-----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, U0HBh6f0t7RG7XFd8+QOf+tkJ1EwizGtxuoij+Id9kmbDQ9OJeysSKy6F2EooMsU b+MHkIdwG+64sDSS+3JLBg== 0000950115-99-001623.txt : 19991215 0000950115-99-001623.hdr.sgml : 19991215 ACCESSION NUMBER: 0000950115-99-001623 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991214 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: SEC FILE NUMBER: 000-25169 FILM NUMBER: 99774291 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 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended October 31, 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 [ ] No --- APPLICABLE ONLY TO CORPORATE ISSUERS The number of outstanding shares of the registrant's Common Stock, par value $.001, was 14,743,183 as of October 31, 1999. Page 1 of 16 GENEREX BIOTECHNOLOGY CORPORATION INDEX PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements - unaudited Consolidated Balance Sheets - October 31, 1999 and July 31, 1999..................................................... 3 Consolidated Statements of Operations for the three month periods ended October 31, 1999 and 1998, and cumulative from November 2, 1995, to October 31, 1999.............................................................. 4 Consolidated Statements of Cash Flows for the three month periods ended October 31, 1999 and 1998, and cumulative from November 1995, to October 31, 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 Signatures............................................................................. 13
Page 2 of 16 Item 1. Consolidated financial statements GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, July 31, 1999 1999 ------------- -------------- ASSETS Current Assets: Cash and cash equivalents $ 4,343,378 $ 5,633,201 Short-term investments 240,182 232,345 Miscellaneous receivables 78,732 182,413 Other current assets 93,707 119,010 ------------- ------------ Total Current Assets 4,755,999 6,166,969 Property and Equipment, Net 1,904,542 1,879,547 Deposits 91,140 66,159 Due From Related Parties 796,175 776,991 ------------- ------------ TOTAL ASSETS $ 7,547,856 $ 8,889,666 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 492,096 $ 428,874 Current maturities of long-term debt 629,123 550,589 ------------- ------------ Total Current Liabilities 1,121,219 979,463 Long-Term Debt, Less Current Maturities -- 444,971 Due to Related Parties 159,218 155,383 Commitments and Contingencies Stockholders' Equity: Preferred stock, $.001 par value; authorized 1,000,000 shares, issued and outstanding 1,000 shares at October 31, 1999 and July 31, 1999 1 1 Common stock, $.001 par value; authorized 50,000,000 shares, issued and outstanding 14,743,183 and 14,740,683 shares at October 31, 1999 and July 31, 1999, respectively 14,743 14,741 Additional paid-in capital 20,918,726 20,903,728 Notes receivable - common stock (425,396) (434,903) Deficit accumulated during the development stage (14,094,450) (12,975,678) Accumulated other comprehensive loss (146,205) (198,040) ------------- ------------ Total Stockholders' Equity 6,267,419 7,309,849 ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,547,856 $ 8,889,666 ============= ============
The Notes to Consolidated Financial Statements are an integral part of these statements. Page 3 of 16 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, 1999 1998 1999 ------------ ------------ ------------ Revenues $ -- $ -- $ -- Operating Expenses: Research and development 409,919 586,258 3,879,519 Research and development - related party -- -- 220,218 General and administrative 772,423 452,551 9,668,693 General and administrative - related party -- -- 314,328 ------------ ------------ ------------ Total Operating Expenses 1,182,342 1,038,809 14,082,758 ------------ ------------ ------------ Operating Loss (1,182,342) (1,038,809) (14,082,758) Other Income (Expense): Interest income 63,822 66 119,012 Interest expense (252) (15,062) (130,704) ------------ ------------ ------------ Net Loss $ (1,118,772) $ (1,053,805) $(14,094,450) ============ ============ ============ Basic and Diluted Net Loss Per Common Share $ (.08) $ (.09) Weighted Average Number of Shares of Common Stock Outstanding 14,741,920 12,348,870 ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements. Page 4 of 16 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, 1999 1998 1999 -------------- -------------- ---------------- Cash Flows From Operating Activities: Net loss $(1,118,772) $(1,053,805) $(14,094,450) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 21,237 16,851 145,106 Reduction of notes receivable - common stock in exchange for services rendered 9,508 -- 48,487 Common stock issued for services rendered -- 129,728 1,174,428 Stock options and warrants issued for services rendered -- -- 1,680,874 Preferred stock issued for services rendered -- -- 100 Founders shares transferred for services rendered -- -- 353,506 Changes in operating assets and liabilities: Miscellaneous receivables 107,236 -- (35,372) Other current assets 26,757 (20,367) (97,210) Accounts payable and accrued liabilities 59,726 (133,808) 1,298,538 Other, net -- (79,347) 110,317 ----------- ----------- ------------ Net Cash Used in Operating Activities (894,308) (1,140,748) (9,415,676) Cash Flows From Investing Activities: Purchase of property and equipment -- (449,915) (292,791) Change in restricted cash -- 105,655 (5,595) Purchase of short-term investments (7,838) -- (240,183) Change in deposits (23,161) 16,304 (40,762) Change in due from related parties -- (33,440) (2,546,170) Other, net -- -- 89,683 ----------- ----------- ------------ Net Cash Used in Investing Activities (30,999) (361,396) (3,035,818) Cash Flows From Financing Activities: Proceeds from issuance of long-term debt -- -- 993,149 Repayment of long-term debt (387,876) (385,299) (867,914) Change in due to related parties -- 48,135 154,541 Proceeds from issuance of common stock, net 15,000 1,819,592 16,631,746 Purchase and retirement of common stock -- (119,066) (119,066) ----------- ----------- ------------ Net Cash Provided By (Used In) Financing Activities (372,876) 1,363,362 16,792,456 Effect of Exchange Rates on Cash 8,360 18,820 2,416 ----------- ----------- ------------ Net Increase (Decrease) in Cash (1,289,823) (119,962) 4,343,378 Cash and Cash Equivalents, Beginning of Period 5,633,201 2,090,827 -- ----------- ----------- ------------ Cash and Cash Equivalents, End of Period $ 4,343,378 $ 1,970,865 $ 4,343,378 =========== =========== ============
The Notes to Consolidated Financial Statements are an integral part of these statements. Page 5 of 16 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 2000; in the Company's opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. 2. Comprehensive Income/(Loss) The Company has adopted the provisions of Statement No. 130, Reporting Comprehensive Income, which modifies the financial statement presentation of comprehensive income and its components. Adoption of this statement had no effect on the Company's financial position or operating results. Comprehensive loss, which includes net loss and the change in the foreign currency translation account during the period, for the three months ended October 31, 1999 and 1998 was $(1,066,937) and $(1,097,768), respectively. 3. Accounts Payable and Accrued Expense Accounts payable and accrued expenses consist of the following:
October 31, July 31, 1999 1999 ----------- --------- Accounts Payable and Accrued Expenses $492,096 $366,927 Consulting Accruals -- 61,947 -------- -------- Total $492,096 $428,874 ======== ========
Page 6 of 16 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (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. On October 1, 1999, the Company was informed that the arbitration panel that heard this case had awarded Sands $14,070 and issued a declaratory judgment to the effect that the Company is required to issue to Sands a warrant to purchase 1,530,020 shares of common stock pursuant to and in accordance with the terms of the October 9, 1997 letter agreement. Thereafter, Sands filed a motion to confirm the award with the New York Supreme Court. In November 1999, the Company filed a cross-motion to vacate the award. Briefing of the motion is scheduled to be completed in December 1999, and a hearing on the motion will follow. If the Company is unsuccessful in their effort to vacate the award and are required to issue warrants or other securities to Sands under the October 1997 letter agreement, the Company will record a charge to operations, and a corresponding increase to Additional Paid in Capital, equal to the fair value of the securities issued to Sands less any consideration which we receive for the securities. However, the Company's ultimate legal and financial liability, including a range of possible losses with respect to the award, cannot be estimated at this time. Therefore, no provision for the award has yet been recorded in the financial statements. The Company does not believe that the final outcome of this case is reasonably likely to have a material adverse effect on the consolidated financial position apart from any charge to operations as previously described. Page 7 of 16 GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. Pending Litigation (Continued) 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. This was tried without a jury in October 1999, and decision is expected in calendar year 1999. 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 investment in a particular company. GPI's only involvement was that at one time there was interest on its part in buying certain assets from this company. GPI failed to file a Statement of Defense to the Statement of Claim and GPI was noted in default on October 1, 1996. On December 9, 1999, an application was filed to set aside the notice of default and permit the Company to enter a statement of defense. The Company expects certain discovery proceedings required by the court to be completed in October 1999, and to proceed with its application to set aside the notice of default promptly thereafter. The Company cannot now predict whether it will succeed in setting aside the notice of default. Failure to do so would preclude the Company from contesting the issue of liability. The Company, however, would be permitted to contest the amount of damages, if any, the plaintiff as a result of the Company's actions or the actions for which the Company is legally responsible. 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. The Company has also filed a counterclaim against MQS, Inc. for breach of contract. The Company is unable to predict the outcome of this litigation at this time. With respect to all litigation, as additional information concerning the estimates used by the Company become known, the Company reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change relate to legal matters, which are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Page 8 of 16 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, 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 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, --------------------------- 1999 1998 -------- -------- Cash paid during the period for: Interest $ 252 $ 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. Transactions With Related Parties The Company's change in "Due from Related Parties" and "Due to Related Parties" for the quarter ended October 31, 1999 represents only the effects of changes in quarter end exchange rates versus those in effect at July 31, 1999. 9. Subsequent Events Subsequent events occurring after October 31, 1999 consist of the following: The Company purchased property to be used as a research facility in Toronto, Canada for approximately $78,500 in cash and $187,500 of long-term debt. Page 9 of 16 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Forward Looking Statements Statements in this discussion and analysis include forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. You can identify these statements by the use of words such as "may", "will", "expect", "anticipate", "believe", "estimate", and similar terminology. Forward-looking statements address, among other things: o implementing our clinical programs and other aspects of our business plans; o financing goals and plans; and o our expectations of when regulatory approvals will be received or other actions will be taken by parties other than us. While we believe it is important to communicate our expectations to investors, these expectations involve known and unknown risks and uncertainties. Future events that we are not able to accurately predict or which we do not fully control may cause actual results to differ materially from those expressed or implied by our forward-looking statements. Risks and uncertainties that may affect our results may include, among others: o unexpected costs or delays in carrying out our clinical programs; o the availability of capital to carry out our clinical programs and other business plans; and o outcomes of pending litigations. Because of these and other risks and uncertainties, we cannot guarantee future results, levels of activity, performance or achievements. General Generex Biotechnology Corporation was incorporated in 1983 as Green Mt. P.S., Inc. In January 1998, we acquired all of the outstanding capital stock of Generex Pharmaceuticals, Inc. ("Generex Pharmaceuticals"), a Canadian corporation formed in November 1995 to engage in pharmaceutical and biotechnological research and other activities, and changed our corporate name to Generex Biotechnology Corporation. The acquisition of Generex Pharmaceuticals was effected by the merger of a recently formed Delaware corporation ("Generex Delaware"), which had acquired all of the outstanding capital stock of Generex Pharmaceuticals in October 1997, with a wholly-owned subsidiary which we formed for this transaction (the "Reverse Acquisition"). As a result of the Reverse Acquisition, the former shareholders of Generex Delaware acquired a majority of our outstanding capital stock and, for accounting purposes, Generex Delaware was treated as the acquiring corporation. Thus, the historical financial statements of Generex Delaware, which essentially represent the historical financial statements of Generex Pharmaceuticals, are deemed to be the historical financial statements of Generex Biotechnology Corporation. Page 10 of 16 On April 30, 1999, we completed a reorganization in which we merged into Generex Delaware to change our state of incorporation from Idaho to Delaware. This reorganization did not result in any material change in our historical financial statements or current financial reporting. As part of the reorganization, Generex Delaware changed its corporate name to "Generex Biotechnology Corporation". We are engaged in developing drug delivery systems. Our principal business focus has been to develop a technology to administer large molecule drugs (i.e., drugs composed of molecules above a specified molecular weight) by the oral route. Historically, large molecule drugs have been administered only by injection because their size inhibits or precludes absorption if administered by oral, transdermal, transnasal or other means. The first product based on our large molecule drug delivery technology is a liquid insulin formulation that is administered using a hand-held aerosol spray applicator. The formulation, which includes insulin and various excipients (i.e., non-active pharmaceutical ingredients) to facilitate the absorption of insulin molecules through the mucous membranes in the mouth and upper gastro-intestinal tract, is sprayed into the mouth and back of the throat, where absorption occurs. This product is presently undergoing clinical trials in the United States and Canada. We do not expect to receive significant revenue from product sales in the current fiscal year or in the next fiscal year. We may, however, receive licensing income, or income in the nature of licensing income (e.g., "signing bonuses" or "advance royalties") in connection with our entering into marketing and distribution agreements. Income from such sources, if received, is likely to be material relative to our total cash needs. We do not have any commitments to receive such payments at the present time. Results of Operations - Three months ended October 31, 1999 The Company has been in the development stage since its inception and has not generated any operating revenues to date. Through October 31, 1999, the Company has accumulated a deficit of $14,094,450 primarily as a result of research and development and general and administrative expenses incurred during the development stage. The Company's accumulated deficit at October 31, 1999, includes a net loss of $1,118,772 for the quarter then ended. In the quarter ended October 31, 1998, the Company's net loss was $1,053,805. The principal reason for the increase in the Company's net loss in the quarter ended October 31, 1999, versus the corresponding period in 1998, was an increase of $319,872 in general and administrative expenses, the majority of which (approximately 90%) was the result of increased legal and accounting expenses incurred principally in connection with pending litigations and the registration of securities under the Securities Act. Research and development expenses actually decreased in the quarter ended October 31, 1999 compared to the year earlier quarter (from $586,258 to $409,919), and interest income (net of interest expense) in the quarter ended October 31, 1999 increased to $63,570 from net interest expense of $14,996 in the corresponding quarter of 1998. Page 11 of 16 Liquidity and Capital Resources To date we have financed our development stage activities primarily through private placements of common stock. At July 31, 1999, we had cash on hand of approximately $5.63 million. At October 31, 1999, our cash on hand was approximately $4.3 million. The decrease in cash over the first quarter was due to our net loss in the quarter, and to the use of approximately $388,000 to satisfy outstanding mortgages on our Brampton and Mississauga, Ontario facilities. We believe that our cash on hand is sufficient to complete the Phase II clinical programs for our oral insulin formulation in the United States and Canada, to fund expected general and administrative expenses and anticipated capital costs through the end of the current fiscal year, and to satisfy the principal amount due in March 2000 (approximately $531,000) on a mortgage incurred to purchase our existing executive and administrative offices. Additional funds will be required, however, to carry out a Phase III clinical program, to continue to fund operations beyond the current fiscal year, and to satisfy obligations which become due next year. We expect to raise additional equity capital in the second or third quarter of this year. As yet, however, we have no commitments for additional financing of any kind. Thus, we face the risk that unforeseen problems with our clinical program or materially negative developments in general economic conditions could interfere with our ability to raise the capital we need, or materially adversely affect the terms upon which such capital is available. If we were unable to raise additional capital as needed, we could be required to "scale back" or otherwise revise our business plan. Any significant scale back of operations or modification of our business plan due to a lack of funding could be expected to materially and adversely affect our prospects. We expect that a significant portion of our Phase III clinical program costs will be obtained through licensing income and future marketing partners' contributions to clinical program costs and/or equity investments. We do not, however, have any licensing agreements or contractual arrangements for other funding at the present time. Transactions with Affiliates Prior to January 1, 1999, a portion of our general and administrative expenses resulted from transactions with affiliated persons, and a number of capital transactions also involved affiliated persons. Although these transactions were not the result of "arms-length" negotiations, we do not believe that this fact had a material impact on our results of operations or financial position. Prior to the current fiscal year, our classified payments to its executive officers as compensation and expense reimbursements as "Research and development - related party" because its executive officers received such payments through personal services corporations rather than directly. For this fiscal year and in the future, these payments have been and will be accounted for as though the payments were made directly to the officers, and not as a related party transaction. We do not foresee a need for, and therefore do not anticipate, any related party transactions in the current fiscal year. Year 2000 Issues 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 Page 12 of 16 in order to remain functional. We have completed our assessment of year 2000 issues and believe that the consequences of such issues will not have a material effect on our business, results of operations or financial condition, without taking into account any efforts by us to avoid such consequences. New Accounting Pronouncements In 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. SFAS 133 has been amended by Statement of Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No. 133," which has delayed the effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. We believe that the adoption of SFAS No. 133 will not have a material impact on our financial reporting. In 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". We believe that the adoption of SOP 98-1 will not have a material impact on our financial reporting. Page 13 of 16 PART II: OTHER INFORMATION Item 1. Legal Proceedings Sands Brothers & Co. Ltd., a New York City-based investment banking and brokerage firm, initiated an arbitration against us under New York Stock Exchange rules on October 2, 1998. Sands alleged that it had the right to receive, for nominal consideration, approximately 1.6 to 2.5 million shares of our common stock. This claim was based upon an October 1997 letter agreement which purported to confirm an agreement appointing Sands Brothers as the exclusive financial advisor to Generex Pharmaceuticals, Inc., our subsidiary. In exchange for agreeing to act in that capacity, the letter agreement purports to grant Sands the right to acquire 17% of Generex Pharmaceuticals common stock for nominal consideration. Following our acquisition of Generex Pharmaceuticals, Sands claimed right to receive shares of Generex Pharmaceuticals common stock applies to our common stock since outstanding shares of Generex Pharmaceuticals were converted into our shares in the acquisition. Sands' claims also included additional shares as a fee related to that acquisition, and $144,000 in monthly fees due under the terms of the purported agreement. On October 1, 1999, we were informed that the arbitration panel that heard this case had awarded Sands $14,070 and issued a declaratory judgment to the effect that we are required to issue to Sands a warrant to purchase 1,530,020 shares of our common stock pursuant to and in accordance with the terms of the October 9, 1997 letter agreement. Thereafter, Sands filed a motion to confirm the award with the New York Supreme Court. In November 1999, we filed a cross-motion to vacate the award. Briefing of our motion is scheduled to be completed in December 1999, and a hearing on the motion will follow. If we are unsuccessful in our effort to vacate the aware and are required to issue warrants or other securities to Sands under the October 1997 letter agreement, we will record a charge to operations, and a corresponding increase to Additional Paid in Capital, equal to the fair value of the securities issued to Sands less any consideration which we receive for the securities. However, our ultimate legal and financial liability, including a range of possible losses with respect to the award, cannot be estimated at this time. Therefore, no provision for the award has yet been recorded in our financial statements. We do not believe that the final outcome of this case is reasonably likely to have a material adverse effect on our consolidated financial position apart from any charge to operations as previously described. We are also involved in the following proceedings: o In February 1997, a claim of wrongful dismissal by a former employee seeking damages of $450,000 (CAD) was brought in Ontario Court in Toronto, Ontario (Lorne Taylor v. Generex Pharmaceuticals, Inc.). This case was tried without a jury in October 1999, and a decision is expected in calendar 1999. o In June 1996, "Generex Inc." was named as an additional defendant in a pending action in The Court of Queen's Bench of Alberta, in Calgary, Alberta (Elbourne, et al. v. Acepharm, Inc., et al.). In this action the plaintiffs seek injunctive relief relating to the ownership and control of Acepharm, damages for an alleged reduction in the value of their shares in Acepharm, Inc. (approximately $680,000 U.S.), and punitive damages (approximately $3.4 million U.S.). In one paragraph, Page 14 of 16 plaintiff's amended Statement of Claim identifies Generex Pharmaceuticals and mis-identifies it as a subsidiary of another corporation. Except for this paragraph, there is no reference to us in the amended Statement of Claim. The specific acts alleged in the amended Statement of Claim to have violated plaintiffs' interests and caused it injury are ascribed to other defendants, and occurred prior to Generex Pharmaceuticals' incorporation in November 1995. We believe that we were made a party to this case because Generex Pharmaceuticals had expressed interest in acquiring certain assets of Acepharm, and the plaintiffs wished to prevent the sale. Because of the dispute over management, ownership and control of Acepharm, Inc., and because Acepharm's assets are unrelated to its business plans and goals, Generex Pharmaceuticals has long since abandoned any interest in purchasing such assets. We deny any wrongdoing relative to any of the matters upon which plaintiff's claims in this action are based. We failed, however, to file a Statement of Defense to those claims on a timely basis, and plaintiffs caused a notice of default to be entered against us. We intend to apply to the court to have the notice of default set aside, and to permit us to file a Statement of Defense. Certain discovery proceedings required by the court prior to our filing this application are expected to be completed this month. Our application will be filed promptly thereafter. We may not succeed in setting aside the notice of default, however, in which case we would be precluded from contesting liability, but would be permitted to contest the amount of damages, if any, which plaintiffs incurred as a result of our actions or of actions for which we are legally responsible. We believe that plaintiffs have suffered no loss or injury based on any action of ours or for which we were responsible, and have made no provision in our financial statements for any loss which might be incurred in this litigation. o In February 1999, MQS, Inc., a former consultant, commenced a civil action against us in the United States District Court for the District of New Jersey claiming that 242,168 shares of our Common Stock and $243,065.50 are due to it for services which it rendered through December 22, 1998. MQS also claims that we have used proprietary technology of MQS in developing our aerosol applicator and in formulating our oral insulin product for aerosol application. We filed our answer to MQS's claims in May 1999, in which we deny that MQS is entitled to the relief that it seeks, or that MQS supplied any proprietary technology to us in the course of its engagement or otherwise. We also have filed a counterclaim against MQS for breach of contract. We are unable to predict the outcome of this litigation at this time. We maintain product liability coverage for claims arising from the use of our products in clinical trials, etc., but do not have any insurance which covers our potential liability in any of the legal proceedings described above. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit Exhibit Title ------- ----------------------- 27 Financial Data Schedule Page 15 of 16 (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. DATE: December 14, 1999 GENEREX BIOTECHNOLOGY CORPORATION By: /s/ E. Mark Perri ------------------------------------- E. Mark Perri Chairman and Chief Financial Officer EX-27 2 FDS
5 3-MOS JUL-31-1999 OCT-31-1999 $4,343,378 240,182 78,732 0 0 4,755,999 2,050,359 145,817 7,547,856 1,121,219 0 0 1 20,933,469 0 7,547,856 0 0 0 0 1,182,342 0 (63,570) 0 0 0 0 0 0 (1,118,772) (.08) (.08)
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