-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rjt6z/sD2pu0HXJ+chRBSm/nOHmwl5lU1c4QsSivqvQUSoV285bh0RCh7hEIx6ht XW8Ds3PQ6mEXKLCaiUqHYg== 0000950116-03-004209.txt : 20031029 0000950116-03-004209.hdr.sgml : 20031029 20031029170753 ACCESSION NUMBER: 0000950116-03-004209 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030731 FILED AS OF DATE: 20031029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENEREX BIOTECHNOLOGY CORP CENTRAL INDEX KEY: 0001059784 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 820490211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25169 FILM NUMBER: 03964366 BUSINESS ADDRESS: STREET 1: 33 HARBOUR SQ STREET 2: STE 202 CITY: TORONTO ONTARIO CANADA STATE: A1 ZIP: M5J 2G2 BUSINESS PHONE: 4163642551 MAIL ADDRESS: STREET 1: 33 HARBOUR SQ STREET 2: STE 202 CITY: TORONTO ONTARIO CA STATE: A1 ZIP: M5J 2G2 10-K 1 ten-k.txt 10-K 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 ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 98-0178636 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 33 Harbour Square, Suite 202, Toronto, Canada M5J 2G2 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Telephone Number: (416) 364-2551 -------------- Internet Website: www.generex.com --------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to section 12(g) of the Act: Common Stock, par value $.001 per share --------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such 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 - -------------------------- 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 - ---------------------- 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 - ---------------------------------- 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 - -------------- 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 - -------------------------------------- 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 - ------------- 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 - ----------------- 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 EX-4 3 ex4-13.txt EXHIBIT 4.13.7 EXHIBIT 4.13.7 WARRANT THE SECURITIES REPRESENTED BY THIS WARRANT AND SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND HAVE NOT BEEN REGISTERED UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL IN FORM REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS. Generex Biotechnology Corporation WARRANT TO PURCHASE COMMON STOCK Warrant No.: 2003NW - [Number] Number of Shares: [Shares] Date of Original Issuance: __________, 2003 Generex Biotechnology Corporation, a Delaware corporation (the "Company"), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, [Name], the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as defined herein) * * *[Amount]* * * fully paid nonassessable shares of Common Stock (as defined herein) of the Company (the "Warrant Shares") at the purchase price per share provided in Section 1(b) below. Section 1. (a) Warrant Subscription Agreement. This Warrant is one of a series of Warrants (the "Warrants") issued pursuant to the terms of one or more Warrant Subscription Agreements pursuant to which the Company has issued Warrants including Warrant between May ___, 2003, and June 12, 2003 (collectively, the "Warrant Purchase Agreements"). (b) Definitions. The following words and terms as used in this Warrant shall have the following meanings: (i) "Approved Stock Plan" shall mean any employee benefit plan as defined in Rule 405 under the Securities Act which has been approved by the Board of Directors of the Company, pursuant to which the Company's securities may be issued to any employee, officer, director, consultant or other service provider for services provided to the Company. (ii) "Common Stock" means (i) the Company's common stock, $.001 par value per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock. (iii) "Convertible Securities" means any stock or securities (other than Options) directly or indirectly convertible into or exchangeable for Common Stock. (iv) "Expiration Date" means _______________, 200__. (v) "Options" means any rights, warrants, or options to subscribe for or purchase Common Stock or Convertible Securities. (vi) "Other Securities" means the other Warrants. (vii) "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (viii) "Principal Market" means the Nasdaq National Market or Nasdaq Small-Cap Market. (ix) "Securities Act" means the Securities Act of 1933, as amended. (x) "Warrant" means this Warrant and all Warrants issued in exchange, transfer or replacement of any thereof. (xi) "Warrant Exercise Price" shall be $__________ per common share, subject to adjustment as hereinafter provided. Section 2. Exercise of Warrant. (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, in whole or in part, at any time on any business day on or after the opening of business on the date hereof and prior to 11:59 P.M. Eastern Time on the Expiration Date by (i) delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto (the "Exercise Notice"), of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (plus any applicable issue or transfer taxes) (the "Aggregate Exercise Price") in cash or by check or wire 2 transfer; and (iii) the surrender to a common carrier for delivery to the Company as soon as practicable following such date, this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction); provided, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this Warrant, such issuance shall be deemed a transfer and the provisions of Section 7 shall be applicable. In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), a certificate or certificates for the Warrant Shares so purchased, in such denominations as may be requested by the holder hereof and registered in the name of, or as directed by, the holder, shall be issued as soon as practicable, and in no event later than five (5) business days after the Company's receipt of the Exercise Notice, the Aggregate Exercise Price and this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction), and deliver the same at the Company's expense to, or as directed by, such holder. Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in clause (ii) above, the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of this Warrant as required by clause (iii) above or the certificates evidencing such Warrant Shares. In the case of a dispute as to the determination of the Warrant Exercise Price, the Company shall promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within five (5) business days of receipt of the holder's subscription notice. (b) Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in no event later than five (5) business days after any exercise and at its own expense, issue a new Warrant identical in all respects to this Warrant exercised except it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised. (c) Notwithstanding anything in this Warrant to the contrary, in no event shall the holder of this Warrant be entitled to exercise a number of Warrant Shares (or portions thereof) in excess of the number of Warrant Shares (or portions thereof) upon exercise of which the sum of (i) the number of Warrant Shares beneficially owned by the holder and its affiliates (other than Warrant Shares which may be deemed beneficially owned through the ownership of the unexercised Warrants and the unexercised or unconverted portion of any other securities of the Company with limitations similar to this paragraph (c)) and (ii) the number of Warrant Shares issuable upon exercise of the Warrants (or portions thereof) with respect to which the determination described herein is being made, would result in beneficial ownership by the holder and its affiliates of more than 9.9% of the outstanding shares of Company common stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Regulation 13D-G of the Securities Exchange Act of 1934, as amended, except as otherwise provided in clause (i) of the preceding sentence. 3 Section 3. Representations and Covenants as to Common Stock. The Company hereby represents and covenants as follows: (a) This Warrant is, and any Warrant issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued. (b) All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. (c) During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least 100% of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. (d) The Company shall promptly secure the listing of the shares of Common Stock issuable upon exercise of this Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. (e) The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. (f) This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. Section 4. Taxes. The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant. 4 Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders. Section 6. Representations of Holder.The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an "accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an "Accredited Investor"). Section 7. Ownership and Transfer. (a) The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. (b) This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed warrant power in the form of Exhibit B attached hereto; provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 7(c) below. (c) The holder of this Warrant understands that this Warrant has not been and is not expected to be, registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (i) subsequently registered thereunder, or (ii) the transferee is an affiliated entity that is an Accredited Investor, or (iii) such holder shall have delivered to the Company an opinion of counsel, in generally acceptable form, to the effect that the securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to Regulation S under 5 the Securities Act or to an exemption from such registration; provided that (A) any sale of such securities made in reliance on Rule 144 promulgated under the Securities Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the Securities and Exchange Commission thereunder; and (B) neither the Company nor any other person is under any obligation to register the Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. Section 8. Adjustment of Warrant Exercise Price and Number of Shares. The Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows: (a) Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. (b) Distribution of Assets. If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement or other transaction) (a "Distribution"), at any time after the issuance of this Warrant, then, in each such case: (i) the Warrant Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Warrant Exercise Price by a fraction of which (A) the numerator shall be the Closing bid price on the trading day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company's Board of Directors) applicable to one share of Common Stock, and (B) the denominator shall be the Closing bid price on the trading day immediately preceding such record date; and (ii) either (A) the number of Warrant Shares obtainable upon exercise of this Warrant shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding clause (i), or (B) in the event that the Distribution is of common stock of a company whose common stock is traded on a national securities exchange or a national automated quotation system, then the holder of this Warrant shall receive an additional warrant to purchase Common Stock, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the amount of the assets that would have been payable to the holder of this Warrant pursuant to the Distribution had the holder exercised this Warrant immediately prior to such record date and with an exercise price equal to the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding clause (i). 6 (c) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided that no such adjustment will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8. (d) Notices. (i) Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail, and certifying, the calculation of such adjustment. (ii) The Company will give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined below), dissolution or liquidation, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder. (iii) The Company will also give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder. Section 9. Purchase Rights; Reorganization, Reclassification, Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. 7 (b) Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any (i) sale of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor resulting from such Organic Change (in each case, the "Acquiring Entity") written agreement (in form and substance satisfactory to the holders of Warrants representing a majority of the shares of Common Stock obtainable upon exercise of the Warrants then outstanding) to deliver to each holder of Warrants in exchange for such Warrants, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to this Warrant and satisfactory to the holders of the Warrants (including, an adjusted warrant exercise price equal to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and exercisable for a corresponding number of shares of Common Stock acquirable and receivable upon exercise of the Warrants, if the value so reflected is less than the Warrant Exercise Price in effect immediately prior to such consolidation, merger or sale). Prior to the consummation of any other Organic Change, the Company shall make appropriate provision (in form and substance satisfactory to the holders of Warrants representing a majority of the shares of Common Stock obtainable upon exercise of the Warrants then outstanding) to insure that each of the holders of the Warrants will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrants, such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of shares of Common Stock which would have been acquirable and receivable upon the exercise of such holder's Warrant as of the date of such Organic Change (without taking into account any limitations or restrictions on the exercisability of this Warrant). Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an indemnification undertaking, issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed. Section 11. Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); (iii) upon receipt, when sent by e-mail (provided that the transmission is electronically tracked and the results of 8 tracking kept on file by the sending party); or (iv) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The mailing addresses, facsimile numbers and e-mail addresses for such communications shall be as set forth below: If to the Company: Generex Biotechnology Corporation 33 Harbour Square, Suite 202 Toronto, Ontario M5J 2G2 Telephone: (416) 364-2551 Facsimile: (416) 364-9363 E-mail: rperri@generex.com Attention: Rose Perri With a copy to: Eckert Seamans Cherin & Mellott 1515 Market Street, 9th Floor Philadelphia, Pennsylvania 19102-1909 Telephone: (215) 851-8472 Facsimile: (215) 851-8383 E-mail: gxm@escm.com Attention: Gary A. Miller, Esq. Or at such other mailing address, facsimile number or e-mail address that the Company shall specify by notice to the holder. To a holder of this Warrant: at the mailing address, facsimile number or e-mail address set forth on the Schedule I to the Warrant Subscription Agreement, with copies to such holder's representatives as set forth on such Schedule I or at such other mailing address, facsimile number or e-mail address as shall be delivered to the Company upon the issuance or transfer of this Warrant. Each party shall provide five days' prior written notice to the other party of any change in mailing address, facsimile number or e-mail address. Section 12. Amendments. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party or holder hereof against which enforcement of such change, waiver, discharge or termination is sought. Section 13. Date. This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. 9 Section 14. Descriptive Headings; Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be governed by the internal laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Delaware. This Warrant has been duly executed by the Company this ___ day of __________, 200__. GENEREX BIOTECHNOLOGY CORPORATION By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 10 EXHIBIT A TO WARRANT - -------------------- SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock ("Warrant Shares") of Generex Biotechnology Corporation, a Delaware corporation (the "Company"), evidenced by the attached Warrant (the "Warrant"). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant. 1. Form of Warrant Exercise Price. The Holder intends that payment of the Warrant Exercise Price shall be made as: a "Cash Exercise" with respect to _______________________ Warrant Shares. 2. Payment of Warrant Exercise Price. If the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder is transmitting herewith the sum of $___________________ to the Company in payment for such Warrant Shares. 3. Delivery of Warrant Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant. Date: _________________________ __, 200_ Name of Registered Holder: ___________________________________________________ Signature: By:________________________________________________ Print Name and Title:______________________________ Title:_____________________________________________ < 11 EXHIBIT B TO WARRANT -------------------- FORM OF WARRANT POWER FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ________________, Federal Identification No. __________, a warrant to purchase ____________ shares of the capital stock of Generex Biotechnology Corporation, a Delaware corporation, represented by warrant certificate no. _____, standing in the name of the undersigned on the books of said corporation. The undersigned does hereby irrevocably constitute and appoint ______________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises. Dated: _________, 200_ _______________________________________ By:____________________________________ Name:__________________________________ Title:_________________________________ 12 EX-10 4 ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 GENEREX BIOTECHNOLOGY CORPORATION 33 Harbour Square, Suite 202 Toronto, Ontario, Canada M5J 2G2 STOCKHOLDERS' AGREEMENT AUGUST 6, 2003 This Stockholders' Agreement (the "Agreement") is made as of August 6, 2003, between Generex Biotechnology Corporation, a Delaware corporation (the "Company") and the Stockholders listed on Exhibit A (each a "Stockholder" and collectively the "Stockholders"). SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT; REGISTRATION RIGHTS 1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "Closing Date" shall have the meaning set forth in Section 1.14 of the Merger Agreement. "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean the Company's Common Stock, $0.001 par value per share. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Holder" shall mean (i) each Stockholder, and (ii) any Person holding Registrable Securities to whom the rights under this Section 1 have been transferred, in whole or in part, in accordance with Section 1.14 hereof. "Merger Agreement" shall mean the Agreement and Plan of Merger dated as of August 6, 2003 among the Company, AgExp Acquisition, Inc. and Antigen Express, Inc. "Person" shall mean a natural person, corporation, partnership, limited liability company, trust or any other entity, other than a governmental entity, recognized by statute in its jurisdiction of formation as having legal existence. "Registrable Securities" shall mean the shares of Common Stock held by the Holders; provided, however, that Registrable Securities shall not include such securities that shall have been (a) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (b) sold in a single transaction exempt from the registration and prospectus delivery requirements of the Securities Act so that all transfer restrictions and restrictive legends with respect thereto shall have been removed prior to the consummation of such sale. The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement with the Commission in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses, except as otherwise stated below, incurred by the Company in complying with Section 1.5 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) and the reasonable fees and disbursements of one counsel for all Holders up to $5,000 included in any registration statement hereunder. "Restricted Securities" shall mean the securities of the Company required to bear the legend set forth in Section 1.3 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set forth above, all reasonable fees and disbursements of counsel for any Holder. "Shares" shall mean the shares of Common Stock issued to a Stockholder pursuant to the Merger Agreement and any other securities issued in respect of such securities upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event. 1.2 RESTRICTIONS ON TRANSFERABILITY. The Shares shall not be sold, assigned, transferred or pledged prior to the effective date of a registration statement under the Securities Act covering the sale of such shares except upon the conditions specified in this Section 1. Each Holder will cause any proposed purchaser, assignee, transferee, or pledgee of any such shares held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 1. 2 1.3 RESTRICTIVE LEGEND. Each certificate representing the Shares and any other securities issued in respect thereof upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 1.4 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. Each Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Common Stock in order to implement the restrictions on transfer established in this Section 1. 1.4 RESTRICTIONS ON TRANSFER; NOTICE OF PROPOSED TRANSFERS. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 1.4. Unless there is in effect a registration statement under the Securities Act covering the proposed sale, assignment, transfer or pledge of any Restricted Securities, prior to any such transfer (other than (i) a transfer not involving a change in beneficial ownership, (ii) any transfer by any Holder to (A) any individual or entity controlled by, controlling, or under common control with, such Holder, or (B) any entity with respect to which such Holder (or any Person controlled by, controlling, or under common control with, such Holder) has the power to direct investment decisions, or (iii) in transactions in compliance with Rule 144), the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, at such holder's expense by either (i) a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 1.3 above, except that such certificate shall not bear such 3 restrictive legend if in the opinion of counsel for such holder and the Company such legend is not required in order to establish compliance with any provision of the Securities Act. Notwithstanding the foregoing, so long as an executive officer or director of the holder serves as an executive officer or director of the Company, such holder agrees to not sell or transfer the Registrable Securities during periods outside of the trading windows applicable to the officers of the Company as set forth in the Company's Insider Trading Program adopted by the Company's Board of Directors. 1.5 MANDATORY REGISTRATION. (a) The Company shall prepare and file with the Commission a registration statement (the "Registration Statement") on Form S-1 (or, when eligible, Form S-3) covering the resale of the Registrable Securities by the Holders on or prior to 30 days after the Closing Date and shall maintain the effectiveness of such registration statement during the period set forth in Section 1.7 but subject to suspensions of registration in accordance with Section 1.8. The Company shall use its commercially reasonable efforts to cause the Registration Statement to be declared effective within ninety (90) days after the Closing Date. (b) The Company shall notify each Holder in writing promptly (and in any event within three days) after receiving notification from the Commission that the Registration Statement has been declared effective. 1.6 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with the registration pursuant to Section 1.5 shall be borne by the Company. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered except the legal fees and disbursements of any counsel for any Holder not required to be paid by the Company which shall be borne by such Holder. 1.7 REGISTRATION PROCEDURES. At its expense the Company will: (a) Prepare and file with the Commission the Registration Statement and use its commercially reasonable efforts to cause such Registration Statement to become effective as soon as possible after the filing thereof, and keep the Registration Statement effective pursuant to Rule 415 at all times, subject to Section 1.8, until the earlier of (i) the date on which all Registrable Securities have been sold by each Holder, and (ii) the date on which the Registration Rights terminate as set forth in Section 1.12; (b) Promptly furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus (and all required amendments and supplements to any thereof), final prospectus and such other documents as such Holders or such underwriters may reasonably request in order to facilitate the public offering of such securities; (c) Prior to the effectiveness of the Registration Statement, file all documents required of the Company for normal blue sky clearance in states reasonably specified in writing by the Holders, provided, however, that the Company shall not be required to qualify to do business in any jurisdiction in which it is not now so qualified; and 4 (d) Maintain the listing of the Registrable Securities on the NASDAQ SmallCap Market. 1.8 SUSPENSION OF REGISTRATION. The Company shall promptly notify the Holders of (i) the issuance by the Commission of a stop order suspending the effectiveness of the Registration Statement, (ii) the happening of any event, of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the occurrence or existence of any pending corporate development that, in the reasonable discretion of the Company, makes it appropriate to suspend the availability of the Registration Statement to comply with Commission rules. In each case the Company shall use commercially reasonable efforts to promptly prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and deliver such number of copies of such supplement or amendment to each Holder as such Holder may reasonably request; provided that, the Company may delay to the extent permitted by law the disclosure of material non-public information concerning the Company the disclosure of which at the time is not, in the good faith opinion of the Company, in the best interests of the Company (an "Allowed Delay"); provided, further, that an Allowed Delay shall not exceed 6030 consecutive days in any 365-day period, and there shall be no more than two such Allowed Delay periods. The Company shall promptly notify the Holders in writing of the existence of an Allowed Delay and shall advise the Holders in writing to cease all sales under the Registration Statement until the end of the Allowed Delay. 1.9 INDEMNIFICATION. (a) The Company will indemnify and hold harmless each Holder and, each of Holder's respective officers and directors, trustees, members, employees and partners, and each Person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration has been effected pursuant to this Section 1, and each underwriter, if any, and each Person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses (including reasonable attorneys' fees), claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act, the Exchange Act, state securities law or any rule or regulation promulgated under such laws applicable to the Company in connection with any the registration, and within a reasonable period the Company will reimburse each such Holder, each of Holder's respective officers and directors, trustees, members, employees and partners, and each Person controlling such Holder within the meaning of Section 5 15 of the Securities Act, each such underwriter and each Person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing, defending or paying any such claim, loss, damage, liability or action; provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling Person or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the Registration Statement, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by the Registration Statement, each Person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act and each other such Holder each of their respective officers and directors, trustees, members, employees and partners, and each Person controlling such Holder within the meaning of Section 15 of the Securities Act, against all expenses (including reasonable attorneys' fees), claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and within a reasonable period will reimburse the Company, such Holders, each of their respective officers and directors, trustees, members, employees and partners, and each Person controlling such Holder within the meaning of Section 15 of the Securities Act, for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in the Registration Statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited into an amount equal to the gross proceeds before expenses and commissions to such Holder received for the shares sold by such Holder, unless such liability arises out of or is based on willful misconduct by such Holder. (c) Each party entitled to indemnification under this Section 1.9 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld or delayed), and the Indemnified Party may participate in such defense at such Indemnified Party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the 6 Indemnifying Party of its obligations under this Section 1.9 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. 1.10 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in the registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may reasonably request in writing and as shall be required in connection with the registration referred to in this Section 1. 1.11 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, the Company agrees to use its commercially reasonable efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times; (b) Use its commercially reasonable efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) So long as a Holder owns any Restricted Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 1.12 TERMINATION OF REGISTRATION RIGHTS. The registration rights granted pursuant to this Agreement shall terminate as to each Holder on the earlier of (i) two years after the effective date of the Registration Statement, (ii) the date on which all Registrable Securities held by such Holder may be resold without registration or without regard to any volume limitations by reason of Rule 144(k) under the Securities Act or any other rule of similar effect, or (iii) all of the Registrable Securities held by such Holder have been sold pursuant to the Registration Statement or Rule 144(k) under the Securities Act or any other rule of similar effect. 7 SECTION 2 MISCELLANEOUS 2.1 GOVERNING LAW. This Agreement shall be governed in all respects by the internal laws of the State of Delaware. 2.2 SURVIVAL. The covenants and agreements made herein shall survive the closing of the transactions contemplated hereby. 2.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Merger Agreement constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that Holders of a majority of the Registrable Securities may, with the Company's prior written consent, waive, modify or amend on behalf of all Holders, any provisions hereof. 2.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to a Holder, at the address for such Holder set forth on Exhibit A hereto or at such other address as such Holder shall have furnished the Company in writing, or (b) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the President, or at such other address as the Company shall have furnished to the Holders. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. 2.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party to this Agreement upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any Holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party to this Agreement, shall be cumulative and not alternative. 8 2.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 2.8 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 2.9 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. (Signature Page(s) Follow(s)) 9 The foregoing Agreement is hereby executed by each party as of the date indicated below. "COMPANY" GENEREX BIOTECHNOLOGY CORPORATION a Delaware Corporation By: ________________________________ Anna E. Gluskin President and Chief Executive Officer Date: August 6, 2003 10 (Signature Page to Stockholders' Agreement) "STOCKHOLDER" _________________________________ Signature of Individual Stockholder JOSEPH V. GULFO __________________________________ Printed Name of Individual Stockholder "STOCKHOLDER" _________________________________ Signature of Individual Stockholder ROBERT E. HUMPHREYS __________________________________ Printed Name of Individual Stockholder or __________________________________ Printed Name of Entity Stockholder By:_______________________________ Signature __________________________________ Printed Name of Signatory ___________________________________ Title 11 EXHIBIT A STOCKHOLDERS Dr. Joseph V. Gulfo Dr. Robert E. Humphreys 12 EX-21 5 ex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF GENEREX BIOTECHNOLOGY CORPORATION Name Place of Incorporation - ---- ---------------------- Generex Pharmaceuticals, Inc. Ontario, Canada Generex (Bermuda), Inc. Bermuda Antigen Express, Inc. Massachusetts, USA All subsidiaries are 100% owned except for Generex (Bermuda), which is 80.1% owned. All subsidiaries conduct business only under their respective corporate names. EX-23 6 ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements No. 333-67118, 333-51194 and No. 333-42452 of Generex Biotechnology Corporation and Subsidiaries (the Company) on Forms S-3, of our report dated September 22, 2003 relating to the financial statements appearing in this Annual Report on Form 10-K of the Company for the year ended July 31, 2003. /s/ BDO Dunwoody, LLP - ------------------------ Toronto, Ontario October 29, 2003 EX-23 7 ex23-2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements No. 333-67118, 333-51194 and No. 333-42452 of Generex Biotechnology Corporation and Subsidiaries (the Company) on Forms S-3, of our report dated October 7, 2002 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the Restatement described in Note 17) appearing in this Annual Report on Form 10-K of the Company for the year ended July 31, 2003. /s/ DELOITTE & TOUCHE LLP - ---------------------------- DELOITTE & TOUCHE LLP Toronto, Ontario October 29, 2003 EX-31 8 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Anna E. Gluskin, certify that: 1. I have reviewed this annual report on Form 10-K of Generex Biotechnology Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: October 29, 2003 By: /s/ Anna E. Gluskin ---------------------------------------- Anna E. Gluskin, Chief Executive Officer (Principal Executive Officer) EX-31 9 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Rose C. Perri, certify that: 1. I have reviewed this annual report on Form 10-K of Generex Biotechnology Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: October 29, 2003 By: /s/ Rose C. Perri -------------------------------------------- Rose C. Perri, Chief Operating Officer (Principal Financial and Accounting Officer) EX-32 10 ex32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATIONS Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. ss. 1350, as adopted), Anna E. Gluskin, Chief Executive Officer and President of Generex Biotechnology Corporation (the "Company"), and Rose C. Perri, Chief Operating Officer of the Company, each hereby certifies that, to the best of his or her knowledge: 1. The Company's Annual Report on Form 10-K for the period ended July 31, 2003, and to which this Certification is attached as Exhibit 32 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the end of the period covered by the Report. DATE: October 29, 2003 By: /s/ Anna E. Gluskin -------------------------------------------- Anna E. Gluskin, Chief Executive Officer (Principal Executive Officer) DATE: October 29, 2003 By: /s/ Rose C. Perri -------------------------------------------- Rose C. Perri, Chief Operating Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----