<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 2000
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________________ to ______________________.
COMMISSION FILE NUMBER: 0-25169
GENEREX BIOTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 82-0490211
--------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 HARBOR SQUARE, SUITE 202
TORONTO, ONTARIO
CANADA M5J 2G2
(Address of principal executive offices)
416/364-2551
(Registrant's telephone number, including area code)
Not applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
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. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's Common Stock, par value
$.001, was 18,768,930 as of October 31, 2000.
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements - unaudited
Consolidated Balance Sheets --
October 31, 2000 and July 31, 1999 ....................... 3
Consolidated Statements of Operations --
for the three month periods ended October 31, 2000
and 1999, and cumulative from November 2, 1995,
to October 31, 2000....................................... 4
Consolidated Statements of Cash Flows --
For the three-month periods ended October 31, 2000
and 1999, and cumulative from November 2, 1995,
to October 31, 2000....................................... 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................... 14
Item 2. Changes in Securities and Use of Proceeds................. 15
Item 6. Exhibit and Reports on Form 8-K and Form 8-K/A............ 16
Signatures.............................................................. 17
2
<PAGE>
Item 1. Consolidated financial statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, July 31,
---------------- ---------------
2000 2000
---------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,915,573 $ 3,204,905
Short-term investments 17,702,001 3,966,263
Miscellaneous receivables 15,587 16,138
Other current assets 250,799 99,041
---------------- ---------------
Total Current Assets 29,883,960 7,286,347
Property and Equipment, Net 2,755,488 2,395,867
Patents, Net 313,688 267,369
Deposits 19,408 47,914
Deferred Offering Costs 3,406,196 --
Due From Related Parties 332,035 343,773
---------------- ---------------
TOTAL ASSETS $ 36,710,775 $ 10,341,270
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,410,676 $ 1,204,282
Current maturities of long-term debt 8,959 9,404
---------------- ---------------
Total Current Liabilities 1,419,635 1,213,686
Long-Term Debt, Less Current Maturities 686,162 712,559
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares,
no shares issued and outstanding at October 31, 2000 and
at July 31, 2000 -- --
Special Voting Rights Preferred stock, $.001 par value;
authorized, issued and outstanding 1,000 shares at
October 31, 2000 and at July 31, 2000 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 18,768,930 and 16,326,333 shares
at October 31, 2000 and July 31, 2000, respectively 18,769 16,327
Additional paid-in capital 57,855,993 30,435,066
Notes receivable - common stock (54,118) (54,118)
Deficit accumulated during the development stage (22,960,932) (21,816,725)
Accumulated other comprehensive loss (254,735) (165,526)
---------------- ---------------
Total Stockholders' Equity 34,604,978 8,415,025
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,710,775 $ 10,341,270
================ ===============
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
November 2,
For the Three Months Ended 1995 (Date of
October 31, Inception) to
-------------------------------------- to October 31,
2000 1999 2000
---------------- ---------------- -----------------
<S> <C> <C> <C>
Contract Research Revenues $ 1,000,000 $ -- $ 1,000,000
Operating Expenses:
Research and development 1,019,979 409,919 7,966,015
Research and development - related party -- -- 220,218
General and administrative 1,324,553 772,423 15,788,343
General and administrative - related party -- -- 314,328
---------------- ---------------- -----------------
Total Operating Expenses 2,344,532 1,182,342 24,288,904
---------------- ---------------- -----------------
Operating Loss (1,344,532) (1,182,342) (23,288,904)
Other Income (Expense):
Miscellaneous income -- -- 7,906
Interest income 219,945 63,822 547,943
Interest expense (19,620) (252) (227,877)
---------------- ---------------- -----------------
Net Loss $ (1,144,207) $ (1,118,772) $ (22,960,932)
================ ================ ==============
Basic and Diluted Net Loss Per Common
Share $ (.07) $ (.08)
================ ================
Weighted Average Number of Shares of
Common Stock Outstanding 17,176,462 14,741,920
================ ================
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
November 2,
For the Three Months Ended 1995 (Date of
October 31, Inception) to
---------------------------------------- to October 31,
2000 1999 2000
---------------- ------------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (1,144,207) $ (1,118,772) $ (22,960,932)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 21,026 21,237 231,703
Reduction of notes receivable - common
stock in exchange for services rendered -- 9,508 423,882
Common stock issued for services rendered 411,250 -- 1,651,978
Stock options and warrants issued for
services rendered -- -- 3,102,024
Preferred stock issued for services rendered -- -- 100
Founders shares transferred for services rendered -- -- 353,506
Changes in operating assets and liabilities:
Miscellaneous receivables -- 107,236 27,873
Other current assets (153,004) 26,757 (255,752)
Accounts payable and accrued liabilities 221,764 59,726 2,234,082
Other, net -- -- 110,317
--------------- -------------- ----------------
Net Cash Used in Operating Activities (643,171) (894,308) (15,081,219)
Cash Flows From Investing Activities:
Purchase of property and equipment (473,034) -- (1,146,988)
Costs incurred for patents (57,347) -- (326,846)
Change in restricted cash -- -- (5,595)
Purchase of short-term investments (13,735,738) (7,838) (17,702,001)
Change in deposits 27,842 (23,161) 29,961
Change in notes receivable - common stock -- -- (4,118)
Change in due from related parties -- -- (2,255,197)
Other, net -- -- 89,683
--------------- -------------- ----------------
Net Cash Used in Investing Activities (14,238,277) (30,999) (21,321,101)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 993,149
Repayment of long-term debt (2,245) (387,876) (963,021)
Change in due to related parties -- -- 154,541
Proceeds from issuance of common stock, net 23,605,925 15,000 48,268,145
Purchase and retirement of common stock -- -- (119,066)
--------------- -------------- ----------------
Net Cash Provided By (Used In) Financing
Activities 23,603,680 (372,876) 48,333,748
Effect of Exchange Rates on Cash (11,564) 8,360 (15,855)
--------------- -------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 8,710,668 (1,289,823) 11,915,573
Cash and Cash Equivalents, Beginning of Period 3,204,905 5,633,201 --
--------------- -------------- ----------------
Cash and Cash Equivalents, End of Period $ 11,915,573 $ 4,343,378 $ 11,915,57
=============== ============== ================
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations for reporting Form
10-Q. Accordingly, certain information and disclosures required by generally
accepted accounting principles for complete financial statements are not
included herein. The interim statements should be read in conjunction with the
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-K.
Interim statements are subject to possible adjustments in connection
with the annual audit of the Company's accounts for the fiscal year 2001; in the
Company's opinion, all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal and recurring nature.
2. Revenue Recognition
Contract revenue from collaborative research agreements is recorded
when earned and as the related costs are incurred. Payments received, which are
related to future performance, are deferred and recognized as revenue when
earned over future performance periods. In accordance with contract terms,
upfront and milestone payments from collaborative research agreements are
considered reimbursements for costs incurred under the agreements, and
accordingly, are generally recognized based on actual efforts expended over the
remaining terms of the agreements.
3. Comprehensive Income/(Loss)
The Company has adopted the provisions of Statement No. 130, Reporting
Comprehensive Income, which modifies the financial statement presentation of
comprehensive income and its components. Adoption of this statement had no
effect on the Company's financial position or operating results.
Comprehensive loss, which includes net loss and the change in the
foreign currency translation account during the period, for the three months
ended October 31, 2000 and 1999 was $1,233,416 and $1,066,937, respectively.
4. Deferred Offering Costs
The Company has capitalized the value of warrants issued in conjunction
with the closing of an equity draw down agreement in August 2000. It is the
current intention of management that this asset will be written off, on a pro
rata basis, against the proceeds derived from the issuance of common stock under
this agreement.
6
<PAGE>
5. Accounts Payable and Accrued Expense
Accounts payable and accrued expenses consist of the following:
October 31, July 31,
2000 2000
----------- ---------
Accounts Payable $884,179 $853,428
Consulting Accruals 64,571 77,086
Litigation Accruals 161,926 167,650
Accrued Legal Fees -- 106,118
Accrued Financial Costs 300,000 --
---------- ----------
Total $1,410,676 $1,204,282
========== ==========
6. Pending Litigation
In October 1998, Sands Brothers & Co., Ltd. (Sands), a New York
City-based investment banking and brokerage firm, initiated arbitration against
the Company under New York Stock Exchange rules. This claim is based upon a
claim that Sands has the right to purchase, for nominal consideration,
approximately 1.5 million shares of the Company's Common Stock. This claim is
based upon an October 1997 letter agreement which purportedly confirmed the
terms of an agreement appointing Sands as the exclusive financial advisor to
Generex Pharmaceuticals, Inc. (GPI) and granting Sands the right to receive
shares representing 17 percent of the outstanding capital stock of GPI on a
fully diluted basis. Following the acquisition of GPI by GBC - Delaware, Inc.,
Sands' claimed a right to receive shares of GPI Common Stock that would,
allegedly, now apply to the Company's Common Stock. Sands also claims that it is
entitled to additional shares of the Company as a result of the GBC - Delaware,
Inc.'s acquisition of GPI (approximately 460,000 shares), and $144,000 in fees
under the terms of the purported Agreement.
Sands has never performed any services for the Company, and the Company
and GPI have denied that the individual who is alleged to have entered into the
purported agreement between Sands and GPI, had the authority to act on GPI's
behalf, and accordingly, is defending against Sands' claim primarily on the
basis that no agreement has ever existed between GPI and Sands.
During a series of hearings before a NYSE arbitration panel commencing
June 8, 1999, Sands amended its claim to include, in the alternative, an
entitlement in the form of an order of specific performance with regard to the
issuance of the warrant as discussed in the October 1997 letter.
By an award dated September 24, 1999, the panel awarded Sands $12,000
plus $2,070 in interest, a declaratory judgment that the Company is required to
issue Sands a warrant for 1,530,020 shares in accordance with the October 1997
letter, and denied all other relief and split the $22,800 in forum fees equally
between Sands and the Company. On October 13, 1999, Sands Brothers commenced a
special proceeding to confirm the Arbitration Award in New York State Supreme
Court, New York County. On November 10, 1999, the Company moved to vacate the
Arbitration Award on the grounds that the Arbitration Panel had exceeded its
authority and had manifestly disregarded the relevant law of agency in issuing
the Award. On March 20, 2000, the New York State Supreme Court granted Sands
7
<PAGE>
Brother's petition to confirm the Award and denied the Company's motion to
vacate the Award. The Court entered Judgment against the Company. The Company
has appealed the lower court's Judgment to the New York State Appellate
Division, First Department. Oral argument of the Company's appeal was heard by
the First Department on October 20, 2000. The Company is presently awaiting the
decision of the First Department. The Company believes that the ultimate legal
and financial liability of the Company, including a range of possible losses
with respect to the award, cannot be estimated at this time. Therefore, no
provision has been recorded in the accompanying financial statements.
Furthermore, it is management's belief that the final outcome is not reasonably
likely to have a material adverse effect on the Company's consolidated financial
position.
In February 1999, MQS, Inc., a former consultant, commenced a civil
action against the Company in the United States District Court for the District
of New Jersey claiming that 242,168 shares of our Common Stock and $243,066 are
due to it for services which it rendered through December 22, 1998. MQS also
claims that the Company has used proprietary technology of MQS in developing the
Company's aerosol applicator and in formulating the Company's oral insulin
product for aerosol application. The Company filed its answer to MQS's claims in
May 1999, in which it denies that MQS is entitled to the relief that it seeks,
or that any of the Company's products or technology incorporates any proprietary
technology belonging to MQS. The Company also filed a counterclaim against MQS
for breach of contract. The Company is unable to predict the outcome of this
litigation at this time.
With respect to all litigation, as additional information concerning
the estimates used by the Company become known, the Company reassesses its
position both with respect to accrued liabilities and other potential exposures.
Estimates that are particularly sensitive to future change relate to legal
matters, which are subject to change as events evolve and as additional
information becomes available during the administration and litigation process.
7. Net Loss Per Share
Basic EPS and Diluted EPS for the three months ended October 31, 2000
and 1999 have been computed by dividing the net loss for each respective period
by the weighted average shares outstanding during that period. All outstanding
warrants and options have been excluded from the computation of Diluted EPS as
they are antidilutive.
8. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the Three Months Ended
October 31,
--------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 19,620 $ 252
Income taxes $ -- $ --
Disclosure of non-cash investing and financing activities:
Issuance of warrants as consideration for an equity financing $3,406,196
agreement were capitalized as deferred offering costs.
</TABLE>
9. Transactions With Related Parties
The Company's change in "Due from Related Parties" for the quarter
ended October 31, 2000 represents only the effects of changes in quarter end
exchange rates versus those in effect at July 31, 2000.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
We have made statements under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Report that are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934. Forward-looking statements do not describe
historical events or other facts but, rather, convey our management's current
expectations. Such statements usually are prefaced with forward-looking words
such as "may", "will", "expect", "anticipate", "believe," "estimate" and similar
terminology. Our forward-looking statements address, among other things:
o the status of activities under our development and license
agreement with Eli Lilly and Company (the "Lilly Agreement");
o our other clinical and product development programs and other
aspects of our business plans;
o our financing goals, plans and future needs; and
o our expectations of when regulatory approvals will be received or
other actions will be taken by parties other than us.
Management's current expectations are subject to a number of factors and
uncertainties that could cause actual results or future conditions to differ
materially from those expressed in or implied by our forward-looking statements.
Thus, we caution investors that the forward-looking statements contained in this
report must be interpreted and understood in light of conditions and
circumstances that exist as of the date of this report. We expressly disclaim
any obligation or undertaking to update or revise forward-looking statements
made in this report to reflect any changes in management's expectations
resulting from future events or changes in the conditions or circumstances upon
which such expectations are based.
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
9
<PAGE>
of Green Mt., we became a wholly-owned subsidiary of Green Mt., Green Mt.
changed its corporate name to Generex Biotechnology Corporation ("Generex
Idaho"), and we changed our corporate name to GBC Delaware, Inc. Because the
reverse acquisition resulted in our shareholders becoming the majority holders
of Generex Idaho, we were treated as the acquiring corporation in the
transaction for accounting purposes. Thus, our historical financial statements,
which essentially represented the historical financial statements of Generex
Pharmaceuticals, were deemed to be the historical financial statements of
Generex Idaho.
In April 1999, we completed a reorganization in which we merged with
Generex Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
Business History. We are engaged in the development of proprietary drug
delivery technology. Our principal business focus has been to develop a
technology for buccal delivery (absorption through the inner cheek walls) of
large molecule drugs, i.e., drugs composed of molecules with molecular weights
above a specified level. Large molecule drugs historically have been
administered only by injection because their size inhibits or precludes
absorption if administered by oral, transdermal, transnasal or other means.
Our first product is an insulin formulation that is administered as a
fine spray into the oral cavity using a hand-held aerosol spray applicator.
Between January 1999 and September 2000, we conducted clinical trials on this
product in the United States, Canada and Europe. In September 2000, we entered
into an agreement to develop this product with Eli Lilly and Company. Under the
Lilly Agreement, Lilly is responsible for conducting clinical trials of the
product, securing regulatory approvals and marketing on a worldwide basis. We
received $1,000,000 in connection with our entry into the agreement and will
receive certain other initial fees and milestone payments subject to the
attainment of certain product development milestones, as well as royalty
payments based on product sales should any products be approved for commercial
sale. Lilly also has the option to develop certain additional products using our
buccal delivery technology depending on the success of the initial product.
Our buccal delivery technology is a platform technology that we believe
has application to a significant number of large molecule drugs in addition to
insulin. During our current fiscal year, we expect to begin development of three
additional products based on this technology that are not covered by the Lilly
Agreement.
Results of Operations - Three months ended October 31, 2000 and 1999
We have been in the development stage since inception and have not
generated any substantial operating revenues to date. Through October 31, 2000,
we accumulated a net operating deficit of $22,960,932 as a result of research
and development and general and administrative expenses incurred during the
development stage.
10
<PAGE>
Our net loss for the quarter ended October 31, 2000, was $1,144,207
versus $1,118,772 in the corresponding quarter of the prior year. The
significant increase in our expenses in the quarter ended October 31, 2000
compared to the quarter ended October 31, 1999 (to $2,344,532 from $1,182,342)
was largely offset by the $1,000,000 in revenues received during the quarter in
connection with the Lilly Agreement and increased net interest income (which was
$200,325 in the quarter ended October 31, 2000, versus $63,570 in the
corresponding quarter of 1999). The increase in net interest income was the
result of higher cash and short term investment balances during the quarter,
compared to the same quarter last year.
The increase in our operating expenses in the quarter ended October 31,
2000, compared to the quarter ended October 31, 1999, was the result of an
increase in research and development expenses (to $1,019,979 from $409,919) and
in general and administrative expenses (to $1,324,553 from $772,423).
The increase in research and development expenses in the quarter ended
October 31, 2000, compared to the quarter ended October 31, 1999, reflects
increased expenditures related to clinical trial programs in the United States,
Canada, and Europe, and costs incurred during the quarter associated with the
construction and set up of a pilot manufacturing facility, which we expect will
be compliant when fully operational with Federal regulations for Good
Manufacturing Practices, and a laboratory, which we expect will be compliant
when fully operational with Federal regulations for Good Laboratory Practices.
These facilities will support the performance of our obligations under the Lilly
Agreement and our other product development efforts.
The increase in general and administrative expenses in the quarter
ended October 31, 2000, compared to the quarter ended October 31, 1999, was
primarily the result of additional expenses associated with the set up and
management of the clinical trials in the United States, Canada and Europe, legal
and professional services, and increased investor relations activities.
Liquidity and Capital Resources
To date we have financed our development stage activities primarily
through private placements of Common Stock and contract research and milestone
payments. At October 31, 2000, we had cash and short term investments (primarily
notes of United States corporations) of approximately $29.62 million. At October
31, 1999, our cash and short term investments were approximately $7.17 million.
The increase in our cash and short term investments in the quarter ended October
31, 2000, compared with the quarter ended October 31, 1999, was primarily the
result of additional equity capital of approximately $22 million (net of
financing costs of approximately $1.66 million) from the October 2000 sale of
2,151,093 units of our securities for cash at a price of $11.00 per unit.
We believe that our cash on hand is sufficient to fund our operations
and capital expenditures for the current fiscal year and well into the next
year. Beyond that, we may require additional funds to support certain clinical
trials of our oral insulin formulation in Canada (for which we have retained
responsibility, subject to certain reimbursement rights, under the Lilly
Agreement), and to continue to fund other research and development activities
11
<PAGE>
and general and administrative expenses. If we were unable to raise additional
capital as needed, we could be required to "scale back" or otherwise revise our
business plans. Any significant scale back of operations or modification of our
business plans due to a lack of funding could be expected to materially and
adversely affect our prospects.
In the past we have funded most of our development and other costs with
equity financing. While we have been able to raise equity capital as required,
unforeseen problems with our clinical program or materially negative
developments in general economic conditions could interfere with our ability to
raise additional equity capital as needed, or materially adversely affect the
terms upon which such capital is available. We presently have a $50 million
equity "draw down" commitment from an investor pursuant to which, subject to
certain limitations and the satisfaction of certain conditions, we have the
right to require the investor to purchase up to $50 million of Common Stock at a
10% discount to the then current market price of the Common Stock. We do not now
foresee a need to draw upon this facility in the current fiscal year.
Transactions with Affiliates
Prior to January 1, 1999, a portion of our general and administrative
expenses resulted from transactions with affiliated persons, and a number of
capital transactions also involved affiliated persons. Although these
transactions were not the result of "arms-length" negotiations, we do not
believe that this fact had a material impact on our results of operations or
financial position. Prior to December 31, 1998, we classified certain payments
to executive officers for compensation and expense reimbursements as "Research
and development - related party" because the executive officers received such
payments through personal services corporations rather than directly. After
December 31, 1998, these payments have been and will continue to be accounted
for as though the payments were made directly to the officers, and not as a
related party transaction. We do not foresee a need for, and therefore do not
anticipate, any related party transactions in the current fiscal year.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes new
accounting and reporting standards for derivative financial instruments and for
hedging activities. SFAS 133 requires the Company to measure all derivatives at
fair value and to recognize them in the balance sheet as an asset or liability,
depending on the Company's rights or obligations under the applicable derivative
contract. Subsequent to the issuance of SFAS 133, the FASB has received many
requests to clarify certain issues causing difficulties. In June 2000, the FASB
issued SFAS 138, which responds to those requests by amending certain provisions
of SFAS 133. The amendments include allowing foreign-currency denominated assets
and liabilities to qualify for hedge accounting, permitting the offsetting of
selected inter-entity foreign currency exposures that reduce the need for third
party derivatives and redefining the nature of interest rate risk to avoid
sources of ineffectiveness. The Company adopted SFAS 133 and the corresponding
amendments of SFAS 138 in the first quarter of the current fiscal year 2001.
SFAS 133, as amended by SFAS 138, did not have a material impact on the
Company's combined results of operations, financial position or cash flows.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements and requires adoption no later than the
fourth quarter of the Company's fiscal year 2001. The Company is currently
evaluating the impact of SAB 101 to determine what effect, if any, it may have
on our financial position and results of operations.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are not presently subject to any material market risk exposures. We
have neither issued nor own any long term debt instruments, or any other
financial instruments as to which we would be subject to material risks. At the
present time, we maintain our cash in short term government or government
guaranteed instruments, short term commercial paper, interest bearing bank
deposits or demand bank deposits which do not earn interest. A substantial
majority of these instruments and deposits are denominated in US dollars, with
the exception of funds denominated in Canadian dollars on deposit in Canadian
banks to meet short term operating needs in Canada. We do not presently employ
any hedging or similar strategy intended to mitigate against losses that could
be incurred as a result of fluctuations in the exchange rates between US and
Canadian currencies. The corresponding market risk associated with interest rate
changes and changes in the exchange rate between US and Canadian currencies is
not considered material.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
With regard to our pending legal proceeding with Sands Brothers & Co.,
Ltd., oral argument of our appeal to the New York State Appellate Division,
First Department, was heard on October 20, 2000. We are presently awaiting the
decision of the First Department.
For a full description of the foregoing legal proceeding, and all other
legal proceedings against the Company, see the Company's Report on Form 10-K for
the year ended July 31, 2000, which is incorporated herein by reference.
14
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
Paragraphs (a) and (b) of Part II, Item 2 are inapplicable.
(c) Issuance of Unregistered Securities
At October 4, 2000, we completed a sale of 2,151,093 units of
securities to accredited investors for cash at a price of $11.00 per unit. Each
unit consisted of a share of Common Stock and a warrant to purchase .15 shares
of Common Stock at an initial exercise price of $13.20 per share. This option
expired on October 18, 2000, without being exercised by the investor. We
received approximately $22 million from the sale (net of financing costs of
approximately $1.66 million).
The Shemano Group, Inc. ("Shemano"), a broker-dealer, has received or
will be receiving compensation for its services in connection with this
placement, including cash compensation of approximately 7% of total placement
proceeds and warrants to purchase a total of approximately 10% of total number
of shares included in the units sold. Shemano has advised us that it intends to
assign its warrants to two of its officers, Gary J. Shemano and William Corbett.
The Shemano warrants are identical to the warrants issued to the investors. The
warrants issued to the investors and Shemano expire on September 29, 2005, and
contain anti-dilution and other terms that are commonly found in such
securities.
The units were sold without registration under the Securities Act of
1933 in reliance upon the exemption from registration provided in Section 4(2)
thereof and Rule 506, Regulation D promulgated thereunder. No general
solicitation was made in connection with the placement. All securities sold were
acquired for investment, and appropriate restrictions have been placed upon the
resale of any of the securities acquired in the placement, including restrictive
legends on the face of the securities and stop orders on our stock and warrant
registers.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Exhibit Title
------- -------------
27 Financial Data Schedule
(b) Reports on Form 8-K and Form 8-K/A.
The following reports have been filed on Form 8-K and Form 8-K/A in the
quarter ended October 31, 2000:
o At August 28, 2000, we filed a Current Report on Form 8-K in
response to Item 5 of Form 8-K - "Other Events" to report the
election of J. Michael Rosen as a director of Generex
Biotechnology Corporation.
o At September 6, 2000, we filed a Current Report on Form 8-K in
response to Item 5 of Form 8-K - "Other Events" to report that we
entered into a Development and License Agreement with Eli Lilly
and Company.
o At September 7, 2000, we filed a Current Report on Form 8-K in
response to Item 5 of Form 8-K - "Other Events" to report that we
entered into a Common Stock Purchase Agreement with Tradersbloom
Limited, a British Virgin Islands corporation.
o At September 7, 2000, we filed an Amendment to a Current Report on
Form 8-K/A in response to Item 7 of Form 8-K - "Financial
Statements and Exhibits" to provide a copy of the Development and
License Agreement with Eli Lilly and Company dated September 5,
2000, redacted to omit trade secrets and confidential commercial
and financial information.
o At October 16, 2000, we filed a Current Report on Form 8-K in
response to Item 5 of Form 8-K - "Other Events" to report the sale
of 2,151,093 units of securities at $11.00 per unit.
o At December 6, 2000, we filed an Amendment to a Current Report on
Form 8-K/A in response to Item 5 of Form 8-K - "Other Events" to
update the description that was contained in Item 5 of the Form
8-K that we filed with the Commission on October 16, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we
have duly caused this report to be signed on our behalf by the undersigned.
DATE: December 15, 2000
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ E. Mark Perri
------------------------------------
E. Mark Perri
Chairman and Chief Financial Officer
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