna Gluskin, Rose Perri and Pankaj Modi
each failed to timely file a Form 4 to report the receipt of options to purchase
common stock granted under our 1998 Stock Option Plan in January 2000, and under
our 2000 Stock Option Plan in July 2000. The requisite Form 4 Reports were filed
by each of these reporting persons in September 2000.
Item 11. Executive Compensation.
Compensation of Executive Officers
We compensate Mark Perri, Rose Perri, and Anna Gluskin indirectly
through a Management Services Agreement with The Great Tao, Inc. The Great Tao,
Inc., is a management firm of which Mr. Perri, Ms. Perri and Ms. Gluskin are
27
<PAGE>
equal owners. The Agreement does not have a definite term. Their combined yearly
compensation through this Agreement for the fiscal year ended July 31, 2000 was
approximately $305,781.
The following table sets forth compensation to Anna Gluskin, Mark Perri
and Rose Perri in the last three fiscal years. Except as set forth in the table,
none of our officers received, combined salary and bonus payments exceeding
$100,000 in those years. Mark Perri, Rose Perri and Anna Gluskin also have
received substantial benefits from us through non-interest bearing loans. These
are discussed in Item 13 of this Report.
Summary Compensation Table
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
------------------------------------------------------------------------------------------------------------------------------------
Name and Year Salary Bonus Other Restricted Securities LTIP All Other
Principal Ended ($) ($) Annual Stock Underlying Payouts Compensation
Position July 31 Compen- Award(s) Options/ ($) ($)
sation ($) SARs
($) (#)
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anna E. Gluskin, 2000 105,385 -0- * -0- 300,000 -0- -0-
Chief Executive 1999 136,483 -0- * -0- -0- -0- -0-
Officer 1998 92,488 -0- * -0- -0- -0- -0-
------------------------------------------------------------------------------------------------------------------------------------
E. Mark Perri, 2000 103,249 -0- * -0- 250,000 -0- -0-
Chief Financial 1999 120,777 -0- * -0- -0- -0- -0-
Officer 1998 92,488 -0- * -0- -0- -0- -0-
------------------------------------------------------------------------------------------------------------------------------------
Rose C. Perri, 2000 97,147 -0- * -0- 250,000 -0- -0-
Chief Operating 1999 120,777 -0- * -0- -0- -0- -0-
Officer 1998 92,488 -0- * -0- -0- -0- -0-
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------
* Less than $50,000
Salaries are stated in the table in U.S. dollars and are based on the
weighted average Canadian/U.S. dollar exchange rate for the years ended July 31,
2000, 1999 and 1998, respectively. This amount represents compensation that Ms.
Gluskin and Ms. Perri received through The Great Tao, Inc., as discussed above.
28
<PAGE>
Stock Options and SARs
The following tables set forth certain information relating to stock
options granted to the officers named in the preceding Summary Compensation
table:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Individual grants Potential realizable
value at assumed
annual rates of stock
price appreciation for
option term
------------------------------------------------------------------------------------------------------------------------------------
Name Number of Percent of
Securities Total options/
Underlying SARs granted Exercise of
options/SARs To employees base price Expiration 5% ($) 10% ($)
granted (#) In fiscal ($/Sh) date
year(%)(1)
(b) (c) (d) (e) (f) (g)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CEO Anna E. Gluskin 100,000 3.5 5.00 1/3/2005 138,000 305,255
200,000 7.0 7.5625 7/31/2005 325,953 923,396
A E. Mark Perri 100,000 3.5 5.00 1/3/2005 138,000 305,255
150,000 5.3 7.5625 7/31/2005 244,465 692,547
B Rose C. Perri 100,000 3.5 5.00 1/3/2005 138,000 305,255
150,000 5.3 7.5625 7/31/2005 244,465 692,547
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes options granted to consultants and advisors.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Number of securities
underlying exercised Value of unexercised
options/SARs at FY-end in-the-money options/SARs
Shares acquired Value (#) at FY-end ($)
Name on exercise (#) realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
(a) (b) (c) (d) (e)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO Anna E. Gluskin -0- -0- 100,000/200,000 256,250/0
A E. Mark Perri -0- -0- 100,000/150,000 256,250/0
B Rose C. Perri -0- -0- 100,000/150,000 256,250/0
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the closing price of our common stock ($7.5625) at July 31, 2000.
We have no long term incentive plans or defined benefit or actuarial
pension plans, and have not repriced any options or SAR's previously granted to
the above named officers.
Directors' Compensation, Other Compensation
None of our directors received cash compensation in the past fiscal
year for their services as directors. One of our directors, William Hawke, was
awarded options to purchase 50,000 shares of common stock in recognition of his
service as a director.
29
<PAGE>
Audit Committee
Our Common Stock is traded on The Nasdaq Stock Market, Inc. National
Market System under the symbol "GNBT". Nasdaq listed companies, under rules
which phase in over a period of 18 months ending June 14, 2001, are required to
have an Audit Committee, governed by a formal written charter, that is composed
of at least three directors, all of whom are "independent" as that term is
defined in Nasdaq rules. At the present time, we have an Audit Committee
governed by a formal charter, the members of which are William M. Hawke, Jan
Michael Rosen and E. Mark Perri. Dr. Hawke and Mr. Rosen are independent
directors, and Mr. Perri is not independent under Nasdaq rules. We have until
June 14, 2001 to meet the requirement that our Audit Committee be comprised of
three or more members, all of whom are independent.
Limitation of Directors' Liability
Our Certificate of Incorporation provides that our directors will not
be personally liable to us or any of our stockholders for monetary damages
arising from the director's breach of fiduciary duty as a director. This
limitation does not apply to:
o Liability from a director's breach of his duty of loyalty;
o Liability from a director's acts or failures to act which were not
done in good faith or involved intentional misconduct or knowing
violation of law;
o Liability for unlawful dividends or distributions;
o Liability in the event of a transaction in which the director
derived an improper personal benefit.
We believe that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors.
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The table on the following page sets forth information regarding the
beneficial ownership of our common stock by:
o Our executive officers and directors;
o All directors and executive officers as a group; and
o Each person known to us to beneficially own more than five percent
(5%) of our outstanding shares of common stock.
The information contained in this table is as of October 18, 2000. At
that date, we had 18,765,037 shares outstanding.
In addition to our common stock, we have outstanding 1,000 shares of
our Special Voting Rights Preferred Stock. All of these shares are owned by Dr.
Pankaj Modi.
A person is deemed to be a beneficial owner of shares if he has the
power to vote or dispose of the shares. This power can be exclusive or shared,
direct or indirect. In addition, a person is considered by SEC rules to
beneficially own shares underlying options or warrants that are presently
exercisable or that will become exercisable within sixty (60) days.
31
<PAGE>
<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner Beneficial Ownership
---------------------- --------------------
Number of Percent of Class
Shares ----------------
---------
<S> <C> <C>
(i) Directors and Executive Officers
E. Mark Perri
33 Harbour Square, Ste. 3502
Toronto, Ontario 4,392,792(1) 23.3%
M5J 2G2
Anna E. Gluskin
33 Harbour Square, Ste. 2409 1,288,127(2) 6.8%
Toronto, Ontario
M5J 2G2
Rose C. Perri
33 Harbour Square, Ste. 2409 1,288,026(2) 6.8%
Toronto, Ontario
M5J 2G2
Pankaj Modi, Ph.D.
519 Golf Links Road 1,250,200(3) 6.6%
Lancaster, Ontario
L9G 4X6
William. M. Hawke, M.D.
21 Whitney Avenue 51,000(4) *
Toronto, Ontario M4W 4A7
Jan Michael Rosen
77 Charles Street 72,587(5) *
Thornhill, Ontario L4J 2E8
Officers and directors as a group 5,966,732(6) 31.1%
(6 persons)
(ii) Other Beneficial Owners
EBI, Inc. In Trust
c/o Miller & Simons
First Floor, Butterfield Square
P.O. Box 260 1,441,496(7) 7.7%
Providencials
Turks and Calcos Islands
British West Indies
GHI, Inc. In Trust
c/o Miller & Simons
First Floor, Butterfield Square
P.O. Box 260 2,500,050(8) 13.3%
Providencials
Turks and Calcos Islands
British West Indies
Smallcap World Fund, Inc.
C/o Capital Research and 1,240,850(9) 6.6%
Management Company
333 South Hope Street
Los Angeles, CA 90071
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
* Less than one percent.
(1) Includes 45,914 shares owned of record by Mr. Perri, and a total of
1,529,382 shares beneficially owned by Mr. Perri but owned of record by
EBI, Inc. (1,100,000 shares), GHI, Inc. (124,050 shares) and First Marathon
Securities Corp (305,332 shares). Also includes: (a) 100,000 shares
issuable upon the exercise of an option granted under our 1998 Stock Option
Plan ("1998 Plan") which is presently exercisable (b) 2,376,000 shares
owned of record by GHI, Inc. and (c) 341,496 shares owned of record by EBI,
Inc., which Mr. Perri may be deemed to beneficially own because of his
power to vote the shares but which are beneficially owned by other
shareholders because they are entitled to the economic benefits of the
shares. Does not include 150,000 shares issuable upon the exercise of an
option granted under our 2000 Stock Option Plan ("2000 Plan") which is not
presently exercisable and will not become exercisable within 60 days from
the date of this Report.
(2) Includes, for each of Ms. Gluskin and Ms. Perri, 1,188,000 shares owned of
record by GHI, Inc. and 100,000 shares issuable upon the exercise of an
option granted under our 1998 Plan which is presently exercisable. Does not
include 200,000 shares issuable to Ms. Gluskin or 150,000 shares issuable
to Ms. Perri upon the exercise of options granted under our 2000 Plan which
are not presently exercisable and will not become exercisable within 60
days from the date of this Report.
(3) Includes 100,000 shares issuable upon the exercise of an option granted
under our 1998 Plan which is presently exercisable, but does not include
150,000 shares issuable upon the exercise of an option granted under our
2000 Plan which is not presently exercisable and will not become
exercisable within 60 days from the date of this Report. Dr. Modi also owns
all the outstanding shares of our Special Voting Rights Preferred Stock.
This stock is not convertible into common stock.
33
<PAGE>
(4) Includes 50,000 shares issuable upon the exercise of an option granted
under our 1998 Plan which is presently exercisable, but does not include
20,000 shares issuable upon the exercise of an option granted under our
2000 Plan which is not presently exercisable and will not become
exercisable within 60 days from the date of this Report.
(5) Includes 1,800 shares owned of record by Uniworld Travel and Tours, Inc.,
but does not include 20,000 shares issuable upon the exercise of an option
granted under our 2000 Plan which is not presently exercisable and will not
become exercisable within 60 days from the date of this Report.
(6) Includes 450,000 shares issuable upon presenting exercisable options
granted under our 1998 Plan, but does not include 690,000 shares issuable
upon the exercise of options granted under our 2000 Plan that are not
presently exercisable and will not become exercisable within 60 days from
the date of this Report.
(7) These shares also are deemed to be beneficially owned by Mark Perri because
he has the sole power to vote the shares. Mr. Perri also has investment
power and otherwise is entitled to the economic benefits of ownership of
1,100,000 of the shares owned of record by EBI, Inc.
(8) These shares also are deemed to be beneficially owned by Mark Perri because
he has the sole power to vote the shares. Mr. Perri also has investment
power and is otherwise entitled to the economic benefits of ownership of
124,050 of the shares owned of record by GHI, Inc. Anna Gluskin and Rose
Perri each own beneficially 1,188,000 of the shares owned of record by GHI,
Inc. by reason of their ownership of investment power and other economic
benefits of the ownership of such shares.
(9) Includes warrants to purchase 161,850 shares.
34
<PAGE>
Item 13. Certain Relationships and Related Transactions.
We were incorporated in September 1997 and acquired Generex
Pharmaceuticals in October 1997. Prior to our acquisition of Generex
Pharmaceuticals, it was a private Canadian corporation majority-owned and
controlled by Mark Perri, Rose Perri and Anna Gluskin. Unless otherwise
indicated, the transactions described below occurred prior to our acquisition of
Generex Pharmaceuticals or pursuant to contractual arrangements entered into
prior to that time. We presently have a policy requiring approval by
stockholders or by a majority of disinterested directors to approve transactions
in which one of our directors has a material interest apart from such director's
interest in Generex.
Real Estate Financing Transactions: In May 1997, EBI, Inc., a company
controlled by Mark Perri, acquired shares of common stock of Generex
Pharmaceuticals for $3 million (CAD) which, based on the exchange rate then in
effect, represented approximately $2.1 million (US). Generex Pharmaceutical's
use of those funds was restricted to acquiring an insulin research facility.
Subsequently this restriction was eased to permit use of the funds to acquire
properties used for manufacturing our oral insulin product and other proprietary
drug delivery products, and related testing, laboratory and administrative
services. Under the terms of the investment, Generex Pharmaceuticals was
required to lend these funds back to EBI until they were needed for the purposes
specified. The entire amount was loaned back to EBI and was outstanding at July
31, 1997. During the period ended July 31, 1998, a total of $2,491,835 CAD was
repaid by EBI. There were no repayments made in the years ended July 31, 2000
and 1999. The balance due from EBI at July 31, 2000, was $508,165 CAD
(approximately $343,773 US based on the exchange rate then in effect). These
funds are due on demand by Generex Pharmaceuticals, provided they are used for
the purchase and/or construction or equipping of oral insulin manufacturing and
testing facilities. The amounts repaid by EBI were used primarily to purchase
and improve certain of our real estate and buildings.
Loans To and From Stockholders: Between November 1995 and July 31,
1998, companies owned and controlled by Mark Perri, Rose Perri and Anna Gluskin
incurred a net indebtedness of $629,234 to Generex Pharmaceuticals, excluding
the indebtedness of EBI described in the preceding paragraph. This indebtedness
arose from cash advances and the payment by Generex Pharmaceuticals of expenses
incurred by these companies, net of repayments and payment of expenses on behalf
of Generex Pharmaceuticals. At July 31, 1999, these companies' net indebtedness
to Generex Pharmaceuticals, exclusive of the EBI indebtedness described above,
was $284,315. At July 31, 2000, this balance had been reduced to zero.
The transactions between Generex Pharmaceuticals 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
35
<PAGE>
and convenience to Mark Perri, Rose Perri and Anna Gluskin than to Generex
Pharmaceuticals. These transactions and financing arrangements were mostly
initiated prior to the transaction in which we acquired Generex Pharmaceuticals,
and no transactions have taken place since January 1, 1999. We presently have a
policy requiring the approval of the Board of Directors, including a majority of
disinterested directors and independent directors, for any transactions in which
a director has a material interest apart from such director's interest in
Generex.
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Generex Biotechnology Corporation filed as Exhibit 3.1 to
our Quarterly Report on Form 10-Q for the quarter ended April 30, 1999 filed June 14, 1999 is
incorporated herein by reference.
3.2 Bylaws of the Company filed as Exhibit 3.2 to our Registration Statement on Form S-1 (File no.
333-82667) filed July 12, 1999 ("1999 S-1") is incorporated herein by reference.
4.1 Form of common stock certificate filed as Exhibit 4.1 to our 1999 S-1 is incorporated herein by reference.
4.2 Form of Special Voting Rights Preferred Stock Certificate filed as Exhibit 4.2 to our 1999 S-1 is
incorporated herein by reference.
4.3.1 1998 Incentive Stock Option Plan filed as Exhibit 4.3 to our 1999 S-1 is incorporated herein by
reference.
4.3.2* 2000 Stock Option Plan.
4.4.1 Form of Registration Rights Agreement dated January 7, 2000, with purchasers of Common Stock and
CU Warrants in January 2000 placement which was filed as Exhibit 4.1 to our Quarterly Report on
Form 10-Q for the quarter ended January 31, 2000, filed March 14, 2000 ("Q2 2000 10-Q") is
incorporated herein by reference.
4.4.2 Form of CU Warrant issued to investors in January 2000 placement filed as Exhibit 4.2 to our Q2
2000 10-Q is incorporated herein by reference.
4.4.3 Form of Placement Agent Warrant issued to Coleman & Company Securities, Inc., Patrick G. Nolan and
Zazoff Associates LLC in January 2000 placement filed as Exhibit 4.3 to our Q2 2000 10-Q is
incorporated herein by reference.
4.4.4 Form of Warrant issued to principals of The Shemano Group, Inc. filed as Exhibit 4.4 to our Q2
2000 10-Q is incorporated herein by reference.
4.5 Option Agreement with Wolfe Axelrod Weinberger LLC filed as Exhibit 4.5 to our Q2 2000 10-Q is
incorporated herein by reference.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.6.1 Form of Securities Purchase Agreement entered into with Protius Overseas Limited and Photon Fund,
Ltd. on May 17, 2000 filed as Exhibit 4.1 to our Quarterly Report on Form 10-Q for the quarter
ended April 30, 2000, filed on June 13, 2000 ("Q3 2000 10-Q") is incorporated herein by reference.
4.6.2 Form of Securities Purchase Agreement entered into with Castle Creek Healthcare LLC, Ram Trading
Ltd., Montrose Investments Ltd., CCL Fund LLC, Velocity Investment Partners Ltd. and Ivan
Lieberburg between May 17, 2000 and May 31, 2000 filed as Exhibit 4.2 to our Q3 2000 10-Q is
incorporated herein by reference.
4.6.3 Form of Registration Rights Agreement entered into by Protius Overseas Limited and Photon Fund,
Ltd. on May 17, 2000, filed as Exhibit 4.3 to our Q3 2000 10-Q is incorporated herein by
reference.
4.6.4 Form of Registration Rights Agreement entered into with Castle Creek Healthcare LLC, Ram Trading
Ltd., Montrose Investments Ltd., CCL Fund LLC, Velocity Investment Partners Ltd. and Ivan
Lieberburg between May 17, 2000 and May 31, 2000 filed as Exhibit 4.4 to our Q3 2000 10-Q is
incorporated herein by reference.
4.6.5 Form of Warrant issued to Protius Overseas Limited and Photon Fund, Ltd. in May 2000 Units
Placement filed as Exhibit 4.5 to our Q3 2000 10-Q is incorporated herein by reference.
4.6.6 Form of Warrant issued to Castle Creek Healthcare LLC, Ram Trading Ltd., Montrose Investments
Ltd., CCL Fund LLC, Velocity Investment Partners Ltd. and Ivan Lieberburg in May 2000 Units
Placement filed as Exhibit 4.6 to our Q3 2000 10-Q is incorporated herein by reference.
4.6.7 Form of Warrant issued to The Shemano Group, Inc. in connection with May 2000 Units Offering
filed as Exhibit 4.7 to our Q3 2000 10-Q is incorporated herein by reference.
10.1.1 Consulting Agreement with Pankaj Modi filed as Exhibit 10.1.1 to our Registration Statement on
Form 10 filed December 14, 1999 ("1999 Form 10") is incorporated herein by reference.
10.1.2 Assignment and Assumption Agreement with Pankaj Modi filed as Exhibit 10.1.2 to our 1999 Form 10
is incorporated herein by reference.
21* Subsidiaries of the Registrant.
23.1* Consent of Withum Smith & Brown, independent auditors
27* Financial Data Schedules
</TABLE>
-------------------
* Filed herewith. All other exhibits are incorporated by reference, as
described.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 27th day of October
2000.
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Anna E. Gluskin
--------------------------
Anna E. Gluskin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Capacity in Which
Name Signed Date
---- ------------------ ----
<S> <C> <C>
/s/ Anna E. Gluskin
----------------------------- Director and Chief October 27, 2000
Anna E. Gluskin Executive Officer
/s/ E. Mark Perri
----------------------------- Director and Chief October 27, 2000
E. Mark Perri Financial and Accounting
Officer
/s/ Rose C. Perri
----------------------------- Director October 27, 2000
Rose C. Perri
/s/ Pankaj Modi
----------------------------- Director October 27, 2000
Pankaj Modi
/s/ William M. Hawke
----------------------------- Director October 30, 2000
William M. Hawke
/s/ Jan M. Rosen
----------------------------- Director October 30, 2000
Jan M. Rosen
</TABLE>
39
