UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended April 30, 1999
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
----------------------- -----------------------
COMMISSION FILE NUMBER: 0-25169
GENEREX BIOTECHNOLOGY CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0490211
- ------------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 HARBOR SQUARE, SUITE 202
TORONTO, ONTARIO
CANADA M5J 2G2
----------------------------------------
(Address of principal executive offices)
416/364-2551
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
---------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's Common Stock, par value
$.001, was 13,727,937 as of April 30, 1999.
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
<TABLE>
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements - unaudited
Consolidated Balance Sheets -
April 30, 1999 and July 31, 1998.......................................... 3
Consolidated Statements of Operations for the three months ended
April 30, 1999 and 1998, the nine months ended April 30, 1999 and
1998, and cumulative from November 2, 1995, to April 30, 1999............. 4
Consolidated Statements of Cash Flows for the nine months ended
April 30, 1999 and 1998, and cumulative from November 1995, to
April 30, 1999............................................................ 5
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 13
Item 5. Other Information......................................................... 13
(a) Reincorporation in Delaware
(b) Redemption of Series A Warrants
(c) Restatement of Certificate of Incorporation
Item 6. Exhibits and Reports on Form 8K........................................... 13
Signatures.......................................................................... 14
</TABLE>
Page 2 of 14
<PAGE>
Item I. Consolidated financial statements
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Restated)
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,859,362 $ 2,090,827
Restricted cash -- 106,527
Miscellaneous receivables 159,629 209,090
Other current assets 132,924 131,340
------------ -----------
Total Current Assets 4,151,915 2,537,784
Property and Equipment, Net 2,222,257 1,634,447
Deposits 68,434 82,509
Due From Related Parties 824,437 1,200,968
------------ -----------
TOTAL ASSETS $ 7,267,043 $ 5,455,708
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 520,541 $ 1,253,003
Current maturities of long-term debt 417,919 411,565
------------ -----------
Total Current Liabilities 938,460 1,664,568
Long-Term Debt, Less Current Maturities 635,084 912,817
Due to Related Parties 160,727 236,024
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares, issued and
outstanding 1,000 shares at April 30, 1999
and July 31, 1998 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 13,727,937 and 11,971,272 shares at
April 30, 1999 and July 31, 1998, respectively 13,728 11,971
Additional paid-in capital 17,067,887 9,565,836
Deficit accumulated during the development stage (11,422,833) (6,736,076)
Accumulated other comprehensive income (loss) (126,011) (199,433)
------------ -----------
Total Stockholders' Equity 5,532,772 2,642,299
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,267,043 $ 5,455,708
============ ===========
</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)
(Restated)
<TABLE>
<CAPTION>
Cumulative
From
November 2,
For the Three Months Ended For the Nine Months Ended 1995 (Date of
April 30, April 30, Inception) to
----------------------------- ---------------------------- April 30,
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ --
Operating Expenses:
Research and development 588,726 156,017 1,829,703 335,304 3,446,194
Research and development - related party -- 14,666 -- 165,452 220,218
General and administrative 1,127,288 484,756 2,830,063 1,355,644 7,351,811
General and administrative - related party -- 77,343 -- 219,298 314,328
----------- ----------- ----------- ----------- ------------
Total Operating Expenses 1,716,014 732,782 4,659,766 2,075,698 11,332,551
----------- ----------- ----------- ----------- ------------
Operating Loss (1,716,014) (732,782) (4,659,766) (2,075,698) (11,332,551)
Other Income (Expense)
Interest income 6,868 -- 6,934 -- 6,934
Interest expense (285) -- (33,925) -- (97,216)
----------- ----------- ----------- ----------- ------------
Net Loss $(1,709,431) $ (732,782) $(4,686,757) $(2,075,698) $(11,422,833)
=========== =========== =========== =========== ============
Basic and Diluted Net Loss Per Common
Share $ (.13) $ (.07) $ (.36) $ (.22)
=========== =========== =========== ===========
Weighted Average Number of Shares of
Common Stock Outstanding 13,416,870 10,391,645 12,890,760 9,583,302
=========== =========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
Page 4 of 14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated)
<TABLE>
<CAPTION>
Cumulative
From
November 2,
For the Nine Months Ended 1995 (Date of
April 30, Inception) to
------------------------------- April 30,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(4,686,757) $(2,075,698) $(11,422,833)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 29,161 21,394 73,246
Common stock issued for services rendered 275,408 433,245 837,661
Stock options and warrants issued for
services rendered 918,064 284,000 1,805,570
Preferred stock issued for services rendered -- 100 100
Changes in operating assets and liabilities:
Miscellaneous receivables 55,227 -- (114,952)
Other current assets 146 21,252 (136,431)
Accounts payable and accrued liabilities 578 345,864 1,326,524
Other, net 67,836 (8,969) 178,153
----------- ----------- ------------
Net Cash Used in Operating Activities (3,340,337) (978,812) (7,452,962)
Cash Flows From Investing Activities:
Purchase of property and equipment (465,358) (15,713) (541,131)
Change in restricted cash 105,655 (76,047) (5,595)
Change in deposits 16,581 -- (1,020)
Change in notes receivable -- 100,453 --
Change in due from related parties 405,728 919 (2,568,658)
Other, net -- -- 89,683
----------- ----------- ------------
Net Cash Provided By (Used in)
Investing Activities 62,606 9,612 (3,026,721)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- 850,365 993,149
Repayment of long-term debt (391,860) -- (455,249)
Change in due to related parties (80,981) 62,046 155,043
Proceeds from issuance of common stock, net 5,691,403 -- 13,819,351
Purchase and retirement of common stock (119,066) -- (119,066)
----------- ----------- ------------
Net Cash Provided By Financing Activities 5,099,496 912,411 14,393,228
Effect of Exchange Rates on Cash
and Cash Equivalents (53,230) 5,311 (54,183)
----------- ----------- ------------
Net Increase (Decrease) in Cash
and Cash Equivalents 1,768,535 (51,478) 3,859,362
Cash and Cash Equivalents, Beginning of Period 2,090,827 196,004 --
----------- ----------- ------------
Cash and Cash Equivalents, End of Period $ 3,859,362 $ 144,526 $ 3,859,362
=========== =========== ============
</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.
On April 30, 1999, the Company reincorporated in the State of Delaware.
This was accomplished by a merger of the Company with its wholly owned
subsidiary GBC-Delaware, Inc. The reincorporation will not have an effect
on the Company's capitalization, management or business operations.
2. Comprehensive Income/(Loss)
Effective August 1, 1998, the Company adopted the provisions of Statement
No. 130, "Reporting Comprehensive Income," which modifies the financial
statement presentation of comprehensive income and its components. Adoption
of this statement had no effect on the Company's financial position or
operating results.
Comprehensive loss, which includes net loss and the change in the foreign
currency translation account during the period, for the nine months ended
April 30, 1999 and 1998 was $(4,613,335) and $(2,124,799), respectively.
3. Accounts Payable and Accrued Expense
Accounts payable and accrued expenses consist of the following:
April 30, July 31,
1999 1998
-------- ----------
Accounts Payable $449,055 $ 336,633
Penalty Arising from Violation of
Financing Agreement -- 738,000
Consulting Accruals 71,486 151,945
Building Purchase Liability -- 26,425
-------- ----------
Total $520,541 $1,253,003
======== ==========
Page 6 of 14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Pending Litigation
Sands Brothers & Co., Ltd. (Sands), a New York City-based investment
banking and brokerage firm, initiated arbitration against the Company under
New York Stock Exchange rules in September 1998. This claim is based upon a
claim that Sands has the right to purchase, for nominal consideration,
approximately 1.5 million shares of the Company's common stock. This claim
is based upon an October 1997 letter agreement which purportedly confirmed
the terms of an agreement appointing Sands as the exclusive financial
advisor to Generex Pharmaceuticals, Inc. (GPI) and granting Sands the right
to receive shares representing 17 percent of the outstanding capital stock
of GPI on a fully diluted basis. Following the acquisition of GPI by GBC -
Delaware, Inc., Sands' claimed a right to receive shares of GPI common
stock that would, allegedly, now apply to the Company's common stock. Sands
also claims that it is entitled to additional shares of the Company as a
result of the GBC - Delaware, Inc.'s acquisition of GPI (approximately
460,000 shares), and $144,000 in fees under the terms of the purported
Agreement.
Sands has never performed any services for the Company, and the
Company and GPI have denied that the individual who is alleged to have
entered into the purported agreement between Sands and GPI, had the
authority to act on GPI's behalf, and accordingly, is defending against
Sands' claim primarily on the basis that no agreement has ever existed
between GPI and Sands.
During a series of hearings before a NYSE arbitration panel commencing
June 8, 1999, Sands amended its claim to include, in the alternative, an
entitlement in the form of an order of specific performance with regard to
the issuance of the warrant as discussed in the October 1997 letter.
By an award dated September 24, 1999, the panel awarded Sands $12,000 plus
$2,070 in interest, a declaratory judgment that the Company is required to
issue Sands a warrant for 1,530,020 shares in accordance with the October
1997 letter, and denied all other relief and split the $22,800 in forum
fees equally between Sands and the Company. The award must be confirmed by
a court of appropriate jurisdiction. The Company intends to seek relief
from the award by requesting, among other things, a New York State court to
vacate the award on various legal grounds. However, the ultimate legal and
financial liability of the Company, including a range of possible losses
with respect to the award cannot be estimated at this time. Therefore, no
provision has been recorded in the accompanying financial statements.
Furthermore, it is management's belief that the final outcome is not
reasonably likely to have a material adverse effect on the Company's
consolidated financial position.
GPI is also contesting a claim for wrongful dismissal in the amount of
approximately $300,000 plus special damages, interest and costs. The
Company believes that the plaintiff was never employed by the Company or
any of its subsidiaries and that the case is without merit.
An action was also commenced against GPI and other companies and
individuals seeking approximately $3,965,000 for allegedly causing certain
adverse consequences of a plaintiff's particular investment in a company.
GPI's only involvement was that at one time there was interest on its part
in buying certain assets from this company. GPI failed to file a Statement
of Defense to the Statement of Claim and GPI was noted in default on
October 1, 1996. An application has been filed to set aside that default
notice, however that application has been adjourned indefinitely.
In February 1999, MQS, Inc., a former consultant to the Company, commenced
a civil action against the Company in the United States District Court for
the District of New Jersey claiming that 242,168 shares of the Company's
Common Stock, and $243,066 are due to it for services which it rendered
through December 22, 1998. MQS also claims compensation on a quantum merit
basis for the value of its services, and for punitive damages. On May 11,
1999, the Company responded to the complaint in this action, however,
discovery has not begun.
With respect to all litigation as additional information concerning the
estimates used by the Company become known, the Company reassesses its
position both with respect to accrued liabilities and other potential
exposures. Estimates that are particularly sensitive to future change
relate to legal matters, which are subject to change as events evolve and
as additional information becomes available during the administration and
litigation process.
Page 7 of 14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Stock Redemption
Under the terms of a settlement, determined in an Ontario, Canada Court,
the Company agreed to purchase 15,357 shares from a shareholder. The total
purchase price of $140,873 included $119,066 which was charged against
additional paid in capital for the stock redemption and $21,807 which was
recorded as litigation settlement expense which represents the excess paid
over the fair value at the time of settlement. The settlement was concluded
in September 1998.
6. Net Loss Per Share
Basic EPS and Diluted EPS for the nine months ended April 30, 1999 and 1998
have been computed by dividing the net loss for each respective period by
the weighted average shares outstanding during that period. All outstanding
warrants have been excluded from the computation of Diluted EPS as they are
antidilutive.
7. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 33,925 $ --
Income taxes $ -- $ --
Disclosure of non-cash investing and financing activities:
Acquisition of property and equipment with collection of
related party receivables $ -- $620,725
Issuance of common stock to satisfy accrued liability $738,000 $ --
Long-term debt incurred in conjunction with acquisition
of property and equipment $ 81,492 $ --
</TABLE>
8. The Company's consolidated financial statements as of April 30, 1999, July
31, 1998 and for the three months and nine months ended April 30, 1999 have
been restated to reflect: (1) founders shares issued for services
providded, (2) an additional charge to reflect the fair value of warrants
issued in exchange for services rendered and (3) additional expense
incurred in conjunction with stock redemption.
The effect of these restatements are as follows:
As Previously As
Reported Restated
------------- -----------
For the year ended July 31, 1998
------------------------------------
Balance Sheet:
Additional paid-in capital 9,162,329 9,565,836
Deficit accumulated during the
development stage (6,332,570) (6,736,075)
For the three months ended April 30, 1999
-----------------------------------------
Balance Sheet:
Additional paid-in capital 16,324,510 17,067,887
Deficit accumulated during the
development stage (10,679,456) (11,422,833)
Consolidated Statements of Operations:
General and administrative 949,788 1,127,288
Net loss (1,531,931) (1,709,431)
Basic and diluted net loss
per common share (.11) (.13)
For the nine months ended April 30, 1999
----------------------------------------
Consolidated Statements of Operations:
Research and development 1,787,203 1,829,703
General and administrative 2,532,692 2,830,063
Net loss (4,346,886) (4,686,757)
Basic and diluted net loss
per common share (.34) (.36)
For the three months ended April 30, 1998
-----------------------------------------
Consolidated Statements of Operations:
General and administrative 512,099 562,099
Net loss (682,782) (732,782)
For the nine months ended April 30, 1998
-----------------------------------------
Consolidated Statements of Operations:
General and administrative 1,524,962 1,574,942
Net loss (2,025,698) (2,075,698)
Basic and diluted net loss
per common share (.21) (.22)
Page 8 of 14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Subsequent Events (Continued):
Subsequent events occurring after April 30, 1999 consist of the following:
The Company received a total of $1,500,004 from the sale of 272,728 shares
of common stock at a price of $5.50 per share.
On May 8, 1999, the Company announced that it exercised its right to redeem
all outstanding Series A Redeemable Common Stock Warrants which were
exercisable at $5.00 per share. The effective date of the redemption was
June 4, 1999. Subsequent to June 4, 1999, the warrants ceased to be
exercisable and the sole right of the holder who did not exercise their
warrant(s) was to receive $.025 per warrant upon surrender of the warrant
certificate to the Company. For 496,547 newly issued shares and the
surrender of warrant certificates, the Company received the following:
Cash $1,941,875
Services Rendered 67,158
Promissory Notes Receivable 473,702
----------
$2,482,735
In addition to the above, the Company received 323,920 previously
outstanding shares, valued for this purpose at $7.8125 per share, and
surrender of warrant certificates in exchange for 506,125 newly issued
shares.
Page 9 of 14
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
When used in this discussion, the words "expect(s)", believe(s)", "will",
"may", "anticipate(s)" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from the
possible results described in such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, and are urged to
carefully review and consider the various disclosures elsewhere in this
Prospectus which discuss factors which affect the Company's business, including
the discussion under the caption "Risk Factors".
General
The Company was incorporated in 1983 as Green Mt. P.S., Inc. In January
1998, the Company acquired all of the outstanding capital stock of Generex
Pharmaceuticals, Inc. ("Generex Pharmaceuticals"), a Canadian corporation formed
in November 1995 to engage in pharmaceutical and biotechnological research and
other activities, and changed its corporate name to Generex Biotechnology
Corporation. The acquisition of Generex Pharmaceuticals was effected by the
merger of a recently formed Delaware corporation ("Generex Delaware"), which had
acquired all of the outstanding capital stock of Generex Pharmaceuticals in
October 1997, with a wholly-owned subsidiary of the Company formed for this
transaction (the "Reverse Acquisition"). As a result of the Reverse Acquisition,
the former shareholders of Generex Delaware acquired a majority of the Company's
outstanding capital stock and, for accounting purposes, Generex Delaware was
treated as the acquiring corporation. Thus, the historical financial statements
of Generex Delaware, which essentially represent the historical financial
statements of Generex Pharmaceuticals, are deemed to be the historical financial
statements of the Company.
On April 30, 1999, the Company completed a reorganization in which the
Company merged into Generex Delaware for the purpose of changing the Company's
state of incorporation from Idaho to Delaware (see Part II, Item 5(a) below).
This reorganization did not result in any material change in the Company's
historical financial statements or current financial reporting.
The Company is engaged in the development of drug delivery systems. Its
principal business focus has been to develop a technology for the administration
of large molecule (i.e., molecules above a specified molecular weight) drugs.
Historically, large molecule drugs have been administered only by injection
because their size inhibits or precludes absorption if administered by oral,
transdermal, transnasal or other means. The principal application to date of the
Company's large molecule drug delivery technology is a liquid insulin
formulation that is administered using a hand-held aerosol spray applicator. The
formulation, which includes insulin and various excipients (i.e., non-active
pharmaceutical ingredients) to facilitate the absorption of insulin molecules
through the mucous membranes in the mouth and upper gastro-intestinal tract, is
sprayed into the mouth and back of the throat, where absorption occurs. This
product, which the Company intends to market in the United States under the name
Oralgen(TM) and in Canada and elsewhere under the name Oralin(TM), is presently
undergoing Phase II clinical trials in the United States and Canada.
Page 10 of 14
<PAGE>
Results of Operations - Three months ended April 30, 1999 and 1998
The Company has been in the development stage since its inception and has
not generated any operating revenues to date. Through April 30, 1999, the
Company accumulated an operating deficit of $11,422,833 as a result of research
and development and general and administrative expenses incurred during the
development stage.
The Company's accumulated operating deficit at April 30, 1999, includes a
net loss of $1,709,431 for the quarter then ended. In the corresponding quarter
of the prior year the Company's net loss was $732,782. The principal reason for
the increase in the Company's net loss in the quarter ended April 30, 1999,
versus the quarter ended April 30, 1998, was an increase in research and
development expenses (to $588,726 from $170,683), and in general and
administrative expenses (to $1,127,288 from $562,099).
The increase in research and development expense in the current period is
attributable primarily to the conduct of Phase II clinical trials of the
Company's oral insulin formulation in Canada and the United States.
The increase in general and administrative expenses in the quarter ended
April 30, 1999, compared to the prior year was primarily a result of the
issuance of warrants to a broker dealer for financial advisory services
($477,500) and participation in industry seminars and exhibitions ($94,695).
Results of Operations - Nine months ended April 30, 1999 and 1998
The Company's net loss for the nine months ended April 30, 1999, was
$4,686,757, compared to a loss of $2,075,698 in the corresponding period of the
preceding fiscal year. The principal reasons for the increase in the Company's
net loss in nine month period ended April 30, 1999, was an increase in research
and development expenses (to $1,829,703 from $500,756) and an increase in
general and administrative expenses (to $2,830,063 from $1,574,942).
The increase in research and development expense in the nine months ended
April 30, 1999, reflects the increases in such expenses in the third quarter
which are discussed above, and a substantial increase (to $1,240,977 from
$330,073) in research and development expenditures in the six months ended
January 31, 1999 versus the corresponding 1998 period. The increase in research
and development expense in the first half of the current fiscal year reflected
costs incurred in preparation for the Company's US and Canadian clinical trial
programs, development work associated with the Company's oral insulin
applicator, preparation of the Company's IND to FDA, support of the clinical
testing conducted in Ecuador, and personnel costs associated with starting up
the Company's pilot manufacturing facility in Toronto which supports the
clinical programs.
The increase in general and administrative expenses the first nine months
of the current year are primarily the result of the increase in such expenses
during the third quarter as discussed above, and increases in legal accounting
fees, in part related to the Company's registration of securities under the
Securities Exchange Act of 1934, costs related to participation in industry
seminars and exhibitions, and increased personnel costs, including a one time
charge ($106,000) associated with the severance of a former executive.
Page 11 of 14
<PAGE>
Liquidity and Capital Resources
The Company has financed its development stage activity primarily through
private placements of equity securities. In the nine months ended April 30,
1999, the Company received cash proceeds of approximately $5.5 million in
additional equity capital, net of expenses relating to the issuance of such
shares and $140,873 to redeem certain outstanding shares. As a result, at April
30, 1999, the Company's stockholders' equity had increased to approximately
$5.53 million versus approximately $2.64 million at July 31, 1998,
notwithstanding its net loss during the nine months ended April 30, 1999.
At April 30, 1999, the Company had cash on hand of approximately $3.86
million. Based on the Company's projections of its cash needs at that time, its
cash on hand was sufficient to fund development activities over the remainder of
the current fiscal year at the levels then planned. In the current fiscal
quarter, the Company has received approximately $3.7 in additional equity
capital through an institutional private placement completed in May 1999, and
the exercise of outstanding warrants in May and June 1999.
Implementation of the Company's business plan will require the
availability of sufficient funds to complete development of its oral insulin
formulation and to carry on other research and development activities. While the
Company has been able to raise capital for its development activities in the
past, it does not have sufficient cash to complete its development plans, and
does not have any commitments for future financing. Thus, the Company faces the
risk that unforeseen problems with its clinical program or materially negative
developments in general economic conditions could interfere with its ability to
raise additional capital or materially adversely affect the terms upon which
such capital is available. If the Company is unable to raise additional capital
as needed, it will be required to "scale back" or otherwise revise its business
plan. Any significant scale back of operations or modification of the Company's
business plan required due to a lack of funding could be expected to materially
and adversely affect the Company's prospects.
The Company believes that its cash on hand is sufficient to complete the
Phase II clinical programs for its oral insulin formulation in the United States
and Canada, but that additional funds will be required to carry out a Phase III
clinical program. The Company expects that a substantial portion of Phase III
costs will be obtained through licensing income, and future marketing partners'
contributions to clinical program costs and/or equity investments. The Company
does not, however, have any licensing agreements or contractual arrangements for
other funding at the present time.
Transactions with Affiliates
A portion of the Company's research and development and administrative
expenses in the current year and in prior periods have resulted from
transactions with affiliated persons. "Research and development - related party"
and "General and administrative - related party" expenses reported by the
Company represent compensation and expense reimbursements paid to management or
consulting companies owned by officers and directors of the Company through
which such officers' and directors' services are provided to the Company. A
number of the Company's capital transactions also have involved affiliated
persons. Although these transactions are not the result of "arms-length"
negotiations, the Company does not believe that this fact has had a material
impact on the Company's results of operations or financial position. The Company
does not foresee a need for, and therefore does not anticipate, any "related
party" transactions.
Page 12 of 14
<PAGE>
Year 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. Management of the Company
has completed its assessment of year 2000 issues and believes that the
consequences of such issues will not have a material effect on the Company's
business, results of operations or financial condition, without taking into
account any efforts by the Company to avoid such consequences.
New Accounting Pronouncements
In 1998, the FASB issued Statement of Financial Accounting Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 modifies the accounting for derivative and hedging
activities and is effective for fiscal years beginning after December 15, 1999.
The Company believes that the adoption of SFAS No. 133 will not have a material
impact on the Company's financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Certain legal proceedings in which the Company is involved have been
disclosed in Item 3 of the Company's Annual Report on Form 10-K filed on October
28, 1999. Information set forth in Item 3 of that Report is incorporated herein
by Reference.
Item 5. Other Information
(a) Reincorporation in Delaware. Effective April 30, 1999, the Company
merged with its wholly-owned Delaware subsidiary, GBC-Delaware, Inc. The purpose
of the merger was to change the Company's state of incorporation from Idaho to
Delaware. The merger did not materially affect the Company's historical
financial statements or future financial reporting. A copy of the Agreement and
Plan of Merger pursuant to which the merger was effected is attached as Exhibit
2-1 to this Report.
Page 13 of 14
<PAGE>
(b) Redemption of Series A Warrants. During May and June, 1999, the
Company issued a total of 1,002,672 shares of Common Stock upon the exercise of
Series A Redeemable Common Stock Purchase Warrants. The warrants were issued in
a 1998 private placement, and were called for redemption by the Company on May
11, 1999. The warrant exercise price ($5.00 per share) was paid (i) in cash,
(ii) in previously-owned shares of Common Stock valued for this purpose at
$7.8125 per share, and (iii) in certain cases, through the cancellation of
indebtedness and the issuance of promissory notes. A total of 388,375 shares
were issued for cash ($1,941,875), 506,125 shares were paid for by the surrender
of 323,920 previously owned shares ($2,530,626), 98,172 shares were sold
partially in consideration of services rendered ($67,158.30) and partially
through the issuance of a two-year promissory note ($423,701.70), and 10,000
shares were sold in consideration of a short term promissory note in the amount
of $50,000.
All shares issued on the exercise of warrants are "restricted securities"
as defined in Rule 144 under the Securities Act of 1933.
(c) Restatement of Certificate of Incorporation. On May 11, 1999, the
Company restated its Certificate of Incorporation, as amended, by integrating it
into a single document without further amendment. The action was taken without a
stockholder vote pursuant to Section 245(b) of the Delaware General Corporation
Law.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Exhibit Title
------- -------------
2-1 Agreement and Plan of Merger dated January 29, 1999*
3-1 Restated Certificate of Incorporation of Generex*
Biotechnology Corporation
27 Financial Data Schedule
* Filed with Form 10-Q
(b) Reports on Form 8-K
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
GENEREX BIOTECHNOLOGY CORPORATION
DATE: October 29, 1999 By: /s/ E. Mark Perri
------------------------------------
E. Mark Perri
Chairman and Chief Financial Officer
Page 14 of 14
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