UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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 January 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)
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 14
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GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART 1: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements - unaudited
Consolidated Balance Sheets -
January 31, 1999 and July 31, 1998 ................................. 3
Consolidated Statements of Operations
for the three months ended January 31, 1999
and 1998, the six months ended January 31, 1999
and 1998, and cumulative from November 2, 1995, to
January 31, 1999 ................................................... 4
Consolidated Statements of Cash Flows
for the six months ended January 31, 1999
and 1998, and cumulative from November 1995, to
January 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 .................................................. 14
Item 5. Other Information .................................................. 14
Item 6. Exhibits and Reports on Form 8-K ................................... 14
Signatures ......................................................... 14
Page 2 of 14
<PAGE>
Item I. Consolidated financial statements
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Restated)
<TABLE>
<CAPTION>
January 31, July 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 3,094,694 $ 2,090,827
Restricted cash -- 106,527
Miscellaneous receivables 209,533 209,090
Other current assets 156,108 131,340
------------ ------------
Total Current Assets 3,460,335 2,537,784
Property and Equipment, Net 2,379,137 1,634,447
Deposits 65,988 82,509
Due From Related Parties 793,804 1,200,968
------------ ------------
TOTAL ASSETS $ 6,699,264 $ 5,455,708
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 674,703 $ 1,253,003
Current maturities of long-term debt 402,978 411,565
------------ ------------
Total Current Liabilities 1,077,681 1,664,568
Long-Term Debt, Less Current Maturities 612,380 912,817
Due to Related Parties 154,981 236,024
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares,
issued and outstanding 1,000 shares at January 31, 1999
and July 31, 1998 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 13,341,586 and 11,971,272 shares at
January 31, 1999 and July 31, 1998, respectively 13,342 11,971
Additional paid-in capital 14,761,312 9,565,836
Deficit accumulated during the development stage (9,713,402) (6,736,076)
Accumulated other comprehensive income (loss) (207,031) (199,433)
------------ ------------
Total Stockholders' Equity 4,854,222 2,642,299
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,699,264 $ 5,455,708
============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 3 of 14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
November 2,
1995 (Date of
For the Three Months Ended For the Six Months Ended Inception)
January 31, January 31, to January 31,
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ --------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ --
Operating Expenses:
Research and development 654,719 148,978 1,240,977 179,287 2,857,468
Research and development - related party -- 129,331 -- 150,786 220,218
General and administrative 1,250,224 595,016 1,702,775 870,888 6,224,523
General and administrative - related party -- 70,157 -- 141,955 314,328
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 1,904,943 943,482 2,943,752 1,342,916 9,616,537
------------ ------------ ------------ ------------ ------------
Operating Loss (1,904,943) (943,482) (2,943,752) (1,342,916) (9,616,537)
Other Income (Expense)
Interest income -- -- 66 -- 66
Interest expense (18,578) -- (33,640) -- (96,931)
------------ ------------ ------------ ------------ ------------
Net Loss $ (1,923,521) $ (943,482) $ (2,977,326) $ (1,342,916) $ (9,713,402)
============ ============ ============ ============ ============
Basic and Diluted Net Loss Per Common
Share $ (.15) $ (.10) $ (.24) $ (.15)
============ ============ ============ ============
Weighted Average Number of Shares of
Common Stock Outstanding 13,029,867 9,379,825 12,637,233 9,192,040
============ ============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 4 of 14
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GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
From
November 2,
1995 (Date of
For the Six Months Ended Inception)
January 31, to January 31,
1999 1998 1999
------------ ------------ ---------------
(Restated) (Restated)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (2,977,326) $ (1,342,916) $ (9,713,402)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 19,277 -- 63,362
Common stock issued for services rendered 245,408 10,932 807,661
Stock options and warrants issued for
services rendered 340,564 234,000 1,228,070
Preferred stock issued for services rendered -- -- 100
Changes in operating assets and liabilities:
Miscellaneous receivables -- -- (170,179)
Other current assets (24,387) 29,268 (160,964)
Accounts payable and accrued liabilities 158,984 (34,957) 1,484,930
Other, net (9,215) 69,545 101,102
------------ ------------ ------------
Net Cash Used in Operating Activities (2,246,695) (1,034,128) (6,359,320)
Cash Flows From Investing Activities:
Purchase of property and equipment (676,994) (15,765) (752,767)
Change in restricted cash 105,655 -- (5,595)
Change in deposits 16,442 -- (1,159)
Change in notes receivable -- 64,645 --
Change in due from related parties 403,459 8,232 (2,570,927)
Other, net -- -- 89,683
------------ ------------ ------------
Net Cash Provided By (Used in)
Investing Activities (151,438) 57,112 (3,240,765)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- 792,687 993,149
Repayment of long-term debt (388,565) -- (451,954)
Change in due to related parties (80,299) 36,621 155,725
Proceeds from issuance of common stock, net 3,991,942 -- 12,119,890
Purchase and retirement of common stock (119,066) -- (119,066)
------------ ------------ ------------
Net Cash Provided By Financing Activities 3,404,012 829,308 12,697,744
Effect of Exchange Rates on Cash (2,012) 8,667 (2,965)
------------ ------------ ------------
Net Increase (Decrease) in Cash 1,003,867 (139,041) 3,094,694
Cash, Beginning of Period 2,090,827 196,004 --
------------ ------------ ------------
Cash, End of Period $ 3,094,694 $ 56,963 $ 3,094,694
============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 5 of 14
<PAGE>
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 six months ended
January 31, 1999 and 1998 was $(2,984,924) and $(1,483,145), respectively.
3. Accounts Payable and Accrued Expense
Accounts payable and accrued expenses consist of the following:
January 31, July 31,
1999 1998
--------- ----------
Accounts Payable $ 548,282 $ 336,633
Penalty Arising from Violation of
Financing Agreement -- 738,000
Consulting Accruals 113,438 151,945
Building Purchase Liability 26,425 26,425
--------- ----------
Total $ 688,145 $1,253,003
========= ==========
Page 6 of 14
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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.
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.
Page 7 of 14
<PAGE>
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 six months ended January 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 have been excluded from the computation of Diluted EPS
as they are antidilutive.
7. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the Six Months Ended
January 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Cash paid during the year for:
Interest $ 33,640 $ --
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 $ --
</TABLE>
8. The Company's consolidated financial statements as of January 31, 1999 and
for the three months and six months ended January 31, 1999 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 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) (6,736,076)
For the three months ended January 31, 1999
-------------------------------------------
Balance Sheet:
Additional paid-in capital 14,195,435 14,761,312
Deficit accumulated during the
development stage (9,147,525) (9,713,402)
Consolidated Statements of Operations:
Research and development 612,219 654,719
General and administrative 1,154,224 1,250,224
Net loss (1,785,021) (1,923,521)
Basic and diluted net loss
per common share (.14) (.15)
For the six months ended January 31, 1999
-----------------------------------------
Consolidated Statements of Operations:
Research and development 1,198,477 1,240,977
General and administrative 1,582,904 1,702,775
Net loss (2,814,955) (2,977,326)
Basic and diluted net loss
per common share (.22) (.24)
Page 8 of 14
<PAGE>
9. Subsequent Events
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Subsequent Events (Unaudited)
Subsequent events occurring after January 31, 1999 consist of the
following:
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.
The Company received a total of $96,000 from the sale of 17,000 shares of
common stock at prices ranging from $5.00 to $6.00.
For consideration of legal services provided, the Company issued 5,000
shares of common stock at $6.00 per share.
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.
Page 9 of 14
<PAGE>
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
II, 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 II clinical trials were
commenced in Canada in November
Page 10 of 14
<PAGE>
1998. The Company's Phase 2 clinical program in the United States commenced
in March 1999. The Company also has received regulatory approval in Ecuador for
limited, non-commercial 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 January 31, 1999 and 1998
The Company has been in the development stage since its inception and has
not generated any operating revenues to date. Through January 31, 1999, the
Company accumulated an operating deficit of $9,147,525 as a result of research
and development and general and administrative expenses incurred during the
development stage.
The Company's accumulated operating deficit at January 31, 1999, includes a
net loss of $1,785,021 for the quarter then ended. In the corresponding quarter
of the prior year the Company's net loss was $943,482. The principal reason for
the increase in the Company's net loss in the quarter ended January 31, 1999,
versus the quarter ended January 31, 1998, was an increase in research and
development expenses (to $612,219 from $278,309), and in general and
administrative expenses (to $1,154,224 from $665,173).
The increase in research and development expense in the current period
reflects the initiation and conduct of Phase II clinical trials of the Company's
oral insulin formulation in Canada, continued development of the Company's
metered dose applicator, preparation for the commencement of clinical trials in
the United States, continuation and support of the Company's clinical program in
Ecuador, and professional services relating to patents.
The increase in general and administrative expenses in the quarter ended
January 31, 1999, compared the prior year was primarily attributed to a
substantial increase ($235,920) in legal and accounting expenses which were
related in part to the Company's registration of its Common Stock under Section
12(g) of the Securities and Exchange Act. Other significant increases in general
and administrative expenses were attributable to participation in industry
seminars and exhibitions ($45,725), a one-time expense associated with the
severance of a former executive ($106,000), and increases in executive
compensation ($80,066).
Results of Operations - Six months ended January 31, 1999 and 1998
The Company's net loss for the six months ended January 31, 1999, was
$2,814,995, compared to a loss of $1,342,916 in the first half of the preceding
fiscal year. The principal reasons for the increase in the Company's net loss in
six month period ended January 31, 1999, was an increase in research and
development expenses to $1,198,477 in the six month period ended January 31,
1999, from $330,073 for the six month period ended January 31, 1998, and an
increase in general and administrative expenses to $1,582,904 in the six months
ended January 31, 1999 versus $1,012,843 in the year earlier period.
The increase in research and development expense in the six months ended
January 31, 1999, reflects the increase in expenses in the second quarter,
discussed above, and a substantial increase (to $586,258 from $51,764) in
research and development expenditures in the first quarter, i.e., the quarter
ended October 31, 1998, versus the quarter ended October 31, 1997. The first
quarter increase in research and development expense increase reflected costs
incurred in preparation for the Canadian clinical trial program, development
work associated with the Company's metered dose applicator, preparation and the
Company's IND to FDA, support of the
Page 11 of 14
<PAGE>
clinical program in Ecuador, and personnel costs associated with starting
up the Company's pilot manufacturing facility in Toronto which supports the
clinical programs. As noted above, research and development expenses in the
first half of 1997 essentially were limited to laboratory personnel costs and
professional expenses relating to patents.
The increase in general and administrative expenses the first six months of
their current year are primarily the result of the increase in such expenses
during the second quarter as discussed above. The Company's general and
administrative expenses increased by $81,010 in the first quarter, i.e., the
quarter ended October 31, 1998, compared to the first quarter of the prior year,
primarily as a result of the addition of new administrative personnel and
participation in industry seminars and exhibitions.
Liquidity and Capital Resources
The Company has financed its development stage activity primarily through
private placements of equity securities. During the six months ended January 31,
1999, the Company has received approximately $5 million in additional equity
capital, including $200,000 of additional capital attributed to the issuance of
warrants for services which resulted in a corresponding expense item, and net of
a stock redemption and expenses associated with acquiring the capital. As a
result, at January 31, 1999, the Company's stockholders' equity had increased to
approximately $4.85 million versus approximately $2.64 million at July 31, 1998,
notwithstanding its net loss during the six months ended January 31, 1999. In
the quarter, the Company also issued 29,110 shares of Common Stock valued at
$119,203 in payment for services, and issued options and warrants to purchase
Common Stock valued for this purpose at $338,500 as compensation for past and
future services.
At January 31, 1999, the Company had cash on hand of approximately $3.1
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. The Company's business plan
contemplates raising additional equity capital to satisfy its cash requirements
at least through the current calendar year. Beyond that point, the Company
expects that a substantial portion of its cash needs for development activities
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.
Page 12 of 14
<PAGE>
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. Prior to this fiscal quarter, the Company had classified
payments in the nature of executive compensation and expense reimbursements as
"Research and development -- related party," and "General and administrative --
related party" because its executive officers received such payments through
personal services corporations rather than directly. In this quarter and in the
future, these payments are and will be accounted for as though the payments were
made directly to the officers, and not as a related party transaction. The
Company does not foresee a need for, and therefore does not anticipate, any
related party transactions.
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 13 of 14
<PAGE>
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.
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
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
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