-----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, WplU/IXxsT+DkkeZnhdWO+WIINpK6kRQ9oL0fAP0uLTtdZ9ePo3YXIodKVVmZaXn Per5R8fE/yRoZP8crmkC9w== 0000950115-99-001352.txt : 19991101 0000950115-99-001352.hdr.sgml : 19991101 ACCESSION NUMBER: 0000950115-99-001352 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19991029 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/A SEC ACT: SEC FILE NUMBER: 000-25169 FILM NUMBER: 99737763 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/A 1 AMENDED QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Amendment No. 1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended October 31, 1998 [ ] 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) IDAHO 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. [ ] Yes [X] No - subject to filing requirements since February 12, 1999 APPLICABLE ONLY TO CORPORATE ISSUERS The number of outstanding shares of the registrant's Common Stock, par value $.001, was 13,363,586 as of March 22, 1999. Page 1 of 13 GENEREX BIOTECHNOLOGY CORPORATION INDEX PART 1: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements - unaudited Consolidated Balance Sheets - October 31, 1998 and July 31, 1998 ................................. 3 Consolidated Statements of Operations for the three month periods ended October 31, 1998 and 1997, and cumulative from November 2, 1995, to October 31, 1998 ................................................... 4 Consolidated Statements of Cash Flows for the three month periods ended October 31, 1998 and 1997, and cumulative from November 1995, to October 31, 1998 ................................................... 5 Notes to Consolidated Financial Statements ......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................ 10 PART II: OTHER INFORMATION Item 1. Legal Proceedings .................................................. 13 Item 5. Other Information .................................................. 13 Item 6. Exhibits and Reports on Form 8-K ................................... 13 Signatures ......................................................... 13 Page 2 of 13 Item 1. Consolidated financial statements GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (UNAUDITED) (RESTATED)
October 31, July 31, 1998 1998 ----------- --------- ASSETS Current Assets: Cash $1,970,865 $2,090,827 Restricted cash -- 106,527 Miscellaneous receivables 223,199 209,090 Other current assets 132,602 131,340 ---------- ---------- Total Current Assets 2,326,666 2,537,784 Property and Equipment, Net 2,117,443 1,634,447 Deposits 64,598 82,509 Due From Related Parties 1,211,687 1,200,968 ---------- ---------- TOTAL ASSETS $5,720,394 $5,455,708 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 358,141 $1,253,003 Current maturities of long-term debt 394,490 411,565 ---------- ---------- Total Current Liabilities 752,631 1,664,568 Long-Term Debt, Less Current Maturities 599,482 912,817 Due to Related Parties 255,496 236,024 Commitments and Contingencies Stockholders' Equity: Preferred stock, $.001 par value; authorized 1,000,000 shares, issued and outstanding 1,000 at October 31, 1998 and July 31, 1998 1 1 Common stock, $.001 par value; authorized 50,000,000 shares, issued and outstanding 12,726,016 and 11,971,272 shares at October 31, 1998 and July 31, 1998, respectively 12,726 11,971 Additional paid-in capital 12,133,335 9,565,836 Deficit accumulated during the development stage (7,789,881) (6,736,076) Accumulated other comprehensive income (loss) (243,396) (199,433) ---------- ---------- Total Stockholders' Equity 4,112,785 2,642,299 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,720,394 $5,455,708 ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. GENEREX BIOTECHNOLOGY CORPORATION (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, 1998 1997 1998 ------------ ------------ ------------ (RESTATED) (RESTATED) Revenues $ -- $ -- $ -- Operating Expenses: Research and development 586,258 30,309 2,202,750 Research and development - related party -- 21,455 220,218 General and administrative 452,551 275,872 4,974,298 General and administrative - related party -- 71,798 314,328 ------------ ------------ ------------ Total Operating Expenses 1,038,809 399,434 7,711,594 ------------ ------------ ------------ Operating Loss (1,038,809) (399,434) (7,711,594) ------------ ------------ ------------ Other Income (Expense): Interest income 66 -- 66 Interest expense (15,062) -- (78,353) ------------ ------------ ------------ Net Loss $ (1,053,805) $ (399,434) $ (7,789,881) ============ ============ ============ Basic and Diluted Net Loss Per Common Share $ (.09) $ (.04) ============ ============ Weighted Average Number of Shares of Common Stock Outstanding 12,348,870 9,000,118 =========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative From November 2, For the Three Months Ended 1995 (Date of October 31, Incepion) to -------------------------- to October 31, 1998 1997 1998 ----------- ----------- ----------- (RESTATED) (RESTATED) Cash Flows From Operating Activities: Net loss $(1,053,805) $ (399,434) $(7,789,881) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 16,851 3,292 60,936 Common stock and warrants issued for services rendered 129,728 234,000 2,317,487 Preferred stock issued for services rendered -- -- 100 Changes in operating assets and liabilities: Miscellaneous receivables -- (55,837) (170,179) Other current assets (20,367) 46,428 (156,944) Accounts payable and accrued liabilities (133,808) (157,310) 1,192,138 Other, net (79,347) (10,384) 30,970 ----------- ----------- ----------- Net Cash Used in Operating Activities (1,140,748) (339,245) (4,515,373) Cash Flows From Investing Activities: Purchase of property and equipment (449,915) (5,524) (525,688) Change in restricted cash 105,655 -- (5,595) Change in deposits 16,304 -- (1,297) Change in notes receivable -- 101,953 -- Change in due from related parties (33,440) (245,070) (3,007,826) Other, net -- -- 89,683 ----------- ----------- ----------- Net Cash Used in Investing Activities (361,396) (148,641) (3,450,723) Cash Flows From Financing Activities: Proceeds from issuance of long-term debt -- -- 993,149 Repayment of long-term debt (385,299) 502,585 (448,688) Change in due to related parties 48,135 -- 284,159 Proceeds from issuance of common stock, net 1,819,592 -- 9,209,540 Purchase and retirement of common stock (119,066) -- (119,066) ----------- ----------- ----------- Net Cash Provided By Financing Activities 1,363,362 502,585 9,919,094 Effect of Exchange Rates on Cash 18,820 5,465 17,867 ----------- ----------- ----------- Net Increase (Decrease) in Cash (119,962) 20,164 1,970,865 Cash, Beginning of Period 2,090,827 196,004 -- ----------- ----------- ----------- Cash, End of Period $ 1,970,865 $ 216,168 $ 1,970,865 =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements. 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. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the fiscal year 1999; 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) Effective August 1, 1998, the Company 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, 1998 and 1997 was $(1,097,768) and $(63,355), respectively. 3. Accounts Payable and Accrued Expense Accounts payable and accrued expenses consist of the following: October 31, July 31, 1998 1998 -------- ---------- Accounts Payable $182,656 $ 336,633 Penalty Arising from Violation of Financing Agreement -- 738,000 Consulting Accruals 149,060 151,945 Building Purchase Liability 26,425 26,425 -------- ---------- Total $358,141 $1,253,003 ======== ========== GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. Pending Litigation Sands Brothers & Co., Ltd. (Sands), a New York City-based investment banking and brokerage firm, initiated arbitration against the Company under New York Stock Exchange rules in September 1998. This claim is based upon a claim that Sands has the right to purchase, for nominal consideration, approximately 1.5 million shares of the Company's common stock. This claim is based upon an October 1997 letter agreement which purportedly confirmed the terms of an agreement appointing Sands as the exclusive financial advisor to Generex Pharmaceuticals, Inc. (GPI) and granting Sands the right to receive shares representing 17 percent of the outstanding capital stock of GPI on a fully diluted basis. Following the acquisition of GPI by GBC - Delaware, Inc., Sands' claimed a right to receive shares of GPI common stock that would, allegedly, now apply to the Company's common stock. Sands also claims that it is entitled to additional shares of the Company as a result of the GBC - Delaware, Inc.'s acquisition of GPI (approximately 460,000 shares), and $144,000 in fees under the terms of the purported Agreement. Sands has never performed any services for the Company, and the Company and GPI have denied that the individual who is alleged to have entered into the purported agreement between Sands and GPI, had the authority to act on GPI's behalf, and accordingly, is defending against Sands' claim primarily on the basis that no agreement has ever existed between GPI and Sands. During a series of hearings before a NYSE arbitration panel commencing June 8, 1999, Sands amended its claim to include, in the alternative, an entitlement in the form of an order of specific performance with regard to the issuance of the warrant as discussed in the October 1997 letter. By an award dated September 24, 1999, the panel awarded Sands $12,000 plus $2,070 in interest, a declaratory judgment that the Company is required to issue Sands a warrant for 1,530,020 shares in accordance with the October 1997 letter, and denied all other relief and split the $22,800 in forum fees equally between Sands and the Company. The award must be confirmed by a court of appropriate jurisdiction. The Company intends to seek relief from the award by requesting, among other things, a New York State court to vacate the award on various legal grounds. However, the ultimate legal and financial liability of the Company, including a range of possible losses with respect to the award cannot be estimated at this time. Therefore, no provision has been recorded in the accompanying financial statements. Furthermore, it is management's belief that the final outcome is not reasonably likely to have a material adverse effect on the Company's consolidated financial position. Generex Pharmaceuticals, Inc., is also contesting a claim for wrongful dismissal in the amount of approximately $300,000 plus special damages, interest and costs. The Company believes that the plaintiff was never employed by the Company or any of its subsidiaries and that the case is without merit. An action was also commenced against GPI and other companies and individuals seeking approximately $3,965,000 for allegedly causing certain adverse consequences of a plaintiff's particular investment in a 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. An application has been filed to set aside that default notice, however that application has been adjourned indefinitely. 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. Stock Redemption Under the terms of a settlement, determined in an Ontario, Canada Court, the Company agreed to purchased 15,357 shares from a shareholder. The total purchase price of $140,873 included $119,066 which was charged against additional paid in capital for the stock redemption and $21,807 which was recorded as litigation settlement expense which represents the excess paid over the fair value at the time of settlement. The settlement was concluded in September 1998. GENEREX BIOTECHNOLOGY CORPORATION (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, 1998 and 1997 have been computed by dividing the net loss for each respective period by the weighted average shares outstanding during that period. All outstanding warrants 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, ----------------------- 1998 1997 -------- --------- Cash paid during the year for: Interest $ 15,062 $ -- 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 $ 81,011 $ --
8. The Company's consolidated financial statements as of October 31, 1998 and July 31, 1998 and for the three months ended October 31, 1998 have been restated to reflect: (1) founders shares issued for services provided, (2) an additional charge to reflect the fair value of warrants issued in exchange for services rendered, (3) addition expense incurred in conjunction with stock redemption and (4) correction of an error in calculating accumulated other comprehensive income (loss). The effect of these restatements are as follows: As Previously As Reported Restated ------------- ------------ For the year ended July 31, 1998 -------------------------------- Balance Sheet: Additional paid-in capital 9,162,329 9,565,836 Deficit accumulated during the development stage (6,332,570) (6,736,076) For the three months ended October 31, 1998 ------------------------------------------- Balance Sheet: Additional paid-in capital 11,705,958 12,133,335 Deficit accumulated during the development stage (7,779,797) (7,789,881) Accumulated other comprehensive income (loss) 173,897 (243,396) Consolidated Statements of Operations: General and administrative 428,660 452,551 Net loss (1,029,934) (1,053,805) GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. Subsequent Events Subsequent events occurring after October 31, 1998 consist of the following: The Company entered into a consulting agreement with an individual. As part of the consultant's compensation, the Company granted the consultant options to purchase 50,000 shares of the Company's common stock at an exercise price of $8.00 per share under the 1998 stock option plan. The stock option plan adopted in January 1998 was not submitted for shareholder approval and terminated on February 1, 1999. A new plan, substantially identical to the terminated plan, has been adopted. All options granted under the previous plan are not affected by the termination. For consideration of financial consulting services provided, the Company issued warrants to purchase 150,000 shares of common stock at $10 per share. The Company received a total of $1,775,600 from the sale of 423,852 shares of common stock at prices ranging from $4.00 to $6.00. For consideration of legal services provided, the Company issued 5,000 shares of common stock at $6 per share. GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. Subsequent Events (Unaudited) 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. The Company has not yet responded to the Complaint in this action. In February 1999, the Company entered into an agreement with an investment banker. Under the terms of the agreement, the investment banker will act as the Company's exclusive investment advisor, exclusive private placement agent and exclusive investment banker for a period of two months. If the investment banker is successful in securing capital for the Company for an agreed upon and stated amount during this period, the term of the agreement will automatically be extended for a period of four months. The Company also has the option to extend the term of the agreement for an additional four months, if it is expressed in writing that it is satisfied with the investment banker's services. In conjunction with the agreement, the investment banker received an option to purchase 100,000 shares of the Company's common stock at an exercise price of $6.00 per share during a five-year period. The investment banker will also receive an additional option to purchase 50,000 shares of the Company's common stock at an exercise price of $7.50 per share during a five-year period for assisting in obtaining financing in an agreed upon and stated amount. In the event of a private placement of the Company's securities, the investment banker is entitled to (i) a transaction fee in the amount of 10 percent of the amount raised, (ii) a 3 percent non-accountable expense allowance and (iii) placement agent warrants equal to 10 percent of the ownership given to any equity raised. Finally in the event that the Company enters into a merger, acquisition, or sale transaction with a party introduced by the investment banker, cash compensation will be paid based on an agreed upon formula. On February 11, 1999, the shareholders of the Company approved the merger of the Company into its wholly-owned subsidiary, GBC-Delaware, Inc. The purpose of the merger is to change the Company's state of incorporation from Idaho to Delaware. The merger is expected to be effected in the Company's third fiscal quarter and will not materially affect the Company's historical financial statements or future financial reporting. Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations When used in this discussion, the words "expect(s)", "feels", "believe(s)", "will", "may", "anticipate(s)" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from the possible results described in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and are urged to carefully review and consider the various disclosures elsewhere in this Prospectus which discuss factors which affect the Company's business, including the discussion under the caption "Risk Factors". General The Company was incorporated in 1983 as Green Mt. P.S., Inc. In January 1998, the Company 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 its 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 of the Company formed for this transaction (the "Reverse Acquisition"). As a result of the Reverse Acquisition, the former shareholders of Generex Delaware acquired a majority of the Company's outstanding capital stock and, for accounting purposes, Generex Delaware was treated as the acquiring corporation. Thus, the historical financial statements of Generex Delaware, which essentially represent the historical financial statements of Generex Pharmaceuticals, are deemed to be the historical financial statements of the Company. In February 1999, the shareholders of the Company approved a reorganization in which the Company will merge into Generex Delaware for the purpose of changing the Company's state of Incorporation from Idaho to Delaware (see Part 11, Item 5 below). This reorganization, which is expected to be consummated in the Company's third fiscal quarter, will not result in any material change in the Company's historical financial statements or current financial reporting. The Company is engaged in the development of drug delivery systems. Its principal business focus has been to develop a technology for the administration of large molecule (i.e., molecules above a specified molecular weight) drugs. Historically, large molecule drugs have been administered only by injection because their size inhibits or precludes absorption if administered only or oral, transdermal, transnasal or other means. The principal application to date of the Company's large molecule drug delivery technology is a liquid insulin formulation that is administered with a metered dose applicator developed by the Company. 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 the mouth and back of the throat, where absorption occurs. The Company intends to market this formulation in the United States under the name Oralgen(TM), and in Canada and elsewhere under the name Oralin(TM). The Company completed pre-clinical studies and proof of concept trials of its oral insulin formulation in early 1998. Phase 11 clinical trials were commenced in Canada in November Page 10 of 13 1998. The Company's Phase 11 clinical program in the United States commenced in March 1999. The Company also has received regulatory approval in Ecuador for limited, noncommercial distribution of its oral insulin formulation to diabetic patients. This clinical program, which is expected to involve approximately 200 patients, is scheduled to begin later this year. Results of Operations - Three months ended October 31, 1998 The Company has been in the development stage since its inception and has not generated any operating revenues to date. Through October 31, 1998, the Company has accumulated an operating deficit of $7,779,797, as a result of research and development and general and administrative expenses incurred during the development stage. The Company's accumulated operating deficit at October 31, 1998, includes a net loss of $1,029,934 for the quarter then ended. In the quarter ended October 31, 1997, the Company's net loss was $399,434. The principal reason for the increase in the Company's net loss in the quarter ended October 31, 1998, versus the corresponding period in 1997, was an increase in research and development expenses (to $586,258 from $51,764). The increase in research and development expense in the 1998 period reflects the Company's preparation for Phase II clinical trials of the Company's oral insulin formulation in Canada, development work associated with the Company's metered dose applicator, preparation and submission of an Investigational New Drug application to the U.S. Food and Drug Administration, continuation and support of the Company's clinical program in Ecuador, and personnel costs associated with starting up the Company's pilot manufacturing facility in Toronto which supports the Company's clinical programs. Research and development expenses in the first quarter of 1997 essentially were limited to laboratory personnel costs. The remainder of the increased loss in the first quarter of 1998 versus the corresponding 1997 quarter was the result of an increase in general and administrative expenses ($81,010) and interest expense ($14,966, net of interest income). The increase in general and administrative expenses in the 1998 quarter was primarily a result of the addition of new administrative personnel and participation in a number of industry seminars and exhibitions during the quarter. Liquidity and Capital Resources The Company has financed its development stage activity primarily through private placements of equity securities. During the quarter ended October 31, 1998, the Company received approximately $2.5 million in additional equity capital, net of a stock redemption and expenses associated with acquiring the capital. As a result, at October 31, 1998, the Company's stockholders' equity had increased to approximately $4.1 million versus approximately $2.6 million at July 31, 1998, notwithstanding its net loss during the quarter. In the quarter, the Company also issued 39,504 shares of common stock valued at $127,664 in payment for services, and issued 180,000 shares and repriced warrants to purchase 7,937 shares to settle outstanding claims resulting in an accounting charge of $740,064 as litigation expense. At October 31, 1998, the Company had cash on hand of approximately $1.97 million, a slight decrease from approximately $2.2 million on hand at July 31, 1998. Based on the Page 11 of 13 Company's projections of its cash needs at that time, its cash on hand was insufficient to fund development activities over the next twelve months at the levels then planned. The Company's business plan contemplated raising additional equity capital to satisfy its short term cash requirements, and the Company intends to rely on its ability to raise additional equity capital as required to continue its development activities at least through the current calendar year. Beyond that point, the Company expects that a substantial portion of its cash needs will be met through licensing income, and future marketing partners' contributions to clinical program costs and/or equity investments. Implementation of the Company's business plan will require the availability of sufficient funds from the sources described above. While the Company has been successful in acquiring capital for its development activities as required, it does not have a substantial "cash cushion", nor does it have any commitments for future financing. Thus, the Company faces the risk that unforeseen problems with its clinical program or materially negative developments in general economic conditions could interfere with its ability to raise additional capital or materially adversely affect the terms upon which such capital is available. If funds are not available as needed from these sources, or from alternative sources, the Company will be required to "scale back" or otherwise revise its business plan. Any significant scale back of operations or modification of the Company's business plan required due to a lack of funding could be expected to materially and adversely affect the Company's prospects. Transactions with Affiliates A portion of the Company's administrative expenses have resulted from transactions with affiliated persons. A number of the Company's capital transactions also have involved affiliated persons. Although these transactions were not the result of "arms-length" negotiations, the Company does not believe that this fact had a material impact on the Company's results of operations or financial position. A portion of the expenses classified as "Research and development - related party" and "General and administrative - related party" are in the nature of executive compensation and expense reimbursements to the Company's executive officers, each of whom receives compensation through a personal services corporation rather than directly. Beginning with the second quarter of the current fiscal year, the Company will not characterize these as "related party" transactions, and will account for them in the same manner as direct compensation and expense reimbursements to the officers in question. Except for such expenses, the Company does not foresee a need for, and therefor does not anticipate, any "related party" transactions after December 31, 1998. Year 2000 Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. Management of the Company has completed its assessment of year 2000 issues and believes that the consequences of such issues will not have a material effect on the Company's business, results of operations or financial condition, without taking into account any efforts by the Company to avoid such consequences. New Accounting Pronouncements In 1998, the FASB issued Statement of Financial Accounting Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 modifies the accounting for derivative and hedging activities and is effective for fiscal years beginning after December 15, 1999. The Company believes that the adoption of SFAS No. 133 will not have a material impact on the Company's financial reporting. Page 12 of 13 PART II: OTHER INFORMATION Item 1. Legal Proceedings The Company has filed an Annual Report on Form 10-K for the year ended July 31, 1999. Information set forth in Item 3 of that Report is incorporated herein by reference. Item 5. Other Information On February 11, 1999, the shareholders of the Company approved the merger of the Company into its wholly-owned subsidiary, GBC-Delaware, Inc. The purpose of the merger is to change the Company's state of incorporation from Idaho to Delaware. The transaction was approved by a vote of 7,854,956 shares to zero. The merger had not been effected as of the date of this Report, but is expected to be effected in the Company's third fiscal quarter, i.e., the quarter ending April 30, 1999. The merger will not materially affect the Company's historical financial statements or future financial reporting. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Exhibit Title ------- ------------- 27 Financial Data Schedule (b) Reports on Form 8-K None GENEREX BIOTECHNOLOGY CORPORATION DATE: October 29, 1999 By: /s/ E. Mark Perri ------------------------------- E. Mark Perri Chairman and Chief Financial Officer Page 13 of 13 EX-27 2 FDS
5 3-MOS JUL-31-1998 OCT-31-1998 $1,970,865 0 223,199 0 0 2,326,666 2,174,721 57,280 5,720,394 752,631 599,482 0 1 12,146,061 0 5,720,394 0 0 0 0 1,038,809 0 14,996 0 0 0 0 0 0 (1,053,805) (.09) (.09)
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