10-Q 1 0001.txt QUARTERLY REPORT 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 April 30, 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 15,254,864 as of April 30, 2000. GENEREX BIOTECHNOLOGY CORPORATION INDEX PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements - unaudited Consolidated Balance Sheets -- April 30, 2000 and July 31, 1999 ................................... 3 Consolidated Statements of Operations -- for the three month periods ended April 30, 2000 and 1999, the nine month periods ended April 30, 2000 and 1999, and cumulative from November 2, 1995, to April 30, 2000............................................. 4 Consolidated Statements of Cash Flows -- For the three-month periods ended April 30, 2000 and 1999, the nine month periods ended April 30, 2000 and 1999, and cumulative from November 2, 1995, to April 30, 2000............................................. 5 Notes to Consolidated Financial Statements.......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 11 PART II: OTHER INFORMATION Item 1. Legal Proceedings................................................... 15 Item 5. Other Information................................................... 17 Item 6. Exhibits and Reports on Form 8-K ................................... 19 Signatures................................................................... 20 2 Item I. Consolidated financial statements GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
April 30, July 31, 2000 1999 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 3,143,004 $ 5,633,201 Short-term investments 251,801 232,345 Miscellaneous receivables 29,230 182,413 Other current assets 85,132 119,010 ------------ ------------ Total Current Assets 3,509,167 6,166,969 Property and Equipment, Net 2,116,088 1,879,547 Deposits 71,547 66,159 Due From Related Parties 714,249 776,991 ------------ ------------ TOTAL ASSETS $ 6,411,051 $ 8,889,666 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 1,134,444 $ 428,874 Current maturities of long-term debt 628,308 550,589 ------------ ------------ Total Current Liabilities 1,762,752 979,463 Long-Term Debt, Less Current Maturities 181,340 444,971 Due to Related Parties 158,194 155,383 Commitments and Contingencies Stockholders' Equity: Preferred stock, $.001 par value; authorized 1,000,000 shares, issued and outstanding 1,000 shares at April 30, 2000 and July 31, 1999 1 1 Common stock, $.001 par value; authorized 50,000,000 shares, issued and outstanding 15,254,864 and 14,740,683 shares at April 30, 2000 and July 31, 1999, respectively 15,255 14,741 Additional paid-in capital 23,865,378 20,903,728 Notes receivable - common stock (147,530) (434,903) Deficit accumulated during the development stage (19,264,453) (12,975,678) Accumulated other comprehensive loss (159,886) (198,040) ------------ ------------ Total Stockholders' Equity 4,308,765 7,309,849 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,411,051 $ 8,889,666 ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements. 3 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative From November 2, For the Three Months Ended For the Nine Months Ended 1995 (Date of April 30, April 30, Inception) to ---------------------------- --------------------------- April 30, 2000 1999 2000 1999 2000 ------------ ------------ ------------ ----------- ----------------- Revenues $ -- $ -- $ -- $ -- $ -- Operating Expenses: Research and development 1,084,295 588,726 2,520,467 1,829,703 5,990,067 Research and development - related party -- -- -- -- 220,218 General and administrative 1,238,806 1,127,288 3,898,972 2,830,063 12,795,242 General and administrative - related party -- -- -- -- 314,328 ------------ ------------ ------------ ------------ ------------ Total Operating Expenses 2,323,101 1,716,014 6,419,439 4,659,766 19,319,855 ------------ ------------ ------------ ------------ ------------ Operating Loss (2,323,101) (1,716,014) (6,419,439) (4,659,766) (19,319,855) Other Income (Expense): Interest income 49,229 6,868 176,703 6,934 231,893 Interest expense (17,258) (285) (46,039) (33,925) (176,491) ------------ ------------ ------------ ------------ ------------ Net Loss $ (2,291,130) $ (1,709,431) $ (6,288,775) $ (4,686,757) $(19,264,453) ============ ============ ============ ============ ============ Basic and Diluted Net Loss Per Common Share $ (.15) $ (.13) $ (.42) $ (.36) ============ ============ ============ ============ Weighted Average Number of Shares of Common Stock Outstanding 15,238,186 13,416,870 14,924,168 12,890,760 ============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements. 4 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative From November 2, For the Nine Months Ended 1995 (Date of April 30, Inception) to ---------------------------- to April 30, 2000 1999 2000 ------------ ------------ ------------ Cash Flows From Operating Activities: Net loss $ (6,288,775) $ (4,686,757) $(19,264,453) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 82,176 29,161 206,045 Reduction in due from related party in exchange for interest payment 45,786 -- 45,786 Reduction of notes receivable - common stock in exchange for services rendered 287,373 -- 326,352 Common stock issued for services rendered -- 275,408 1,174,428 Stock options and warrants issued for services rendered 924,350 918,064 2,605,224 Preferred stock issued for services rendered -- -- 100 Founders shares transferred for services rendered -- -- 353,506 Changes in operating assets and liabilities: Miscellaneous receivables 157,788 55,227 15,180 Other current assets 35,188 146 (88,779) Accounts payable and accrued liabilities 703,660 578 1,942,472 Other, net -- 67,836 110,317 ------------ ------------ ------------ Net Cash Used in Operating Activities (4,052,454) (3,340,337) (12,573,822) Cash Flows From Investing Activities: Purchase of property and equipment (98,970) (465,358) (391,761) Change in restricted cash -- 105,655 (5,595) Purchases of short-term investments (19,456) -- (251,801) Change in deposits (4,225) 16,581 (21,826) Change in due from related parties 30,379 405,728 (2,515,791) Other, net -- -- 89,683 ------------ ------------ ------------ Net Cash Provided By (Used in) Investing Activities (92,272) 62,606 (3,097,091) Cash Flows From Financing Activities: Proceeds from issuance of long-term debt -- -- 993,149 Repayment of long-term debt (391,735) (391,860) (871,773) Change in due to related parties -- (80,981) 154,541 Proceeds from issuance of common stock, net 2,037,816 5,691,403 18,654,562 Purchase and retirement of common stock -- (119,066) (119,066) ------------ ------------ ------------ Net Cash Provided By Financing Activities 1,646,081 5,099,496 18,811,413 Effect of Exchange Rates on Cash and Cash Equivalents 8,448 (53,230) 2,504 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents (2,490,197) 1,768,535 3,143,004 Cash and Cash Equivalents, Beginning of Period 5,633,201 2,090,827 -- ------------ ------------ ------------ Cash and Cash Equivalents, End of Period $ 3,143,004 $ 3,859,362 $ 3,143,004 ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements. 5 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) 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 2000; 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. 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 change in the foreign currency translation account during the period, for the nine months ended April 30, 2000 and 1999 was $6,250,621 and $4,613,335, respectively. 3. Accounts Payable and Accrued Expense Accounts payable and accrued expenses consist of the following:
April 30, July 31, 2000 1999 ------------- ------------- Accounts Payable and Accrued Expenses $ 1,066,867 $ 366,927 Litigation Accrual 67,577 -- Consulting Accruals -- 61,947 ------------- ------------- Total $ 1,134,444 $ 428,874 ============= =============
4. Pending Litigation Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against the Company under New York Stock Exchange rules on October 2, 1998. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.6 to 2.5 million shares of the Company's common stock. This claim was based upon an October 1997 letter agreement, which purported to confirm an agreement appointing Sands Brothers as the exclusive financial advisor to Generex Pharmaceuticals, Inc., (GPI), now a subsidiary of the Company. In exchange for agreeing to act in that capacity, the letter agreement purports to grant Sands the right to acquire 17% of GPI's common stock for nominal consideration. Following the Company's acquisition of GPI, Sands claimed right to receive shares of GPI's common stock applies to the Company's common stock since outstanding shares of GPI were converted into the Company's shares in the acquisition. Sands' claims also included additional shares as a fee related to that acquisition, and $144,000 in monthly fees due under the terms of the purported agreement. 6 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. Pending Litigation (Continued) On October 1, 1999, the Company was informed that the arbitration panel that heard this case had awarded Sands $14,070 and issued a declaratory judgment to the effect that the Company is required 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 October 9, 1997 letter agreement. Thereafter, Sands filed a motion to confirm the award with the New York Supreme Court. In March 2000, the court affirmed the award. The Company has appealed the decision to the Appellate Division of the New York Supreme Court. If the Company is unsuccessful in their effort to appeal the arbitration award obtained by Sands and are required to issue warrants or other securities to Sands under the October 1997 letter agreement, the Company will record a charge to operations, and a corresponding increase to Additional Paid in Capital, equal to the fair value of the securities issued to Sands less any consideration which the Company receives for the securities. However, the Company's ultimate legal and financial liability, including a range of possible losses with respect to the award, cannot be estimated at this time. Therefore, no provision for the award has yet been recorded in the financial statements. The Company does not believe that the final outcome of this case is reasonably likely to have a material adverse effect on their consolidated financial position apart from any charge to operations as previously described. In February 1997, a claim of wrongful dismissal by a former employee seeking damages of approximately $311,245 was brought in Ontario Court in Toronto, Ontario. This case was tried without a jury in October 1999, and a decision in favor of the plaintiff in the amount of approximately $131,908, plus interest and costs was rendered against the Company in December 1999. The Company has appealed this decision. The Company's management, after consultation with its legal counsel, has determined the range of likely loss to be approximately $68,139 to $192,281 and therefore has recorded a charge to operations in the amount of $68,139 for the nine months ended April 30, 1999. An action was also commenced against GPI and other companies and individuals seeking approximately $4,080,000 for allegedly causing certain adverse consequences of a plaintiff's investment in a particular company. GPI's only involvement was that at one time there was interest on its part in buying certain assets from this company. GPI failed to file a Statement of Defense to the Statement of Claim and GPI was noted in default on October 1, 1996. On December 9, 1999, an application was filed to set aside the notice of default and permit the Company to enter a statement of defense. This application was assigned to a Master who declined to grant relief. The Company is now seeking a new hearing before a judge, which in essence is a new proceeding at which new evidence can be introduced. The Company cannot now predict whether it will succeed in setting aside the notice of default. Failure to do so would preclude the Company from contesting the issue of liability. The Company, however, would be permitted to contest the amount of damages, if any, the plaintiff as a result of the Company's actions or the actions for which the Company is legally responsible. 7 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. Pending Litigation (Continued) In February 1999, MQS, Inc., a former consultant to the Company, commenced a civil action against the Company in the United States District Court for the District of New Jersey claiming that 242,168 shares of the Company's Common Stock, and $243,066 are due to it for services which it rendered through December 22, 1998. MQS also claims compensation on a quantum merit basis for the value of its services, and for punitive damages. In May 1999, the Company responded to the complaint in which the Company denied that MQS is entitled to the relief it seeks or that any of the Company's' products or technology incorporates any proprietary technology belonging to MQS. The Company has also filed a counterclaim against MQS, Inc. for breach of contract. In December 1999, the Company filed a motion with the court to amend their answer and counterclaim to add additional claims against MQS, including claims based upon unauthorized use and misappropriation of the Company's trade secrets and technology by MQS, and to add additional parties as counterclaim defendants. Subsequent to the Company's filing, MQS filed a motion to amend its complaint to add certain officers of the Company as individual defendants on the claims previously made. The Company and MQS have agreed to allow the other to amend its pleadings in the manner sought and are jointly developing a schedule for responding to the new pleadings and conducting discovery in the case. 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. 5. Net Loss Per Share Basic EPS and Diluted EPS for the nine months ended April 30, 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. 6. Supplemental Disclosure of Cash Flow Information
For the Nine Months Ended April 30, ------------------------ 2000 1999 -------- -------- Cash paid during the period for: Interest $ 252 $ 33,925 Income taxes $ -- $ -- Disclosure of non-cash investing and financing activities: Issuance of common stock to satisfy accrued liability $ -- $738,000 Long-term debt incurred in conjunction with acquisition of property and equipment $190,206 $ 81,492 Reduction in due from related party through repayment of long-term debt $ 1,287 $ --
8 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. Transactions with Related Parties The Company's change in "Due from Related Parties" and "Due to Related Parties" for the nine months ended April 30, 2000 represents cash collections, expenses paid on behalf of the Company by Related Parties, and the effects of changes in exchange rates during the nine month period ended April 30, 2000. 8. Stockholders' Equity In exchange for services rendered, the Company issued a warrant to purchase 150,000 shares of the Company's common stock at a price of $7.50 per share, with an expiration date of April 30, 2004. This warrant was determined to have a value of $355,500 and was charged to operations. In conjunction with raising capital, the Company issued a warrant to its underwriter to purchase 47,059 units, with an exercise price of $4.25 per unit. Each unit, until January 6, 2003, consists of one share of the Company's common stock and three quarters of one of the Company's Series CU warrants. On or after January 7, 2003 until January 7, 2005, the holder shall be entitled to only receive shares of the Company's common stock. Attached to each share of common stock sold during the private placement of 470,590 shares in January 2000, was three quarters of one of the Company's Series CU warrants. Each CU warrant has an exercise price of $7.00 and expires in January 2003. During the nine month period ended April 30, 2000, warrants with exercise prices ranging from $5.50 to $7.50 were exercised for 41,091 shares of the Company's common stock. 9. Stock Based Compensation The Company granted 1,280,000 Incentive Stock Options (ISOs) to employees, of which 985,000 vested upon grant, 265,000 on January 3, 2001, 15,000 on January 3, 2002 and 15,000 on January 3, 2003. The exercise price for all 1,280,000 is $5.00 per share. Since the Company accounts for its options under APB No. 25, no compensation cost was recognized. The Company granted 155,000 stock options to consultants, which vested upon grant with an exercise price of $5.00 - $5.50 per share. The options granted were determined to have a value of $366,350 and was charged to operations. In exchange for services rendered, the Company issued a stock option to purchase 125,000 shares of the Company's common stock at a price of $8.00 per share, with an expiration date of June 15, 2004. The options granted were determined to have a value of $202,500 and was charged to operations. The Company granted 15,000 ISOs to employees, which vested in three equal increments on April 14, 2000, April 14, 2001 and April 14, 2002, with an exercise price of $5.50. Since the Company accounts for its operations under APB No. 25, no compensation cost was recognized. 9 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. Subsequent Events Subsequent events occurring after April 30, 2000 consist of the following: On May 31, 2000, the Company sold 1,041,670 shares of common stock for net proceeds of $5,885,407. Financing costs associated with this placement amounted to $364,601. Attached to each share of common stock was a warrant to purchase one share of common stock at an exercise price of $8.6625 with an expiration date of May 31,2003. In conjunction with raising capital, the Company issued warrants to purchase 150,000 shares of the Company's common stock at a price of $10.00 per share, with an expiration date of May 31, 2005. These warrants were determined to have a value of $631,500. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Statements in this discussion and analysis include forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act . You can identify these statements by the use of words such as "may", "will", "expect", "anticipate", "believe", "estimate", and similar terminology. Forward-looking statements address, among other things: o implementing our clinical programs and other aspects of our business plans; o financing goals and plans; and o our expectations of when regulatory approvals will be received or other actions will be taken by parties other than us. While we believe it is important to communicate our expectations to investors, these expectations involve known and unknown risks and uncertainties. Future events that we are not able to accurately predict or which we do not fully control may cause actual results to differ materially from those expressed or implied by our forward-looking statements. Risks and uncertainties that may affect our results may include, among others: o unexpected costs or delays in carrying out our clinical programs; o the availability of capital to carry out our clinical programs and other business plans; and o outcomes of pending litigations. Because of these and other risks and uncertainties, we cannot guarantee future results, levels of activity, performance or achievements. General Generex Biotechnology Corporation was incorporated in 1983 as Green Mt. P.S., Inc. In January 1998, we acquired all of the outstanding capital stock of Generex Pharmaceuticals, Inc. ("Generex Pharmaceuticals"), a Canadian corporation formed in November 1995 to engage in pharmaceutical and biotechnological research and other activities, and changed our corporate name to Generex Biotechnology Corporation. The acquisition of Generex Pharmaceuticals was effected by the merger of a recently formed Delaware corporation ("Generex Delaware"), which had acquired all of the outstanding capital stock of Generex Pharmaceuticals in October 1997, with a wholly-owned subsidiary which we formed for this transaction (the "Reverse Acquisition"). As a result of the Reverse Acquisition, the former shareholders of Generex Delaware acquired a majority of our outstanding capital stock and, for accounting purposes, Generex Delaware was treated as the acquiring corporation. Thus, the historical financial statements 11 of Generex Delaware, which essentially represent the historical financial statements of Generex Pharmaceuticals, are deemed to be the historical financial statements of Generex Biotechnology Corporation. On April 30, 1999, we completed a reorganization in which we merged into Generex Delaware to change our state of incorporation from Idaho to Delaware. This reorganization did not result in any material change in our historical financial statements or current financial reporting. As part of the reorganization, Generex Delaware changed its corporate name to "Generex Biotechnology Corporation". We are engaged in developing drug delivery systems. Our principal business focus has been to develop a technology to administer large molecule drugs (i.e., drugs composed of molecules above a specified molecular weight) by the oral route. Historically, large molecule drugs have been administered only by injection because their size inhibits or precludes absorption if administered by oral, transdermal, transnasal or other means. The first product based on our large molecule drug delivery technology is a liquid insulin formulation that is administered using a hand-held aerosol spray applicator. The formulation, which includes insulin and various excipients (i.e., non-active pharmaceutical ingredients) to facilitate the absorption of insulin molecules through the mucous membranes in the mouth and upper gastro-intestinal tract, is sprayed into and absorbed in the mouth and back of the throat. This product is presently undergoing clinical trials in the United States, Canada and Europe. We do not expect to receive significant revenue from product sales in the current fiscal year or in the next fiscal year. We may, however, receive licensing income, or income in the nature of licensing income (e.g., "signing bonuses" or "advance royalties") in connection with our entering into marketing and distribution agreements. Income from such sources, if received, is likely to be material relative to our total cash needs. We do not have any commitments to receive such payments at the present time, and we do not expect to receive any such payments in our current fiscal year. Results of Operations - Three months ended April 30, 2000 and 1999 We have been in the development stage since inception and have not generated any operating revenues to date. Through April 30, 2000, we accumulated an operating deficit of $19,319,855 as a result of research and development and general and administrative expenses incurred during the development stage. Our accumulated operating deficit at April 30, 2000, includes a net loss of $2,291,130 for the quarter then ended. In the corresponding quarter of the prior year our net loss was $1,709,431. The principal reasons for the increase in our loss in the quarter ended April 30, 2000, versus the quarter ended April 30, 1999, were increases in research and development expenses (to $1,084,295 from $588,726) and in general and administrative expenses (to $1,238,806 from $1,127,288). We had net interest income of $31,971 in the quarter ended April 30, 2000, versus net interest income of $6,583 in the corresponding quarter of 1999. The increase in research and development expense in the current period reflects a substantial increase in scope of Phase II clinical trials of our oral insulin formulation compared 12 to the corresponding 1999 period. Clinical trials are now being conducted at seven sites versus two sites at the end of the third quarter of 1999. The increase in general and administrative expenses in the quarter ended April 30, 2000, represents primarily increased legal expenses related to the preparation, filing and processing of patent applications and related patent services, and increased travel costs associated with the administration of clinical trials. Results of Operations - Nine months ended April 30, 2000 and 1999 Our net loss for the nine months ended April 30, 2000, was $6,288,775, compared to a loss of $4,686,757 in the first nine months of the prior fiscal year. The principal reasons for the increase in our loss in the nine month period ended April 30, 2000, were increases in research and development expenses to $2,520,467 in the nine month period ended April 30, 2000, from $1,829,703 for the nine month period ended April 30, 1999, and an increase in general and administrative expenses to $3,898,972 in the nine months ended April 30, 2000 versus $2,830,063 in the year earlier period. We had net interest income of $130,664 in the nine month period ended April 30, 2000, versus net interest expense of $26,991 in the comparable nine month period ended April 30, 1999. The increase in research and development expense in the nine months ended April 30, 1999, reflects increases in such expenses in the second and third quarters relating to clinical trials of our oral insulin formulation, as discussed above. The increase in general and administrative expenses during the nine months of the current year are primarily the result of increase in salaries, consulting and professional expenses (including legal expenses related to pending litigation) in the first and second quarter of this year versus the first six months of the prior year, a litigation reserve established in the second quarter, and increased legal expenses related to patents and increased travel expenses associated with the administration of clinical trials and participation in industry seminars throughout the nine month period. Liquidity and Capital Resources To date we have financed our development stage activities primarily through private placements of common stock. We had approximately $3,394,805 of cash and short term investments on hand at April 30, 2000 (versus approximately $5,865,546 in cash and short term investments on hand at July 31, 1999). In May of this year, we raised an additional $6.25 million of equity capital to support our research and development and other activities. We also have refinanced two mortgages that appeared as long term debt on our balance sheet at April 30, 2000, and this indebtedness (approximately $800,000 CDN) is now due in 2005. We believe that our cash on hand is sufficient to complete the Phase II clinical programs for our oral insulin formulation, to initiate Phase III clinical trials in Canada later this calendar year, to fund expected general and administrative expenses and anticipated capital costs through the end of this calendar year, and to initiate and carry out pre-clinical studies of additional applications of our platform large molecule drug delivery technology during the second half of 13 this calendar year. Additional funds will be required, however, to initiate and carry out Phase III clinical trials of our oral insulin formulation in the United States, and to continue to fund other research and development activities and general and administrative expenses in 2001. We expect to raise additional equity capital in the fourth quarter of this year and in the first half of next year. As yet, however, we have no commitments for additional financing of any kind. Thus, we face the risk that unforeseen problems with our clinical program or materially negative developments in general economic conditions could interfere with our ability to raise the capital we need, or materially adversely affect the terms upon which such capital is available. 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. We expect a significant portion of our Phase III clinical program costs in the United States, and clinical programs related to other applications of our large molecule drug delivery technology, to be obtained through licensing income and/or future marketing partners' contributions to clinical program costs and/or equity investments. We do not, however, have any licensing agreements or contractual arrangements for other funding at the present time. 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 the current fiscal year, our classified payments to its executive officers as compensation and expense reimbursements as "Research and development - related party" because its executive officers received such payments through personal services corporations rather than directly. For this fiscal year and in the future, these payments have been and will 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. Year 2000 Issues We have completed our assessment of year 2000 issues and believe that the consequences of such issues will not have a material effect on our business, results of operations or financial condition, without taking into account any efforts by us to avoid such consequences. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in either assets or liabilities. As amended in June 1999 by SFAS No. 137 this statement is effective for all fiscal years beginning after June 15, 2000, and is not to be applied retroactively to financial statements for prior periods. The impact of the adoption of the standard has not been determined. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings (a) Sands Brothers Litigation. Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against us under New York Stock Exchange rules on October 2, 1998. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.6 to 2.5 million shares of our common stock. This claim was based upon an October 1997 letter agreement which purported to confirm an agreement appointing Sands Brothers as the exclusive financial advisor to Generex Pharmaceuticals, Inc., our subsidiary. In exchange for agreeing to act in that capacity, the letter agreement purports to grant Sands the right to acquire 17% of Generex Pharmaceuticals common stock for nominal consideration. Following our acquisition of Generex Pharmaceuticals, Sands claimed right to receive shares of Generex Pharmaceuticals common stock applies to our common stock since outstanding shares of Generex Pharmaceuticals were converted into our shares in the acquisition. Sands' claims also included additional shares as a fee related to that acquisition, and $144,000 in monthly fees due under the terms of the purported agreement. On October 1, 1999, we were informed that the arbitration panel that heard this case had awarded Sands $14,070 and issued a declaratory judgment to the effect that we are required to issue to Sands a warrant to purchase 1,530,020 shares of our common stock pursuant to and in accordance with the terms of the October 9, 1997 letter agreement. Thereafter, Sands filed a motion to confirm the award with the New York Supreme Court. In March 2000, the Court affirmed the award. We have appealed this decision to the Appellate Division of the New York Supreme Court. If we are unsuccessful in our effort to vacate the arbitration award obtained by Sands and are required to issue warrants or other securities to Sands under the October 1997 letter agreement, we will record a charge to operations, and a corresponding increase to Additional Paid in Capital, equal to the fair value of the securities issued to Sands less any consideration which we receive for the securities. However, our ultimate legal and financial liability, including a range of possible losses with respect to the award, cannot be estimated at this time. Therefore, no provision for the award has yet been recorded in our financial statements. We do not believe that the final outcome of this case is reasonably likely to have a material adverse effect on our consolidated financial position apart from any charge to operations as previously described. (b) Sparks Litigation. In February 1997, a claim of wrongful dismissal by a former employee seeking damages of CDN$450,000 was brought in Ontario Court in Toronto, Ontario (Lorne Sparks v. Generex Pharmaceuticals, Inc.). This case was tried without a jury in October 1999, and a decision in favor of the plaintiff in the amount of CDN $193,981.80 (approximately US$131,908), plus interest and costs, was rendered against us in December 1999. We have appealed this decision. (c) Acepharm, Inc. Litigation. In June 1996, "Generex Inc." was named as an additional defendant in a pending action in The Court of Queen's Bench of Alberta, in Calgary, Alberta (Elbourne, et al. v. Acepharm, Inc., et al.). In this action the plaintiffs seek injunctive relief relating to the ownership and control of Acepharm, damages for an alleged reduction in the 15 value of their shares in Acepharm, Inc. (approximately $680,000 U.S.), and punitive damages (approximately $3.4 million U.S.). In one paragraph, plaintiff's amended Statement of Claim identifies Generex Pharmaceuticals and mis-identifies it as a subsidiary of another corporation. Except for this paragraph, there is no reference to us in the amended Statement of Claim. The specific acts alleged in the amended Statement of Claim to have violated plaintiffs' interests and caused it injury are ascribed to other defendants, and occurred prior to Generex Pharmaceuticals' incorporation in November 1995. We believe that we were made a party to this case because Generex Pharmaceuticals had expressed interest in acquiring certain assets of Acepharm, and the plaintiffs wished to prevent the sale. Because of the dispute over management, ownership and control of Acepharm, Inc., and because Acepharm's assets are unrelated to its business plans and goals, Generex Pharmaceuticals has long since abandoned any interest in purchasing such assets. We deny any wrongdoing relative to any of the matters upon which plaintiff's claims in this action are based. We failed, however, to file a Statement of Defense to those claims on a timely basis, and plaintiffs caused a notice of default to be entered against us, and applied to the court to have the notice of default set aside, and for leave to file a Statement of Defense. Our application was referred to a Master, who denied our application to set the Noting of Default aside, primarily because of our delay in seeking relief. We have now moved to seek a new hearing before a judge, which in essence is a new proceeding at which new evidence can be introduced. If we do not succeed in setting aside the notice of default, we would be precluded from contesting liability, but would be permitted to contest the amount of damages, if any, which plaintiffs incurred as a result of our actions or of actions for which we are legally responsible. We believe that plaintiffs have suffered no loss or injury based on any action of ours or for which we were responsible, and have made no provision in our financial statements for any loss which might be incurred in this litigation. (d) MQS Litigation. In February 1999, MQS, Inc., a former consultant of ours, commenced a civil action against us in the United States District Court for the District of New Jersey claiming that 242,168 shares of our Common Stock and $243,065.50 are due to it for services which it rendered through December 22, 1998. MQS also claimed that we used proprietary technology of MQS in developing our aerosol applicator and in formulating our oral insulin product for aerosol application. We filed our answer to MQS's claims in May 1999, in which we denied that MQS is entitled to the relief that it seeks, or that any of our products or technology incorporates any proprietary technology belonging to MQS. We also filed a counterclaim against MQS for breach of contract. In December 1999, we filed a motion with the court to amend our answer and counterclaim to add additional claims against MQS, including claims based upon unauthorized use and misappropriation of our trade secrets and technology by MQS, and to add additional parties as counterclaim defendants. Subsequent to our filing, MQS filed a motion to amend its complaint to add certain of our officers as individual defendants on the claims previously made against us. We and MQS each agreed to allow the other to amend its pleadings in the manner sought, and the pleadings were completed in May of this year. We now expect the discovery phase of this litigation to proceed through the end of this year, and are unable to predict the outcome of this litigation at this time. 16 We maintain product liability coverage for claims arising from the use of our products in clinical trials, etc., but do not have any insurance which covers our potential liability in any of the legal proceedings described above. 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 In May 2000, we sold 1,041,669 units of securities ("Units") for cash at a price of $6.00 per Unit. Each Unit consisted of a share of Common Stock and a warrant to purchase a share of Common Stock at an initial exercise price of $8.6625 per share. The Units were purchased by eight investors, as follows: -------------------------------------------------------------------- Consideration Purchaser Units Purchased ($) -------------------------------------------------------------------- Protius Overseas Limited 483,333 $2,900,000 -------------------------------------------------------------------- Photon Fund, Ltd. 166,667 $1,000,000 -------------------------------------------------------------------- Castle Creek Healthcare LLC 133,334 $ 800,004 -------------------------------------------------------------------- Ram Trading, Ltd. 100,000 $ 600,000 -------------------------------------------------------------------- Montrose Investments Ltd. 83,334 $ 500,000 -------------------------------------------------------------------- CCL Fund LLC 33,334 $ 200,004 -------------------------------------------------------------------- Velocity Investment Partners Ltd 25,000 $ 150,000 -------------------------------------------------------------------- Ivan Lieberburg 16,667 $ 100,000 -------------------------------------------------------------------- Two registered broker dealers, The Shemano Group, Inc. and Pali Capital Inc., received compensation for their services to us in connection with this placement. Such compensation consisted of cash compensation of $180,000 to Pali Capital, cash compensation of $164,500 to The Shemano Group, and warrants to purchase a total of 39,168 shares of Common Stock to The Shemano Group. The Shemano Group assigned its right to receive such warrants to two of its officers, Gary J. Shemano and William Corbett. 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 consistent, including restrictive legends on the face of the securities and stop orders on the Registrant's stock and warrant registers. The securities were sold without registration under the Securities Act of 1933 (the "1933 Act") in reliance upon the exemption from registration provided in Section 4(2) thereof and Rule 506, Regulation D promulgated thereunder, and in the case of the sales to Protius Overseas Limited and Photon Fund Ltd., on Regulation S promulgated under the 1933 Act. We have agreed to register for resale under the 1933 Act all shares of Common Stock sold in the placement and issuable upon exercise of warrants included in the Units sold, and intend to do so during the current fiscal quarter. 17 The terms of the warrants purchased by investors and issued to The Shemano Group are as follows: -------------------------------------------------------------------------------- Expiration Exercise Securities Issuable Date Price per Issuable Upon Exercise Warrant per Warrant -------------------------------------------------------------------------------- Investor Warrants 5/17/2005 $8.6625 1 share of Common Stock -------------------------------------------------------------------------------- The Shemano Group Warrants 5/17/2005 $10.00 1 share of Common Stock -------------------------------------------------------------------------------- (d) Use of Proceeds from Sales of Registered Securities The Registration Statement to which the following disclosures pertain is Registration Statement on Form S-1 (Registration No. 333-82667) effective November 19, 1999 (the "Registration Statement"). From the effective date of the Registration Statement through April 30, 2000, net proceeds from the sale of securities pursuant to the Registration Statement have been applied as follows*: (1) Construction of plant, building and $ 0 facilities (2) Purchase and installation of machinery and equipment 0 (3) Purchase of real estate 0 (4) Acquisition of other businesses 0 (5) Repayment of debt 0 (6) Working capital 243,000 (7) Temporary investments 0 (8) Any other purpose expected to involve $100,000 or more 0 (9) Research and development 0 Total applied through April 30, 2000* 0 *The Registration Statement registered shares of outstanding Common Stock for sale by certain of our stockholders, and we will receive no proceeds from such sales. The registration statement also registered shares of common Stock for sale by us upon the exercise of certain outstanding warrants. At April 30, 2000, 41,091 of such warrants had been exercised. The resales of all such shares is now covered by Registration Statement No. 333-33556 effective May 26, 2000. 18 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit Exhibit Title ------- ------------- 4.1 Form of Securities Purchase Agreement entered into with Protius Overseas Limited and Photon Fund, Ltd. on May 17, 2000 4.2 Form of Securities Purchase Agreement entered into with Castle Creek Healthcare LLC, Ram Trading Ltd., Montrose Investments Ltd., CCL Fund LLC, Velocity Investment Partners Ltd. and Ivan Lieberburg between May 17, 2000 and May 31, 2000 4.3 Form of Registration Rights Agreement entered into by Protius Overseas Limited and Photon Fund, Ltd. on May 17, 2000 4.4 Form of Registration Rights Agreement entered into with Castle Creek Healthcare LLC, Ram Trading Ltd., Montrose Investments Ltd., CCL Fund LLC, Velocity Investment Partners Ltd. and Ivan Lieberburg between May 17, 2000 and May 31, 2000 4.5 Form of Warrant issued to Protius Overseas Limited and Photon Fund, Ltd. in May 2000 Units Placement 4.6 Form of Warrant issued to Castle Creek Healthcare LLC, Ram Trading Ltd., Montrose Investments Ltd., CCL Fund LLC, Velocity Investment Partners Ltd. and Ivan Lieberburg in May 2000 Units Placement 4.7 Form of Warrant issued to The Shemano Group, Inc. in connection with May 2000 Units Offering 27 Financial Data Schedule 19 (b) Reports on Form 8-K. On March 27, 2000, we filed a Current Report on Form 8-K in response to Item 5 of Form 8-K - "Other Events" to report recent developments in our litigation with Sands Brothers & Co. Ltd. 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: June 13, 2000 GENEREX BIOTECHNOLOGY CORPORATION By: /s/ E. Mark Perri ------------------------------------ E. Mark Perri Chairman and Chief Financial Officer