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
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
<TABLE>
PART I: FINANCIAL INFORMATION
<S> <C> <C>
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
</TABLE>
Page 2 of 16
<PAGE>
Item 1. Consolidated financial statements
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
------------- --------------
ASSETS
<S> <C> <C>
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
============= ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 3 of 16
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
November 2,
For the Three Months Ended 1995 (Date of
October 31, Inception) to
---------------------------------- to October 31,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 4 of 16
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
November 2,
For the Three Months Ended 1995 (Date of
October 31, Inception) to
---------------------------------- to October 31,
1999 1998 1999
-------------- -------------- ----------------
<S> <C> <C> <C>
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
=========== =========== ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 5 of 16
<PAGE>
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:
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
----------- ---------
<S> <C> <C>
Accounts Payable and Accrued Expenses $492,096 $366,927
Consulting Accruals -- 61,947
-------- --------
Total $492,096 $428,874
======== ========
</TABLE>
Page 6 of 16
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
For the Three Months Ended
October 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
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