-----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, LNdvx6x44tC+AtZmHOIoTLnertiAXMDysUVNRUEB7dV9R581IObdQ9PRVC7Kj9gR mMsBFU+Co4YoxAaugoKqYQ== 0000950115-99-001354.txt : 19991101 0000950115-99-001354.hdr.sgml : 19991101 ACCESSION NUMBER: 0000950115-99-001354 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 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: 99737768 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 April 30, 1999 [ ] 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 [X] APPLICABLE ONLY TO CORPORATE ISSUERS The number of outstanding shares of the registrant's Common Stock, par value $.001, was 13,727,937 as of April 30, 1999. GENEREX BIOTECHNOLOGY CORPORATION INDEX PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements - unaudited Consolidated Balance Sheets - April 30, 1999 and July 31, 1998.......................................... 3 Consolidated Statements of Operations for the three months ended April 30, 1999 and 1998, the nine months ended April 30, 1999 and 1998, and cumulative from November 2, 1995, to April 30, 1999............. 4 Consolidated Statements of Cash Flows for the nine months ended April 30, 1999 and 1998, and cumulative from November 1995, to April 30, 1999............................................................ 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 (a) Reincorporation in Delaware (b) Redemption of Series A Warrants (c) Restatement of Certificate of Incorporation Item 6. Exhibits and Reports on Form 8K........................................... 13 Signatures.......................................................................... 14
Page 2 of 14 Item I. Consolidated financial statements GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Restated)
April 30, July 31, 1999 1998 --------- -------- ASSETS Current Assets: Cash and cash equivalents $ 3,859,362 $ 2,090,827 Restricted cash -- 106,527 Miscellaneous receivables 159,629 209,090 Other current assets 132,924 131,340 ------------ ----------- Total Current Assets 4,151,915 2,537,784 Property and Equipment, Net 2,222,257 1,634,447 Deposits 68,434 82,509 Due From Related Parties 824,437 1,200,968 ------------ ----------- TOTAL ASSETS $ 7,267,043 $ 5,455,708 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 520,541 $ 1,253,003 Current maturities of long-term debt 417,919 411,565 ------------ ----------- Total Current Liabilities 938,460 1,664,568 Long-Term Debt, Less Current Maturities 635,084 912,817 Due to Related Parties 160,727 236,024 Commitments and Contingencies Stockholders' Equity: Preferred stock, $.001 par value; authorized 1,000,000 shares, issued and outstanding 1,000 shares at April 30, 1999 and July 31, 1998 1 1 Common stock, $.001 par value; authorized 50,000,000 shares, issued and outstanding 13,727,937 and 11,971,272 shares at April 30, 1999 and July 31, 1998, respectively 13,728 11,971 Additional paid-in capital 17,067,887 9,565,836 Deficit accumulated during the development stage (11,422,833) (6,736,076) Accumulated other comprehensive income (loss) (126,011) (199,433) ------------ ----------- Total Stockholders' Equity 5,532,772 2,642,299 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,267,043 $ 5,455,708 ============ ===========
The Notes to Consolidated Financial Statements are an integral part of these statements. Page 3 of 14 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Restated)
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, 1999 1998 1999 1998 1999 ------------ ------------ ------------ ------------ ------------ Revenues $ -- $ -- $ -- $ -- $ -- Operating Expenses: Research and development 588,726 156,017 1,829,703 335,304 3,446,194 Research and development - related party -- 14,666 -- 165,452 220,218 General and administrative 1,127,288 484,756 2,830,063 1,355,644 7,351,811 General and administrative - related party -- 77,343 -- 219,298 314,328 ----------- ----------- ----------- ----------- ------------ Total Operating Expenses 1,716,014 732,782 4,659,766 2,075,698 11,332,551 ----------- ----------- ----------- ----------- ------------ Operating Loss (1,716,014) (732,782) (4,659,766) (2,075,698) (11,332,551) Other Income (Expense) Interest income 6,868 -- 6,934 -- 6,934 Interest expense (285) -- (33,925) -- (97,216) ----------- ----------- ----------- ----------- ------------ Net Loss $(1,709,431) $ (732,782) $(4,686,757) $(2,075,698) $(11,422,833) =========== =========== =========== =========== ============ Basic and Diluted Net Loss Per Common Share $ (.13) $ (.07) $ (.36) $ (.22) =========== =========== =========== =========== Weighted Average Number of Shares of Common Stock Outstanding 13,416,870 10,391,645 12,890,760 9,583,302 =========== =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements. Page 4 of 14 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated)
Cumulative From November 2, For the Nine Months Ended 1995 (Date of April 30, Inception) to ------------------------------- April 30, 1999 1998 1999 ----------- ----------- ------------ Cash Flows From Operating Activities: Net loss $(4,686,757) $(2,075,698) $(11,422,833) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 29,161 21,394 73,246 Common stock issued for services rendered 275,408 433,245 837,661 Stock options and warrants issued for services rendered 918,064 284,000 1,805,570 Preferred stock issued for services rendered -- 100 100 Changes in operating assets and liabilities: Miscellaneous receivables 55,227 -- (114,952) Other current assets 146 21,252 (136,431) Accounts payable and accrued liabilities 578 345,864 1,326,524 Other, net 67,836 (8,969) 178,153 ----------- ----------- ------------ Net Cash Used in Operating Activities (3,340,337) (978,812) (7,452,962) Cash Flows From Investing Activities: Purchase of property and equipment (465,358) (15,713) (541,131) Change in restricted cash 105,655 (76,047) (5,595) Change in deposits 16,581 -- (1,020) Change in notes receivable -- 100,453 -- Change in due from related parties 405,728 919 (2,568,658) Other, net -- -- 89,683 ----------- ----------- ------------ Net Cash Provided By (Used in) Investing Activities 62,606 9,612 (3,026,721) Cash Flows From Financing Activities: Proceeds from issuance of long-term debt -- 850,365 993,149 Repayment of long-term debt (391,860) -- (455,249) Change in due to related parties (80,981) 62,046 155,043 Proceeds from issuance of common stock, net 5,691,403 -- 13,819,351 Purchase and retirement of common stock (119,066) -- (119,066) ----------- ----------- ------------ Net Cash Provided By Financing Activities 5,099,496 912,411 14,393,228 Effect of Exchange Rates on Cash and Cash Equivalents (53,230) 5,311 (54,183) ----------- ----------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents 1,768,535 (51,478) 3,859,362 Cash and Cash Equivalents, Beginning of Period 2,090,827 196,004 -- ----------- ----------- ------------ Cash and Cash Equivalents, End of Period $ 3,859,362 $ 144,526 $ 3,859,362 =========== =========== ============
The Notes to Consolidated Financial Statements are an integral part of these statements. Page 5 of 14 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. On April 30, 1999, the Company reincorporated in the State of Delaware. This was accomplished by a merger of the Company with its wholly owned subsidiary GBC-Delaware, Inc. The reincorporation will not have an effect on the Company's capitalization, management or business operations. 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 nine months ended April 30, 1999 and 1998 was $(4,613,335) and $(2,124,799), respectively. 3. Accounts Payable and Accrued Expense Accounts payable and accrued expenses consist of the following: April 30, July 31, 1999 1998 -------- ---------- Accounts Payable $449,055 $ 336,633 Penalty Arising from Violation of Financing Agreement -- 738,000 Consulting Accruals 71,486 151,945 Building Purchase Liability -- 26,425 -------- ---------- Total $520,541 $1,253,003 ======== ========== Page 6 of 14 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. GPI 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. 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. On May 11, 1999, the Company responded to the complaint in this action, however, discovery has not begun. 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. Page 7 of 14 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. Stock Redemption Under the terms of a settlement, determined in an Ontario, Canada Court, the Company agreed to purchase 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. 6. Net Loss Per Share Basic EPS and Diluted EPS for the nine months ended April 30, 1999 and 1998 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 Nine Months Ended April 30, ------------------------- 1999 1998 -------- -------- Cash paid during the period for: Interest $ 33,925 $ -- Income taxes $ -- $ -- Disclosure of non-cash investing and financing activities: Acquisition of property and equipment with collection of related party receivables $ -- $620,725 Issuance of common stock to satisfy accrued liability $738,000 $ -- Long-term debt incurred in conjunction with acquisition of property and equipment $ 81,492 $ --
8. The Company's consolidated financial statements as of April 30, 1999, July 31, 1998 and for the three months and nine months ended April 30, 1999 have been restated to reflect: (1) founders shares issued for services providded, (2) an additional charge to reflect the fair value of warrants issued in exchange for services rendered and (3) additional expense incurred in conjunction with stock redemption. 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) (6,736,075) For the three months ended April 30, 1999 ----------------------------------------- Balance Sheet: Additional paid-in capital 16,324,510 17,067,887 Deficit accumulated during the development stage (10,679,456) (11,422,833) Consolidated Statements of Operations: General and administrative 949,788 1,127,288 Net loss (1,531,931) (1,709,431) Basic and diluted net loss per common share (.11) (.13) For the nine months ended April 30, 1999 ---------------------------------------- Consolidated Statements of Operations: Research and development 1,787,203 1,829,703 General and administrative 2,532,692 2,830,063 Net loss (4,346,886) (4,686,757) Basic and diluted net loss per common share (.34) (.36) For the three months ended April 30, 1998 ----------------------------------------- Consolidated Statements of Operations: General and administrative 512,099 562,099 Net loss (682,782) (732,782) For the nine months ended April 30, 1998 ----------------------------------------- Consolidated Statements of Operations: General and administrative 1,524,962 1,574,942 Net loss (2,025,698) (2,075,698) Basic and diluted net loss per common share (.21) (.22) Page 8 of 14 GENEREX BIOTECHNOLOGY CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. Subsequent Events (Continued): Subsequent events occurring after April 30, 1999 consist of the following: The Company received a total of $1,500,004 from the sale of 272,728 shares of common stock at a price of $5.50 per share. On May 8, 1999, the Company announced that it exercised its right to redeem all outstanding Series A Redeemable Common Stock Warrants which were exercisable at $5.00 per share. The effective date of the redemption was June 4, 1999. Subsequent to June 4, 1999, the warrants ceased to be exercisable and the sole right of the holder who did not exercise their warrant(s) was to receive $.025 per warrant upon surrender of the warrant certificate to the Company. For 496,547 newly issued shares and the surrender of warrant certificates, the Company received the following: Cash $1,941,875 Services Rendered 67,158 Promissory Notes Receivable 473,702 ---------- $2,482,735 In addition to the above, the Company received 323,920 previously outstanding shares, valued for this purpose at $7.8125 per share, and surrender of warrant certificates in exchange for 506,125 newly issued shares. Page 9 of 14 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations When used in this discussion, the words "expect(s)", 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. On April 30, 1999, the Company completed a reorganization in which the Company merged into Generex Delaware for the purpose of changing the Company's state of incorporation from Idaho to Delaware (see Part II, Item 5(a) below). This reorganization did 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 by 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 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 the mouth and back of the throat, where absorption occurs. This product, which the Company intends to market in the United States under the name Oralgen(TM) and in Canada and elsewhere under the name Oralin(TM), is presently undergoing Phase II clinical trials in the United States and Canada. Page 10 of 14 Results of Operations - Three months ended April 30, 1999 and 1998 The Company has been in the development stage since its inception and has not generated any operating revenues to date. Through April 30, 1999, the Company accumulated an operating deficit of $11,422,833 as a result of research and development and general and administrative expenses incurred during the development stage. The Company's accumulated operating deficit at April 30, 1999, includes a net loss of $1,709,431 for the quarter then ended. In the corresponding quarter of the prior year the Company's net loss was $732,782. The principal reason for the increase in the Company's net loss in the quarter ended April 30, 1999, versus the quarter ended April 30, 1998, was an increase in research and development expenses (to $588,726 from $170,683), and in general and administrative expenses (to $1,127,288 from $562,099). The increase in research and development expense in the current period is attributable primarily to the conduct of Phase II clinical trials of the Company's oral insulin formulation in Canada and the United States. The increase in general and administrative expenses in the quarter ended April 30, 1999, compared to the prior year was primarily a result of the issuance of warrants to a broker dealer for financial advisory services ($477,500) and participation in industry seminars and exhibitions ($94,695). Results of Operations - Nine months ended April 30, 1999 and 1998 The Company's net loss for the nine months ended April 30, 1999, was $4,686,757, compared to a loss of $2,075,698 in the corresponding period of the preceding fiscal year. The principal reasons for the increase in the Company's net loss in nine month period ended April 30, 1999, was an increase in research and development expenses (to $1,829,703 from $500,756) and an increase in general and administrative expenses (to $2,830,063 from $1,574,942). The increase in research and development expense in the nine months ended April 30, 1999, reflects the increases in such expenses in the third quarter which are discussed above, and a substantial increase (to $1,240,977 from $330,073) in research and development expenditures in the six months ended January 31, 1999 versus the corresponding 1998 period. The increase in research and development expense in the first half of the current fiscal year reflected costs incurred in preparation for the Company's US and Canadian clinical trial programs, development work associated with the Company's oral insulin applicator, preparation of the Company's IND to FDA, support of the clinical testing conducted in Ecuador, and personnel costs associated with starting up the Company's pilot manufacturing facility in Toronto which supports the clinical programs. The increase in general and administrative expenses the first nine months of the current year are primarily the result of the increase in such expenses during the third quarter as discussed above, and increases in legal accounting fees, in part related to the Company's registration of securities under the Securities Exchange Act of 1934, costs related to participation in industry seminars and exhibitions, and increased personnel costs, including a one time charge ($106,000) associated with the severance of a former executive. Page 11 of 14 Liquidity and Capital Resources The Company has financed its development stage activity primarily through private placements of equity securities. In the nine months ended April 30, 1999, the Company received cash proceeds of approximately $5.5 million in additional equity capital, net of expenses relating to the issuance of such shares and $140,873 to redeem certain outstanding shares. As a result, at April 30, 1999, the Company's stockholders' equity had increased to approximately $5.53 million versus approximately $2.64 million at July 31, 1998, notwithstanding its net loss during the nine months ended April 30, 1999. At April 30, 1999, the Company had cash on hand of approximately $3.86 million. Based on the Company's projections of its cash needs at that time, its cash on hand was sufficient to fund development activities over the remainder of the current fiscal year at the levels then planned. In the current fiscal quarter, the Company has received approximately $3.7 in additional equity capital through an institutional private placement completed in May 1999, and the exercise of outstanding warrants in May and June 1999. Implementation of the Company's business plan will require the availability of sufficient funds to complete development of its oral insulin formulation and to carry on other research and development activities. While the Company has been able to raise capital for its development activities in the past, it does not have sufficient cash to complete its development plans, and does not 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 the Company is unable to raise additional capital as needed, it 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. The Company believes that its cash on hand is sufficient to complete the Phase II clinical programs for its oral insulin formulation in the United States and Canada, but that additional funds will be required to carry out a Phase III clinical program. The Company expects that a substantial portion of Phase III costs will be obtained through licensing income, and future marketing partners' contributions to clinical program costs and/or equity investments. The Company does not, however, have any licensing agreements or contractual arrangements for other funding at the present time. Transactions with Affiliates A portion of the Company's research and development and administrative expenses in the current year and in prior periods have resulted from transactions with affiliated persons. "Research and development - related party" and "General and administrative - related party" expenses reported by the Company represent compensation and expense reimbursements paid to management or consulting companies owned by officers and directors of the Company through which such officers' and directors' services are provided to the Company. A number of the Company's capital transactions also have involved affiliated persons. Although these transactions are not the result of "arms-length" negotiations, the Company does not believe that this fact has had a material impact on the Company's results of operations or financial position. The Company does not foresee a need for, and therefore does not anticipate, any "related party" transactions. Page 12 of 14 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. PART II: OTHER INFORMATION Item 1. Legal Proceedings Certain legal proceedings in which the Company is involved have been disclosed in Item 3 of the Company's Annual Report on Form 10-K filed on October 28, 1999. Information set forth in Item 3 of that Report is incorporated herein by Reference. Item 5. Other Information (a) Reincorporation in Delaware. Effective April 30, 1999, the Company merged with its wholly-owned Delaware subsidiary, GBC-Delaware, Inc. The purpose of the merger was to change the Company's state of incorporation from Idaho to Delaware. The merger did not materially affect the Company's historical financial statements or future financial reporting. A copy of the Agreement and Plan of Merger pursuant to which the merger was effected is attached as Exhibit 2-1 to this Report. Page 13 of 14 (b) Redemption of Series A Warrants. During May and June, 1999, the Company issued a total of 1,002,672 shares of Common Stock upon the exercise of Series A Redeemable Common Stock Purchase Warrants. The warrants were issued in a 1998 private placement, and were called for redemption by the Company on May 11, 1999. The warrant exercise price ($5.00 per share) was paid (i) in cash, (ii) in previously-owned shares of Common Stock valued for this purpose at $7.8125 per share, and (iii) in certain cases, through the cancellation of indebtedness and the issuance of promissory notes. A total of 388,375 shares were issued for cash ($1,941,875), 506,125 shares were paid for by the surrender of 323,920 previously owned shares ($2,530,626), 98,172 shares were sold partially in consideration of services rendered ($67,158.30) and partially through the issuance of a two-year promissory note ($423,701.70), and 10,000 shares were sold in consideration of a short term promissory note in the amount of $50,000. All shares issued on the exercise of warrants are "restricted securities" as defined in Rule 144 under the Securities Act of 1933. (c) Restatement of Certificate of Incorporation. On May 11, 1999, the Company restated its Certificate of Incorporation, as amended, by integrating it into a single document without further amendment. The action was taken without a stockholder vote pursuant to Section 245(b) of the Delaware General Corporation Law. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Exhibit Title ------- ------------- 2-1 Agreement and Plan of Merger dated January 29, 1999* 3-1 Restated Certificate of Incorporation of Generex* Biotechnology Corporation 27 Financial Data Schedule * Filed with Form 10-Q (b) Reports on Form 8-K None. 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. GENEREX BIOTECHNOLOGY CORPORATION DATE: October 29, 1999 By: /s/ E. Mark Perri ------------------------------------ E. Mark Perri Chairman and Chief Financial Officer Page 14 of 14 EX-27 2 FDS
5 9-MOS JUL-31-1998 APR-30-1999 $3,859,362 0 159,629 0 0 4,151,915 2,295,493 73,236 7,267,043 938,460 635,084 0 1 17,081,615 0 7,267,043 0 0 0 0 4,659,766 0 26,991 0 0 0 0 0 0 (4,686,757) (0.36) (0.36)
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