-----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, M+f/91VEE2Pgds6zjm8a402CtOkw3Waojln1RP3spu9enuDxJyBhuZcWasGsn6CZ jLX0z+zJhihUTPuaFVngPQ== 0000950116-01-501258.txt : 20020413 0000950116-01-501258.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950116-01-501258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011214 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25169 FILM NUMBER: 1813298 BUSINESS ADDRESS: STREET 1: 33 HARBOUR SQ STREET 2: STE 202 CITY: TORONTO ONTARIO CANA STATE: A1 BUSINESS PHONE: 4163642551 MAIL ADDRESS: STREET 1: 33 HARBOUR SQ STREET 2: STE 202 CITY: TORONTO ONTARIO M5J STATE: A1 10-Q 1 tenq.txt 10-Q 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, 2001 [ ] 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: 000-25169 GENEREX BIOTECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 98-0178636 - --------------------------- ---------------------------------- (State of other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 33 HARBOUR 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 20,682,634 as of October 31, 2001. GENEREX BIOTECHNOLOGY CORPORATION INDEX PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements - unaudited Consolidated Balance Sheets -- October 31, 2001 and July 31, 2001 .......................... 3 Consolidated Statements of Operations -- for the three month periods ended October 31, 2001 and 2000, and cumulative from November 2, 1995, to October 31, 2001.......................................... 4 Consolidated Statements of Cash Flows -- For the three-month periods ended October 31, 2001 and 2000, and cumulative from November 2, 1995, to October 31, 2001.......................................... 5 Notes to Consolidated Financial Statements................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 16 PART II: OTHER INFORMATION Item 1. Legal Proceedings............................................ 17 Item 6. Exhibits and Reports on Form 8-K............................. 17 Signatures................................................................. 18 2 Item 1. Consolidated Financial Statements GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, July 31, 2001 2001 ---------------- --------------- ASSETS Current Assets: Cash and cash equivalents $ 2,137,331 $ 10,109,559 Short-term investments 31,533,142 26,892,729 Officers' loans receivable 1,046,215 1,023,743 Miscellaneous receivables 12,473 12,865 Other current assets 73,080 112,620 ---------------- --------------- Total Current Assets 34,802,241 38,151,516 Property and Equipment, Net 3,727,097 3,727,761 Patents, Net 487,731 434,307 Deposits 17,159 20,000 Due From Related Parties 322,177 332,289 ---------------- --------------- TOTAL ASSETS $ 39,356,405 $ 42,665,873 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 2,047,695 $ 2,650,773 Current maturities of long-term debt 9,538 9,634 ---------------- --------------- Total Current Liabilities 2,057,233 2,660,407 Long-Term Debt, Less Current Maturities 659,797 683,026 Commitments and Contingencies Stockholders' Equity: Series A, preferred stock, $.001 par value; (liquidation preference $12,015,000) authorized 1,000,000 shares, 1,000 shares issued and outstanding at October 31, 2001 and at July 31, 2001 1 1 Special Voting Rights Preferred stock, $.001 par value; authorized, issued and outstanding 1,000 shares at October 31, 2001 and at July 31, 2001 1 1 Common stock, $.001 par value; authorized 50,000,000 shares, issued 20,686,526 and 20,681,526 shares at October 31, 2001 and July 31, 2001, respectively and outstanding 20,676,526 and 20,681,526 shares at October 31, 2001 and July 31, 2001, respectively 20,686 20,681 Treasury stock, at cost; 10,000 shares (39,150) -- Additional paid-in capital 88,804,354 88,776,859 Notes receivable - common stock (319,861) (314,300) Deficit accumulated during the development stage (51,497,170) (48,913,935) Accumulated other comprehensive loss (329,486) (246,867) ---------------- --------------- Total Stockholders' Equity 36,639,375 39,322,440 ---------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,356,405 $ 42,665,873 ================ ===============
The Notes to Consolidated Financial Statements are an integral part of these statements. 3 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative From November 2, For the Three Months Ended 1995 (Date of October 31, Inception) to -------------------------------------- to October 31, 2001 2000 2001 ---------------- ---------------- -------------- Contract Research Revenues $ -- $ 1,000,000 $ 1,000,000 Operating Expenses: Research and development 676,339 1,019,979 26,772,235 Research and development - related party -- -- 220,218 General and administrative 2,228,225 1,324,553 29,979,694 General and administrative - related party -- -- 314,328 ---------------- ---------------- ------------- Total Operating Expenses 2,904,564 2,344,532 57,286,475 ---------------- ---------------- ------------- Operating Loss (2,904,564) (1,344,532) (56,286,475) Other Income (Expense): Miscellaneous income 3,997 -- 22,567 Interest income 333,534 219,945 2,079,379 Interest expense (16,202) (19,620) (297,641) ---------------- ---------------- ------------- Net Loss Before the Undernoted (2,583,235) (1,144,207) (54,482,170) Minority Interest Share of Loss -- -- 2,985,000 ---------------- ---------------- ------------- Net Loss $ (2,583,235) $ (1,144,207) $ (51,497,170) ================ ================ ============= Basic and Diluted Net Loss Per Common Share $ (.12) $ (.07) ================ ================ Weighted Average Number of Shares of Common Stock Outstanding 20,683,646 17,176,462 ================ ================
The Notes to Consolidated Financial Statements are an integral part of these statements. 4 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative From November 2, For the Three Months Ended 1995 (Date of October 31, Inception) to ---------------------------------------- to October 31, 2001 2000 2001 ---------------- ------------------- -------------- Cash Flows From Operating Activities: Net loss $ (2,583,235) $ (1,144,207) $ (51,497,170) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 91,777 21,026 533,054 Minority interest share of loss -- -- (2,985,000) Reduction of notes receivable - common stock in exchange for services rendered -- -- 423,882 Write-off or deferred offering costs -- -- 3,406,196 Common stock issued for services rendered -- 411,250 2,069,992 Stock options and warrants issued for services rendered -- -- 4,588,060 Preferred stock issued for services rendered -- -- 100 Founders' shares transferred for services rendered -- -- 353,506 Changes in operating assets and liabilities: Miscellaneous receivables -- -- 30,620 Other current assets 39,387 (153,004) (78,219) Accounts payable and accrued expenses (591,025) 221,764 2,901,096 Other, net -- -- 110,317 --------------- ------------------- ------------- Net Cash Used in Operating Activities (3,043,096) (643,171) (40,143,566) Cash Flows From Investing Activities: Purchase of property and equipment (168,794) (473,034) (2,465,765) Costs incurred for patents (68,094) (57,347) (535,027) Change in restricted cash -- -- (5,595) Purchase of short-term investments (4,640,413) (13,735,738) (31,533,142) Increase in officers' loans receivable (22,472) -- (1,046,215) Change in deposits 2,840 27,842 32,355 Change in notes receivable - common stock (5,561) -- (19,861) Change in due from related parties -- -- (2,255,197) Other, net -- -- 89,683 --------------- ------------------- -------------- Net Cash Used in Investing Activities (4,902,494) (14,238,277) (37,738,764) Cash Flows From Financing Activities: Proceeds from issuance of long-term debt -- -- 993,149 Repayment of long-term debt (2,274) (2,245) (968,258) Change in due to related parties -- -- 154,541 Proceeds from exercise of warrants -- -- 2,256,482 Proceeds from exercise of stock options 27,500 -- 772,500 Proceeds from minority interest investment -- -- 2,985,000 Proceeds from issuance of preferred stock -- -- 12,015,000 Purchase of treasury stock (39,150) -- (39,150) Proceeds from issuance of common stock, net -- 23,605,925 61,999,294 Purchase and retirement of common stock -- -- (119,066) --------------- ------------------- -------------- Net Cash Provided By (Used In) Financing Activities (13,924) 23,603,680 80,049,492 Effect of Exchange Rates on Cash (12,714) (11,564) (29,831) --------------- ------------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents (7,972,228) 8,710,668 2,137,331 Cash and Cash Equivalents, Beginning of Period 10,109,559 3,204,905 -- --------------- ------------------- -------------- Cash and Cash Equivalents, End of Period $ 2,137,331 $ 11,915,573 $ 2,137,331 =============== =================== ==============
The Notes to Consolidated Financial Statements are an integral part of these statements. 5 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (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 2002; 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, 2001 and 2000, was $2,665,854 and $1,233,416, respectively. 4. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following: October 31, July 31, 2001 2001 ---------- ---------- Accounts Payable $ 536,003 $ 896,061 Litigation Accruals 185,820 191,653 Clinical -- 147,699 Accrued Legal Fees -- 420,360 Financial Services 750,000 995,000 Executive Compensation 575,872 -- ---------- ---------- Total $2,047,695 $2,650,773 ========== ========== 6 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. 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% 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. Sands has submitted a motion to the New York Supreme Court to modify and confirm the arbitration panel's award. The Company is opposing Sands' motion and also has filed a motion with the court to vacate the arbitration award. The Company believes that the arbitration panel's award does not accord with the direction of the Appellate Division, as set forth in its order remanding the proceeding to the arbitration panel for further consideration. The Company is not able to estimate an amount or range of possible loss from this legal proceeding at the present time. Therefore, no provision has been recorded in the accompanying financial statements. 7 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. Pending Litigation (continued) In February 2001, a former business associate of the Vice President of Research and Development (VP), and an entity called Centrum Technologies Inc. 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 Centrum Technologies Inc. On July 20, 2001, the Company filed a preliminary motion to dismiss the action of Centrum Technologies Inc. as a nonexistent entity or, alternatively, to stay such action on the grounds of want of authority of such entity to commence the action and, in the further alternative, to dismiss such action for failure to produce documents referred to in the statement of claim. On December 6, 2001, the Company's preliminary motion to dismiss the action of Centrum Technologies Inc. was heard and granted. The Company intends to continue its vigorous defense of this legal proceeding. 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. In February 1997, 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 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 of is not material to the consolidated financial position of the Company. In March 1999, a former consultant to the Company commenced an action in the Ontario Superior Court of Justice against the Company seeking approximately $94,000 and 1,465 shares of the Company's Common Stock for alleged breach of contract damages and additional amounts in punitive damages. In April 1999, the Company filed a counterclaim for monies the Company believes are due to the Company from this former consultant. The parties have completed discovery and are awaiting a trial date. 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 of is not material to the consolidated financial position of the Company. 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 consolidated financial position. 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. 8 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. Net Loss Per Share Basic EPS and Diluted EPS for the three months ended October 31, 2001 and 2000 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. 7. Supplemental Disclosure of Cash Flow Information
For the Three Months Ended October 31, -------------------------- 2001 2000 ------- ---------- Cash paid during the period for: Interest $16,202 $ 19,620 Income taxes $ -- $ -- Disclosure of non-cash investing and financing activities: Issuance of warrants as consideration for an equity financing agreement were capitalized as deferred offering costs $ -- $3,406,196
8. Transactions With Related Parties The Company's change in "Due from Related Parties" for the quarter ended October 31, 2001 represents only the effects of changes in quarter end exchange rates versus those in effect at July 31, 2001. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements We have made statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Notes to Consolidated Financial Statements and elsewhere in this Report that may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 the status of activities under our development and license agreement with Eli Lilly and Company; o our other clinical and product development programs and other aspects of our business plans; o the development of additional products using our buccal delivery technology; 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. 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 a new and as yet not fully proven drug delivery technology; o the risks and uncertainties regarding the actual effect on humans of seemingly safe and efficacious formulations when tested clinically; o the inherent uncertainties associated with identification and initial development of product candidates; o the inherent uncertainties associated with clinical trials of products candidates; o the inherent uncertainties associated with the process of obtaining regulatory approval to market product candidates; and 10 o adverse developments in our collaboration with Lilly regarding buccal insulin, which is currently our only product candidate that has moved beyond preliminary research and development. Additional factors that could affect future results are set forth in our Annual Report on Form 10-K for the fiscal year ended July 31, 2001. 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 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. 11 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 this agreement (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. In January 2001, we established 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"). 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. The parties intend to select at least one pharmaceutical product for research and development by first anniversary of the formation of the joint venture. The parties will conduct the joint venture through Generex (Bermuda), Ltd., a Bermuda limited liability company. 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 ownership interest in the joint venture entity. 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 equity ownership of the joint venture entity. 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. 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. In the future, we expect to undertake development of additional products based on this technology that are not covered by the Lilly Agreement or the joint venture with Elan. Results of Operations - Three months ended October 31, 2001 and 2000 We have been in the development stage since inception and have not generated any operating revenues to date, other than $1,000,000 in revenues received in connection with the Lilly Agreement in the quarter ended October 30, 2000. 12 Our net loss for the quarter ended October 31, 2001 was $2,583,235 versus $1,144,207 in the corresponding quarter of the prior fiscal year. The net loss increased in this fiscal quarter versus the corresponding quarter of the prior fiscal year due to an increase in general and administrative expenses and due the absence of revenues in this fiscal quarter (versus $1,000,000 of Lilly Agreement signing fees recognized in the quarter ended October 31, 2000). These negative items were partially offset by lower research and development expenses and increased interest income. The decrease in research and development expenses in the quarter ended October 31, 2001, compared to the quarter ended October 31, 2000, reflects the absence in this fiscal quarter of expenditures related to the completion of our pilot manufacturing facility (which was still under construction and set up during the quarter ended October 31, 2000) and the focus of research and development activities during this fiscal quarter on in vitro and in vivo work in preparation for eventual clinical trials under the Lilly Agreement rather than on completion of clinical trial programs for the purpose of demonstrating the potential applicability of our buccal delivery technology to insulin (which was the case in the quarter ended October 31, 2000). The increase in general and administrative expenses in the quarter ended October 31, 2001, compared to the quarter ended October 31, 2000, was primarily the result of additional expenses associated with the bonus compensation awarded during the quarter ended October 31, 2001 to management personnel by the Compensation Committee of the Board of Directors in respect of their fiscal 2001 performance and higher legal expenses associated with material legal proceedings. 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 of the last fiscal year. 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, 2001, we had cash and short term investments (primarily notes of United States corporations) of approximately $33.67 million. At October 31, 2000, our cash and short term investments were approximately $29.62 million. The increase in our cash and short term investments in the quarter ended October 31, 2001, compared with the quarter ended October 31, 2000, was primarily the result of additional equity capital of $10.8 million (net of financing costs of approximately $.75 million) from two private placements in July 2001 of units of securities consisting of 1.0 shares of common stock and warrants to purchase an additional .25 shares of common stock at a price of $9.25 per unit. The additional equity capital was partially offset by the use of cash for ongoing operations throughout the year. 13 We believe that our current cash position is sufficient to meet all of our working capital needs for at least the next 12 months based on the pace of our current development activities (including our activities under the Lilly Agreement and under our joint venture with Elan). 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. Transactions with Affiliates On May 3, 2001, the Company's three senior officers, who are also shareholders of the Company, were advanced $334,300 each, in exchange for promissory notes. These notes bear interest at 8.5 percent per annum and are payable in full on May 1, 2002. These notes are guaranteed by a related company owned by these officers and secured by a pledge of 2,500,000 shares of the Company's common stock currently owned by this related company. As of October 31, 2001, the balance outstanding on these notes, including accrued interest, was $1,046,215. Prior to January 1, 1999, a portion of our general and administrative expenses resulted from transactions with affiliated persons, and a number of capital transactions also involved affiliated persons. Although these transactions were not the result of "arms-length" negotiations, we do not believe that this fact had a material impact on our results of operations or financial position. Prior to December 31, 1998, we classified certain payments to executive officers for compensation and expense reimbursements as "Research and development - related party" because the executive officers received such payments through personal services corporations rather than directly. After December 31, 1998, these payments have been and will continue to be accounted for as though the payments were made directly to the officers, and not as a related party transaction. We do not foresee a need for, and therefore do not anticipate, any related party transactions in the current fiscal year. New Accounting Pronouncements In June 1998, 1999, and 2000, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, respectively. These statements require 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. The adoption on August 1, 2000 of these statements did not have a significant impact on our financial position or results of operations. 14 In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance on the recognition, presentation, and disclosure of revenues in financial statements of all public registrants. In October 2000, the SEC issued a Frequently Asked Questions document related to SAB 101 which provides interpretive guidance. We adopted SAB 101 in fiscal year 2001, and the adoption of SAB 101 did not have a significant impact on our financial position or results of operations. In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 141 is applicable to business combinations beginning July 1, 2001. The adoption of this statement did not have a significant impact on our financial position or results of operations. In June 2001, the 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 initial recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. Goodwill and intangible assets previously recorded, in our 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 will be effective for our fiscal year 2002, however management is assessing the impact that SFAS No. 142 will have on our financial position and results of operations. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are not presently subject to any material market risk exposures. We are exposed to market risk associated with interest rate changes and changes in the exchange rate between U.S. and Canadian currencies. 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 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. 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. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings This is an update to the description of our pending legal proceeding with Sands Brothers & Co., Ltd. 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 the registrant's common stock purportedly pursuant to and in accordance with the terms of the October 1997 letter agreement. Sands has submitted a motion to the Supreme Court of New York, County of New York to modify and to confirm the arbitration panel's award. We are opposing Sands' motion and we also have filed a motion with the court to vacate the arbitration award. We believe that the arbitration panel's award does not accord with the direction of the New York State Appellate Division, First Department, as set forth in its order remanding the proceeding to the arbitration panel for further consideration. We are not able to estimate an amount or range of potential loss from this legal proceeding at the present time. 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, 2001, which is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. none (b) Reports on Form 8-K. The following report was filed in the quarter ended October 31, 2001: o On November 8, 2001, we filed a Current Report on Form 8-K to update our description of the Sands legal proceeding under Item 5 of Form 8-K - "Other Events". 17 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 13, 2001 GENEREX BIOTECHNOLOGY CORPORATION By: /s/ E. Mark Perri -------------------------------------------- E. Mark Perri Chairman and Chief Financial Officer (principal financial and accounting officer) 18 -----END PRIVACY-ENHANCED MESSAGE-----