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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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-25169
GENEREX BIOTECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 98-0178636
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 Harbour Square, Suite 202, Toronto, Canada M5J 2G2
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(Address of principal executive offices) (Zip Code)
Telephone Number: (416) 364-2551
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Internet Website: www.generex.com
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Securities registered pursuant to Section 12(b) of the Act: None
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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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at October 14, 2003, based on the closing sales price as of that
date, was approximately $43,889,178.
At October 14, 2003, the registrant had 27,628,593 shares of common stock
outstanding.
Documents incorporated by reference: Proxy Statement to be filed within 120 days
after the end of the fiscal year.
Forward-Looking Statements
Certain statements in the "Business" (Item 1) and "Management's Discussion and
Analysis of Financial Condition and Results of Operation" (Item 7) sections and
elsewhere in this Annual Report on Form 10-K of Generex Biotechnology
Corporation for the fiscal year ended July 31, 2003 constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act limits our liability in any lawsuit based on forward looking
statements we have made. All statements, other than statements of historical
facts, included in this annual report that address activities, events or
developments that we expect or anticipate will or may occur in the future,
including such matters as our projections, future capital expenditures, business
strategy, competitive strengths, goals, expansion, market and industry
developments and the growth of our businesses and operations, are
forward-looking statements. These statements can be identified by introductory
words such as "expects", "plans", "intends", "believes", "will", "estimates",
"forecasts", "projects" or words of similar meaning, and by the fact that they
do not relate strictly to historical or current facts. Our forward-looking
statements address, among other things:
o our expectations concerning product candidates for our technologies;
o our expectations concerning existing or potential development and
license agreements for third-party collaborations and
joint ventures;
o our expectations of when different phases of clinical activity may
commence; and
o our expectations of when regulatory submissions may be filed or when
regulatory approvals may be received.
Any or all of our forward-looking statements may turn out to be wrong. They may
be affected by inaccurate assumptions that we might make or by known or unknown
risks and uncertainties. Actual outcomes and results may differ materially from
what is expressed or implied in our forward-looking statements. Among the
factors that could affect future results are:
o the inherent uncertainties of product development based on our new and
as yet not fully proven technologies;
o the risks and uncertainties regarding the actual effect on humans of
seemingly safe and efficacious formulations and treatments when tested
clinically;
o the inherent uncertainties associated with clinical trials of product
candidates;
o the inherent uncertainties associated with the process of obtaining
regulatory approval to market product candidates; and
o adverse developments in our joint venture with a subsidiary of Elan
Corporation, plc regarding buccal morphine.
Additional factors that could affect future results are set forth throughout the
"Business" (Item 1) section, including the subsection entitled "Certain
Additional Risk Factors", and elsewhere in this annual report. Because of the
risks and uncertainties associated with forward-looking statements, you should
not place undue reliance on them. Further, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
2
PART I
Item 1. Business
Overview
Generex Biotechnology Corporation is engaged primarily in the research and
development of drug delivery technologies. Our primary focus at the present time
is our proprietary technology for the administration of formulations of large
molecule drugs to the oral (buccal) cavity using a hand-held aerosol applicator.
A substantial number of large molecule drugs (i.e., drugs composed of molecules
with a higher than specified molecular weight) have been approved for sale in
the United States or are presently undergoing clinical trials as part of the
process to obtain such approval, including various proteins, peptides,
monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which
generally can be administered by various methods, large molecule drugs
historically have been administered predominately by injection. The principal
reasons for this have been the vulnerability of large molecule drugs to
digestion and the relatively large size of the molecule itself, which makes
absorption into the blood stream through the skin or mucosa inefficient or
ineffective.
All injection therapies involve varying degrees of discomfort and inconvenience.
With chronic and sub-chronic diseases, the discomfort and inconvenience
associated with injection therapies frequently results in less than optimal
patient acceptance of and compliance with the prescribed treatment plan. Poor
acceptance and compliance can lead to medical complications and higher disease
management costs. Also, elderly, infirm and pediatric patients with chronic or
sub-chronic conditions may not be able to self-inject their medications. In such
cases assistance is required which increases both the cost and inconvenience of
the therapy.
Our goal is to develop proprietary formulations of large molecule drugs that can
be administered through the buccal mucosa, primarily the inner cheek walls,
thereby eliminating or reducing the need for injections. We believe that our
buccal delivery technology is a platform technology that has application to many
large molecule drugs, and provides a convenient, non-invasive, accurate and cost
effective way to administer such drugs. We have identified several large
molecule drugs as possible candidates for development, but to date have focused
our development efforts on a buccal insulin product.
Between January 1998 and September 2000, we conducted clinical trials of our
buccal insulin product in the United States, Canada, Europe and Ecuador. In
September 2000, we entered into an agreement to develop this product with Eli
Lilly and Company ("Lilly"). To date, over 750 patients with diabetes have been
dosed with our oral insulin product at approved facilities in seven countries.
Lilly did not, however, authorize or conduct any clinical trials or provide
financial support for those trials. We did receive a $1,000,000 up front payment
from Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end
the development and license agreement for the development and commercialization
of buccal delivery of insulin. We are currently negotiating terms for Lilly to
continue to supply a specified amount of insulin for further development of our
product. We will retain all of the intellectual property and commercialization
rights with respect to the buccal spray drug delivery technology, and we will
have the continuing right to develop and commercialize the product.
3
In January 2001, we established a joint venture with a wholly owned subsidiary
of Elan Corporation, plc. We agreed the joint venture would pursue the
application of certain of our and Elan's drug delivery technologies, including
our platform technology for the buccal delivery of pharmaceutical products, for
the treatment of prostate cancer, endometriosis and/or the suppression of
testosterone and estrogen. The joint venture formed a company to pursue these
activities, Generex (Bermuda), Ltd., a Bermuda limited liability company.
Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal
delivery technology and certain Elan drug delivery technologies. In January
2002, the parties expanded the joint venture to include buccal morphine for the
management of pain and selected buccal morphine as the initial product for
development under Generex (Bermuda), Ltd. This expansion of the joint venture
occurred after we successfully completed a proof of concept clinical study of
morphine delivery using our proprietary buccal delivery technology. While we
have pursued the development of the morphine product, we have had limited
assistance from Elan.
In August 2003, after the end of our most recent fiscal year, we acquired
Antigen Express, Inc. Antigen is engaged in the research and development of
technologies and immunomedicines for the treatment of malignant, infectious,
autoimmune and allergic diseases.
We are a development stage company, and from inception through the end of fiscal
year 2003 had not received any revenues from operations other than the up-front
payment from Lilly. We have no products approved for commercial sale by drug
regulatory authorities. We have begun the regulatory approval process for only
three products, our oral insulin formulation, morphine and fentanyl. We believe
that our buccal delivery technology is a platform technology that has
application to a large number of large molecule drugs in addition to insulin.
Estrogen, heparin, monoclonal antibodies, human growth hormone, fertility
hormone, as well as a number of vaccines are among the compounds that we have
identified as possible candidates for product development.
Buccal Delivery Technology
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Our buccal delivery technology involves the preparation of a proprietary
formulation in which an active pharmaceutical agent is placed in a solution with
a combination of absorption enhancers and other excipients classified generally
recognized as safe ("GRAS") by the Food and Drug Administration ("FDA") when
used in accordance with specified quantity and other limitations. The resulting
formulation is aerosolized with a pharmaceutical grade chemical propellant and
is administered to the patient using our proprietary RapidMist(TM) device. The
device is a small, lightweight, hand-held, easy-to-use aerosol applicator
comprised of a container for the formulation, a metered dose valve, an actuator
and dust cap. Using the device, the patient self-administers the formulation by
spraying it into the mouth. The device contains multiple applications, the
number being dependent, among other things, on the concentration of the
formulation. Absorption of the pharmaceutical agent occurs in the buccal cavity,
principally through the inner cheek walls. In clinical studies of our insulin
product, insulin absorption in the buccal cavity has been shown to be very
rapid. We are also evaluating the use of our RapidMist device for the delivery
of both morphine and fentanyl.
4
Buccal Insulin Product
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Insulin is a hormone that is naturally secreted by the pancreas to regulate the
level of glucose, a type of sugar, in the bloodstream. The term diabetes refers
to a group of disorders that are characterized by the inability of the body to
properly regulate blood glucose levels. When glucose is abundant, it is
converted into fat and stored for use when food is not available. When glucose
is not available from food, these fats are broken down into free fatty acids
that stimulate glucose production. Insulin acts by stimulating the use of
glucose as fuel and by inhibiting the production of glucose. In a healthy
individual, a balance is maintained between insulin secretion and glucose
metabolism.
There are two major types of diabetes. Type 1 diabetes (juvenile onset diabetes
or insulin dependent diabetes) refers to the condition where the pancreas
produces little or no insulin. Type 1 diabetes accounts for 5-10 percent of
diabetes cases. It often occurs in children and young adults. Type 1 diabetics
must take daily insulin injections, typically three to five times per day, to
regulate blood glucose levels.
In Type 2 diabetes (adult onset or non-insulin dependent diabetes mellitus), the
body does not produce enough insulin, or cannot properly use the insulin
produced. Type 2 diabetes is the most common form of the disease and accounts
for 90-95 percent of diabetes cases. In addition to insulin therapy, Type 2
diabetics may take oral drugs that stimulate the production of insulin by the
pancreas or that help the body to more effectively use insulin.
If not treated, diabetes can lead to blindness, kidney disease, nerve disease,
amputation, heart disease and stroke. Each year, between 12,000 and 24,000
people lose their sight because of diabetes. Diabetes is also the leading cause
of end-stage renal disease (kidney failure), accounting for about 40% of new
cases.
In addition, about 60-70 percent of people with diabetes have mild to severe
forms of diabetic nerve damage, which, in severe forms, can lead to lower limb
amputations. Diabetics are also 2 to 4 times more likely to have heart disease,
which is present in 75 percent of diabetes-related deaths, and are 2 to 4 times
more likely to suffer a stroke.
There is no known cure for diabetes. The World Health Organization estimates
that there are currently over 1.5 billion diabetics worldwide. It is further
estimated that this number will almost double by the year 2025. There are
estimated to be 17 million people suffering from diabetes in North America
alone, approximately 5 million of whom are undiagnosed, and diabetes is the
second largest cause of death by disease in North America.
We conducted the first clinical trials of our buccal insulin formulation with
human subjects in Ecuador in January 1998. We ultimately conducted a number of
studies in Ecuador in 1998, each of which involved a selection of between 8 and
10 patients. The principal purpose of these studies was to evaluate the
effectiveness of our oral insulin formulation in humans compared with injected
insulin and placebos.
5
On the basis of the test results in Ecuador and other pre-clinical data, we made
an Investigatory New Drug submission to the Health Protection Branch in Canada
(Canada's equivalent to the United States' Food and Drug Administration) in July
1998, and received permission from the Canadian regulators to proceed with
clinical trials in September 1998. We filed an Investigational New Drug
Application with the Food and Drug Administration in October 1998, and received
FDA approval to proceed with human trials in November 1998.
We began our clinical trial programs in Canada and the United States in January
1999. Between January 1999 and September 2000 we conducted clinical trials of
our insulin formulation involving approximately 200 Type 1 and Type 2 diabetic
patients and healthy volunteers. The study protocol in most trials involved
administration of two different doses of our insulin formulation following
either a liquid sustacal meal or a standard meal challenge. The objective of
these studies was to evaluate our insulin formulation's efficacy in controlling
post-prandial (meal related) glucose levels. These trials demonstrated that our
insulin formulation controlled post-prandial hyperglycemia in a manner
comparable to injected insulin.
In April 2003, we were granted permission to commence Phase II-B clinical trials
in Canada. In September 2003, we commenced a 90 day study in 80 Type 2 diabetic
patients with poorly controlled blood glucose. The objective of the study is to
determine the metabolic effect of our insulin product. We continue to conduct
limited clinical studies in the United States, and other countries.
Other Large Molecule Drug Projects
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We have identified numerous compounds, other than insulin, as candidates for
product development.
Morphine and Fentanyl
- ---------------------
The delivery of morphine and fentanyl by oral formulation (pills) and injection
for the treatment of moderate to severe breakthrough and postoperative pain
fails to provide patients with adequate relief and control (breakthrough and
postoperative pain are characterized as being moderate to severe in intensity,
having a rapid onset of action and a short to medium duration). Not only does
delivery by pills have a slow onset of action, it is often difficult for
patients to adjust their doses, with the result that patients are either over or
under medicated. Injections are invasive and require an attendant to administer
the medication which reduces the patient's control over the pain and may cause
increased anxiety. Often, patients must wait in pain until an attendant can
medicate them.
We seek to develop a buccal delivery formulation for morphine and fentanyl that
will have a critical series of attributes well suited for the treatment of
breakthrough and post operative pain and which will be cost effective and will
have a demonstrable improvement over current delivery methods. These include
fast access to the circulatory system, precise dosing control and a simple,
self-administration procedure.
6
We made an Investigatory New Drug submission for buccal morphine to the Health
Protection Branch in Canada in January 2002, and received permission from the
Canadian regulators to proceed with clinical trials in March 2002. We have
commenced clinical trials in Ecuador and we are in the process of recruiting
investigators to conduct clinical trials in Canada. In January 2002, we filed an
Investigational New Drug Application for buccal morphine with the Food and Drug
Administration. The buccal morphine product is being developed by Generex
Bermuda under our joint venture with a subsidiary of Elan Corporation.
We made an Investigatory New Drug submission for fentanyl to the Health
Protection Branch in Canada in August 2002, and received permission from the
Canadian regulators to proceed with clinical trials in October 2002.
Other Products
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We have had discussions of possible research collaborations with various
pharmaceutical companies concerning use of our large molecule drug delivery
technology with insulin, morphine, fentanyl and other compounds, including
monoclonal antibodies, human growth hormone, fertility hormone, estrogen and
heparin, and a number of vaccines.
Prior to September 2000, we had not aggressively pursued development
opportunities apart from insulin because we believed it was more advantageous to
concentrate our resources, particularly our financial resources, on developing
the insulin product. While the insulin product remains our first priority, we
continue to develop a buccal delivery formulation for morphine and fentanyl. We
believe we have sufficient financial resources to pursue the development of our
current products and the initial exploration of additional products.
Immunomedicine Technology and Products
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Our new subsidiary, Antigen, is engaged in research and development of
technologies and immunomedicines for the treatment of malignant, infectious,
autoimmune and allergic diseases. Our immunomedicine products work by
stimulating the immune system to either attack offending agents (i.e., cancer
cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self
proteins and allergens). Our immunomedicine products are based on two platform
technologies that were discovered by an executive officer of Antigen, the Ii-Key
hybrid peptides and Ii-Suppression. These technologies are expected to greatly
boost immune cell responses which treat the ailments and conditions.
We have not filed an Investigational New Drug application to begin clinical
trials. Rather, our immunomedicine products are in the pre-clinical stage of
development and trials in human patients are not expected for 12 months.
Development efforts are underway in melanoma, breast cancer, prostate cancer,
HIV and Type I diabetes. We are establishing collaborations with academic
centers to advance the technology, with the ultimate goal of conducting clinical
testing. For more details regarding our acquisition of Antigen, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" (Item 7) below.
7
Corporate History
We were incorporated in Delaware in September 1997 for the purpose of acquiring
Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to
engage in pharmaceutical and biotechnological research and other activities. Our
acquisition of Generex Pharmaceuticals was completed in October 1997 in a
transaction in which the holders of all outstanding shares of Generex
Pharmaceuticals exchanged their shares for shares of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green Mt.
P.S., Inc., a previously inactive Idaho corporation formed in 1983. As a result
of this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
In August 2003, subsequent to the end of fiscal 2003, we acquired all of the
capital stock of Antigen in exchange for approximately 2,800,000 shares of our
common stock, and Antigen became a wholly owned subsidiary of Generex.
Government Regulation
Our research and development activities, and the eventual manufacturing and
marketing of our products, are subject to extensive regulation by the Food and
Drug Administration in the United States (FDA) and comparable regulatory
authorities in other countries. Among other things, extensive regulation puts a
burden on our ability to bring products to market. While these regulations apply
to all competitors in our industry, many of our competitors have extensive
experience in dealing with 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.
8
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
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All aspects of our research, development and foreseeable commercial activities
are subject to extensive regulation by FDA and other regulatory authorities in
the United States. United States federal and state statutes and regulations
govern, among other things, the testing, manufacturing, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of
pharmaceutical products. The regulatory approval process, including clinical
trials, usually takes several years and requires the expenditure of substantial
resources. If regulatory approval of a product is granted, the approval may
include significant limitations on the uses for which the product may be
marketed. The steps required before a pharmaceutical product may be marketed in
the United States include:
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.
Pre-clinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. The results of the pre-clinical tests are
submitted to 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 Investigational New Drug application, 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. We filed an Investigational New Drug application for
buccal morphine in January 2002.
Clinical trials involve the administration of the new drug to humans under the
supervision of a qualified investigator. The protocols for the trials must be
submitted to FDA as part of the Investigational New Drug application. Also, each
clinical trial must be approved and conducted under the auspices of an
Institutional Review Board, which considers, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
Clinical trials are typically conducted in three sequential phases (Phase I,
Phase II, and Phase III), but the phases may overlap. Phase I clinical trials
test the drug on healthy human subjects for safety and other aspects, but not
effectiveness. Phase II clinical trials are conducted in a limited patient
population to gather evidence about the efficacy of the drug for specific
purposes, to determine dosage tolerance and optimal dosages, and to identify
possible adverse effects and safety risks. When a compound has shown evidence of
efficacy and acceptable safety in Phase II evaluations, Phase III clinical
trials are undertaken to evaluate clinical efficacy and to test for safety in an
expanded patient population at clinical trial sites in different geographical
locations. 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.
9
In the United States, the results of pre-clinical 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 be registered with, and approved by FDA.
Manufacturing facilities must also comply with FDA's Good Manufacturing
Practices, and 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
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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 FDA. These requirements vary widely from country
to country. Generally, however, no action can be taken to market any drug
product in a country until an appropriate application has been approved by the
regulatory authorities in that country. FDA approval does not assure approval by
other regulatory authorities. The current approval process varies from country
to country, and the time spent in gaining approval varies from that required for
FDA approval. The Canadian regulatory process is substantially similar to that
of the United States. We obtained regulatory approval to begin clinical trials
of our oral insulin formulation in Canada in November 1998. In Ecuador,
regulatory authorities approved the limited non-commercial distribution of our
oral insulin formulation in September 1998. We obtained regulatory approval to
begin clinical trials of our buccal morphine product in Canada in March 2002 and
received regulatory approval to begin clinical trials of our fentanyl product in
Canada in October 2002. We are currently in the process of recruiting
investigators to conduct clinical trials of our buccal morphine product.
10
Marketing
We intend to rely on collaborative arrangements with one or more other companies
that possess strong pharmaceutical marketing and distribution resources to
perform these functions for us. Accordingly, we will not have the same control
over marketing and distribution that we would have if we conducted these
functions ourselves.
With respect to the Generex Bermuda joint venture, Elan may, at its option,
choose to market morphine or any other product developed under the joint
venture. Except for these arrangements, we do not have any agreements with any
other companies for marketing or distributing our products. With respect to our
insulin product, we possess the worldwide marketing rights to this product after
they reverted to us upon the termination in May 2003 of the development and
license agreement with Lilly.
Manufacturing
To date, we have produced our oral insulin formulation only under laboratory
conditions on a small scale. In December 2000, we completed our pilot
manufacturing facility in Toronto in the same commercial complex in which our
original laboratory is located, and we are in the process of obtaining
regulatory approval for the facility. We believe that this facility will be
capable of producing our insulin product at levels necessary to supply our needs
for late stage human clinical trials of the product and for initial commercial
sales outside the United States, even though we have not yet actually produced
product at those levels. We will need to significantly increase our
manufacturing capability in order to manufacture any product in commercial
quantities.
We own facilities in Brampton and Mississauga, Ontario, all within 25 miles from
downtown Toronto, that were purchased with the intention of improving and
equipping them for manufacturing. These facilities are currently leased to
unrelated third parties, however, we believe we can place these facilities into
production of our insulin product or other products within 12 to 18 months lead
time if additional production capabilities are necessary.
Our new subsidiary Antigen leases office and laboratory space in Worcester,
Massachusetts, which is sufficient for its present needs. The laboratory is
approximately 820 square feet and has permission to store and use biohazardous
(including recombinant DNA materials) and flammable chemicals.
Raw Material Supplies
The excipients used in our formulation are available from numerous sources in
sufficient quantities for clinical purposes, and we believe that they will be
available in sufficient quantities for commercial purposes when required,
although we have not yet attempted to secure a commercial supply of any such
products.
11
Components suitable for our RapidMist(TM) device are available from a limited
number of potential suppliers, as is the chemical propellant used in the device.
We believe that the components which now comprise the device will be utilized
with the commercial version of our insulin product. We also expect to use the
RapidMist(TM) device in connection with our buccal morphine and fentanyl
products. We have also secured supply arrangements with the manufacturers of all
other components and the propellant that we presently use in our RapidMist(TM)
device for commercial quantities of such components and the propellant. All such
suppliers are prominent, reputable and reliable suppliers to the pharmaceutical
industry. Because we now have a single supplier for each of these components and
propellant, however, we are more vulnerable to supply interruptions than would
be the case if we had multiple suppliers for each component. We do not believe
that the risk of a single source of supply for proprietary raw materials or
device components is unusual in the pharmaceutical industry.
Insulin is available worldwide from only a few sources. However, alternative
supplies of insulin are under development in Europe. The terms of our License
Agreement with Lilly, provide for Lilly to negotiate terms for continued supply
of insulin to Generex after termination of the License Agreement. We are
currently working with Lilly on terms of a supply agreement under which Lilly
will supply a specified amount of insulin for our further development needs,
although we have not yet executed an agreement. We believe Lilly will continue
to supply insulin for further development needs. We also believe future
development and marketing partners under licensing and development agreements,
if any, will provide, or assist us to obtain, pharmaceutical compounds that are
used in products covered under such agreements.
While morphine is a controlled substance, it is readily available for use in
clinical trials. We currently have the appropriate licenses and facilities for
acquiring and storing morphine in Canada. Various regulatory issues surround the
import of morphine into the United States and we will need to address these
issues prior to commencing clinical trials in the United States.
Raw materials for our pre-clinical development stage immunomedicine products
include amino acids (for peptide therapeutics) and oligonucleotides (for genetic
constructs). These materials are readily available from commercial suppliers. We
utilize the services of several commercial laboratories for the manufacturing of
our pre-clinical development stage immunomedicine products.
Intellectual Property
We currently have fifteen issued U.S. patents pertaining to aspects of buccal
delivery technology and covering our oral insulin formulation. We have six U.S.
patent applications and one Canadian patent application pending, which also
relate to aspects of our buccal delivery technology, our oral insulin
formulation and our oral morphine formulation. In addition, we hold one U.S.
patent and two Canadian patents and have one U.S. application pending that
pertains to delivery technologies other than our buccal delivery technology.
We also have an indirect interest in three drug delivery patents held by another
company, Centrum Biotechnologies, Inc., which is 50% owned by us.
Our new subsidiary Antigen currently holds six issued U.S. patents, one
Australian patent, and two pending U.S. patent applications concerning
technology for modulating the immune system via activation of antigen-specific
helper T lymphocytes. Some of these patents are held under exclusive licenses
from the University of Massachusetts. Dr. Humphreys and Dr. Xu, officers of
Antigen, are the listed inventors or co-inventors on all of these patents and
patent applications, including those licensed from the University of
Massachusetts.
12
Our long-term success will substantially depend upon our ability to obtain
patent protection for our technology and our ability to protect our technology
from infringement, misappropriation, discovery and duplication. We cannot be
sure that any of our pending patent applications will be granted, or that any
patents which we own or obtain in the future will fully protect our position.
Our patent rights, and the patent rights of biotechnology and pharmaceutical
companies in general, are highly uncertain and include complex legal and factual
issues. We believe that our existing technology and the patents which we hold or
have applied for do not infringe any one else's patent rights. We believe our
patent rights will provide meaningful protection against others duplicating our
proprietary technologies. We cannot be sure of this, however, because of the
complexity of the legal and scientific issues that could arise in litigation
over these issues. (See "Legal Proceedings" (Item 3) for discussion of certain
legal proceedings involving intellectual property issues.)
We also rely on trade secrets and other unpatented proprietary information. We
seek to protect this information, in part, by confidentiality agreements with
our employees, consultants, advisors and collaborators.
Competition
We expect that products based upon our buccal delivery technology and any other
products that we may develop will compete directly with products developed by
pharmaceutical and biotechnology companies, universities, government agencies
and public and private research organizations.
Products developed by our competitors may use a different active pharmaceutical
agent or treatment to treat the same medical condition or indication as our
product or may provide for the delivery of substantially the same active
pharmaceutical ingredient as our products using different methods of
administration. For example, a number of pharmaceutical and biotechnology
companies are engaged in various stages of research, development and testing of
alternatives to insulin therapy for the treatment of diabetes, as well as new
methods of delivering insulin. These methods, including nasal, transdermal,
needle free (high pressure) injection and pulmonary, may ultimately successfully
deliver insulin to diabetic patients. Some biotechnology companies have also
developed different technologies to enhance the presentation of peptide
antigens. Many of our competitors and potential competitors have substantially
greater scientific research and product development capabilities, as well as
financial, marketing and human resources, than we do.
Where the same or substantially the same active ingredient is available using
alternative delivery means or the same or substantially the same result is
achievable with a different treatment or technology, we expect that competition
among products will be based, among other things, on product safety, efficacy,
ease of use, availability, price, marketing and distribution. When different
active pharmaceutical ingredients are involved, these same competitive factors
will apply to both the active agent and the delivery method.
13
We consider other drug delivery and biotechnology companies to be direct
competitors for the cooperation and support of major drug and biotechnology
companies that own or market proprietary pharmaceutical compounds and
technologies, as well as for the ultimate patient market. Of primary concern to
us are the competitor companies that are known to be developing delivery systems
for insulin and other pharmaceutical agents that we have identified as product
candidates and technologies to enhance the presentation of peptide antigens.
Buccal Insulin Product
- ----------------------
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 III testing of
its inhalation product in the second half of 1998.
Other companies have announced development efforts relating to alternative (to
injection) methods of delivering insulin or other large molecule drugs,
including Alkermes, which announced a collaboration with Eli Lilly and Company
in April 2000 to develop a pulmonary method of administering insulin. Other
companies developing alternative means of delivering insulin and other large
molecule drugs include: Emisphere Technologies (pills taken orally), Nobex
Corporation (pills taken orally), and Nastech Pharmaceuticals (nasal), among
others. These companies are at various stages of clinical development.
In addition to other delivery systems for insulin, there are numerous products
which have been approved for use in the treatment of Type 2 diabetics in place
of or in addition to insulin therapy. These products may also be considered
competitive with insulin products.
Buccal Morphine and Fentanyl Products
- -------------------------------------
Cephalon, Inc. currently markets Actiq(R) in the United States and has recently
acquired the rights to the product in Europe. Actiq(R) delivers buccal
transmucosal fentanyl to the cheek walls through the use of a lollipop. On
November 4, 1998 the FDA cleared Actiq(R) for marketing for use in the
management of breakthrough cancer pain. The product was launched in March 1999
in the United States.
14
Aradigm Corporation is developing the hand-held AERx Pain Management System for
the treatment of breakthrough cancer pain. The AERx Pain Management System is a
pulmonary delivery system to deliver the drug through inhalation. AERx has
distinct advantages over the administration by injection of morphine and similar
opiate-derived pain control drugs. Aradigm has completed Phase II clinical
trials of this formulation.
Nastech Pharmaceuticals is developing an intranasal formulation of morphine that
is in Phase II clinical trials. Results reported to date show the product to be
safe and efficacious in the treatment of episodes of breakthrough pain. Nastech
is currently seeking a licensing partner for this product.
Immunomedicine Technology and Products
- --------------------------------------
A number of companies that are engaged in the development of immunomedicines
employ technologies that are competitive to our new subsidiary, Antigen. Zycos
Inc. has developed the Biotope(R) technology, Cel-Sci Corporation has developed
the LEAPS delivery technology and Epimmune Inc. has developed the PADRE(R)
technology. These company have initiated early stage clinical trials for several
products for the treatment of cancer, autoimmune, and allergic diseases. These
companies also have established collaborations with academic centers and other
companies for the development of certain products. We have not initiated
clinical trials with any of our immunomedicine products, nor have we established
commercial collaborations to date. We have established collaborations with major
academic centers for the development of our immunomedicine 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 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, 2003, our expenditures on
research and development were $38,864,948. These included $5,150,075 in the year
ended July 31, 2003, $6,618,820 in the year ended July 31, 2002, and $19,929,799
in the year ended July 31, 2001. The decrease in our research and development
expenses in 2003 compared to 2002 is due principally to contraction of our
15
ongoing research and development activities under our collaboration with Elan
and the collaboration with Lilly, which ended in May 2003. The decrease in our
research and development expenses in 2002 compared with 2001, is due principally
to the accounting treatment for our joint venture with Elan, which resulted in a
$15,000,000 research and development expense for the license fee paid by Generex
(Bermuda) Ltd. to Elan for technology rights in 2001 (our consolidated net loss,
which includes this expense, however, was partially offset by approximately $2.9
million of minority interest, reflecting Elan's 19.9% ownership interest in the
joint venture).
Employees
At September 30, 2003, we had twenty-six full-time employees, including our
executive officers and other individuals who work for us full time but are
employed by management companies that provide their services and including six
employees of our new subsidiary Antigen. Fourteen of our employees are executive
and administrative, nine are scientific and technical personnel who engage
primarily in development activities and in preparing formulations for testing
and clinical trials, and three are engaged in corporate and product promotion,
public relations and investor relations. We believe our employee relations are
good. None of our employees are covered by a collective bargaining agreement.
We will continue to need qualified scientific personnel and personnel with
experience in clinical testing, government regulation and manufacturing. We may
have difficulty in obtaining qualified scientific and technical personnel as
there is strong competition for these people from other pharmaceutical and
biotechnology companies as well as universities and research institutions. Our
business could be materially harmed if we are unable to recruit and retain
qualified scientific, administrative and executive personnel to support our
expanding activities, or if one or more members of our limited scientific and
management staff were unable or unwilling to continue their association with us.
We do not have fixed term agreements with any of our key management or
scientific staff, other than Dr. Pankaj Modi. 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. We also use non-employee consultants to assist us in
business development. These consultants and advisors usually have the right to
terminate their relationship with us on short notice. Loss of some of these key
advisors could interrupt or delay development of one or more of our products or
otherwise adversely affect our business plans.
16
Executive Officers and Directors
Name* Age Position Held with Generex
- ----- --- --------------------------
Anna E. Gluskin 52 President, Chief Executive Officer and
Director
Rose C. Perri 36 Chief Operating Officer, acting Chief
Financial Officer, Treasurer, Secretary and
Director
Pankaj Modi, Ph.D. 49 Vice President, Research and Development and
Director
Gerald Bernstein 70 Vice President and Director
Mark Fletcher, Esq. 38 Executive Vice President and General Counsel
J. Michael Rosen 52 Director
Peter Levitch 71 Director
John P. Barratt 59 Director
* Mark Perri, our former Chairman and Chief Financial Officer, passed away on
November 6, 2002.
Anna E. Gluskin -- Director since September 1997. Ms. Gluskin has served as our
President and Chief Executive Officer since October 1997. She held comparable
positions with Generex Pharmaceuticals, Inc. from its formation in 1995 until
its acquisition by us in October 1997.
Rose C. Perri -- Director since September 1997. Ms. Perri has served as our
Treasurer and Secretary since October 1997, and as Chief Operating Officer since
August 1998. She was an officer of Generex Pharmaceuticals, Inc. from its
formation in 1995 until its acquisition by us in October 1997. Effective
November 2002, Ms. Perri became acting Chief Financial Officer.
Pankaj Modi, Ph.D. -- Director since September 1997. Dr. Modi has served as our
Vice President, Research and Development since October 1997. Prior to that time,
Dr. Modi was Director of Insulin Research for Generex Pharmaceuticals, Inc., 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
researcher at McMaster University in Hamilton, Ontario from February 1994
through October 1996.
17
Gerald Bernstein, M.D. -- Director since October 2002. Dr. Gerald Bernstein has
served as our Vice President since October 1, 2001. Dr. Bernstein acts as a key
liaison for us on medical and scientific affairs to the medical, scientific and
financial communities and consults us under a consulting agreement on research
and medical affairs and on development activities. Dr. Bernstein has been an
associate clinical professor at the Albert Einstein College of Medicine in New
York and an attending physician at Beth Israel Medical Center, Lenox Hill
Hospital and Montefore Medical Center, all in New York. He is a former president
of the American Diabetes Association.
Mark Fletcher, Esq. -- Mr. Fletcher has served as our Executive Vice President
and General Counsel since April 2003. From October 2001 to March 2003, Mr.
Fletcher was engaged in the private practice of law as a partner at Goodman and
Carr LLP, a leading Toronto law firm. From March 1993 to September 2001, Mr.
Fletcher was a partner at Brans, Lehun, Baldwin LLP in Toronto. Mr. Fletcher
received his LL.B. from the University of Western Ontario in 1989 and was
admitted to the Ontario Bar in 1991.
J. Michael Rosen -- Director since August 2000. Mr. Rosen has been a principal
in a number of related travel management and hotel marketing businesses since
1978. The principal companies in this group, all of which are headquartered in
Ontario, are Uniworld Travel & Tours, Inc., Nevada Vacations, Inc., Casino
Vacations, Inc. and Casino Tours, Inc. Mr. Rosen presently serves as the
President or a Vice President, and the Chief Financial Officer, of each of these
companies. Mr. Rosen is an accountant by training, and was engaged in the
private practice of accounting prior to 1978.
Peter Levitch - Director since October 2002. Mr. Levitch has been President of
Peter Levitch & Associates, an independent consulting firm to health
professionals since 1981. In this capacity, he advises companies through the
various stages of the development of pharmaceuticals, medical devices, biologics
and diagnostics, including clinical evaluation and the FDA regulatory approval
phases. He has served as an advisor to more than 200 leading biotechnology and
biological firms, including Amgen, Genentech, Immunex, DuPont, Baxter and
Johnson and Johnson. Prior to 1981, Mr. Levitch was Vice President, Clinical and
Regulatory Affairs at Oxford Research International Corp. and held senior
positions managing the regulatory and clinical programs at Ortho Diagnostic
Systems (a subsidiary of Johnson & Johnson).
John P. Barratt -- Director since March 2003. Mr. Barratt is Chief Operating
Officer of Beyond.com, a company in which he has been employed since 2000. From
January 1996 to September 2000, Mr. Barratt served as partner-in-residence for
the Quorum Group of Companies, an international investment partnership
specializing in providing debt and equity capital to the emerging high growth
technology sector. From 1988 to December 1995, Mr. Barratt was Executive Vice
President and Chief Operating Officer of Coscan Development Corporation. He
previously held a number of senior-level management positions, including Deputy
Chief Executive of Lloyds Bank Canada. Mr. Barratt also currently serves as a
director of GLP NT Corporation and BNN Split Corporation.
We entered into a joint venture with Elan Corporation, plc ("Elan") and certain
affiliates of Elan in January 2001. Pursuant to a Securities Purchase Agreement
dated January 16, 2001 between us, Elan and Elan International Services, Ltd.
("EIS"), a subsidiary of Elan, EIS has the right to nominate one director to our
Board of Directors for so long as EIS or its affiliates own at least 1.0% of the
issued and outstanding shares of common stock. Dr. Lieberburg, a former director
nominated by EIS, resigned effective August 1, 2002. EIS has not informed us of
its nominee to replace Dr. Lieberburg. Under the terms of the Securities
Purchase Agreement, the EIS-nominated director may not in any event have more
than 15% of the aggregate voting power of the Board of Directors as a whole.
18
Dr. Modi holds the position of Vice President, Research and Development pursuant
to a consulting agreement that was originally entered into as of October 1,
1996, that was amended and supplemented as of January 7, 1998, and that was
amended and supplemented as of December 31, 2000. An amendment to Dr. Modi's
consulting agreement was approved by the Board of Directors in January 2002.
Under the consulting agreement, we must use our best efforts to cause Dr. Modi
to be nominated for election and elected as our director for as long as the
consulting agreement is in force.
There are no family relationships among our officers and directors.
Other Key Employees and Consultants
Slava Jarnitskii is our Financial Controller. He began his employment with
Generex Pharmaceuticals in September 1996 and has been in our employ since our
acquisition of Generex Pharmaceuticals in October 1997. Before his employment
with Generex Pharmaceuticals, Mr. Jarnitskii received a Masters of Business
Administration degree from York University in September 1996.
Dr. Joseph V. Gulfo, MD, MBA is Chief Executive Officer and President of
Antigen. Dr. Gulfo joined Antigen in August 1999 as CEO. Dr. Gulfo has over 15
years experience in the management and development of biopharmaceutical
companies and products. He has overseen development of several FDA-approved
products for diagnosis and treatment of cancer including ProstaScint(R) and
Valstar(R), and negotiated numerous licensing arrangements. From 1984 to 1988,
he was Chief Operating Officer and a Director of Anthra Pharmaceuticals, Inc.
and Chairman of that company's UK subsidiary. Dr. Gulfo holds an MD from the
University of Medicine and Dentistry of New Jersey and MBA in Finance from Seton
Hall University.
Dr. Robert E. Humphreys, MD, PhD, is currently Executive Vice-President and
Chief Operating Officer of Antigen. Dr. Humphreys founded Antigen in 1999 and
was its President. He has extensive experience in the National Institute of
Health, arthritis, cancer and diabetes study sections. Dr. Humphreys is the
principal inventor on 6 awarded US patents and has over 150 peer-reviewed
publications to his credit. Prior to founding Antigen, Dr. Humphreys was
Professor of Medicine and Pharmacology at University of Massachusetts Medical
School. He received his MD and PhD degrees from Yale University and
post-doctoral fellow degree in immunology from Harvard University. He also
received his initial training at Bethesda Naval Hospital.
Dr. Minzhen Xu is Vice President - Biology of Antigen. Dr. Xu received an MD
from the Shanghai Medical University in China and a PhD in immunology from
University of Massachusetts Medical School. He has been with Antigen since its
inception and is the company's chief experimentalist.
19
Certain Additional Risk Factors
In addition to historical facts or statements of current condition, this Annual
Report on Form 10-K contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events.
The following discussion outlines certain factors that we think could cause our
actual outcomes and results to differ materially from our forward-looking
statements. These factors are in addition to those set forth elsewhere in this
Annual Report on Form 10-K.
Risks Related to Our Financial Condition
- ----------------------------------------
We have a history of losses, and will incur additional losses.
We are a development stage company with a limited history of operations, and do
not expect ongoing revenues from operation in the immediately foreseeable
future. To date, we have not been profitable and our accumulated net loss before
preferred stock dividend was approximately $76,000,000 at July 31, 2003. Our
losses have resulted principally from costs incurred in research and
development, including clinical trials, and from general and administrative
costs associated with our operations. While we seek to attain profitability, we
cannot be sure that we will ever achieve product and other revenue sufficient
for us to attain this objective.
Our product candidates are in research or early stages of pre-clinical and
clinical development. We will need to conduct substantial additional research,
development and clinical trials. We will also need to receive necessary
regulatory clearances both in the United States and foreign countries and obtain
meaningful patent protection for and establish freedom to commercialize each of
our product candidates. We cannot be sure that we will obtain required
regulatory approvals, or successfully research, develop, commercialize,
manufacture and market any other product candidates. We expect that these
activities, together with future general and administrative activities, will
result in significant expenses for the foreseeable future.
To progress in product development or marketing, we will need additional capital
which may not be available to us. This may delay our progress in product
development or market.
We will require funds in excess of our existing cash resources:
o to proceed under our joint venture with Elan, which requires us to fund
80.1% of initial product development costs;
o to develop buccal and immunomedicine products;
o to develop new products based on our buccal delivery and immunomedicine
technologies, including clinical testing relating to new products;
o to develop or acquire other technologies or other lines of business;
o to establish and expand our manufacturing capabilities;
20
o to finance general and administrative and research activities that are
not related to specific products under development; and
o to finance the research and development activities of our new
subsidiary Antigen. We have agreed to fund at least $2,000,000 of
Antigen expenditures during the first two years following the
acquisition.
In the past, we have funded most of our development and other costs through
equity financing. We anticipate that our existing capital resources will enable
us to maintain currently planned operations through the next twelve months.
However, this expectation is based on our current operating plan, which could
change as a result of many factors, and we may need additional funding sooner
than anticipated. To the extent operating and capital resources are insufficient
to meet future requirements, we will have to raise additional funds to continue
the development and commercialization of our products. Unforeseen problems,
including materially negative developments in our joint venture with Elan, in
our clinical trials or in general economic conditions, could interfere with our
ability to raise additional equity capital or materially adversely affect the
terms upon which such funding is available.
It is possible that we will be unable to obtain additional funding as and when
we need it. If we were unable to obtain additional funding as and when needed,
we could be forced to delay the progress of certain development efforts. Such a
scenario poses risks. For example, our ability to bring a product to market and
obtain revenues could be delayed, our competitors could develop products ahead
of us, and/or we could be forced to relinquish rights to technologies, products
or potential products.
New equity financing could dilute current shareholders.
If we raise funds through equity financing to meet the needs discussed above, it
will have a dilutive effect on existing holders of our shares by reducing their
percentage ownership. The shares may be sold at a time when the market price is
low because we need the funds. This will dilute existing holders more than if
our stock price was higher. In addition, equity financings normally involve
shares sold at a discount to the current market price.
Our research and development and marketing efforts are likely to be highly
dependent on corporate collaborators and other third parties who may not devote
sufficient time, resources and attention to our programs, which may limit our
efforts to successfully develop and market potential products.
Because we have limited resources, we have sought to enter into collaboration
agreements with other pharmaceutical companies that will assist us in
developing, testing, obtaining governmental approval for and commercializing
products using our buccal delivery and immunomedicine technologies. Any
collaborator with whom we may enter into such collaboration agreements may not
support fully our research and commercial interests since our program may
compete for time, attention and resources with such collaborator's internal
programs. Therefore, these collaborators may not commit sufficient resources to
our program to move it forward effectively, or that the program will advance as
rapidly as it might if we had retained complete control of all research,
development, regulatory and commercialization decisions.
21
Risks Related to Our Technologies
- ---------------------------------
Because our technologies and products are at an early stage of development, we
cannot expect revenues in the foreseeable future.
We have no products approved for commercial sale at the present time. To be
profitable, we must successfully research, develop, obtain regulatory approval
for, manufacture, introduce, market and distribute our products under
development. We may not be successful in one or more of these stages of the
development of our products, and/or any of the products we develop may not be
commercially viable.
While over 750 patients with diabetes have been dosed with our oral insulin
formulation at approved facilities in seven countries, our clinical program has
not reached a point where we are prepared to apply for regulatory approvals to
market the product in any country. Until we have developed a commercially viable
product which receives regulatory approval, we will not receive revenues from
ongoing operations.
We will not receive revenues from operations until we receive regulatory
approval to sell our products. Many factors impact our ability to obtain
approvals for commercially viable products.
We have no products approved for commercial sale by drug regulatory authorities.
We have begun the regulatory approval process for our oral insulin formulation,
buccal morphine and fentanyl products. Our immunomedicine products are in the
pre-clinical stage of development.
Pre-clinical and clinical trials of our products, and the manufacturing and
marketing of our technologies, are subject to extensive, costly and rigorous
regulation by governmental authorities in the United States, Canada and other
countries. The process of obtaining required regulatory approvals from the FDA
and other regulatory authorities often takes many years, is expensive and can
vary significantly based on the type, complexity and novelty of the product
candidates. For these reasons, it is possible we will never receive approval for
one or more product candidates.
Delays in obtaining United States or foreign approvals for our products could
result in substantial additional costs to us, and, therefore, could adversely
affect our ability to compete with other companies. If regulatory approval is
ultimately granted, the approval may place limitations on the intended use of
the product we wish to commercialize, and may restrict the way in which we are
permitted to market the product.
Due to legal and factual uncertainties regarding the scope and protection
afforded by patents and other proprietary rights, we may not have meaningful
protection from competition.
22
Our long-term success will substantially depend upon our ability to protect our
proprietary technologies from infringement, misappropriation, discovery and
duplication and avoid infringing the proprietary rights of others. Our patent
rights, and the patent rights of biotechnology and pharmaceutical companies in
general, are highly uncertain and include complex legal and factual issues.
Because of this, our pending patent applications may not be granted. These
uncertainties also mean that any patents that we own or will obtain in the
future could be subject to challenge, and even if not challenged, may not
provide us with meaningful protection from competition. Due to our financial
uncertainties, we may not possess the financial resources necessary to enforce
our patents. Patents already issued to us or our pending applications may become
subject to dispute, and any dispute could be resolved against us.
Because a substantial number of patents have been issued in the field of
alternative drug delivery and because patent positions can be highly uncertain
and frequently involve complex legal and factual questions, the breadth of
claims obtained in any application or the enforceability of our patents cannot
be predicted. Consequently, we do not know whether any of our pending or future
patent applications will result in the issuance of patents or, to the extent
patents have been issued or will be issued, whether these patents will be
subject to further proceedings limiting their scope, will provide significant
proprietary protection or competitive advantage, or will be circumvented or
invalidated.
Also because of these legal and factual uncertainties, and because pending
patent applications are held in secrecy for varying period in the United States
and other countries, even after reasonable investigation we may not know with
certainty whether any products that we (or a licensee) may develop will infringe
upon any patent or other intellectual property right of a third party. For
example, we are aware of certain patents owned by third parties that such
parties could attempt to use in the future in efforts to affect our freedom to
practice some of the patents that we own or have applied for. Based upon the
science and scope of these third party patents, we believe that the patents that
we own or have applied for do not infringe any such third party patents,
however, we cannot know for certain whether we could successfully defend our
position, if challenged. We may incur substantial costs if we are required to
defend ourselves in patent suits brought by third parties. These legal actions
could seek damages and seek to enjoin testing, manufacturing and marketing of
the accused product or process. In addition to potential liability for
significant damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process.
Risks Related to Marketing of Our Potential Products
- ----------------------------------------------------
We may not become, or stay, profitable even if our products are approved for
sale.
Even if we obtain regulatory approval to market our oral insulin product or any
other product candidate, many factors may prevent the product from ever being
sold in commercial quantities. Some of these factors are beyond our control,
such as:
o acceptance of the formulation or treatment by health care professionals
and diabetic patients;
o the availability, effectiveness and relative cost of alternative
diabetes or immunomedicine treatments that may be developed by
competitors; and
o the availability of third-party (i.e., insurer and governmental agency)
reimbursements.
23
We may not be able to compete with treatments now being marketed and developed,
or which may be developed and marketed in the future by other companies.
Our products will compete with existing and new therapies and treatments. We are
aware of a number of companies currently seeking to develop alternative means of
delivering insulin, as well as new drugs intended to replace insulin therapy at
least in part. We are also aware of a number of companies currently seeking to
develop alternatives means of enhancing and suppressing peptides. In the longer
term, we also face competition from companies that seek to develop cures for
diabetes and other malignant, infectious, autoimmune and allergic diseases
through techniques for correcting the genetic deficiencies that underlie such
diseases.
We will have to depend upon others for marketing and distribution of our
products, and we may be forced to enter into contracts limiting the benefits we
may receive and the control we have over our products. We intend to rely on
collaborative arrangements with one or more other companies that possess strong
marketing and distribution resources to perform these functions for us. We may
not be able to enter into beneficial contracts, and we may be forced to enter
into contracts for the marketing and distribution of our products that
substantially limit the potential benefits to us from commercializing these
products. In addition, we will not have the same control over marketing and
distribution that we would have if we conducted these functions ourselves.
Numerous pharmaceutical, biotechnology and drug delivery companies, hospitals,
research organizations, individual scientists and nonprofit organizations are
engaged in the development of alternatives to our technologies. Many of these
companies have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than we do.
Accordingly, our competitors may succeed in developing competing technologies,
obtaining FDA approval for products or gaining market acceptance more rapidly
than we can.
If government programs and insurance companies do not agree to pay for or
reimburse patients for our products, we will not be successful.
Sales of our potential products depend in part on the availability of
reimbursement by third-party payors such as government health administration
authorities, private health insurers and other organizations. Third-party payors
often challenge the price and cost-effectiveness of medical products and
services. FDA approval of health care products does not guarantee that these
third party payors will pay for the products. Even if third party payors do
accept our product, the amounts they pay may not be adequate to enable us to
realize a profit. Legislation and regulations affecting the pricing of
pharmaceuticals may change before our products are approved for marketing and
any such changes could further limit reimbursement.
Risks Related to Potential Liabilities
- --------------------------------------
We face significant product liability risks, which may have a negative effect on
our financial condition.
24
The administration of drugs or treatments to humans, whether in clinical trials
or commercially, can result in product liability claims whether or not the drugs
or treatments are actually at fault for causing an injury. Furthermore, our
products may cause, or may appear to have caused, serious adverse side effects
(including death) or potentially dangerous drug interactions that we may not
learn about or understand fully until the drug or treatment has been
administered to patients for some time. Product liability claims can be
expensive to defend and may result in large judgments or settlements against us,
which could have a severe negative effect on our financial condition. We
maintain product liability insurance in amounts we believe to be commercially
reasonable for our current level of activity and exposure, but claims could
exceed our coverage limits. Furthermore, due to factors in the insurance market
generally and our own experience, we may not always be able to purchase
sufficient insurance at an affordable price. Even if a product liability claim
is not successful, the adverse publicity and time and expense of defending such
a claim may interfere with our business.
Outcome of an Arbitration Proceeding with Sands Brothers may have an adverse
impact on us.
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based investment
banking and brokerage firm, initiated an arbitration against us under New York
Stock Exchange rules. Sands alleged that it had the right to receive, for
nominal consideration, approximately 1.5 million shares of our common stock.
Sands based its claim upon an October 1997 letter agreement that was purported
by Sands to confirm an agreement appointing Sands as the exclusive financial
advisor to Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late
1997. In exchange therefor, the letter agreement purported to grant Sands the
right to acquire 17% of Generex Pharmaceuticals' common stock for nominal
consideration. Sands claimed that its right to receive shares of Generex
Pharmaceuticals' common stock applies to our common stock since outstanding
shares of Generex Pharmaceuticals' common stock were converted into shares of
our common stock in the acquisition. Sands' claims also included additional
shares allegedly due as a fee related to that acquisition, and $144,000 in
monthly fees allegedly due under the terms of the purported agreement.
After several arbitration and court proceedings, on October 29, 2002, the
Appellate Division of the New York Supreme Court issued a decision remanding the
issue of damages to a new panel of arbitrators and limiting the issue of damages
before the new panel to reliance damages which is not to include an award of
lost profits. Reliance damages are out-of-pocket damages incurred by Sands.
On November 27, 2002, Sands filed with the Appellate Division a motion to
reargue the appeal, or, in the alternative, for leave to appeal to the Court of
Appeals of New York from the order of the Appellate Division. On March 18, 2003,
the Appellate Division denied Sands' motion.
Despite the recent favorable decisions, the case is still ongoing and our
ultimate liability cannot yet be determined with certainty. Our financial
condition would be materially adversely affected to the extent that Sands
receives shares of our common stock for little or no consideration or
substantial monetary damages as a result of this legal proceeding. We are not
able to estimate an amount or range of potential loss from this legal proceeding
at the present time.
25
Risks Related to the Market for Our Stock
- -----------------------------------------
If our stock is delisted from the NASDAQ SmallCap Market and/or becomes subject
to Penny Stock regulations, the market price for our stock may be reduced and it
may be more difficult for us to obtain financing.
On June 5, 2003, our common stock was delisted from the NASDAQ National Market
because of our failure to maintain a minimum of $10,000,000 in stockholders'
equity. On June 5, 2003, our stock began trading on the NASDAQ SmallCap Market.
The NASDAQ SmallCap Market has its own standards for continued listing,
including a minimum of $2.5 million stockholders' equity. As of July 31, 2003,
our stockholders' equity was $5,856,965.
In addition, for continued listing on both the NASDAQ National Market and
SmallCap Market, our stock price must be at least $1.00. During periods in
fiscal 2002 and the beginning of fiscal 2003, our stock price dropped close to
$1.00 per share. If we do not meet this requirement in the future, we may be
subject to delisting by NASDAQ.
If our stock is delisted from NASDAQ, there will be less interest for our stock
in the market. This may result in lower prices for our stock and make it more
difficult for us to obtain financing.
If our stock is not listed on NASDAQ and fails to maintain a price of $5.00 or
more per share, our stock would become subject to the Securities and Exchange
Commission's "Penny Stock" rules. These rules require a broker to deliver, prior
to any transaction involving a Penny Stock, a disclosure schedule explaining the
Penny Stock Market and its risks. Additionally, broker/dealers who recommend
Penny Stocks to persons other than established customers and accredited
investors must make a special written suitability determination and receive the
purchaser's written agreement to a transaction prior to the sale. In the event
our stock becomes subject to these rules, it will become more difficult for
broker/dealers to sell our common stock. Therefore, it may be more difficult for
us to obtain financing.
The price of Our Stock may be volatile.
There may be wide fluctuation in the price of our stock. These fluctuations may
be caused by several factors including:
o announcements of research activities and technology innovations or new
products by us or our competitors;
o changes in market valuation of companies in our industry generally;
o variations in operating results;
o changes in governmental regulations;
o developments in patent and other proprietary rights;
o public concern as to the safety of drugs or treatments developed by us
or others;
o results of clinical trials of our products or our competitors'
products; and
o regulatory action or inaction on our products or our competitors'
products.
26
From time to time, we may hire companies to assist us in pursuing investor
relations strategies to generate increased volumes of investment in our stock.
Such activities may result, among other things, in causing the price of our
stock to increase on a short-term basis.
Furthermore, the stock market generally and the market for stocks of companies
with lower market capitalizations and small biopharmaceutical companies, like
us, have from time to time experienced, and likely will again experience
significant price and volume fluctuations that are unrelated to the operating
performance of a particular company.
Our outstanding Special Voting Rights Preferred Stock and provisions of our
Certificate of Incorporation could delay or prevent the acquisition or sale of
our business.
Holders of our Special Voting Rights Preferred Stock have the ability to prevent
any change of control in us. Our Vice President of Research and Development, Dr.
Pankaj Modi, owns all of our Special Voting Rights Preferred Stock. In addition,
our Certificate of Incorporation permits our Board of Directors to designate new
series of preferred stock and issue those shares without any vote or action by
the shareholders. Such newly authorized and issued shares of preferred stock
could contain terms that grant special voting rights to the holders of such
shares that make it more difficult to obtain shareholder approval for an
acquisition of our business or increase the cost of any such acquisition.
27
Item 2. Properties
Our executive and principal administrative offices occupy approximately 5,000
square feet of office space in the Business Centre at 33 Harbour Square in
downtown Toronto, Ontario, Canada. We own the Business Centre, which comprises
approximately 9,100 square feet of usable space. The space in the Centre that is
not used by us is leased to third parties.
We own a laboratory facility in Toronto that we have used for limited production
of our oral insulin formulation for clinical purposes, and have completed a
pilot manufacturing facility for our insulin product in the same commercial
complex. Our laboratory facility is approximately 2,650 square feet. Our pilot
manufacturing facility, which also includes laboratory facilities, is
approximately 4,800 square feet. We also own two additional spaces at this
location one of which is currently leased to third parties and one of which is
used for storage. Both of these spaces could be used for manufacturing
facilities if necessary. We have obtained regulatory approval for the laboratory
facility, and we are currently in the process of obtaining regulatory approval
for the pilot manufacturing facility.
In August we purchased an additional 23,500 square feet of property at the same
location in Toronto for $2,400,000 CAN, or approximately $1,525,000 US for
investment purposes. The property is located adjacent to our current laboratory
facility, and could be used by us for expansion of our facilities. It is
currently leased to third parties.
We have mortgages on our Toronto properties totaling $1,895,475 at July 31,
2003. These mortgages require the payment of interest, with minimal principal
reduction, prior to their due dates. These mortgages currently require an
aggregate $13,850 in monthly debt service payments. Aggregate principal
maturities for these mortgages will be $426,767 in fiscal 2004, $1,296,386 in
fiscal 2005 and $172,322 in fiscal 2006.
We lease approximately 1,710 square feet of office and laboratory space in
Worcester, Massachusetts that Antigen uses for its research and development
activities. We assumed the lease in August 2003 when we acquired Antigen. The
lease is for a term of 2 years with an annual rental of $103,500. This space is
sufficient for Antigen's present activities.
We do not expect to need manufacturing capabilities related to our insulin
product beyond our pilot facility before the end of the current fiscal year. We
own an 11,625 square foot building in Brampton, Ontario, which is approximately
25 miles outside Toronto, and a 13,500 square foot building in Mississauga,
Ontario, which is about 20 miles from downtown Toronto, for ultimate use in
manufacturing. We have done preliminary work on these facilities, but we do not
expect to make a substantial investment in improving and equipping them for
manufacturing operations until our requirements in this area are better defined.
Both properties are currently leased to third parties.
We could use our other properties to expand research, development or testing of
our buccal and immunomedicine products if current facilities prove inadequate
for our needs.
28
Item 3. Legal Proceedings
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On October 2,
1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against us under New York Stock
Exchange rules. Sands alleged that it had the right to receive, for nominal
consideration, approximately 1.5 million shares of our common stock. Sands based
its claim upon an October 1997 letter agreement that was purported by Sands to
confirm an agreement appointing Sands as the exclusive financial advisor to
Generex Pharmaceuticals, Inc., a subsidiary of us that was acquired in late
1997. In exchange, the letter agreement purported to grant Sands the right to
acquire 17% of Generex Pharmaceuticals' common stock for nominal consideration.
Sands claimed that its right to receive shares of Generex Pharmaceuticals'
common stock applies to our common stock since outstanding shares of Generex
Pharmaceuticals' common stock were converted into shares of our common stock in
the acquisition. Sands' claims also included additional shares allegedly due as
a fee related to that acquisition, and $144,000 in monthly fees allegedly due
under the terms of the purported agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel
that heard this case awarded Sands $14,070 and issued a declaratory judgment
requiring us to issue to Sands a warrant to purchase 1,530,020 shares of our
common stock pursuant to and in accordance with the terms of the purported
October 1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of the State of
New York, County of New York (the "New York Supreme Court"). On November 10,
1999, we moved to vacate the arbitration award. On March 20, 2000, the New York
Supreme Court granted Sands' petition to confirm the award and denied our motion
to vacate the award. We appealed and on January 23, 2001, the New York State
Appellate Division, First Department (the "Appellate Division"), modified the
judgment of the New York Supreme Court that had confirmed the arbitration award
against us. The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of $14,070 to
Sands but modified the judgment to vacate the portion of the arbitration award
directing the issuance to Sands of a warrant to purchase 1,530,020 shares of our
common stock. The Appellate Division held that the portion of the award
directing us to issue warrants to Sands is too indefinite to be enforceable and
remanded the matter to the arbitration panel for a final and definite award with
respect to such relief or its equivalent (including possibly an award of
monetary damages). The arbitration panel commenced hearings on the matters
remanded by the Appellate Division in June 2001.
On November 7, 2001, the arbitration panel issued an award again requiring us to
issue to Sands a warrant to purchase 1,530,020 shares of our common stock
purportedly pursuant to and in accordance with the terms of the October 1997
letter agreement. Thereafter, Sands submitted a motion to the New York Supreme
Court to modify and confirm the arbitration panel's award while we filed a
motion with the court to vacate the arbitration award. On February 25, 2002, the
New York Supreme Court vacated the arbitration panel's award. The Supreme Court
concluded that the arbitration panel had "disregarded the plain meaning" of the
directive given by the Appellate Division in the Appellate Division's January
23, 2001 decision that remanded the matter of the warrant for reconsideration by
the panel. The Supreme Court found that the arbitration panel's award "lacks a
rational basis". The Supreme Court also remanded the matter to the New York
Stock Exchange on the issue of whether the arbitration panel should be
disqualified. Sands has appealed the February 25, 2002 order of the Supreme
Court to the Appellate Division. We filed a cross-appeal on issues relating to
the disqualification of the arbitration panel.
29
On October 29, 2002, the Appellate Division issued a decision and order
unanimously modifying the lower court's order by remanding the issue of damages
to a new panel of arbitrators and otherwise affirming the lower court's order.
The Appellate Division's decision and order limits the issue of damages before
the new panel of arbitrators to reliance damages which is not to include an
award of lost profits. Reliance damages are out-of-pocket damages incurred by
Sands. The Appellate Division stated that the lower court properly determined
that the arbitration award, which had granted Sands warrants for 1,530,020
shares of our stock, was "totally irrational."
On March 18, 2003, the Appellate Division of the Supreme Court of New York
denied a motion by Sands for re-argument of the October 29, 2002 decision, or,
in the alternative, for leave to appeal to the Court of Appeals. At the present
time, we are not able to predict the ultimate outcome of this legal proceeding
or to estimate a range of possible loss from this legal proceeding. Therefore,
no provision has been recorded in the accompanying financial statements.
Subash Chandarana et al. v Generex Biotechnology Corporation et al. In February
2001, a former business associate of our Vice President of Research and
Development ("VP") and an entity called Centrum Technologies Inc. ("CTI")
commenced an action in the Ontario Superior Court of Justice against the VP and
us seeking, among other things, damages for alleged breaches of contract and
tortious acts related to a business relationship between this former associate
and the VP that ceased in July 1996. The plaintiffs' statement of claim also
seeks to enjoin the use, if any, by us of three patents allegedly owned by the
company called CTI. On July 20, 2001, we filed a preliminary motion to dismiss
the action of CTI as a nonexistent entity or, alternatively, to stay such action
on the grounds of want of authority of such entity to commence the action. The
plaintiffs brought a cross motion to amend the statement of claim to substitute
Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a corporation of which 50
percent of the shares are owned by the former business associate and the
remaining 50 percent are owned by us. Consequently, the shareholders of CBI are
in a deadlock. The court granted our motion to dismiss the action of CTI and
denied the plaintiffs' cross motion without prejudice to the former business
associate to seek leave to bring a derivative action in the name of or on behalf
of CBI. The former business associate subsequently filed an application with the
Ontario Superior Court of Justice for an order granting him leave to file an
action in the name of and on behalf of CBI against the VP and us. In September
2003, the Ontario Superior Court of Justice granted the request and issued an
order giving the former business associate leave to file an action in the name
of and on behalf of CBI against the VP and us. We intend to continue our
vigorous defense of this legal proceeding. We are not able to predict the
ultimate outcome of this legal proceeding at the present time or to estimate an
amount or range of potential loss, if any, from this legal proceeding.
Hope Manufacturing, Inc. and Steven Wood. In July 2002, Hope Manufacturing and
Steven Wood commenced actions against certain defendants, including us and
certain of our officers, in the Ontario Superior Court of Justice claiming
compensatory damages, punitive damages and various forms of injunctive and
declaratory relief for breach of contract and various business torts. We believe
the claims against us are frivolous and completely without merit. We are not a
30
party to any agreement with the plaintiffs. Most of the requested relief relates
to restrictions on the use of patents and information allegedly owned by the
plaintiffs, and an accounting for the use of such items. We have not used any
patents or information owned by the plaintiffs. All of the patents and
information claimed to be owned by the plaintiffs are completely unrelated to
any product or technology we are currently developing or intend to develop.
Therefore, even if the court were to award some declaratory or injunctive
relief, we would not be affected. The parties have now signed Minutes of
Settlement resolving all outstanding issues in the action. The settlement is
presently in the process of being finalized.
We are involved in certain other legal proceedings in addition to those
specifically described herein. Subject to the uncertainty inherent in all
litigation, we do not believe at the present time that the resolution of any of
these legal proceedings is likely to have a material adverse effect on our
consolidated financial position, results of operations and cash flows.
We maintain product liability coverage for claims arising from the use of our
products in clinical trials, but do not have any insurance that covers our
potential liability in any of the legal proceedings described above.
31
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of stockholders in the fourth quarter of
the fiscal year ended July 31, 2003. We have called a meeting of stockholders to
be held on November 4, 2003 to vote on three matters.
32
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been listed on the NASDAQ SmallCap Market since June 5,
2003. From May 5, 2000 to June 4, 2003, our common stock was listed on the
NASDAQ National Market. From February 1998 to May 2000, the "bid" and "asked"
prices for our common stock were quoted on the OTC Bulletin Board operated by
the National Association of Securities Dealers. Prior to February 1998, there
was no public market for our common stock.
The table below sets forth the high and low, intra-day sales prices of our
common stock reported on the NASDAQ National Market for each fiscal quarter (or
portion thereof) in the prior two years ended July 31, 2003. The table below
also sets forth the high and low closing "bid" prices for our common stock
reported on the NASDAQ SmallCap Market for the period from June 5, 2003 to July
31, 2003.
Sales Prices
(except where indicated)
High Low
---- ---
Fiscal 2002
-----------
First Quarter $8.75 $2.91
Second Quarter $7.76 $5.26
Third Quarter $6.20 $3.31
Fourth Quarter $5.24 $1.75
Fiscal 2003
-----------
First Quarter $2.63 $0.85
Second Quarter $2.60 $1.00
Third Quarter $1.42 $0.65
Fourth Quarter
05/01/03 - 06/04/03 $1.72 $0.87
06/05/03 - 07/31/03* $2.63 $1.35
* High and low closing "bid" prices, which represent prices between dealers and
do not include retail markup, markdown or commission and may not represent
actual transactions.
The closing sales price for our common stock reported on October 14, 2003, was
$2.05.
At October 14, 2003, there were 720 holders of record of our common stock.
33
Existing Stock Compensation Plans
The following table sets forth information as of October 14, 2003 regarding our
existing compensation plans and individual compensation arrangements pursuant to
which our equity securities are authorized for issuance to employees or
non-employees (such as directors, consultants and advisors) in exchange for
consideration in the form of services:
- ------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
- ------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders
1998 Stock Option Plan 995,500 $6.68 0
2000 Stock Option Plan 1,774,500 $8.90 225,500
2002 Stock Option Plan 3,825,159 $3.78 174,841
--------- ----- -------
Total 6,595,159 $4.38 400,341
- ------------------------------------------------------------------------------------------------------------
Equity compensation 0 0 0
plans not approved by
security holders
- ------------------------------------------------------------------------------------------------------------
Total 6,595,139 $4.38 253,341
- ------------------------------------------------------------------------------------------------------------
Dividends
We have not paid dividends on our common stock in the past and have no present
intention of paying dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In the fiscal year ended July 31, 2003 and the subsequent interim period ended
October 14, 2003, we sold common stock and other securities in transactions in
reliance upon exemptions from the registration requirements of the Securities
Act of 1933 as follows:
o In November 2002 and March 2003, we issued an aggregate of 100,000
shares of common stock to two financial consultants as compensation for
services rendered. We recognized an aggregate expense of $133,000 in
connection with these shares. The expense amount was determined by
attributing to each share the market price on the date of issuance. We
relied on Section 4(2) of the Securities Act of 1933 in issuing these
shares. The issuances were not part of a public offering, the shares
bore restrictive legends, and each of the financial consultants had
sufficient sophistication in financial affairs so as to not require the
protection of the Securities Act of 1933.
34
o Effective May 13, 2003, we offered all holders of our outstanding
warrants the opportunity to exercise their warrants at a reduced price
of $1.50 per share on or before June 12, 2003. After June 12, 2003 the
exercise price on all of the unexercised warrants reverted to the price
stated in the original warrant. In addition, any holder exercising a
reduced-priced warrant was entitled to receive a new warrant with an
exercise price equal to the greater of one half of the original
exercise price of the prior warrant or the market price on the day the
prior warrant was exercised. We received gross proceeds of
approximately $2,300,000 from this offer as holders elected to exercise
warrants for 1,531,001 shares within the reduced price period. We
issued new warrants exercisable for 1,635,121 shares, with exercise
prices calculated in the manner stated above, to holders who exercised
their original warrants within the reduced price period. The exercise
price of the new warrants ranged from a high of $6.50 to a low of
$1.25. The number of new warrants exceeds the number of shares issued
on exercise of old warrants because some old warrants included
"cashless" or "net" exercise provisions. We relied on Section 4(2) of
the Securities Act and Rule 506 of Regulation D promulgated thereunder
in issuing the shares and warrants without registration under the
Securities Act of 1933.
o On May 29, 2003, we completed a private placement sale of 2,926,301
units of securities ("Units") for cash at a price of $1.15 per Unit to
9 accredited investors. Each Unit consisted of one share of our common
stock and a warrant to purchase four tenths of one share (0.4 shares)
of our common stock at an exercise price of $1.71 per share, with a
three-year exercise period. We raised $3,365,250, with net proceeds to
us of approximately $3,100,000, in the private placement. The Shemano
Group, a San Francisco investment banking firm, acted as the placement
agent and received an aggregate commission of $235,568 and warrants to
purchase 99,000 shares of our common stock at an exercise price of
$1.71 per share. We relied on Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder in issuing the Units,
shares and warrants without registration under the Securities Act of
1933.
o On June 10, 2003, we completed the private placement sale of 666,667
units of securities ("Units") for cash to one accredited investor at a
price of $1.50 per Unit. Each Unit consisted of one share of our common
stock and one warrant to purchase one share of our common stock at an
exercise price of $1.80 per share, with a three-year exercise period.
We raised $1,000,000 in the private placement. No commissions or
similar fees were paid in connection with this transaction. We relied
on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder in issuing the Units, shares and warrants
without registration under the Securities Act of 1933.
o On August 8, 2003, we acquired all of the outstanding capital stock of
Antigen Express, Inc. pursuant to an Agreement and Plan of Merger.
Pursuant to the merger agreement, Antigen became our wholly-owned
subsidiary. We issued approximately 2,800,000 shares of our common
stock to the former shareholders of Antigen in exchange for the all of
the outstanding shares of capital stock of Antigen. No commissions or
similar fees were paid in connection with this transaction. We relied
on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder in issuing these shares without registration
under the Securities Act of 1933.
35
Item 6. 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 on Form 10-K. Our financial statements for the
year ended July 31, 2003 were audited by BDO Dunwoody, LLP. Our financial
statements for the years ended July 31, 2002 and 2001 were audited by Deloitte &
Touche LLP. Our financial statements for the year ended July 31, 2000 and 1999
were audited by WithumSmith+Brown.
In thousands, except per share data
Year Ended July 31,
-------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating Results:
- ------------------
Revenue -- -- $ 1,000 -- --
Net Loss $(13,262) $(13,693) $(27,097) $(8,841) $(6,240)
Net Loss Available to $(14,026) $(14,414) $(27,097) $(8,841) $(6,240)
Common Stockholders
Cash Dividends per share -- -- -- -- --
Common Stockholders
Loss per Common Share:
- ----------------------
Basic and Diluted Net Loss (.67) (.70) (1.44) (.58) (.47)
Per Common Share
Financial Positions:
- --------------------
Total Assets $ 22,639 $ 28,161 $ 42,666 $10,341 $8,890
Long-Term Debt $ 1,895 $ 663 $ 693 $ 722 $ 996
Series A, Preferred Stock $ 13,501 $ 12,736 $ 12,015 -- --
Stockholder's Equity $ 5,857 $ 12,863 $ 27,307 $ 8,415 $ 7,310
36
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.
In August 2003, we acquired Antigen Express, Inc. Antigen is engaged in the
research and development of technologies and immunomedicines for the treatment
of malignant, infectious, autoimmune and allergic diseases. For details about
the this acquisitions, See "Developments Subsequent to Fiscal 2003" below.
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.
37
Our first product is an insulin formulation that is administered as a fine spray
into the oral cavity using a hand-held aerosol spray applicator. Between January
1999 and September 2000, we conducted limited clinical trials on this product in
the United States, Canada, Europe and Ecuador. In September 2000, we entered
into an agreement to develop this product with Eli Lilly and Company ("Lilly").
To date, over 750 patients with diabetes have been dosed with our oral insulin
product at approved facilities in seven countries. We have conducted several
clinical trials with insulin supplied by Lilly under our agreement. Lilly did
not, however, authorize or conduct any clinical trials or provide financial
support for those trials. We did receive a $1,000,000 up front payment from
Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end the
development and license agreement for the development and commercialization of
buccal delivery of insulin. We are currently negotiating terms for Lilly to
continue to supply a specified amount of insulin for further development of our
product. We will retain all of the intellectual property and commercialization
rights with respect to the buccal spray drug delivery technology, and we will
have the continuing right to develop and commercialize the product.
In January 2001, we established a joint venture with Elan International
Services, Ltd. ("EIS"), a wholly owed subsidiary of Elan Corporation, plc (EIS
and Elan Corporation, plc being collectively referred to as "Elan"). The joint
venture will pursue the application of certain of our and Elan's drug delivery
technologies, including our platform technology for the buccal delivery of
pharmaceutical products, for the treatment of prostate cancer, endometriosis
and/or the suppression of testosterone and estrogen. In January 2002, the
parties expanded the joint venture to include buccal morphine for the management
of pain and selected buccal morphine as the initial product for development
under Generex (Bermuda) Ltd. This expansion of the joint venture occurred after
we successfully completed a proof of concept clinical study of morphine delivery
using our proprietary buccal delivery technology.
In connection with the joint venture, EIS purchased 1,000 shares of a new series
of our preferred stock, designated as Series A Preferred Stock, for $12,015,000.
We applied the proceeds from the sale of the Series A Preferred Stock to
subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS
paid in capital of $2,985,000 to subscribe for a 19.9% equity interest in
Generex (Bermuda), Ltd. While we initially own 80.1% of the joint venture
entity, EIS has the right, subject to certain conditions, to increase its
ownership up to 50% by exchanging the Series A Preferred Stock for 30.1% of our
interest in the joint venture entity. In January 2002 and 2003, pursuant to the
terms of the agreement with EIS, EIS received a 6% stock dividend of Series A
Preferred Stock.
Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal
delivery technology and certain Elan drug delivery technologies. Using the funds
from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable
license fee of $15,000,000 to Elan in consideration for being granted the rights
to utilize the Elan drug delivery technologies.
EIS also purchased 344,116 shares of our common stock for $5,000,000. We may use
the proceeds of this sale for any corporate purpose. If the joint venture
achieves certain milestones, we may require EIS to purchase an additional
$1,000,000 of our common stock at a 30% premium to the then prevailing fair
market value of our common stock.
38
Our new subsidiary Antigen is engaged in research and development of
technologies and immunomedicines for the treatment of malignant, infectious,
autoimmune and allergic diseases. Our immunomedicine products work by
stimulating the immune system to either attack offending agents (i.e., cancer
cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self
proteins and allergens). Our immunomedicine products are based on two platform
technologies that were discovered by an executive officer of Antigen, the Ii-Key
hybrid peptides and Ii-Suppression. Our immunomedicine products are in the
pre-clinical stage of development and trials in human patients are not expected
for 12 months. Development efforts are underway in melanoma, breast cancer,
prostate cancer, HIV and Type I diabetes. We are establishing collaborations
with academic centers to advance the technology, with the ultimate goal of
conducting clinical testing.
We do not expect to receive any revenues from product sales in the current
fiscal year. We expect, however, to satisfy all of our cash needs during the
current year from capital raised through prior equity financing.
Disclosure Regarding Research and Development Projects
- ------------------------------------------------------
Our major research and development projects are the refinement of our basic
buccal delivery technology, our buccal insulin project and our buccal morphine
product.
Both our insulin product and our morphine product are in clinical trials. In
Canada, we have recently begun Phase II-B trials for insulin. In order to obtain
FDA and Canadian HPB approval for any of our product candidates, we will be
required to complete "Phase III" trials which involve testing our product with a
large number of patients over a significant period of time. The conduct of Phase
III trials will require significantly greater funds than we either have on hand
or have in experience in raising in any year or two years' time. We will
therefore need to receive funding from a corporate collaborator, or engage in
fundraising on a scale with which we have no experience.
Because of various uncertainties, we cannot predict the timing of completion of
our buccal insulin or buccal morphine products. These uncertainties include the
success of current studies, our ability to obtain the required financing and the
time required to obtain regulatory approval even if our research and development
efforts are completed and successful. For the same reasons, we cannot predict
when any products may begin to produce net cash inflows.
Most of our research and development activities to date have involved developing
our platform technology for use with insulin and morphine. Insubstantial amounts
have been expended on projects with other drugs, and those projects involved a
substantial amount of platform technology development. Therefore, in the past,
we have not made significant distinctions in the accounting for research and
development expenses among products, as a significant potion of all research has
involved improvements to the platform technology in connection with insulin,
which may benefit all our potential products. In the fiscal year ended July 31,
2003, approximately 94% of our $5,150,075 in research expenses was attributable
to insulin and platform technology development, and approximately 5.5% was
attributable to morphine and fentanyl projects. As morphine and fentanyl are
both narcotic painkillers, the research is related. In the fiscal year ended
July 31, 2002, approximately 98% of our $6,618,820 of research and development
was expended for insulin and platform technology, and approximately 1.6% for
morphine and fentanyl.
39
Developments in Fiscal 2003
- ---------------------------
In August 2002, we purchased approximately $1.6 million of property for
investment purposes, which is included at book value in assets held for
investment, net. The property is situated in the same location as our pilot
plant. In conjunction with the purchase, we incurred approximately $1.21 million
of additional long-term debt based upon exchange rates in effect during the
period. The debt is held by a Canadian Chartered Bank (the "Bank") and the
seller. As of July 31, 2003, approximately $804,000 is due to the Bank and is to
be repaid in 35 monthly principal installments of approximately $4,760 plus
interest, with final payment of the remaining principal balance due on the 36th
month. The loan bears interest at a fixed rate of 5.8% per annum, and is secured
by the property acquired, assignment of rental income of the property, funds on
deposit of approximately $189,000 and a general guarantee by us. The guarantee
is limited to $1.2 million Canadian Dollars (approximately $857,000), and is
extended for as long as a balance is outstanding on the original loan. As of
July 31, 2003, approximately $357,000 is due to the seller with monthly interest
payments at 10% per annum for 24 months with the principal due on July 31, 2004
and which is subordinated to the amount due to the Bank. We intend to hold this
property for investment purposes and collect rental income. Included in income
from rental operations, net is $252,416 of rental income and $231,626 of rental
expenses, including interest charges of $77,033, for the fiscal year ended July
31, 2003.
Developments Subsequent to Fiscal 2003
- --------------------------------------
In August 2003, we acquired all of the outstanding capital stock of Antigen
pursuant to an Agreement and Plan of Merger (the "Merger Agreement") between us,
Antigen and AGEXP Acquisition, Inc. ("AGEXP"), our wholly owned subsidiary that
was formed for purposes of the transaction. Pursuant to the Merger Agreement:
o AGEXP merged with and into Antigen (the "Merger");
o Antigen became our wholly owned subsidiary; and
o all of the former shareholders Antigen are entitled to receive shares of
our common stock in exchange for their shares of Antigen capital stock.
Antigen has facilities and its headquarters located at Worcester, Massachusetts.
Antigen is engaged in research and development to develop immunomedicines for
the treatment of malignant, infectious, autoimmune and allergic diseases.
Antigen's potential products are based on two platform technologies (Ii-Key
hybrid peptides and Ii-Suppression) discovered by an officer of Antigen.
40
The Merger Agreement provides that each holder of Antigen common stock and each
holder of each of the four outstanding series of Antigen preferred stock will
receive shares of our common stock for each share of Antigen common stock or
preferred stock held by such holder. The Merger Agreement establishes exchange
rates for the conversion of Antigen common and the various series of preferred
stock into our common stock. Assuming that no Antigen stockholder exercises
appraisal rights, an aggregate of approximately 2,800,000 shares of our common
stock will be issued to the former Antigen stockholders in connection with the
Merger. In addition, pursuant to the Merger Agreement, we assumed Antigen common
stock purchase options. If these options are fully exercised, the option holders
will receive 112,400 shares of our common stock.
The shares of our common stock issued in connection with the Merger will be
restricted securities. However, we have undertaken to register the shares for
resale.
We have committed to funding at least $2,000,000 for Antigen's research and
development projects in the next two years.
Restatement
Subsequent to the issuance of its financial statements for the year ended July
31, 2001, management determined that its Series A Preferred stock should be
reclassified from stockholders' equity, in accordance with Emerging Issues Task
Force Topic D-98, "Classification and Measurement of Redeemable Securities,"
because the redemption feature of the Series A Preferred stock is beyond our
control. This restatement did not affect net loss for the year ended July 31,
2001, nor did it affect total assets. The Series A Preferred stock should have
been included outside the statement of stockholders' equity from the date of its
issuance in January 2001.
Results of Operations -- 2003 Compared with 2002
We had a net loss of $13,261,764 for the year ended July 31, 2003 (fiscal 2003)
compared to a loss of $13,693,034 in the year ended July 31, 2002 (fiscal 2002).
The net loss for fiscal 2003 and 2002 excludes $764,154 and $720,900,
respectively in preferred stock dividend on preferred shares. The decrease in
our fiscal 2003 net loss resulted from a decrease in research and development
expenses (to $5,150,075 from $6,618,820) that was offset in part by an increase
in general and administrative expenses (to $8,698,615 from $7,911,626)
The increase in general and administrative expenses for fiscal 2003 reflects the
issuance of common stock, options and warrants to employees, consultants and
advisors for services rendered that resulted in an increase in non-cash charges
of $882,698 (to $1,313,585 from $430,887). The increase in general and
administrative expenses was partially offset by a decrease in legal and
litigation expenses and a reduction in travel expenses. The decrease in research
and development expenses for fiscal 2003 reflects the decreased level of
research and development activities under our collaboration with Elan and under
the collaboration with Lilly, which terminated in May 2003.
Our interest and miscellaneous income (net of interest expense) in fiscal 2003
decreased to $565,511 from $784,852 in fiscal 2002 due to decreases in our cash
and short-term investments and lower interest rates. We received income from
rental operations (net of expense) of $20,790 in fiscal 2003. We did not receive
any revenues in fiscal 2003.
41
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 ($2,239,431 in fiscal 2003 and
$1,144,252 in fiscal 2002) were paid partially through the issuance of common
stock and/or warrants and options to purchase common stock.
In addition, in fiscal 2003, the minority shareholder's share of the loss
generated by Generex (Bermuda), Ltd., was $625 as compared to a $52,560 in
fiscal 2002.
Results of Operations -- 2002 Compared with 2001
We had a net loss of $13,693,034 for the year ended July 31, 2002 (fiscal 2002)
compared to a loss of $27,097,210 in the year ended July 31, 2001 (fiscal 2001).
The net loss for fiscal 2002 excludes $720,900 in preferred stock dividend on
preferred shares. No preferred stock dividend was payable in fiscal 2001. The
decrease in our fiscal 2002 net loss resulted from decreases in research and
development expenses (to $6,618,820 from $19,929,799) and general and
administrative expenses (to $7,911,626 from $12,507,740).
The decrease in our expenses was partially offset by a decrease in interest and
other income. Our interest and miscellaneous income (net of interest expense) in
fiscal 2002 decreased to $784,852 from $1,355,329 in fiscal 2001 due to
decreases in our cash and short-term investments. We did not receive any
revenues in fiscal 2002. In fiscal 2001, we received $1,000,000 in revenue from
our agreement with Lilly.
The principal reasons for the decrease in our research and development expense
from fiscal 2002 to 2001 resulted from the accounting treatment for our joint
venture with Elan, which resulted in a $15,000,000 research and development
expense for the license fee paid by Generex (Bermuda) Ltd. to Elan for
technology rights in 2001 (our consolidated net loss, which includes this
expense, however, was partially offset by approximately $2.9 million of minority
interest, reflecting Elan's 19.9% ownership interest in the joint venture).
Our general and administrative expenses decreased due to reductions in various
categories of these expenses, including a reduction of approximately $4,000,000
in financial services expenses principally due to a decrease in the number and
value of compensatory warrants and options issued and a reduction of
approximately $700,000 in the amount of consulting fees paid.
Our expense reductions were partially offset by an increase in executive
compensation of approximately $900,000 and small increases in other expense
categories.
In both fiscal 2002 and 2001, 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 ($1,144,252 in fiscal 2002 and $5,100,361 in fiscal
2001) were paid partially through the issuance of shares of common stock and/or
warrants and options to purchase common stock.
42
In addition, in fiscal 2002, the minority shareholder's share of the loss
generated by Generex (Bermuda), Ltd., was $52,560 as compared to a $2,985,000
minority interest share of loss in fiscal 2001.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. It requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
We consider certain accounting policies related to impairment of long-lived
assets, intangible assets and accrued liabilities to be critical to our business
operations and the understanding of our results of operations:
Impairment of Long-Lived Assets. We review for impairment whenever events or
changes in circumstances indicate that the carrying amount of property and
equipment may not be recoverable under the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." If it is determined that an impairment loss has occurred
based upon expected future cash flows, the loss is recognized in the Statement
of Operations.
Intangible Assets. We have intangible assets related to patents. The
determination of the related estimated useful lives and whether or not these
assets are impaired involves significant judgments. In assessing the
recoverability of these intangible assets, we use an estimate of undiscounted
operating income and related cash flows over the remaining useful life, market
conditions and other factors to determine the recoverability of the asset. If
these estimates or their related assumptions change in the future, we may be
required to record impairment charges against these assets.
Estimating accrued liabilities, specifically litigation accruals. Our current
estimated range of liabilities related to pending litigation is based on
management's best estimate of future costs. While the final resolution of the
litigation could result in amounts different than current accruals, and
therefore have an impact on our consolidated financial results in a future
reporting period, we believe the ultimate outcome will not have a significant
effect on our consolidated results of operations, financial position or cash
flows.
43
Liquidity and Capital Resources
To date we have financed our development stage activities primarily through
private placements of common stock. In the fourth quarter of fiscal 2003, we
raised an aggregate of approximately $6.5 million from private placements and
from exercise of outstanding warrants. In fiscal 2003 we granted stock options,
warrants and shares of common stock to employees, consultants and advisors with
a value of $1,313,585 for services rendered, all of which are included in
general and administrative expenses. In September 2001, we began a program to
repurchase up to $1 million of our common stock from the open market. Through
July 31, 2003, we repurchased a total of 149,500 shares of common stock to be
held in treasury for $483,869, at an average price of $3.24 per share.
Notwithstanding the repurchase of additional 53,000 shares of common stock, our
net loss resulted in a decrease in stockholders' equity to $5,856,965 at July
31, 2003, versus $12,862,592 at July 31, 2002.
At July 31, 2003, we had on hand cash and short term investments (primarily
notes of U.S. corporations) of approximately $14.7 million versus approximately
$21 million at July 31, 2002.
We believe that our current cash position is sufficient to meet all 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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Transactions with Affiliates
On May 3, 2001, we advanced $334,300 to each of three senior officers, who are
also our shareholders, in exchange for promissory notes. These notes bore
interest at 8.5 percent per annum and were payable in full on May 1, 2002. These
notes were guaranteed by a related company owned by these officers and secured
by a pledge of 2,500,000 shares of our common stock owned by this related
company. On June 3, 2002, our Board of Directors extended the maturity date of
the loans to October 1, 2002. The other terms and conditions of the loans and
guaranty remained unchanged and in full force and effect. As of July 31, 2002,
the balance outstanding on these notes, including accrued interest, was
$1,114,084. Pursuant to a decision made by the Compensation Committee as of
August 30, 2002, these loans were satisfied through the application of 592,716
shares of pledged stock, at a value of $1.90 per share, which represented the
lowest closing price during the sixty days prior to August 30, 2002.
44
Prior to January 1, 1999, a portion of our general and administrative expenses
resulted from transactions with affiliated persons, and a number of capital
transactions also involved affiliated persons. Although these transactions were
not the result of "arms-length" negotiations, we do not believe that this fact
had a material impact on our results of operations or financial position. Prior
to December 31, 1998, we classified certain payments to executive officers for
compensation and expense reimbursements as "Research and Development - related
party" and "General and Administrative - related party" because the executive
officers received such payments through personal services corporations rather
than directly. After December 31, 1998, these payments have been and will
continue to be accounted for as though the payments were made directly to the
officers, and not as a related party transaction. We do not foresee a need for,
and therefore do not anticipate, any related party transactions in the current
fiscal year.
On August 7, 2002, we purchased real estate with an aggregate purchase price of
approximately $1.6 million from an unaffiliated party. In connection with that
transaction, Angara Enterprises, Inc., a licensed real estate broker that is an
affiliate of Anna Gluskin, received a commission from the proceeds of the sale
to the seller in the amount of 3% of the purchase price, or $45,714. We believe
that this is less than the aggregate commission which would have been payable if
a commission had been negotiated with an unaffiliated broker on an arm's length
basis.
We utilize a management company to manage all of our real properties. The
property management company is owned by Rose Perri, Anna Gluskin and the estate
of Mark Perri, our former Chairman of the Board. For the fiscal years ended July
31, 2003, 2002 and 2001, we have paid the management company $33,237, $37,535
and $38,450, respectively, in management fees.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 also
addresses the measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets.
Intangible assets previously recorded in the Company's financial statements will
be affected by the provisions of SFAS No. 142. This statement provides that
intangible assets with finite useful lives be amortized and that intangible
assets with indefinite lives and goodwill will not be amortized, but will rather
be tested at least annually for impairment. SFAS No. 142 became effective for
the Company's current fiscal year. The adoption of this statement did not have a
significant effect on the Company's consolidated financial position or results
of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires companies to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred, which is adjusted to its present value each period. In addition,
companies must capitalize a corresponding amount by increasing the carrying
amount of the related long-lived asset, which is depreciated over the useful
life of the related asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of this statement did not have a significant
effect on the Company's consolidated financial position or results of
operations.
45
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business. SFAS No. 144 establishes a single accounting model for
assets to be disposed of by sale whether previously held and used or newly
acquired. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001 and the interim periods within. The adoption of this statement did not
have a significant impact on the Company's consolidated financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which supercedes Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and requires that a
liability be recognized when it is incurred and should initially be measured and
recorded at fair value. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of this
statement did not have an impact on the Company's consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which amends SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation, and requires disclosure about those effects
in both annual and interim financial statements. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did
not have a significant impact on the Company's consolidated financial position
or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities". FIN No. 46 clarifies the application of
Accounting Research Bulletin No. 51 for certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No. 46
applies to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the second quarter of fiscal 2004 to variable interest
entities in which the Company may hold a variable interest that it acquired
before February 1, 2003. The provisions of FIN No. 46 require that the Company
immediately disclose certain information if it is reasonably possible that the
Company will be required to consolidate or disclose variable interest entities
when FIN No. 46 becomes effective. The Company has determined that it does not
have a significant interest in such entities requiring the related disclosure
based on its preliminary analysis and assessment.
46
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The changes are intended to improve financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. Additionally, those changes are expected to result in more consistent
reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149
is effective for contracts and hedging relationships entered into or modified
after June 30, 2003, and for provisions that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, apply in accordance with their respective effective
dates. The adoption of this statement did not have a significant effect on the
Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. It also
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatorily redeemable financial instruments of nonpublic
entities. It is to be implemented by reporting a cumulative effect of a change
in an accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim period
of adoption. Restatement is not permitted. The Company's initial adoption of
this statement on August 1, 2003, will require the reclassification of its
Series A, Preferred stock to long-term liabilities within its Consolidated
Balance Sheets. Additionally, on a prospective basis, the mandatory dividends
will be classified as Interest expense within its Consolidated Statements of
Operations.
47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks associated with changes in the exchange rates
between U.S. and Canadian currencies and with changes in the interest rates
related to our fixed rate debt. We do not believe that any of these risks will
have a material impact on our financial condition, results of operations and
cash flows.
At the present time, we maintain our cash in short term government or government
guaranteed instruments, short term commercial paper, interest bearing bank
deposits or demand bank deposits which do not earn interest. A substantial
majority of these instruments and deposits are denominated in U.S. dollars, with
the exception of funds denominated in Canadian dollars on deposit in Canadian
banks to meet short term operating needs in Canada. At the present time, with
the exception of professional fees and costs associated with the conduct of
clinical trials in the United States and Europe, substantially all of our
operating expense obligations are denominated in Canadian dollars. We do not
presently employ any hedging or similar strategy intended to mitigate against
losses that could be incurred as a result of fluctuations in the exchange rates
between U.S. and Canadian currencies.
As of July 31, 2003, we have fixed rate debt totaling $1,895,475, of which
$804,325, $551,859 and $539,291 bears interest at a fixed rate of 5.8%, 9.7% and
10%, respectively. These debt instruments mature from July 2004 through October
2005. As our fixed rate debt mature, we will likely refinance such debt at their
existing market interest rates which may be more or less than interest rates on
the maturing debt. Since this debt is fixed rate debt, if interest rates were to
increase 100 basis points prior to maturity, there would be no impact on
earnings or cash flows.
We have neither issued nor own any long term debt instruments, or any other
financial instruments, for trading purposes and as to which we would be subject
to material market risks.
48
Item 8. Financial Statements and Supplementary Data
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports F1 - F2
Consolidated Balance Sheets
July 31, 2003 and 2002 F3
Consolidated Statements of Operations
For the Years Ended July 31, 2003, 2002 and 2001
and Cumulative From Inception to July 31, 2003 F4
Consolidated Statements of Changes in Stockholders' Equity
For the Period November 2, 1995 (Date of Inception)
to July 31, 2003 F5 - F14
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2003, 2002 and 2001
and Cumulative From Inception to July 31, 2003 F15
Notes to Consolidated Financial Statements F16 - F39
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
Generex Biotechnology Corporation
(A Development Stage Company)
We have audited the consolidated balance sheet of Generex Biotechnology
Corporation (a development stage company) as at July 31, 2003 and the
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended and for the period from November 2, 1995 (date of
inception) to July 31, 2003. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. We did not audit the
consolidated financial statements of Generex Biotechnology Corporation for the
period from November 2, 1995 (date of inception) to July 31, 2002. Such
statements are included in the cumulative inception to July 31, 2003 totals on
the consolidated statements of operations and cash flows and reflect a net loss
of 83% of the related cumulative total. Those statements were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to amounts for the period from November 2, 1995 (date of inception) to
July 31, 2003 included in the cumulative totals, is based solely upon the report
of the other auditors.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide
a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, these
consolidated financial statements present fairly, in all material respects, the
financial position of Generex Biotechnology Corporation (a development stage
company) as at July 31, 2003 and the results of its operations and its cash
flows for the year then ended and for the period from November 2, 1995 (date of
inception) to July 31, 2003 in conformity with United States generally accepted
accounting principles.
/s/ BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
September 22, 2003
F1
Independent Auditors' Report
To the Board of Directors and Stockholders of
Generex Biotechnology Corporation:
We have audited the accompanying consolidated balance sheet of Generex
Biotechnology Corporation and subsidiaries (a development stage company) as of
July 31, 2002 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended July 31, 2002 and 2001.
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an 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, based on our audits, such financial statements present fairly,
in all material respects, the financial position of the Company as at July 31,
2002 and the results of its operations and its cash flows for the years ended
July 31, 2002 and 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche, LLP
Chartered Accountants
Toronto, Ontario
October 7, 2002
F2
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
July 31,
-----------------------------------
2003 2002
---------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 12,356,578 $ 8,131,463
Restricted cash 188,967 --
Short-term investments 2,362,071 12,862,757
Officers' loans receivable -- 1,114,084
Miscellaneous receivables -- 12,493
Other current assets 319,293 221,629
---------------- ---------------
Total Current Assets 15,226,909 22,342,426
Property and Equipment, Net 4,218,832 4,033,094
Assets Held For Investment, Net 1,906,312 --
Patents, Net 898,876 830,142
Deposits 25,000 632,401
Due From Related Party 362,779 322,685
---------------- ---------------
TOTAL ASSETS $ 22,638,708 $ 28,160,748
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,386,214 $ 1,898,943
Current maturities of long-term debt 426,767 172,453
---------------- ---------------
Total Current Liabilities 1,812,981 2,071,396
Long Term Debt, Less Current Maturities 1,468,708 490,860
Commitments and Contingencies (Note 8)
Series A, Preferred stock, $.001 par value; authorized 1,000,000
shares, issued and outstanding 1,123 and 1,060 at July 31, 2003
and 2002, respectively 13,500,054 12,735,900
Stockholders' Equity:
Special Voting Rights Preferred stock, $.001 par value; authorized,
issued and outstanding 1,000 shares at July 31, 2003 and 2002 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued 26,017,524 and 20,697,326 shares at July 31, 2003
and 2002, respectively, and outstanding 25,275,308 and
20,600,826 shares at July 31, 2003 and 2002, respectively 26,017 20,697
Treasury stock, at cost; 742,216 and 96,500 shares of common
stock at July 31, 2003 and 2002, respectively (1,610,026) (395,531)
Additional paid-in capital 85,065,980 77,220,231
Notes receivable - common stock (359,998) (336,885)
Deficit accumulated during the development stage (77,353,787) (63,327,869)
Accumulated other comprehensive (loss) income 88,778 (318,052)
---------------- ---------------
Total Stockholders' Equity 5,856,965 12,862,592
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,638,708 $ 28,160,748
================ ===============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F3
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
For the Years Ended November 2,
July 31, 1995 (Date of
------------------------------------------------ Inception) to
2003 2002 2001 July 31, 2003
------------- ------------- -------------- -------------
Revenues $ -- $ -- $ 1,000,000 $ 1,000,000
Operating Expenses:
Research and development 5,150,075 6,618,820 19,929,799 38,644,730
Research and development - related party -- -- -- 220,218
General and administrative 8,698,615 7,911,626 12,507,740 43,581,771
General and administrative - related party -- -- -- 314,328
------------- ------------- -------------- -------------
Total Operating Expenses 13,848,690 14,530,446 32,437,539 82,761,047
------------- ------------- -------------- -------------
Operating Loss (13,848,690) (14,530,446) (31,437,539) (81,761,047)
Other Income (Expense):
Miscellaneous income 94,376 15,995 10,664 128,941
Income (loss) from rental operations, net 20,790 -- -- 20,790
Interest income 543,336 833,167 1,417,847 3,122,348
Interest expense (72,201) (64,310) (73,182) (417,950)
------------- ------------- -------------- -------------
Net Loss Before Undernoted (13,262,389) (13,745,594) (30,082,210) (78,906,918)
Minority Interest Share of Loss 625 52,560 2,985,000 3,038,185
------------- ------------- -------------- -------------
Net Loss (13,261,764) (13,693,034) (27,097,210) (75,868,733)
Preferred Stock Dividend 764,154 720,900 -- 1,485,054
------------- ------------- -------------- -------------
Net Loss Available to Common Stockholders $ (14,025,918) $ (14,413,934) $ (27,097,210) $ (77,353,787)
============= ============= ============== =============
Basic and Diluted Net Loss Per Common
Share $ (.67) $ (.70) $ (1.44)
============= ============= ==============
Weighted Average Number of Shares of
Common Stock Outstanding 20,885,164 20,660,079 18,769,077
============= ============= ==============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F4
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury
Stock Stock Stock Additional
----- ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- --------- ----------- ----------- --------- ---------- -----------
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
======== ========= =========== =========== ======== ======= ===========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholder'
Stock Stage Income (Loss) Equity
------------- --------------- ---------------- ---------------
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) - (693,448) (4,017) (697,465)
------- ----------- ------------ ---------------
Balance, July 31, 1996 $ - $ (693,448) $ (4,017) $ 2,015,624
======= =========== ============ ===============
F-5
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury
Stock Stock Stock Additional
----- ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- --------- ----------- ----------- --------- ---------- -----------
Balance, August 1, 1996 - $ - 4,587,764 $ 4,588 - $ - $ 2,708,501
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, $.0512 - - 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 - - 16,222
Issuance of common stock for cash,
June 1997, $8.9810 - - 29,579 30 - - 265,618
Issuance of common stock for cash,
June 1997, $10.0978 - - 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
======== ====== =========== =========== ======== ======= ===========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholder'
Stock Stage Income (Loss) Equity
------------- --------------- ---------------- --------------
Balance, August 1, 1996 $ - $ (693,448) $ (4,017) $ 2,015,624
Issuance of common stock for cash,
September 1996, $.0509 - - - 109
Issuance of common stock for cash,
December 1996, $10.2421 - - - 14,636
Issuance of common stock for cash,
January 1997, $.0518 - - - 76
Issuance of common stock for cash,
March 1997, $10.0833 - - - 121
Issuance of common stock for cash,
May 1997, $.0512 - - - 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, $10.0978 - - - 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) (1,379,024) 3,543 (1,375,481)
-------- -------------- ---------- ------------
Balance, July 31, 1997 $ - $ (2,072,472) $ (474) $ 3,448,836
======== ============== ========== ============
F6
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury
Stock Stock Stock Additional
----- ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- --------- ----------- ----------- --------- ---------- -----------
Balance, August 1, 1997 - $ - 9,000,118 $ 9,000 - $ - $ 5,512,782
Issuance of warrants in exchange for
services rendered, October 1997, $.50 - - - - - - 234,000
Issuance of common stock in exchange
for services rendered, December 1997,
$0.05 - - 234,000 234 - - 10,698
Issuance of SVR Preferred Stock in
exchange for services rendered,
January 1998, $.001 1,000 1 - - - - 99
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 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 common stock in exchange
for services rendered, May 1998, $2.50 - - 162,000 162 - - 404,838
Issuance of warrants in exchange for
services rendered, May 1998, $.60 - - - - - - 300,000
Issuance of common stock for cash, June
1998, $2.50 - - 286,000 286 - - 714,714
Exercise of warrants for cash, June
1998, $0.0667 - - 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 1,000 $ 1 11,971,272 $ 11,971 - $ - $ 9,565,836
======== ========= =========== =========== ======== ======= ===========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholder'
Stock Stage Income (Loss) Equity
------------- --------------- ---------------- --------------
Balance, August 1, 1997 $ - $ (2,072,472) $ (474) $ 3,448,836
Issuance of warrants in exchange for
services rendered, October 1997, $.50 - - - 234,000
Issuance of common stock in exchange
for services rendered, December 1997,
$0.05 - - - 10,932
Issuance of SVR Preferred Stock in
exchange for services rendered,
January 1998, $.001 - - - 100
Shares issued pursuant to the January 9,
1998 reverse merger between GBC-Delaware, Inc.
and Generex Biotechnology Corporation - - - -
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 common stock in exchange
for services rendered, May 1998, $2.50 - - - 405,000
Issuance of warrants in exchange for
services rendered, May 1998, $.60 - - - 300,000
Issuance of common stock for cash, June
1998, $2.50 - - - 715,000
Exercise of warrants for cash, June
1998, $0.0667 - - - 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) (4,663,604) (198,959) (4,862,563)
-------- -------------- ---------- ------------
Balance, July 31, 1998 $ - $ (6,736,076) $ (199,433) $ 2,642,299
======== ============== ========== ============
F7
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury
Stock Stock Stock Additional
----- ----- ----- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- --------- ----------- ----------- --------- ---------- -----------
Balance, August 1, 1998 1,000 $ 1 11,971,272 $ 11,971 - $ - $ 9,565,836
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 in exchange
for services rendered, 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
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,
$5.50 - - 388,375 389 - 1,941,484
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 - - 94,776 95 - - 473,787
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 - - - - - - -
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)
Costs 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 1,000 $ 1 14,740,683 $ 14,741 - $ - $20,903,728
======== ========= =========== =========== ======== ======= ===========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholders'
Stock Stage Income (Loss) Equity
------------ ----------- ------------- ------------
Balance, August 1, 1998 $ - $ (6,736,076) $ (199,433) $2,642,299
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 in exchange
for services rendered, 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
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,
$5.50 - - - 1,941,873
Exercise of warrants in exchange for note
receivable, June 1999, $5.00 (473,882) - - -
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 - - 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)
Costs 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) (6,239,602) 1,393 (6,238,209)
--------- -------------- ---------- -----------
Balance, July 31, 1999 $(434,903) $ (12,975,678) $ (198,040) $ 7,309,849
========= ============== ========== ===========
F-8
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury Additional
Stock Stock Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
------ -------- -------- ------- ------ ------ -----------
Balance, August 1, 1999 1,000 $ 1 14,740,683 $ 14,741 - $ - $20,903,728
Adjustment for exercise of warrants
recorded June 1999, $5.00 - - (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 stock in exchange for services
rendered, January 2000, $5.00 - - 8,100 8 - - 40,492
Granting of stock options for services
rendered, January 2000 - - - - - - 568,850
Granting of warrants for services rendered,
January 2000 - - - - - - 355,500
Exercise of warrants for cash, February
2000, $5.50 - - 2,000 2 - - 10,998
Exercise of warrants for cash, March 2000,
$5.50 - - 29,091 29 - - 159,972
Exercise of warrants for cash, March 2000,
$6.00 - - 2,000 2 - - 11,998
Exercise of 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 of common stock for services,
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 stock options for services
rendered, July 2000 - - - - - - 496,800
Reduction of note receivable in exchange
for services rendered - - - - - - -
Accrued interest on note receivable - - - - - - -
Comprehensive Income (Loss):
Net Loss - - - - - - -
Other comprehensive income (loss):
Currency translation adjustment - - - - - - -
Total Comprehensive Income (Loss)
------ --------- ----------- ----------- -------- ------- -----------
Balance, July 31, 2000 1,000 $ 1 16,326,333 $ 16,327 - $ - $30,435,066
====== ========= =========== =========== ======== ======= ===========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholders'
Stock Stage Income (Loss) Equity
------------ ------------ ------------- ------------
Balance, August 1, 1999 $(434,903) $ (12,975,678) $ (198,040) $ 7,309,849
Adjustment for exercise of warrants
recorded June 1999, $5.00 - - - -
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 stock in exchange for services
rendered, January 2000, $5.00 - - - 40,500
Granting of stock options for services
rendered, January 2000 - - - 568,850
Granting of warrants for services rendered,
January 2000 - - - 355,500
Exercise of warrants for cash, February
2000, $5.50 - - - 11,000
Exercise of warrants for cash, March 2000,
$5.50 - - - 160,001
Exercise of warrants for cash, March 2000,
$6.00 - - - 12,000
Exercise of 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 of common stock for services,
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 stock options for services
rendered, July 2000 - - - 496,800
Reduction of note receivable in exchange
for services rendered 384,903 - - 384,903
Accrued interest on note receivable (4,118) - - (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) (8,841,047) 32,514 (8,808,533)
--------- -------------- ---------- -----------
Balance, July 31, 2000 $ (54,118) $ (21,816,725) $ (165,526) $ 8,415,025
========= ============== ========== ===========
F-9
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury Additional
Stock Stock Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
------- ------- -------- -------- -------- -------- ---------
Balance, August 1, 2000 1,000 $ 1 16,326,333 $16,327 - $ - $30,435,066
Exercise of warrants for cash, August
2000, $6.00 - - 2,000 2 - - 11,998
Issuance of common stock for services
rendered August 2000 - - 35,000 35 - - 411,215
Issuance of warrants in exchange for
equity line agreement, August 2000 - - - - - - 3,406,196
Exercise of warrants for cash, August
2000, $7.50 - - 30,300 30 - - 227,220
Exercise of warrants for cash, August
2000, $8.6625 - - 30,000 30 - - 259,845
Cashless exercise of warrants, August 2000 - - 8,600 9 - - (9)
Exercise of warrants for cash, August
2000, $10.00 - - 10,000 10 - - 99,990
Exercise of warrants for cash, September
2000, $8.6625 - - 63,335 63 - - 548,576
Exercise of warrants for cash, September
2000, $5.50 - - 16,182 16 - - 88,986
Exercise of warrants for cash, September
2000, $6.00 - - 53,087 53 - - 318,470
Exercise of warrants for cash, September
2000, $10.00 - - 9,584 10 - - 95,830
Exercise of warrants for cash, September
2000, $7.50 - - 32,416 32 - - 243,088
Issuance of common stock for cash pursuant
to private placement, October 2000, $11.00 - - 2,151,093 2,151 - - 23,659,872
Exercise of warrants for cash, Oct. 2000,
$6.00 - - 1,000 1 - - 5,999
Financing costs associated with private
placement, October 2000 - - - - - - (1,956,340)
Exercise of warrants for cash, November -
December 2000, $4.25 - - 23,528 23 - - 99,971
Cashless exercise of warrants, December
2000 - - 3,118 3 - - (3)
Exercise of warrants for cash, November -
December 2000, $6.00 - - 22,913 23 - - 137,455
Exercise of warrants for cash, December
2000, $7.00 - - 8,823 9 - - 61,752
Issuance of common stock as employee
compensation, December 2000 - - 8,650 8 - - 100,548
Exercise of warrants for cash, January
2001, $6.00 - - 3,000 3 - - 17,997
Issuance of common stock for cash pursuant
to private placement, January 2001, $14.53 - - 344,116 344 - - 4,999,656
Financing costs associated with private
placement, January 2001 - - - - - - (200,000)
Issuance of common stock pursuant to
litigation settlement, January 2001 - - 2,832 2 - - 21,096
Granting of stock options in exchange for
services rendered, January 2001 - - - - - - 745,000
Granting of stock options in exchange for
services rendered, February 2001 - - - - - - 129,600
Exercise of stock options for cash,
February 2001, $5.00 - - 50,000 50 - - 249,950
Exercise of warrants for cash, March 2001,
$6.00 - - 500 1 - - 2,999
Exercise of stock options in exchange for
note receivable, March 2001 - - 50,000 50 - - 249,950
Issuance of common stock in exchange for
services rendered, March 2001, $5.50 - - 8,000 8 - - 43,992
Granting of stock options in exchange for
services rendered, May 2001 - - - - - - 592,300
Exercise of stock options for cash, June
2001, $5.00 - - 75,000 75 - - 374,925
Exercise of stock options for cash, June
2001, $5.50 - - 12,500 12 - - 68,738
Exercise of warrants for cash, June 2001,
$6.00 - - 4,000 4 - - 23,996
Exercise of stock options for cash, July
2001, $5.00 - - 7,500 8 - - 37,492
Exercise of stock options for cash, July
2001, $5.50 - - 2,500 3 - - 13,747
Exercise of warrants for cash, July 2001,
$6.00 - - 2,000 2 - - 11,998
Issuance of common stock for cash pursuant
to private placement, July 2001, $9.25 - - 1,254,053 1,254 - - 11,598,736
Financing costs associated with private
placement, July 2001 - - - - - - (768,599)
Shares issued in exchange for services
rendered, July 2001, $9.25 - - 23,784 24 - - 219,978
Shares issued for Anti-Dilution
Provisions, July 2001 - - 5,779 6 - - 53,450
Issuance of warrants in exchange for
services rendered, July 2001 - - - - - - 19,134
Accrued interest on note receivable - - - - - - -
Comprehensive Income (Loss):
Net Loss - - - - - - -
Other comprehensive income (loss):
Currency translation adjustment - - - - - - -
Total Comprehensive Income (Loss)
------ ------- ---------- ------- ------ -------- -----------
Balance at July 31, 2001 1,000 $ 1 20,681,526 $20,681 - $ - $76,761,860
====== ======= ========== ======= ====== ======== ===========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholders'
Stock Stage Income (Loss) Equity
----------- -------------- -------------- -------------
Balance, August 1, 2000 $ (54,118) $ (21,816,725) $ (165,526) $8,415,025
Exercise of warrants for cash, August
2000, $6.00 - - - 12,000
Issuance of common stock for services
rendered August 2000 - - - 411,250
Issuance of warrants in exchange for
equity line agreement, August 2000 - - - 3,406,196
Exercise of warrants for cash, August
2000, $7.50 - - - 227,250
Exercise of warrants for cash, August
2000, $8.6625 - - - 259,875
Cashless exercise of warrants, August 2000 - - - -
Exercise of warrants for cash, August
2000, $10.00 - - - 100,000
Exercise of warrants for cash, September
2000, $8.6625 - - - 548,639
Exercise of warrants for cash, September
2000, $5.50 - - - 89,002
Exercise of warrants for cash, September
2000, $6.00 - - - 318,523
Exercise of warrants for cash, September
2000, $10.00 - - - 95,840
Exercise of warrants for cash, September
2000, $7.50 - - - 243,120
Issuance of common stock for cash pursuant
to private placement, October 2000, $11.00 - - - 23,662,023
Exercise of warrants for cash, Oct. 2000,
$6.00 - - - 6,000
Financing costs associated with private
placement, October 2000 - - - (1,956,340)
Exercise of warrants for cash, November -
December 2000, $4.25 - - - 99,994
Cashless exercise of warrants, December
2000 - - - -
Exercise of warrants for cash, November -
December 2000, $6.00 - - - 137,478
Exercise of warrants for cash, December
2000, $7.00 - - - 61,761
Issuance of common stock as employee
compensation, December 2000 - - - 100,556
Exercise of warrants for cash, January
2001, $6.00 - - - 18,000
Issuance of common stock for cash pursuant
to private placement, January 2001, $14.53 - - - 5,000,000
Financing costs associated with private
placement, January 2001 - - - (200,000)
Issuance of common stock pursuant to
litigation settlement, January 2001 - - - 21,098
Granting of stock options in exchange for
services rendered, January 2001 - - - 745,000
Granting of stock options in exchange for
services rendered, February 2001 - - - 129,600
Exercise of stock options for cash,
February 2001, $5.00 - - - 250,000
Exercise of warrants for cash, March 2001,
$6.00 - - - 3,000
Exercise of stock options in exchange for
note receivable, March 2001 (250,000) - - -
Issuance of common stock in exchange for
services rendered, March 2001, $5.50 - - - 44,000
Granting of stock options in exchange for
services rendered, May 2001 - - - 592,300
Exercise of stock options for cash, June
2001, $5.00 - - - 375,000
Exercise of stock options for cash, June
2001, $5.50 - - - 68,750
Exercise of warrants for cash, June 2001,
$6.00 - - - 24,000
Exercise of stock options for cash, July
2001, $5.00 - - - 37,500
Exercise of stock options for cash, July
2001, $5.50 - - - 13,750
Exercise of warrants for cash, July 2001,
$6.00 - - - 12,000
Issuance of common stock for cash pursuant
to private placement, July 2001, $9.25 - - - 11,599,990
Financing costs associated with private
placement, July 2001 - - - (768,599)
Shares issued in exchange for services
rendered, July 2001, $9.25 - - - 220,002
Shares issued for Anti-Dilution
Provisions, July 2001 - - - 53,456
Issuance of warrants in exchange for
services rendered, July 2001 - - - 19,134
Accrued interest on note receivable (10,182) - - (10,182)
Comprehensive Income (Loss):
Net Loss - (27,097,210) - (27,097,210)
Other comprehensive income (loss):
Currency translation adjustment - - (81,341) (81,341)
------------- ----------- -----------
Total Comprehensive Income (Loss) (27,097,210) (81,341) (27,178,551)
--------- ------------- ----------- -----------
Balance at July 31, 2001 $(314,300) $ (48,913,935) $ (246,867) $27,307,440
========= ============= =========== ===========
F-10
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury Additional
Stock Stock Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- -------- -------- -------- -------- -------- ----------
Balance, August 1, 2001 1,000 $ 1 20,681,526 $20,681 - $ - $76,761,860
Exercise of stock options for cash,
August 2001, $5.50 - - 5,000 5 - - 27,495
Purchase of Treasury Stock for cash
October 2001, $3.915 - - - - (10,000) (39,150) -
Issuance of stock options in exchange for
services rendered, December 2001 - - - - - - 25,000
Issuance of common stock as employee
compensation, January 2002 - - 10,800 11 - - 71,161
Preferred stock dividend paid January 2002 - - - - - - -
Purchase of Treasury Stock for cash
February 2002, $4.693 - - - - (31,400) (147,346) -
Issuance of warrants in exchange for
services rendered, March 2002 - - - - - - 202,328
Purchase of Treasury Stock for cash
March 2002, $4.911 - - - - (7,700) (37,816) -
Purchase of Treasury Stock for cash
April 2002, $4.025 - - - - (12,800) (54,516) -
Issuance of stock options in exchange for
services rendered, June 2002 - - - - - - 132,387
Purchase of Treasury Stock for cash
July 2002, $4.025 - - - - (34,600) (116,703) -
Accrued interest on note receivable - - - - - - -
Comprehensive Income (Loss):
Net Loss - - - - - - -
Other comprehensive income (loss):
Currency translation adjustment - - - - - - -
Total Comprehensive Income (Loss)
------ ------- ---------- ------- -------- --------- -----------
Balance at July 31, 2002 1,000 $ 1 20,697,326 $20,697 (96,500) $(395,531) $77,220,231
====== ======= ========== ======= ======== ========= ===========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholders'
Stock Stage Income (Loss) Equity
------------ ------------- ------------- ------------
Balance, August 1, 2001 $ (314,300) $ (48,913,935) $ (246,867) $27,307,440
Exercise of stock options for cash,
August 2001, $5.50 - - - 27,500
Purchase of Treasury Stock for cash
October 2001, $3.915 - - - (39,150)
Issuance of stock options in exchange for
services rendered, December 2001 - - - 25,000
Issuance of common stock as employee
compensation, January 2002 - - - 71,172
Preferred stock dividend paid January 2002 - (720,900) - (720,900)
Purchase of Treasury Stock for cash
February 2002, $4.693 - - - (147,346)
Issuance of warrants in exchange for
services rendered, March 2002 - - - 202,328
Purchase of Treasury Stock for cash
March 2002, $4.911 - - - (37,816)
Purchase of Treasury Stock for cash
April 2002, $4.025 - - - (54,516)
Issuance of stock options in exchange for
services rendered, June 2002 - - - 132,387
Purchase of Treasury Stock for cash
July 2002, $4.025 - - - (116,703)
Accrued interest on note receivable (22,585) - - (22,585)
Comprehensive Income (Loss):
Net Loss - (13,693,034) - (13,693,034)
Other comprehensive income (loss):
Currency translation adjustment - (71,185) (71,185)
------------- ---------- -----------
Total Comprehensive Income (Loss) (13,693,034) (71,185) (13,764,219)
---------- ------------- ---------- -----------
Balance at July 31, 2002 $ (336,885) $ (63,327,869) $ (318,052) $12,862,592
========== ============= ========== ===========
F-11
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO JULY 31, 2003
SVR
Preferred Common Treasury Additional
Stock Stock Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- -------- -------- -------- -------- -------- ----------
Balance, August 1, 2002 1,000 $ 1 20,697,326 $20,697 (96,500) $ (395,531) $77,220,231
Receipt of restricted shares of common
stock as settlement for executive loan,
September 2002, $1.90 - - - - (592,716) (1,126,157) -
Purchase of Treasury Stock for cash
October 2002, $1.5574 - - - - (40,000) (62,294) -
Issuance of warrants in exchange for the
services rendered, November 2002, $2.50 - - - - - - 988,550
Issuance of stock options in exchange for
services receivable, November 2002, $2.10 - - - - - - 171,360
Issuance of common stock in exchange for
services rendered, November 2002, $2.10 - - 30,000 30 - - 62,970
Issuance of common stock as employee
compensation, January 2003, $2.10 - - 9,750 10 - - 20,465
Purchase of Treasury Stock for cash
December 2002, $2.0034 - - - - (13,000) (26,044) -
Preferred stock dividend paid January 2003 - - - - - - -
Issuance of common stock in exchange for
services rendered, March 2003, $1.00 - - 70,000 70 - - 69,930
Issuance of common stock for cash pursuant
to private placement, May 2003, $1.15 - - 2,926,301 2,926 - - 3,362,324
Financing costs associated with private
placement, May 2003 - - - - - - (235,568)
Exercise of warrants for cash, May 2003,
$1.50 - - 35,000 35 - - 52,465
Issuance of common stock for cash pursuant
to private placement, June 2003, $1.50 - - 666,667 667 - - 999,333
Issuance of common stock as employee
compensation, June 2003, $2.00 - - 100 - - - 200
Exercise of warrants for cash, June 2003,
$1.50 - - 1,496,001 1,496 - - 2,242,506
Cashless exercise of warrants, June 2003 - - 16,379 16 - - (16)
Exercise of stock options for cash, June
2003, $1.59 - - 70,000 70 - - 111,230
Accrued interest on note receivable - - - - - - -
Comprehensive Income (Loss):
Net Loss - - - - - - -
Other comprehensive income (loss)
Currency translation adjustment - - - - - - -
Total Comprehensive Income (Loss)
------ ------- ---------- ------- -------- ----------- -----------
Balance at July 31, 2003 1,000 $ 1 26,017,524 $26,017 (742,216) $(1,610,026) $85,065,980
====== ======= ========== ======= ======== =========== ==========
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
- Common Development Comprehensive Stockholders'
Stock Stage Income (Loss) Equity
------------ ------------- ------------- ------------
Balance, August 1, 2002 $ (336,885) $(63,327,869) $ (318,052) $12,862,592
Receipt of restricted shares of common
stock as settlement for executive loan,
September 2002, $1.90 - - - (1,126,157)
Purchase of Treasury Stock for cash
October 2002, $1.5574 - - - (62,294)
Issuance of warrants in exchange for the
services rendered, November 2002, $2.50 - - - 988,550
Issuance of stock options in exchange for
services receivable, November 2002, $2.10 - - - 171,360
Issuance of common stock in exchange for
services rendered, November 2002, $2.10 - - - 63,000
Issuance of common stock as employee
compensation, January 2003, $2.10 - - - 20,475
Purchase of Treasury Stock for cash
December 2002, $2.0034 - - - (26,044)
Preferred stock dividend paid January 2003 - (764,154) - (764,154)
Issuance of common stock in exchange for
services rendered, March 2003, $1.00 - - - 70,000
Issuance of common stock for cash pursuant
to private placement, May 2003, $1.15 - - - 3,365,250
Financing costs associated with private
placement, May 2003 - - - (235,568)
Exercise of warrants for cash, May 2003,
$1.50 - - - 52,500
Issuance of common stock for cash pursuant
to private placement, June 2003, $1.50 - - - 1,000,000
Issuance of common stock as employee
compensation, June 2003, $2.00 - - - 200
Exercise of warrants for cash, June 2003,
$1.50 - - - 2,244,002
Cashless exercise of warrants, June 2003 - - - -
Exercise of stock options for cash, June
2003, $1.59 - - - 111,300
Accrued interest on note receivable (23,113) - - (23,113)
Comprehensive Income (Loss):
Net Loss - (13,261,764) - (13,261,764)
Other comprehensive income (loss)
Currency translation adjustment - - 406,830 406,830
------------ ---------- -----------
Total Comprehensive Income (Loss) - (13,261,764) 406,830 (12,854,934)
---------- ------------ ---------- -----------
Balance at July 31, 2003 $ (359,998) $(77,353,787) $ 88,778 $ 5,856,965
========== ============ ========== ===========
F-12
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended Cumulative From
July 31, November 2, 1995
--------------------------------------------------- (Date of Inception)
2003 2002 2001 to July 31, 2003
------ ------ ------ ------------------
Cash Flows From Operating Activities:
Net loss $ (13,261,764) $ (13,693,034) $ (27,097,210) $ (75,868,733)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 589,836 431,547 230,600 1,462,660
Minority interest share of loss (625) (52,560) (2,985,000) (3,038,185)
Reduction of notes receivable - common stock
in exchange for services rendered -- -- -- 423,882
Write-off of deferred offering costs -- -- 3,406,196 3,406,196
Write-off of abandoned patents 9,134 -- -- 9,134
Common stock issued for services rendered 153,675 71,172 829,264 2,294,839
Stock options and warrants issued for services
rendered 1,159,910 359,715 1,486,036 6,107,685
Preferred stock issued for services rendered -- -- -- 100
Founders' shares transferred for services
rendered -- -- -- 353,506
Changes in operating assets and liabilities:
Miscellaneous receivables 13,192 -- 2,747 43,812
Other current assets (78,886) (108,610) (14,858) (305,102)
Accounts payable and accrued expenses (553,606) (740,319) 1,479,803 2,198,196
Other, net -- -- -- 110,317
-------------- --------------- --------------- --------------
Net Cash Used in Operating Activities (11,969,134) (13,732,089) (22,662,422) (62,801,693)
Cash Flows From Investing Activities:
Purchase of property and equipment (506,108) (779,519) (1,623,017) (3,582,598)
Costs incurred for patents (108,576) (440,698) (197,434) (1,016,207)
Change in restricted cash (177,488) -- -- (183,083)
Increase in officers' loans receivable (12,073) (90,341) (1,023,743) (1,126,157)
Proceeds from maturity of short-term investments 20,570,283 59,309,515 39,097,000 119,686,192
Purchases of short-term investments (10,069,597) (45,279,543) (62,023,466) (122,048,263)
Change in deposits 107,755 (614,464) 27,396 (477,194)
Change in notes receivable - common stock (23,113) (22,585) (10,182) (59,998)
Change in due from related parties -- -- -- (2,255,197)
Other, net -- -- -- 89,683
-------------- --------------- --------------- --------------
Net Cash Provided By (Used in)
Investing Activities 9,781,083 12,082,365 (25,753,446) (10,972,822)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- -- 993,149
Repayment of long-term debt (60,004) (9,363) (5,208) (1,035,351)
Change in due to related parties -- -- -- 154,541
Proceeds from exercise of warrants 2,296,502 -- 2,256,482 4,552,984
Proceeds from exercise of stock options 111,300 27,500 745,000 883,800
Proceeds from minority interest investment 625 52,560 2,985,000 3,038,185
Proceeds from issuance of common stock, net 4,129,682 -- 37,337,074 66,128,976
Proceeds from issuance of preferred stock -- -- 12,015,000 12,015,000
Purchase and retirement of common stock -- -- -- (119,066)
Purchase of treasury stock (88,338) (395,531) -- (483,869)
-------------- --------------- --------------- --------------
Net Cash Provided By (Used In)
Financing Activities 6,389,767 (324,834) 55,333,348 86,128,349
Effect of Exchange Rate Changes on Cash 23,399 (3,538) (12,826) 2,744
-------------- --------------- --------------- --------------
Net Increase (Decrease) in Cash and Cash
Equivalents 4,225,115 (1,978,096) 6,904,654 12,356,578
Cash and Cash Equivalents, Beginning of Year 8,131,463 10,109,559 3,204,905 --
-------------- --------------- --------------- --------------
Cash and Cash Equivalents, End of Year $ 12,356,578 $ 8,131,463 $ 10,109,559 $ 12,356,578
============== =============== =============== ==============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-13
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Business:
Generex Biotechnology Corporation (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 limited
history of operations and has not generated any revenues from
operations with the exception of the $1 million received in
conjunction with the execution of a development agreement (see Note
8). 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.
Note 2 - Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which a controlling interest
is maintained. For those consolidated subsidiaries where the Company
ownership is less than 100 percent, the outside stockholders'
interests are shown as minority interests. 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 (SFAS) 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
Short-term investments consisted primarily of short-term notes of
U.S. corporations and Canadian government savings bonds with original
maturities of between three to twelve months and one to five years at
July 31, 2003 and 2002, respectively. These short-term notes are
classified as held to maturity and are valued at amortized cost. At
July 31, 2003 and 2002, 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. As patents are abandoned, the net book value of
the patent is written off.
F-14
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
Impairment or Disposal of Long-Lived Assets
The Company assesses the impairment of patents under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets"
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. A determination of impairment
(if any) is made based on estimates of future cash flows.
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
governments under research and development tax credit arrangements
are offset against current income tax expense.
Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax 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
The Company has elected to continue to account for its stock
compensation plans under the recognition and measurement principles
of Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. No
stock-based employee compensation cost related to stock options is
reflected in the Company's Statements of Operations, as all options
granted under the plan had an exercise price more than or equal to
the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per
share as if the Company had applied the fair value recognition
provisions of SFAS No. 123.
For the Years Ended July 31,
-----------------------------------------------
2003 2002 2001
------ ------ ------
Net Loss Available to Common
Stockholders, as Reported $ (14,025,918) $ (14,413,934) $ (27,097,210)
Deduct: Total Stock-Based Employee
Compensation Expense Determined
Under Fair Value Based Method 3,335,731 2,777,400 4,658,300
Pro Forma Net Loss Available
to Common Stockholders $ (17,361,649) $ (17,191,334) $ (31,755,510)
Loss Per Share:
Basic and diluted, as reported $ (0.67) $ (0.70) $ (1.44)
Basic and diluted, pro forma $ (0.83) $ (0.83) $ (1.69)
F-15
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
Net Loss Per Common Share
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 15 for methodology for determining
net loss per share.
Comprehensive Loss
Other comprehensive income (loss), which includes only foreign
currency translation adjustments, is shown in the Statement of
Changes in Stockholders' Equity.
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 and government
instruments. 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 U.S. 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 U.S. currency are recorded in the other comprehensive
loss component of stockholders' equity.
Financial Instruments
The carrying values of officers' loans receivable, miscellaneous
receivables, accounts payable and accrued expenses approximate their
fair values due to their short-term nature. Due from related party
approximates its fair value as it is due on demand and long-term debt
approximates its fair value based upon the borrowing rates available
for the nature of the underlying debt.
The Company follows the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting.
F-16
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
Reclassifications
Certain amounts reported in the 2002 and 2001 financial statements
have been reclassified to conform to the 2003 presentation.
Effects of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
addresses the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 also
addresses the measurement of intangible assets acquired outside of a
business combination whether acquired individually or with a group of
other assets. Intangible assets previously recorded in the Company's
financial statements will be affected by the provisions of SFAS No.
142. This statement provides that intangible assets with finite
useful lives be amortized and that intangible assets with indefinite
lives and goodwill will not be amortized, but will rather be tested
at least annually for impairment. SFAS No. 142 became effective for
the Company's current fiscal year. The adoption of this statement did
not have a significant effect on the Company's consolidated financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires companies to record
the fair value of a liability for an asset retirement obligation in
the period in which it is incurred, which is adjusted to its present
value each period. In addition, companies must capitalize a
corresponding amount by increasing the carrying amount of the related
long-lived asset, which is depreciated over the useful life of the
related asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of this statement did not have a
significant effect on the Company's consolidated financial position
or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a
business. SFAS No. 144 establishes a single accounting model for
assets to be disposed of by sale whether previously held and used or
newly acquired. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001 and the interim periods within. The adoption
of this statement did not have a significant impact on the Company's
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supercedes
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit and Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
requires that a liability be recognized when it is incurred and
should initially be measured and recorded at fair value. This
statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The adoption of this statement did
not have an impact on the Company's consolidated financial position
or results of operations.
F-17
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
Effects of Recent Accounting Pronouncements (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" which amends SFAS
No. 123, "Accounting for Stock-Based Compensation". SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation, and requires disclosure
about those effects in both annual and interim financial statements.
SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The adoption of SFAS No. 148 did not have a significant impact
on the Company's consolidated financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities". FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51 for certain
entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest
after that date. It applies in the second quarter of fiscal 2004 to
variable interest entities in which the Company may hold a variable
interest that it acquired before February 1, 2003. The provisions of
FIN No. 46 require that the Company immediately disclose certain
information if it is reasonably possible that the Company will be
required to consolidate or disclose variable interest entities when
FIN No. 46 becomes effective. The Company has determined that it does
not have a significant interest in such entities requiring the
related disclosure based on its preliminary analysis and assessment.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The changes are intended to improve financial reporting by requiring
that contracts with comparable characteristics be accounted for
similarly. Additionally, those changes are expected to result in more
consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts and hedging
relationships entered into or modified after June 30, 2003, and for
provisions that relate to SFAS No. 133 implementation issues that
have been effective for fiscal quarters that began prior to June 15,
2003, apply in accordance with their respective effective dates. The
adoption of this statement did not have a significant effect on the
Company's consolidated financial position or results of operations.
F-18
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued):
Effects of Recent Accounting Pronouncements (Continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liability and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liability and equity. It also requires that
an issuer classify a financial instrument that is within its scope as
a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities.
It is to be implemented by reporting a cumulative effect of a change
in an accounting principle for financial instruments created before
the issuance date of the statement and still existing at the
beginning of the interim period of adoption. Restatement is not
permitted. The Company's initial adoption of this statement on August
1, 2003, will require the reclassification of its Series A Preferred
Stock to long-term liabilities within its Consolidated Balance
Sheets. Additionally, on a prospective basis, the mandatory dividends
will be classified as Interest expense within its Consolidated
Statements of Operations.
Note 3 - Property and Equipment:
The costs and accumulated depreciation of property and equipment are
summarized as follows:
July 31,
-----------------------------
2003 2002
------ ------
Land $ 320,869 $ 285,407
Buildings and Improvements 2,030,819 1,936,548
Furniture and Fixtures 81,214 76,956
Office Equipment 108,076 93,491
Lab Equipment 3,026,529 2,434,409
----------- -----------
Total Property and Equipment 5,567,507 4,826,811
Less Accumulated Depreciation 1,348,675 793,717
----------- -----------
Property and Equipment, Net $ 4,218,832 $ 4,033,094
=========== ===========
Depreciation expense amounted to $474,764, $393,655 and $209,114 for
the years ended July 31, 2003, 2002 and 2001, respectively.
Note 4 - Property Held for Investment, Net:
The costs and accumulated depreciation of assets held for investment
are summarized as follows:
July 31,
-----------------------------
2003 2002
------ ------
Assets Held For Investment $ 1,967,933 $ --
Less: Accumulated Depreciation 61,621 --
----------- -----------
Assets Held For Investment, Net $ 1,906,312 $ --
=========== ===========
Depreciation expense amounted to $57,877, $-0- and $-0- for the years
ended July 31, 2003, 2002 and 2001, respectively.
The Company's intent is to hold this property for investment purposes
and collect rental income. Included in income from rental operations,
net is $252,416 of rental income and $231,626 of rental expenses,
including interest charges of $77,033, for the year ended July 31,
2003.
F-19
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Patents:
The costs and accumulated amortization of patents are summarized as
follows:
July 31,
-----------------------------
2003 2002
------ ------
Patents $ 1,020,805 $ 890,061
Less: Accumulated Amortization 121,929 59,919
----------- -----------
Patents, Net $ 898,876 $ 830,142
=========== ===========
Amortization expense amounted to $57,195, $37,892 and $21,486 for the
years ended July 31, 2003, 2002 and 2001, respectively. Amortization
expense is expected to be approximately $63,000 per year for the
years ended July 31, 2004, 2005, 2006, 2007 and 2008
Note 6 - Income Taxes:
The Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss
carryforwards arise from both United States and Canadian sources.
Pretax losses arising from domestic operations (United States) was
$10,794,200 and from foreign operations (Canada and Bermuda) was
$2,467,564 for the year ended July 31, 2003. As of July 31, 2003, the
Company has net operating loss carryforwards in Generex Biotechnology
Corporation of approximately $39,259,987, which expire in 2014
through 2023, and in Generex Pharmaceuticals Inc. of approximately
$16,040,901, which expire in 2006 through 2010. These loss
carryforwards are subject to limitation in future years should
certain ownership changes occur.
For the years ended July 31, 2003, 2002 and 2001, 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 income taxes consist of the following:
July 31,
-----------------------------
2003 2002
------ ------
Deferred Tax Assets:
Net operating loss carryforwards $ 18,160,666 $ 13,530,427
Other timing difference 1,594,982 2,027,664
------------ ------------
Total Deferred Tax Assets 19,755,648 15,558,091
Valuation Allowance (19,755,648) (15,558,091)
------------ ------------
Net Deferred Income Taxes $ -- $ --
============ ============
F-20
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Income Taxes (Continued):
A reconciliation of the United States Federal Statutory rate to the
Company's effective tax rate for the years ended July 31, 2003, 2002
and 2001 is as follows:
2003 2002 2001
------ ------ ------
Federal statutory rate (34.0)% (34.0)% (34.0)%
Increase (decrease) in income taxes resulting from:
Loss incurred in Bermuda for which no benefit is
recognized -- 2.9 15.1
Imputed interest income on intercompany receivables
from foreign subsidiaries 1.4 1.4 .5
Foreign taxes booked at different rates .7 .7 .4
Nondeductible items 1.9 1.8 .1
Other .1 .1 (1.5)
Change in valuation allowance 29.9 27.1 19.4
----- ----- -----
Effective tax rate --% --% --%
===== ===== =====
Note 7 - Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following:
July 31,
-----------------------------
2003 2002
------ ------
Accounts Payable $ 1,094,129 $ 853,184
Accrued Legal 292,085 460,840
Executive Compensation -- 584,919
----------- ------------
Total $ 1,386,214 $ 1,898,943
=========== ============
Note 8 - Commitments and Contingent Liabilities:
Consulting Services
The Company's Consulting Agreement with its Vice President of
Research and Development (the V.P.), as amended and supplemented,
continues through July 31, 2010, subject to termination without cause
by the V.P. or the Company at any time after January 31, 2003 upon 12
months prior written notice. The Consulting Agreement provides for an
annual base compensation of $250,000 per year (starting August 1,
2000), subject to annual increases. In addition, the Consulting
Agreement provides for certain bonus compensation to be paid to the
V.P. for achievement of certain milestones under the Company's
development agreements with pharmaceutical companies. During the 2001
fiscal year, the Company paid the V.P. $300,000 for his involvement
in securing a development agreement for a specific product with a
pharmaceutical company. The Consulting Agreement also provides for
the V.P. to be granted options to purchase 150,000 shares of common
stock in each of the next 10 fiscal years, starting with the 2001
fiscal year. The options must be granted under option plans approved
by the Company's stockholders.
In connection with amending and supplementing the Consulting
Agreement in January 1998, the Company issued 1,000 shares of Special
Voting Rights Preferred Stock to the V.P. See Note 12 for description
of Special Voting Rights Preferred Stock.
F-21
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Leases
The Company has entered into various operating lease agreements for
the use of vehicles and office equipment.
Aggregate minimum annual lease commitments of the Company under
non-cancelable operating leases as of July 31, 2003 are as follows:
Year Amount
---- --------
2004 $ 28,331
2005 18,581
2006 13,145
2007 4,190
Thereafter --
--------
Total Minimum Lease Payments $ 64,247
========
Lease expense amounted to $23,712, $13,766 and $20,753 for the years
ended July 31, 2003, 2002 and 2001, 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 under current lease agreements to be received in
years ending after July 31, 2003:
Year Amount
---- --------
2004 $151,978
2005 151,978
2006 25,330
Thereafter --
--------
Total $329,286
========
Property Held for Investment
The Company leases units of property that it owns located in Toronto,
Canada. The following represents the approximate minimum amount in
lease income under current lease agreements to be received in years
ending after July 31, 2003:
Year Amount
---- --------
2004 $202,276
2005 174,251
2006 123,131
2007 68,770
2008 46,066
Thereafter 37,761
--------
Total $652,255
========
F-22
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Supply Agreements
The Company has 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. 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. These milestone payments are based on exceeding certain
specified levels of product purchases. If the milestone obligations
are not met after a five-year period, the Company may elect to pay
Valois an annual payment of $50,000 until the milestone obligation is
met in order to maintain exclusive rights under the agreement. 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. There were no milestone payments required by the agreement
in the years ended July 31, 2003, 2002 and 2001.
The Company has 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 units, and thereafter,
shall continue until terminated by either party by giving twelve
months written notice.
Concentrations In Development Arrangements
The Company has a development arrangement with a major pharmaceutical
company, whereby the pharmaceutical company is primarily responsible
for conducting clinical trials related to a specific agreed upon
product, securing regulatory approvals and marketing on a worldwide
basis. The Company is primarily responsible for completing all
necessary product research and development. Although the Company
presently has sufficient funds to meet its foreseeable obligations,
the costs of the Company's obligations may be significant, and may
exceed current funds. If the development arrangement were to be
curtailed or terminated, the market perception of the prospects for
the Company's product, the timing of regulatory approvals, and the
Company's ability to raise funds could be adversely affected.
In conjunction with the execution of this development arrangement,
the Company received an agreement signing fee of $1,000,000 during
the fiscal year ended July 31, 2001, which was included in revenues
as all necessary requirements have been satisfied.
On May 23, 2003, the Company announced the termination of this
development arrangement for the development and commercialization of
the buccal delivery of insulin. Pursuant to the provisions of the
development and license agreement, both parties are working on terms
for the pharmaceutical company to continue to supply a specified
amount of insulin for the Company's further development work. All of
the Company's intellectual property and commercialization rights with
respect to the buccal spray drug delivery technology will revert to
the Company, which will have the continuing right to develop and
commercialize the product at its own expense.
F-23
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Pending Litigation
On October 2, 1998, Sands Brothers & Co. Ltd., a New York City-based
investment banking and brokerage firm, initiated an arbitration
against the Company under New York Stock Exchange rules. Sands
alleged that it had the right to receive, for nominal consideration,
approximately 1.5 million shares of the Company's common stock. Sands
based its claim upon an October 1997 letter agreement that was
purported by Sands to confirm an agreement appointing Sands as the
exclusive financial advisor to Generex Pharmaceuticals, Inc., a
subsidiary of the Company that was acquired in late 1997. In
exchange, the letter agreement purported to grant Sands the right to
acquire 17 percent of Generex Pharmaceuticals' common stock for
nominal consideration. Sands claimed that its right to receive shares
of Generex Pharmaceuticals' common stock applies to the Company's
common stock since outstanding shares of Generex Pharmaceuticals'
common stock were converted into shares of the Company's common stock
in the acquisition. Sands' claims also included additional shares
allegedly due as a fee related to that acquisition, and $144,000 in
monthly fees allegedly due under the terms of the purported
agreement.
Pursuant to an arbitration award dated September 22, 1999, the
arbitration panel that heard this case awarded Sands $14,070 and
issued a declaratory judgment requiring the Company to issue to Sands
a warrant to purchase 1,530,020 shares of the Company's common stock
pursuant to and in accordance with the terms of the purported October
1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of
the State of New York, County of New York (the "New York Supreme
Court"). On November 10, 1999, the Company moved to vacate the
arbitration award. On March 20, 2000, the New York Supreme Court
granted Sands' petition to confirm the award and denied the Company's
motion to vacate the award. The Company appealed and on January 23,
2001, the New York State Appellate Division, First Department (the
"Appellate Division"), modified the judgment of the New York Supreme
Court that had confirmed the arbitration award against the Company.
The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of
$14,070 to Sands but modified the judgment to vacate the portion of
the arbitration award directing the issuance to Sands of a warrant to
purchase 1,530,020 shares of the Company's common stock. The
Appellate Division held that the portion of the award directing the
Company to issue warrants to Sands is too indefinite to be
enforceable and remanded the matter to the arbitration panel for a
final and definite award with respect to such relief or its
equivalent (including possibly an award of monetary damages). The
arbitration panel commenced hearings on the matters remanded by the
Appellate Division in June 2001. On November 7, 2001, the arbitration
panel issued an award again requiring the Company to issue to Sands a
warrant to purchase 1,530,020 shares of the Company's common stock
purportedly pursuant to and in accordance with the terms of the
October 1997 letter agreement. Thereafter, Sands submitted a motion
to the New York Supreme Court to modify and confirm the arbitration
panel's award while the Company filed a motion with the court to
vacate the arbitration award. On February 25, 2002, the New York
Supreme Court vacated the arbitration panel's award. The Supreme
Court concluded that the arbitration panel had "disregarded the plain
meaning" of the directive given by the Appellate Division in the
Appellate Division's January 23, 2001 decision that remanded the
matter of the warrant for reconsideration by the panel. The Supreme
Court found that the arbitration panel's award "lacks a rational
basis". The Supreme Court also remanded the matter to the New York
Stock Exchange on the issue of whether the arbitration panel should
be disqualified. Sands has appealed the February 25, 2002 order of
the Supreme Court to the Appellate Division. The Company filed a
cross-appeal on issues relating to the disqualification of the
arbitration panel.
F-24
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Pending Litigation (Continued)
On October 29, 2002, the Appellate Division issued a decision and
order unanimously modifying the lower court's order by remanding the
issue of damages to a new panel of arbitrators and otherwise
affirming the lower court's order. The Appellate Division's decision
and order limits the issue of damages before the new panel of
arbitrators to reliance damages which is not to include an award of
lost profits. Reliance damages are out-of-pocket damages incurred by
Sands. The Appellate Division stated that the lower court properly
determined that the arbitration award, which had granted Sands
warrants for 1,530,020 shares of the registrant's stock, was "totally
irrational."
On March 18, 2003, the Appellate Division of the Supreme Court of New
York denied a motion by Sands for re-argument of the October 29, 2002
decision, or, in the alternative, for leave to appeal to the Court of
Appeals.
At the present time, the Company is not able to predict the ultimate
outcome of this legal proceeding or to estimate a range of possible
loss from this legal proceeding. Therefore, no provision has been
recorded in the accompanying financial statements.
In February 2001, a former business associate of the Vice President
of Research and Development (VP), and an entity called Centrum
Technologies Inc. ("CTI") commenced an action in the Ontario Superior
Court of Justice against the Company and the VP seeking, among other
things, damages for alleged breaches of contract and tortious acts
related to a business relationship between this former associate and
the VP that ceased in July 1996. The plaintiffs' statement of claim
also seeks to enjoin the use, if any, by the Company of three patents
allegedly owned by the company called CTI. On July 20, 2001, the
Company filed a preliminary motion to dismiss the action of CTI as a
nonexistent entity or, alternatively, to stay such action on the
grounds of want of authority of such entity to commence the action.
The plaintiffs brought a cross motion to amend the statement of claim
to substitute Centrum Biotechnologies, Inc. ("CBI") for CTI. CBI is a
corporation of which 50 percent of the shares are owned by the former
business associate and the remaining 50 percent are owned by the
Company. Consequently, the shareholders of CBI are in a deadlock. The
court granted the Company's motion to dismiss the action of CTI and
denied the plaintiffs' cross motion without prejudice to the former
business associate to seek leave to bring a derivative action in the
name of or on behalf of CBI. The former business associate
subsequently filed an application with the Ontario Superior Court of
Justice for an order granting him leave to file an action in the name
of and on behalf of CBI against the VP and the Company. The Company
has opposed the application which is now pending before the Court. In
September 2003, the Ontario Superior Court of Justice granted the
request and issued an order giving the former business associate
leave to file an action in the name of and on behalf of CBI against
Modi and the Company. The Company is not able to predict the ultimate
outcome of this legal proceeding at the present time or to estimate
an amount or range of potential loss, if any, from this legal
proceeding.
F-25
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued):
Pending Litigation (Continued)
In February 1997, an individual alleging to be a former employee of
Generex Pharmaceuticals, Inc., commenced an action in the Ontario
Superior Court of Justice for wrongful dismissal. The Ontario
Superior Court of Justice rendered judgment in favor of the plaintiff
for approximately $127,000 plus interest in November 1999 and further
awarded costs to the plaintiff in March 2000. An appeal of the
judgment was filed with the Court of Appeal for Ontario in April
2000. The appeal was heard on February 26, 2003, and on February 28,
2003, the Court of Appeals dismissed the appeal with costs. Generex
Pharmaceuticals, Inc., has sought leave to appeal the Courts of
Appeal's decision to the Supreme Court of Canada. The Company intends
to continue its vigorous defense of this action. The Company does not
believe that the ultimate resolution of this legal proceeding will
have a material effect on the consolidated financial position of the
Company. The Company has established a reserve for potential loss
contingencies related to the resolution of this legal proceeding, the
amount of which is not material to the financial position, operations
and cash flows of the Company.
In July 2002 an individual and his related corporation commenced
actions against certain defendants, including the Company and certain
officers of the Company, in the Ontario Superior Court of Justice,
claiming compensatory damages, punitive damages and various forms of
injunctive and declaratory relief for breach of contract and various
business torts. Management believes the claims against the Company
and the officers are frivolous and completely without merit. Neither
the Company nor its officers are a party to any agreement with the
plaintiffs. Most of the requested relief relates to restrictions on
the use of patents and information allegedly owned by the plaintiffs,
and an accounting for the use of such items. Neither the Company nor
its officers have used any patents or information owned by the
plaintiffs. All of the patents and information claimed to be owned by
the plaintiffs are completely unrelated to any product or technology
the Company is currently developing or intends to develop. Therefore,
even if the court were to award some declaratory or injunctive
relief, neither the Company nor its officers would be affected.
Management is defending this action vigorously. The parties have now
signed Minutes of Settlement resolving all outstanding issues in the
action. The settlement is presently in the process of being finalized
and the Company believes that the resolution will not have a material
adverse effect on the Company's financial position, operations or
cash flows.
The Company is involved in certain other legal proceedings in
addition to those specifically described herein. Subject to the
uncertainty inherent in all litigation, the Company does not believe
at the present time that the resolution of any of these legal
proceedings is likely to have a material adverse effect on the
Company's financial position, operations or cash flows.
With respect to all litigation, as additional information concerning
the estimates used by the Company become known, the Company
reassesses its position both with respect to accrued liabilities and
other potential exposures.
Employment Agreement
On March 17, 2003, the Company entered into an employment agreement
for an initial term of five years, whereby the Company is required to
pay an annual base salary and bonus of $130,000 to the employee. In
the event the agreement is terminated within the initial five-year
term, by reason other than cause, death, voluntary retirement or
disability, the Company is required to pay the employee in one lump
sum twelve months base salary and the average annual bonus.
F-26
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions:
The amount due from a related party at July 31, exclusive of the
officers' loans receivable, is as follows:
EBI, Inc.
---------
Beginning Balance, August 1, 2001 $ 332,289
Effect of Foreign Currency Translation Adjustments (9,604)
---------
Ending Balance, July 31, 2002 322,685
Effect of Foreign Currency Translation Adjustments 40,094
---------
Ending Balance, July 31, 2003 $ 362,779
=========
This amount, which is due from EBI, Inc., is non-interest bearing,
unsecured and has no fixed terms of repayment. EBI, Inc. is a
shareholder of the Company and is controlled by the estate of the
Company's former Chairman of the Board.
The Company estimates the following additional amounts would have
been recorded if such transaction was consummated under arms-length
agreements:
For the Years Ended July 31,
-----------------------------------------
2003 2002 2001
------ ------ ------
Interest Income $ 12,207 $ 31,250 $ 32,209
The interest income amounts were computed at estimated prevailing
rates based on the average receivable balance outstanding during the
periods reflected.
During the years ended July 31, 2003, 2002 and 2001, the Company's
four senior officers, who are also shareholders of the Company, were
compensated indirectly by the Company through management services
contracts between the Company and management firms of which they are
owners. The amounts paid to these management firms amounted to
$1,319,238, $1,075,847 and $672,477 for the years ended July 31,
2003, 2002 and 2001, respectively.
See Note 8 for a discussion of the consulting agreement with the
Company's Vice President of Research and Development.
On May 3, 2001, three of the Company's senior officers, who are also
shareholders of the Company, were given loans of $334,300 each, in
exchange for promissory notes. These notes bear interest at 8.5
percent per annum and were originally payable in full on May 1, 2002.
The notes were extended until October 1, 2002, at terms comparable to
the original notes. These notes are guaranteed by a related company
owned by these officers and secured by 2,500,000 pledged shares of
the Company's common stock currently owned by this related company.
In September 2002, the notes were redeemed pursuant to the Stock
Pledge Agreement. The outstanding balance of $1,126,157 was repaid
with 592,716 shares of common stock, as determined by the
Compensation Committee. These shares effectively became treasury
stock.
On August 7, 2002 the Company purchased real estate with an aggregate
purchase price of approximately $1.6 million from an unaffiliated
party. In connection with that transaction, Angara Enterprises, Inc.,
a licensed real estate broker that is an affiliate of a senior
officer of the Company, received a commission from the proceeds of
the sale to the seller in the amount of 3% of the purchase price.
Management believes that this is less than the aggregate commission
which would have been payable if an unaffiliated broker had been
used.
F-27
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions (Continued):
The Company utilizes a management company to manage all of its real
properties. The property management company is owned by two of the
Company's senior officers and the estate of the Company's former
Chairman of the Board. For the years ended July 31, 2003, 2002 and
2001, the Company has paid the management company $33,237, $37,535
and $38,450, respectively, in management fees.
Note 10 - Long-Term Debt:
Long-term debt consists of the following:
July 31,
-------------------------
2003 2002
------ ------
Mortgage payable - interest at 9.7 percent per annum, monthly
payments of principal and interest of $4,453, final payment due May
25, 2005, secured by first mortgage over real property located at 17
Carlaw Avenue and 33 Harbour Square, Toronto,
Canada $ 551,859 $ 497,281
Mortgage payable - interest at 10 percent per annum, monthly payments
of principal and interest of $1,662, final payment due October 2005,
secured by real property located at 11 Carlaw Avenue,
Toronto, Canada 182,341 166,032
Demand Term Loan payable - interest at 5.8 percent per annum, monthly
principal payments of $4,760 plus interest, final payment due July
2005, secured by real property located at 11 Carlaw Avenue, Toronto,
Canada and restricted cash of $188,967 804,325 --
Mortgage payable - interest at 10 percent per annum, monthly interest
payments only, principal due July 2004, secured by secondary rights
to real property located at 11 Carlaw Avenue, Toronto, Canada 356,950 --
----------- -----------
Total Debt 1,895,475 663,313
Less Current Maturities 426,767 172,453
----------- -----------
Long-Term Debt, Less Current Maturities $ 1,468,708 $ 490,860
=========== ===========
Aggregate maturities of long-term debt of the Company due within the
next five years ending July 31, are as follows:
Year Amount
---- --------
2004 $ 426,767
2005 1,296,386
2006 172,322
Thereafter --
----------
Total $1,895,475
==========
F-28
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Series A Preferred Stock:
During 2001, the Company issued 1,000 shares of Series A Preferred
Stock (Series A) with a par value of $.001 per share. The holder has
the right at any time after January 16, 2004 to convert Series A
shares into shares of common stock of the Company; the number of
shares of common stock issuable upon conversion is variable based on
a formula which reflects the common stock price. The holder also has
the option to exchange the shares of the Company's Series A Preferred
stock for 3,612 shares of the Company's convertible preferred shares
of Generex (Bermuda), Ltd. which represents 30.1 percent of the
Company's equity ownership in Generex (Bermuda) Ltd. Upon exercise,
the holder and the Company would each own 50 percent of Generex
(Bermuda) Ltd. (See Note 18 for discussions of Generex (Bermuda),
Ltd.) Holders of Series A shares are not entitled to vote. In
addition, the holders of Series A 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, and are also entitled to receive
a mandatory annual dividend equal to 6 percent per year on the
original issue price of $12,015 per share. This dividend is to be
compounded each anniversary of the date of issuance of the Series A
shares and payable by issuance of additional Series A shares valued
at the original issue price. Any Series A shares outstanding on
January 16, 2007, are to be redeemed for cash or shares of common
stock.
On January 15, 2002, the Company paid a 6 percent stock dividend on
the Company's Series A Preferred Stock. The dividend was paid in
shares of Series A Preferred Stock, and resulted in a charge to
accumulated deficit of $720,900, which was calculated based upon the
original issue price of the preferred shares.
On January 15, 2003, the Company paid a 6 percent stock dividend on
the Company's Series A Preferred Stock. The dividend was paid in
shares of Series A Preferred Stock, and resulted in a charge to
accumulated deficit of $764,154, which was calculated based upon the
original issue price of the preferred shares.
At July 31, 2003 and 2002, the Series A had an aggregate liquidation
preference of $13,500,054 and $12,735,900, respectively.
F-29
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stockholders' Equity:
Warrants
As of July 31, 2003, 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
---------------- ---------------- ---------------
568,647 $ 12.15 August 12, 2003
150,000 $ 10.00 November 17, 2003
112,584 $ 3.75 January 31, 2004
3,500 $ 6.00 February 17, 2004
53,000 $ 6.00 April 6, 2004
9,091 $ 2.75 April 26, 2004
125,000 $ 4.00 June 15, 2004
3,243 $ 14.53 July 6, 2004
11,764 $ 4.25 January 7, 2005
691,667 $ 4.34 May 17, 2005
19,584 $ 5.00 May 17, 2005
256,667 $ 8.66 May 17, 2005
214,484 $ 6.50 September 29, 2005
114,055 $ 6.60 September 29, 2005
239,222 $ 11.13 September 29, 2005
226 $ 12.99 September 29, 2005
75,000 $ 25.15 January 16, 2006
666,667 $ 1.80 June 6, 2006
188,656 $ 5.09 July 6, 2006
124,859 $ 10.18 July 6, 2006
50,000 $ 12.99 March 18, 2007
1,269,519 $ 1.71 May 27, 2007
70,000 $ 1.25 November 29, 2007
60,000 $ 1.88 November 29, 2007
505,000 $ 2.50 November 29, 2007
30,000 $ 3.00 November 29, 2007
Notes Receivable - Common Stock
Notes receivable - common stock consist of two separate promissory
notes. The first promissory note was issued in conjunction with the
redemption of Series A Redeemable Common Stock Purchase Warrants in
June 1999, and was for $50,000. This note, which was originally due
on December 1, 1999, was initially extended until October 1, 2000,
and then extended until June 1, 2001. On July 31, 2001, the
uncollected balance on this note, including accrued interest at 7
percent per annum, was $57,720 and a new promissory note was signed.
Under the terms of the July 31, 2001 note, the principal of $57,720,
together with accrued interest at 7 percent per annum, was due July
31, 2002. On July 31, 2002, the uncollected balance on this note,
including accrued interest, was $61,867 and a new promissory note was
signed. Under the terms of the July 31, 2002 note, the principal of
$61,867, together with accrued interest at 7 percent per annum, was
due July 31, 2003. On July 31, 2003, the uncollected balance on this
note, including accrued interest, was $66,198 and a new promissory
note was signed. Under the terms of the July 31, 2003 note, the
principal of $66,198, together with accrued interest at 7 percent per
annum, is due July 31, 2004.
F-30
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stockholders' Equity (Continued):
Notes Receivable - Common Stock (Continued)
The second promissory note was issued in conjunction with the
exercise of 50,000 Common Stock Options in March 2001, and was for
$250,000. This note was originally due on March 15, 2002, when a new
promissory note was signed, effectively extending the due date to
March 15, 2003. On March 15, 2003 a new promissory note was signed,
effectively extending the due date to March 15, 2004. As of July 31,
2003 and 2002, the outstanding balance on this note, including
accrued interest at 7 percent per annum, was $293,800 and $275,018,
respectively.
Preferred Stock
The Company has authorized 1,000,000 shares of preferred stock with a
par value of one-tenth of a cent ($.001) per share. 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.
Special Voting Rights Preferred Stock
In 1997, the Company issued 1,000 shares of Special Voting Rights
Preferred Stock (SVR Shares) 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 applicable 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.
Treasury Stock
In September 2001, the Board of Directors of the Company authorized
the repurchase of up to $1 million of the Company's common stock from
the open market. During the fiscal years ended July 31, 2003 and
2002, the Company purchased 53,000 and 96,500 shares of common stock
to be held in treasury at a cost of $88,338 and $395,531,
respectively. Also included in treasury stock are 592,716 shares of
common stock valued at $1,126,157 received as repayment of officer
loans receivable (see Note 9). As of July 31, 2003 and 2002, there
were 742,216 and 96,500 shares held in treasury valued at $1,610,026
and $395,531, respectively.
Note 13 - Stock Based Compensation:
Stock Option Plans
The Company has three stock option plans under which options
exercisable for shares of common stock have been or may be granted to
employees, directors, consultants and advisors. A total of 1,500,000
shares of common stock are reserved for issuance under the 1998 Stock
Option Plan (the 1998 Plan), a total of 2,000,000 shares of common
stock are reserved for issuance under the 2000 Stock Option Plan (the
2000 Plan) and a total of 4,000,000 shares of common stock are
reserved for issuance under the 2001 Stock Option Plan (the 2001
Plan).
The 1998, 2000 and 2001 Plans (the Plans) are administered by the
Compensation Committee (the Committee). 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 is also authorized to
prescribe, amend and rescind terms relating to options granted under
the Plans. Generally, the interpretation and construction of any
provision of the Plans or any options granted hereunder is within the
discretion of the Committee.
F-31
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stock Based Compensation (Continued):
Stock Option Plans (Continued)
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.
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, 2000 3,054,500 $ 6.38
Granted 1,455,000 6.14
Canceled -- --
Exercised 197,500 5.04
---------
Outstanding - July 31, 2001 4,312,000 6.36
Granted 780,159 5.42
Canceled 80,000 5.65
Exercised 5,000 5.50
---------
Outstanding - July 31, 2002 5,007,159 6.22
Granted 2,860,000 1.85
Canceled 1,077,000 5.95
Exercised 195,000 5.70
---------
Outstanding - July 31, 2003 6,595,159 $ 4.38
=========
The following table summarizes information on stock options
outstanding at July 31, 2003:
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, 2003 (Years) Price July 31, 2003 Price
-------------- ------------- ---------- -------- ------------- --------
$1.00 - $2.19 2,905,000 4.01 $ 1.87 2,268,500 $ 1.80
$5.00 - $6.54 1,980,659 2.35 $ 5.11 1,880,659 $ 5.10
$7.50 - $8.70 1,609,500 2.10 $ 7.68 1,609,500 $ 7.68
$10.21 100,000 2.50 $ 10.21 100,000 $ 10.21
Options typically vest over a period of two years and have a
contractual life of five years.
F-32
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stock Based Compensation (Continued):
Stock Option Plans (Continued)
Options exercisable at July 31, are as follows:
Number of Weighted Average
Year Options Exercise Price
---- ------- --------------
2001 3,182,000 $ 6.63
2002 4,685,659 $ 6.26
2003 5,858,659 $ 4.62
During the years ended July 31, 2003, 2002 and 2001, no amount was
charged to compensation expense with respect to options granted to
employees and directors of the Company.
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:
Risk-Free Expected Expected Expected
Interest Rate Life (Years) Volatility Dividends
------------- ------------ ---------- ---------
July 31, 2003 .90% 4.59 1.0219 --
July 31, 2002 1.74% 4.81 .9641 --
July 31, 2001 4.66% 4.25 .9332 --
The weighted average fair value of the Company's stock options
calculated using the Black-Scholes option-pricing model for options
granted during the years ended July 31, 2003, 2002 and 2001 was
$1.35, $4.33 and $4.12 per share, respectively.
Equity Instruments Issued for Services Rendered
During the years ended July 31, 2003, 2002 and 2001, the Company
issued stock options, warrants and shares of common stock in exchange
for services rendered to the Company. The fair value of each stock
option and warrant was valued using the Black Scholes pricing model
which takes into account as of the grant date the exercise price and
expected life of the stock option or warrant, 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
stock option or warrant. Shares of common stock are valued at the
quoted market price on the date of grant. Each the fair value of each
grant was charged to the related expense in the statement of
operations for the services received.
Note 14 - Net Loss Per Share:
Basic EPS and Diluted EPS for the years ended July 31, 2003, 2002 and
2001 have been computed by dividing the net loss available to common
stockholders for each respective period by the weighted average
shares outstanding during that period. All outstanding warrants and
options and shares to be issued upon conversion of Series A Preferred
stock, representing approximately 12,741,679 incremental shares, have
been excluded from the 2003 computation of Diluted EPS as they are
antidilutive due to the losses generated.
F-33
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Supplemental Disclosure of Cash Flow Information:
For the Years Ended July 31,
------------------------------
2003 2002 2001
------ ------ ------
Cash paid during the year for:
Interest $149,233 $64,310 $77,230
Income taxes $ -- $ -- $ --
Disclosure of non-cash investing and financing activities:
Year Ended July 31, 2003
Issuance of Series A Preferred Stock as preferred stock dividend $ 764,154
Settlement of officer loans receivable in exchange for shares of
common stock held in treasury $ 1,126,157
Assumption of long-term debt in conjunction with building purchase $ 1,080,486
Utilization of deposit in conjunction with building purchase $ 501,839
Year Ended July 31, 2002
Issuance of Series A Preferred stock as preferred stock dividend $ 720,900
Year Ended July 31, 2001
The fair value of warrants issued as consideration for an equity
financing agreement was initially capitalized as deferred
offering
costs and subsequently expensed $ 3,406,196
Note receivable was accepted in conjunction with exercise of
common stock options $ 250,000
Common stock was issued as settlement of an accrued liability $ 21,098
Note 16 - Segment Information:
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 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 No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
The Company has three reportable operating segments, United States,
Canada and Bermuda, 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.
F-34
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Segment Information (Continued):
The regions in which the Company had identifiable assets and
operating losses are presented in the following table. Additions to
long-lived assets and Identifiable assets are those that can be
directly associated with a geographic area. Operating loss by
geographic segment does not include an allocation of general
corporate expenses.
Additions to
Long-Lived Identifiable Operating
Assets Assets Loss
------------ ------------ ---------
2003
----
General Corporate $ 108,576 $ 15,080,988 $ 7,557,126
Canada 2,088,433 7,557,720 6,291,564
United States -- -- --
Bermuda -- -- --
----------- ------------ ------------
Total $ 2,197,009 $ 22,638,708 $ 13,848,690
=========== ============ ============
2002
----
General Corporate $ 440,698 $ 22,575,641 $ 6,252,134
Canada 779,519 5,585,107 8,248,622
United States -- -- --
Bermuda -- -- 29,690
----------- ------------ ------------
Total $ 1,220,217 $ 28,160,748 $ 14,530,446
=========== ============ ============
2001
----
General Corporate $ 197,434 $ 38,227,315 $ 11,768,696
Canada 1,623,017 4,438,558 19,668,843
United States -- -- --
Bermuda -- -- --
----------- ------------ ------------
Total $ 1,820,451 $ 42,665,873 $ 31,437,539
=========== ============ ============
Note 17 - Collaborative Agreements:
The Company has a joint venture with Elan International Services,
Ltd. ("EIS"), a wholly owned subsidiary of Elan Corporation, plc (EIS
and Elan Corporation, plc being collectively referred to as "Elan").
Through the joint venture, the parties agreed to pursue the
application of certain of the Company's and Elan's drug delivery
technologies, including the Company's platform technology for the
buccal delivery of large molecule drugs, to pharmaceutical products
for the treatment of prostate cancer, endometriosis and/or the
suppression of testosterone and estrogen. In January 2002, the
parties expanded the joint venture agreement to include buccal
morphine for the management of pain. The parties will conduct the
joint venture through Generex (Bermuda), Ltd. (Generex Bermuda), a
Bermuda limited liability company. The parties are free to develop
other products on their own outside the field of the joint venture.
F-35
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Collaborative Agreements (Continued):
The Company applied the $12,015,000 that it received from EIS for the
shares of the Company's Series A Preferred Stock (see Note 12) to
form Generex Bermuda. The Company's interest in this company consists
of 6,000 shares of Generex Bermuda common stock and 3,612 shares of
convertible preferred stock, representing an 80.1 percent equity
ownership interest in Generex Bermuda. At the same time, EIS remitted
$2,985,000 to purchase 2,388 shares of Generex Bermuda convertible
preferred stock, representing a 19.9 percent equity ownership
interest in Generex Bermuda. The Series A Preferred stock has an
exchange feature which allows EIS to acquire an additional 30.1
percent equity ownership interest in Generex Bermuda. As of July 31,
2003, 2002 and 2001, the minority interest has been reduced to $-0-
due to their share of Generex Bermuda's net loss.
Generex Bermuda was granted rights to use the Company's buccal
delivery technology and certain Elan drug delivery technologies for
purposes of the joint venture. Using the funds from the initial
capitalization, Generex Bermuda paid a nonrefundable license fee of
$15,000,000 to Elan in consideration for being granted rights to use
the Elan drug delivery technologies during the year ended July 31,
2001. The Company expensed the entire cost of the license as a
research and development expense because of the uncertainties
surrounding the future realization of revenue from the use of the
license. During the years ended July 31, 2003 and 2002, Generex
Bermuda continued to incur research and development and operational
expenses in conjunction with the joint venture's operations.
Note 18 - Quarterly Information (Unaudited):
The following schedule sets forth certain unaudited financial data
for the preceding eight quarters ending July 31, 2003. In our
opinion, the unaudited information set forth below has been
prepared on the same basis as the audited information and includes
all adjustments necessary to present fairly the information set
forth herein. The operating results for the quarter are not
indicative of results for any future period.
Q1 Q2 Q3 Q4
------------ ------------ ------------ ------------
Fiscal Year July 31, 2003:
--------------------------
Contract research revenue $ -- $ -- $ -- $ --
Operating loss $ (2,805,371) $ (4,700,645) $ (2,763,741) $ (3,578,933)
Net loss $ (2,668,662) $ (4,575,030) $ (2,607,871) $ (3,410,201)
Net loss available to common
stockholders $ (2,668,662) $ (5,331,975) $ (2,607,871) $ (3,417,410)
Net loss per share $ (0.13) $ (0.27) $ (0.13) $ (.14)
Fiscal Year July 31, 2002:
--------------------------
Contract research revenue $ -- $ -- $ -- $ --
Operating loss $ (2,904,564) $ (3,781,525) $ (3,401,056) $ (4,443,301)
Net loss $ (2,583,235) $ (3,558,703) $ (3,239,150) $ (4,311,946)
Net loss available to common
stockholders $ (2,583,235) $ (4,279,603) $ (3,239,150) $ (4,311,946)
Net loss per share $ (0.12) $ (0.21) $ (0.16) $ (.21)
F-36
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 - Subsequent Events:
The following event occurred subsequent to July 31, 2003:
Antigen Express, Inc.
On August 8, 2003, the Company acquired all of the outstanding
capital stock of Antigen Express, Inc. ("Antigen") pursuant to an
Agreement and Plan of Merger ("Merger Agreement"). Pursuant to the
Merger Agreement, Antigen became a wholly-owned subsidiary of the
Company.
Antigen's facilities and headquarters are located in Worcester,
Massachusetts. Antigen is engaged in research and development efforts
focused on the development of immunomedicines for the treatment of
malignant, infectious, autoimmune and allergic diseases.
The acquisition of Antigen brings two additional platform
technologies to the Company. The immunomedicines based on these
technologies allow for specific modulation of the immune system to
allow for activation and re-activation against cancer and infectious
agents and de-activation in the case of if allergy and autoimmune
disease. The delivery technologies currently possessed by the
Company, when used with Antigen's active immunotherapies may provide
for breakthrough therapeutics.
The Merger Agreement provides that each holder of Antigen common
stock and each holder of each of the four outstanding series of
Antigen preferred stock will receive shares of the Company's common
stock, par value $0.001 per share, for each share of Antigen common
stock or preferred stock held by such holder. The Merger Agreement
establishes exchange rates for the conversion of Antigen common and
the various series of preferred stock into the Company's common
stock. Assuming that no Antigen stockholder exercises appraisal
rights, an aggregate of 2,779,974 shares of the Company's common
stock will be issued to the former Antigen stockholders in connection
with the Merger. These shares have been valued based upon the average
trading price as quoted on the NASDAQ for the five days prior and
subsequent to the announcement of the acquisition for a total of
$4,645,059 or $1.6709 per share. In addition, pursuant to the Merger
Agreement, the Company assumed Antigen common stock purchase options.
If these options are fully exercised, the option holders will receive
112,400 shares of the Company's common stock.
The Merger Agreement also calls for the Company to fund an aggregate
amount of not less than $2,000,000 ratably over the two year period
following the effective date of the agreement. The advances will be
debt, equity or a combination thereof in the sole discretion of the
Company.
The determination of the fair value of the assets acquired and
liabilities assumed as a result of this acquisition is in progress.
F-37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective July 1, 2003, we dismissed Deloitte & Touche, LLP ("Deloitte") and
engaged BDO Dunwoody, LLP ("BDO Dunwoody") to serve as the independent public
accountants to audit our financial statements for the fiscal year ending July
31, 2003.
The appointment of BDO Dunwoody as independent public accountants replacing
Deloitte was approved by the audit committee of our Board of Directors. Deloitte
did not decline to stand for re-election.
Deloitte's reports on our financial statements for the last two fiscal years did
not contain an adverse opinion or a disclaimer of opinion, and was not qualified
or modified as to uncertainty, audit scope or accounting principles.
During our past two fiscal years, and the subsequent interim period preceding
Deloitte's dismissal, we had no disagreements with Deloitte, as the term
"disagreement" is defined in Item 304(a)(1)(iv) of Regulation S-K, on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which disagreements, if not resolved to Deloitte's
satisfaction, would have caused Deloitte to make reference to the subject matter
of the disagreements in its reports. During our past two fiscal years, and the
subsequent interim period preceding Deloitte's dismissal, there were no
"reportable events" as that term is defined in Item 304 (a)(1)(v) of Regulation
S-K.
Effective July 1, 2003, we engaged BDO Dunwoody as our independent public
accountants. During the past two fiscal years, we have had no consultations with
BDO Dunwoody concerning: (a) the application of accounting principles to a
specific transaction or the type of opinion that might be rendered on our
financial statements, as to which a written report was provided to us or as to
which we received oral advice from BDO Dunwoody, that BDO Dunwoody concluded was
an important factor in reaching a decision on any accounting, auditing or
financial reporting issue; or (b) any matter that was the subject of a
disagreement or a reportable event, as those terms are defined in Item
304(a)(1)(iv) and (v) of Regulation S-K.
50
Item 9A. Controls and Procedures
Based on our management's evaluation (with the participation of our principal
executive officer and principal financial officer), as of the end of the period
covered by this Annual Report on Form 10-K, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)
during the period covered by this Annual Report on Form 10-K that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
51
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference from the
Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed
with the Commission not later than 120 days after the end of the fiscal year to
which this report relates.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed
with the Commission not later than 120 days after the end of the fiscal year to
which this report relates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the
Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed
with the Commission not later than 120 days after the end of the fiscal year to
which this report relates.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed
with the Commission not later than 120 days after the end of the fiscal year to
which this report relates.
Item 14. Principal Accounting Fees and Services
This Item is not yet applicable to us.
52
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Index to Consolidated Financial Statements and Accompanying Notes
The following documents are filed as a part of this Annual Report on Form 10-K:
Independent Auditors' Reports................................ F1 - F2
Consolidated Balance Sheets
July 31, 2003 and 2002....................................... F3
Consolidated Statements of Operations
For the Years Ended July 31, 2003, 2002 and 2001
and Cumulative From Inception to July 31, 2003............... F4
Consolidated Statements of Changes in Stockholders' Equity
For the Period November 2, 1995 (Date of Inception)
to July 31, 2003............................................. F5 - F14
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2003, 2002 and 2001
and Cumulative From Inception to July 31, 2003............... F15
Notes to Consolidated Financial Statements................... F16 - F39
53
Exhibits
Exhibit No. Description
- ----------- -----------
2 Agreement and Plan of Merger among Generex Biotechnology
Corporation, Antigen Express, Inc. and AGEXP Acquisition
Inc. filed as Exhibit 2.1 to our Current Report on Form 8-K
filed with the Commission on August 15, 2003 is incorporated
herein by reference.
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 with the Commission on 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 with the Commission on July 12, 1999 ("1999 S-1") is
incorporated herein by reference.
54
4.1.1 Form of common stock certificate filed as Exhibit 4.1 to our
1999 S-1 is incorporated herein by reference.
4.1.2 Certificate of Designations, Preferences and Rights of
Series A Preferred Stock filed as Exhibit 4.4 to our Report
on Form 8-K filed with the Commission on January 23, 2001
("January 2001 8-K") is incorporated herein by reference.
4.2.1 1998 Stock Option Plan filed as Exhibit 4.3 to our 1999 S-1
is incorporated herein by reference.
4.2.2 2000 Stock Option Plan filed as Exhibit 4.3.2 to our Form
10-K for the fiscal year ended July 31, 2000 filed with the
Commission on October 30, 2000 is incorporated herein by
reference.
4.2.3 2001 Stock Option Plan filed as Exhibit 4.2.3 to our Form
10-K for the fiscal year ended July 31, 2001 filed with the
Commission on October 29, 2001 ("2001 10-K").
4.3 Form of Warrant issued to Ladenburg Thalmann & Co., Inc.
dated July 6, 2001, filed as Exhibit 4.15 to our
Registration Statement on Form S-3 (File No. 333-67118)
filed with the Commission on August 8, 2001 is incorporated
herein by reference.
4.4.1 Form of Securities Purchase Agreement entered into with
Cranshire Capital, L.P.; RAM Trading Ltd.; Gryphon Master
Fund; Kodiak Opportunity, L.P.; Kodiak Opportunity 3C7,
L.P.; Kodiak Opportunity Offshore, Ltd.; Novelly Exempt
Trust; Langley Partners, L.P.; Montrose Investments, Ltd.;
WEC Asset Management, LLC; ZLP Master Technology Fund, Ltd.;
Alpha Capital Aktiengesellschaft; and The dotCOM Fund, LLC,
dated July 3, 2001, filed as Exhibit 1 to our Report on Form
8-K dated July 6, 2001 and filed with the Commission on July
17, 2001 ("July 2001 8-K") is incorporated herein by
reference.
4.4.2 Form of Registration Rights Agreement entered into with
Cranshire Capital, L.P.; RAM Trading Ltd.; Gryphon Master
Fund; Kodiak Opportunity, L.P.; Kodiak Opportunity 3C7,
L.P.; Kodiak Opportunity Offshore, Ltd.; Novelly Exempt
Trust; Langley Partners, L.P.; Montrose Investments, Ltd.;
WEC Asset Management, LLC; ZLP Master Technology Fund, Ltd.;
Alpha Capital Aktiengesellschaft; and The dotCOM Fund, LLC,
dated July 3, 2001, filed as Exhibit 2 to our July 2001 8-K
is incorporated herein by reference.
4.4.3 Form of Warrant granted to Cranshire Capital, L.P.; RAM
Trading Ltd.; Gryphon Master Fund; Kodiak Opportunity, L.P.;
Kodiak Opportunity 3C7, L.P.; Kodiak Opportunity Offshore,
Ltd.; Novelly Exempt Trust; Langley Partners, L.P.; Montrose
Investments, Ltd.; WEC Asset Management, LLC; ZLP Master
Technology Fund, Ltd.; Alpha Capital Aktiengesellschaft; and
The dotCOM Fund, LLC, dated July 6, 2001, filed as Exhibit 3
to our July 2001 8-K is incorporated herein by reference.
55
4.5.1 Securities Purchase Agreement entered into with Capital
Ventures International, dated July 3, 2001, filed as Exhibit
4 to our July 2001 8-K is incorporated herein by reference.
4.5.2 Registration Rights Agreement entered into with Capital
Ventures International, dated July 3, 2001, filed as Exhibit
5 to our July 2001 8-K is incorporated herein by reference.
4.5.3 Warrant granted to Capital Ventures International, dated
July 3, 2001, filed as Exhibit 6 to our July 2001 8-K is
incorporated herein by reference.
4.6.1 Form of Securities Purchase Agreement entered into with
Elliott International, L.P. and Elliott Associates, L.P.,
dated July 3, 2001, filed as Exhibit 7 to our July 2001 8-K
is incorporated herein by reference.
4.6.2 Form of Registration Rights Agreement entered into with
Elliott International, L.P. and Elliott Associates, L.P.,
dated July 3, 2001, filed as Exhibit 8 to our July 2001 8-K
is incorporated herein by reference.
4.6.3 Warrant issued to Elliott International, L.P. and Elliott
Associates, L.P., dated July 5, 2001, filed as Exhibit 9 to
our July 2001 8-K is incorporated herein by reference.
4.7.1 Securities Purchase Agreement between Generex Biotechnology
Corporation, Elan International Services, Ltd. and Elan
Corporation, plc., dated January 16, 2001, filed as Exhibit
4.1 to our Report on Form 8-K/A dated January 16, 2001 filed
with the Commission on February 1, 2001 is incorporated
herein by reference.
4.7.2 Registration Rights Agreement between Generex Biotechnology
Corporation and Elan International Services, Ltd. dated
January 16, 2001 filed as Exhibit 4.2 to our January 2001
8-K is incorporated herein by reference.
4.7.3 Form of Warrant issued to Elan International Services, Ltd.
filed as Exhibit 4.3 to our January 2001 8-K is incorporated
herein by reference.
4.8.1 Form of Securities Purchase Agreement entered into with
certain parties to October 2000 Private Placement filed as
Exhibit 2 to our Report on Form 8-K dated October 4, 2000
and filed on October 16, 2000 ("October 2000 8-K") is
incorporated herein by reference.
56
4.8.2 Form of Registration Rights Agreement entered into with
certain parties to October 2000 Private Placement filed as
Exhibit 3 to our October 2000 8-K is incorporated herein by
reference.
4.8.3 Form of Warrant issued to certain parties to October 2000
Private Placement filed as Exhibit 4 to our October 2000 8-K
is incorporated herein by reference.
4.9 Securities Purchase Agreement entered into with Smallcap
World Fund, Inc. dated September 29, 2000 filed as Exhibit 1
to our October 2000 8-K is incorporated herein by reference.
4.10 Form of Warrant (GCR Series) held by Robert P. Carter,
Harvey Kaye, Fittube, Inc., Edward Maskaly and Gulfstream
Capital Group, L.C. filed as Exhibit 4.4.2 to our
Registration Statement on Form 10 filed with the Commission
December 14, 1998, as amended February 24, 1999 ("Form 10"),
is incorporated herein by reference.
4.11 Letter Agreement and Warrant with M. H. Meyerson & Co., Inc.
dated November 17, 1998 filed as Exhibit 4.4.4 to our Form
10 is incorporated herein by reference.
4.12 Option Agreement with Wolfe Axelrod Weinberger LLC dated
January 3, 2000, filed as Exhibit 4.5 to our Quarterly
Report on Form 10-Q for the quarter ended January 31, 2000
filed with the Commission on March 14, 2000 is incorporated
herein by reference.
4.13.1 Form of Securities Purchase Agreement entered into with
Cranshire Capital, L.P.; Gryphon Partners, L.P.; Langley
Partners, L.P.; Lakeshore Capital, Ltd.; LH Financial;
Omicron Capital; Photon Fund, Ltd.; Howard Todd Horberg and
Vertical Ventures, LLC dated May 29, 2003 filed as Exhibit
4.1 to our Quarterly Report on Form 10-Q/A for the quarter
ended April 30, 2003 ("3Q 2003 10-Q/A") filed with the
Commission on August 13, 2003 is incorporated herein by
reference.
4.13.2 Form of Registration Rights Agreement entered into with
Cranshire Capital, L.P.; Gryphon Partners, L.P.; Langley
Partners, L.P.; Lakeshore Capital, Ltd.; LH Financial;
Omicron Capital; Photon Fund, Ltd.; Howard Todd Horberg and
Vertical Ventures, LLC dated May 29, 2003 filed as Exhibit
4.2 to our 3Q 2003 10-Q/A is incorporated herein by
reference.
4.13.3 Form of Warrant granted to Cranshire Capital, L.P.;
Gryphon Partners, L.P.; Langley Partners, L.P.; Lakeshore
Capital, Ltd.; LH Financial; Omicron Capital; Photon Fund,
Ltd.; Howard Todd Horberg and Vertical Ventures, LLC dated
May 29, 2003 filed as Exhibit 4.3 to our 3Q 2003 10-Q/A is
incorporated herein by reference.
57
4.13.4 Form of Securities Purchase Agreement entered into with
Cranshire Capital, L.P. dated June 6, 2003 filed as Exhibit
4.4 to our 3Q 2003 10-Q/A is incorporated herein by
reference.
4.13.5 Form of Registration Rights Agreement entered into with
Cranshire Capital, L.P. dated June 6, 2003 filed as Exhibit
4.5 to our 3Q 2003 10-Q/A is incorporated herein by
reference.
4.13.6 Form of Warrant granted to Cranshire Capital, L.P.
dated June 6, 2003 filed as Exhibit 4.6 to our 3Q 2003
10-Q/A is incorporated herein by reference.
4.13.7 Form of replacement Warrant issued to warrant holders
exercising at reduced exercise price in may and June 2003.*
10.1.1 Memorandum of Agreement dated January 7, 1998 between
Generex Pharmaceuticals, Inc., GHI Inc., Generex
Biotechnology Corporation, Dr. Pankaj Modi and Galaxy
Technology, Canada and Consulting Agreement between Generex
Pharmaceuticals and Pankaj Modi dated October 1, 1996 filed
as Exhibit 10.1.1 to our Form 10 is incorporated herein by
reference.
10.1.2 Assignment and Assumption Agreement between Generex
Pharmaceuticals and Pankaj Modi dated October 1, 1996 filed
as Exhibit 10.1.2 to our Registration Statement on Form 10/A
filed with the Commission on February 24, 1999 is
incorporated herein by reference
10.1.3 Supplemental Agreement dated December 31, 2000 between
Generex Pharmaceuticals, Inc., Generex Biotechnology
Corporation and Dr. Pankaj Modi, filed as Exhibit 10.1.4 to
our 2001 10-K.
10.2.1 Development and License Agreement dated September 5, 2000
between Generex Biotechnology Corporation and Eli Lilly and
Company filed as Exhibit 10.1 to our Report on Form 8-K/A
dated September 5, 2000 and filed with the Commission on
January 24, 2001 is incorporated herein by reference.
10.3.1 Amended and Restated Subscription, Joint Development and
Operating Agreement dated January 15, 2002, between Elan
Corporation, plc, Elan International Services, Ltd. and
Generex Biotechnology Corporation and Generex (Bermuda),
Ltd. filed as Exhibit 10.1 to our Current Report on Form
8-K/A ("September 2003 8-K/A") filed with the Commission on
September 9, 2003 is incorporated herein by reference.
10.3.2 Amended and Restated License Agreement dated January 15,
2002, between Elan Corporation, plc and Generex (Bermuda),
Ltd. filed as Exhibit 10.2 to our September 2003 8-K/A is
incorporated herein by reference.
58
10.3.3 Amended and Restated License Agreement dated January 15,
2002, between Generex Biotechnology Corporation and Generex
(Bermuda), Ltd. filed as Exhibit 10.3 to our September 2003
8-K/A is incorporated herein by reference.
10.4 Stockholders Agreement among Generex Biotechnology
Corporation and the former holders of capital stock of
Antigen Express, Inc.*
16. Letter from Deloitte & Touche, LLP regarding its concurrence
with the statements made by Generex in this Report regarding
its dismissal as principal accountant filed as Exhibit 16 to
our Current Report on Form 8-K/A filed with the Commission
on July 11, 2003 is incorporated herein by reference.
21 Subsidiaries of the Registrant.*
23.1 Consent of BDO Dunwoody, LLP, independent auditors.*
23.2 Consent of Deloitte & Touche LLP, independent auditors.*
24 Powers of Attorney, filed as Exhibit 24 to our 2001 10-K.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*
32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
- ------------------
* Filed herewith. All other exhibits are incorporated by reference, as
described.
Reports on Form 8- K
The following Reports on Form 8-K were filed during the last quarter of the
fiscal year ended July 31, 2003 and subsequent interim period ended October 14,
2003:
o Report on Form 8-K, filed with the Commission May 27, 2003, relating to
the private placement of unregistered common stock under Item 5 - Other
Events.
o Report on Form 8-K, filed with the Commission June 5, 2003, relating to
the NASDAQ National Market delisting under Item 5 - Other Events.
o Report on Form 8-K, filed with the Commission July 7, 2003, relating to
the change in independent auditor under Item 4 - Change in Registrant's
Certifying Accountant and Item 7 - Financial Statements and Exhibits.
59
o Report on Form 8-K/A, filed with the Commission July 11, 2003, relating
to the change in independent auditor under Item 4 - Change in
Registrant's Certifying Accountant and Item 7 - Financial Statements
and Exhibits.
o Report on Form 8-K, filed with the Commission July 17, 2003, relating
to the redacted agreements with respect to the transaction with Elan
Corporation, plc and its affiliate under Item 7 - Financial Statements
and Exhibits.
o Report on Form 8-K, filed with the Commission August 15, 2003, relating
to the acquisition by merger of Antigen Express, Inc. under Item 2 -
Acquisition of Assets and Item 7 - Financial Statements and Exhibits.
o Report on Form 8-K/A, filed with the Commission September 9, 2003,
relating to the redacted agreements with respect to the transaction
with Elan Corporation, plc and its affiliate under Item 7 - Financial
Statements and Exhibits.
60
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 29th day of October,
2003.
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Anna E. Gluskin
-----------------------
Name: Anna E. Gluskin
Title: President
Date: October 29, 2003
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.
Name Capacity in Which Signed Date
- ---- ------------------------ ----
/s/ Anna E. Gluskin President, Chief Executive October 29, 2003
- ---------------------------- Officer and Director
Anna E. Gluskin
/s/ Rose C. Perri Chief Operating Officer, October 29, 2003
- ---------------------------- Treasurer, Acting CFO,
Rose C. Perri Secretary and Director
/s/ Pankaj Modi, Ph.D. Vice President, Research and October 29, 2003
- ---------------------------- Development and Director
Pankaj Modi, Ph.D.
/s/ Gerald Bernstein Vice President and Director October 29, 2003
- ----------------------------
Gerald Bernstein
/s/ J. Michael Rosen Director October 29, 2003
- ----------------------------
J. Michael Rosen
/s/ Peter Levitch Director October 29, 2003
- ----------------------------
Peter Levitch
/s/ John P. Barratt Director October 29, 2003
- ----------------------------
John P. Barratt
/s/ Slava Jarnitskii Controller October 29, 2003
- ----------------------------
Slava Jarnitskii
61