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 April 30, 2000
[ ] 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 15,254,864 as of April 30, 2000.
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements - unaudited
Consolidated Balance Sheets --
April 30, 2000 and July 31, 1999 ................................... 3
Consolidated Statements of Operations -- for the three month
periods ended April 30, 2000 and 1999, the nine month periods
ended April 30, 2000 and 1999, and cumulative from November 2,
1995, to April 30, 2000............................................. 4
Consolidated Statements of Cash Flows -- For the three-month
periods ended April 30, 2000 and 1999, the nine month periods
ended April 30, 2000 and 1999, and cumulative from November 2,
1995, to April 30, 2000............................................. 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................... 15
Item 5. Other Information................................................... 17
Item 6. Exhibits and Reports on Form 8-K ................................... 19
Signatures................................................................... 20
2
<PAGE>
Item I. Consolidated financial statements
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 3,143,004 $ 5,633,201
Short-term investments 251,801 232,345
Miscellaneous receivables 29,230 182,413
Other current assets 85,132 119,010
------------ ------------
Total Current Assets 3,509,167 6,166,969
Property and Equipment, Net 2,116,088 1,879,547
Deposits 71,547 66,159
Due From Related Parties 714,249 776,991
------------ ------------
TOTAL ASSETS $ 6,411,051 $ 8,889,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,134,444 $ 428,874
Current maturities of long-term debt 628,308 550,589
------------ ------------
Total Current Liabilities 1,762,752 979,463
Long-Term Debt, Less Current Maturities 181,340 444,971
Due to Related Parties 158,194 155,383
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares, issued and
outstanding 1,000 shares at April 30, 2000
and July 31, 1999 1 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 15,254,864 and 14,740,683 shares at
April 30, 2000 and July 31, 1999, respectively 15,255 14,741
Additional paid-in capital 23,865,378 20,903,728
Notes receivable - common stock (147,530) (434,903)
Deficit accumulated during the development stage (19,264,453) (12,975,678)
Accumulated other comprehensive loss (159,886) (198,040)
------------ ------------
Total Stockholders' Equity 4,308,765 7,309,849
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,411,051 $ 8,889,666
============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<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,
2000 1999 2000 1999 2000
------------ ------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ --
Operating Expenses:
Research and development 1,084,295 588,726 2,520,467 1,829,703 5,990,067
Research and development - related party -- -- -- -- 220,218
General and administrative 1,238,806 1,127,288 3,898,972 2,830,063 12,795,242
General and administrative - related party -- -- -- -- 314,328
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 2,323,101 1,716,014 6,419,439 4,659,766 19,319,855
------------ ------------ ------------ ------------ ------------
Operating Loss (2,323,101) (1,716,014) (6,419,439) (4,659,766) (19,319,855)
Other Income (Expense):
Interest income 49,229 6,868 176,703 6,934 231,893
Interest expense (17,258) (285) (46,039) (33,925) (176,491)
------------ ------------ ------------ ------------ ------------
Net Loss $ (2,291,130) $ (1,709,431) $ (6,288,775) $ (4,686,757) $(19,264,453)
============ ============ ============ ============ ============
Basic and Diluted Net Loss Per Common
Share $ (.15) $ (.13) $ (.42) $ (.36)
============ ============ ============ ============
Weighted Average Number of Shares of
Common Stock Outstanding 15,238,186 13,416,870 14,924,168 12,890,760
============ ============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
From
November 2,
For the Nine Months Ended 1995 (Date of
April 30, Inception) to
---------------------------- to April 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (6,288,775) $ (4,686,757) $(19,264,453)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 82,176 29,161 206,045
Reduction in due from related party in exchange for
interest payment 45,786 -- 45,786
Reduction of notes receivable - common stock in
exchange for services rendered 287,373 -- 326,352
Common stock issued for services rendered -- 275,408 1,174,428
Stock options and warrants issued for services rendered 924,350 918,064 2,605,224
Preferred stock issued for services rendered -- -- 100
Founders shares transferred for services rendered -- -- 353,506
Changes in operating assets and liabilities:
Miscellaneous receivables 157,788 55,227 15,180
Other current assets 35,188 146 (88,779)
Accounts payable and accrued liabilities 703,660 578 1,942,472
Other, net -- 67,836 110,317
------------ ------------ ------------
Net Cash Used in Operating Activities (4,052,454) (3,340,337) (12,573,822)
Cash Flows From Investing Activities:
Purchase of property and equipment (98,970) (465,358) (391,761)
Change in restricted cash -- 105,655 (5,595)
Purchases of short-term investments (19,456) -- (251,801)
Change in deposits (4,225) 16,581 (21,826)
Change in due from related parties 30,379 405,728 (2,515,791)
Other, net -- -- 89,683
------------ ------------ ------------
Net Cash Provided By (Used in) Investing Activities (92,272) 62,606 (3,097,091)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- -- 993,149
Repayment of long-term debt (391,735) (391,860) (871,773)
Change in due to related parties -- (80,981) 154,541
Proceeds from issuance of common stock, net 2,037,816 5,691,403 18,654,562
Purchase and retirement of common stock -- (119,066) (119,066)
------------ ------------ ------------
Net Cash Provided By Financing Activities 1,646,081 5,099,496 18,811,413
Effect of Exchange Rates on Cash
and Cash Equivalents 8,448 (53,230) 2,504
------------ ------------ ------------
Net Increase (Decrease) in Cash
and Cash Equivalents (2,490,197) 1,768,535 3,143,004
Cash and Cash Equivalents, Beginning of Period 5,633,201 2,090,827 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 3,143,004 $ 3,859,362 $ 3,143,004
============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
<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-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 change in the foreign
currency translation account during the period, for the nine months
ended April 30, 2000 and 1999 was $6,250,621 and $4,613,335,
respectively.
3. Accounts Payable and Accrued Expense
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
------------- -------------
<S> <C> <C>
Accounts Payable and Accrued Expenses $ 1,066,867 $ 366,927
Litigation Accrual 67,577 --
Consulting Accruals -- 61,947
------------- -------------
Total $ 1,134,444 $ 428,874
============= =============
</TABLE>
4. Pending Litigation
Sands Brothers & Co. Ltd., a New York City-based investment banking
and brokerage firm, initiated an arbitration against the Company
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 the Company's 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.,
(GPI), now a subsidiary of the Company. In exchange for agreeing to
act in that capacity, the letter agreement purports to grant Sands
the right to acquire 17% of GPI's common stock for nominal
consideration. Following the Company's acquisition of GPI, Sands
claimed right to receive shares of GPI's common stock applies to the
Company's common stock since outstanding shares of GPI were converted
into the Company's 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.
6
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Pending Litigation (Continued)
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 the
Company's 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 March
2000, the court affirmed the award. The Company has appealed the
decision to the Appellate Division of the New York Supreme Court.
If the Company is unsuccessful in their effort to appeal the
arbitration award obtained by Sands 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 the Company receives 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 their consolidated financial position apart from any charge
to operations as previously described.
In February 1997, a claim of wrongful dismissal by a former employee
seeking damages of approximately $311,245 was brought in Ontario
Court in Toronto, Ontario. This case was tried without a jury in
October 1999, and a decision in favor of the plaintiff in the amount
of approximately $131,908, plus interest and costs was rendered
against the Company in December 1999. The Company has appealed this
decision.
The Company's management, after consultation with its legal counsel,
has determined the range of likely loss to be approximately $68,139
to $192,281 and therefore has recorded a charge to operations in the
amount of $68,139 for the nine months ended April 30, 1999.
An action was also commenced against GPI and other companies and
individuals seeking approximately $4,080,000 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. This application
was assigned to a Master who declined to grant relief. The Company is
now seeking a new hearing before a judge, which in essence is a new
proceeding at which new evidence can be introduced. 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.
7
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Pending Litigation (Continued)
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. In May 1999, the Company responded to the
complaint in which the Company denied that MQS is entitled to the
relief it seeks or that any of the Company's' products or technology
incorporates any proprietary technology belonging to MQS. The Company
has also filed a counterclaim against MQS, Inc. for breach of
contract.
In December 1999, the Company filed a motion with the court to amend
their answer and counterclaim to add additional claims against MQS,
including claims based upon unauthorized use and misappropriation of
the Company's trade secrets and technology by MQS, and to add
additional parties as counterclaim defendants. Subsequent to the
Company's filing, MQS filed a motion to amend its complaint to add
certain officers of the Company as individual defendants on the
claims previously made. The Company and MQS have agreed to allow the
other to amend its pleadings in the manner sought and are jointly
developing a schedule for responding to the new pleadings and
conducting discovery in the case. 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.
5. Net Loss Per Share
Basic EPS and Diluted EPS for the nine months ended April 30, 2000
and 1999 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.
6. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 252 $ 33,925
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 $190,206 $ 81,492
Reduction in due from related party through repayment
of long-term debt $ 1,287 $ --
</TABLE>
8
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Transactions with Related Parties
The Company's change in "Due from Related Parties" and "Due to
Related Parties" for the nine months ended April 30, 2000 represents
cash collections, expenses paid on behalf of the Company by Related
Parties, and the effects of changes in exchange rates during the nine
month period ended April 30, 2000.
8. Stockholders' Equity
In exchange for services rendered, the Company issued a warrant to
purchase 150,000 shares of the Company's common stock at a price of
$7.50 per share, with an expiration date of April 30, 2004. This
warrant was determined to have a value of $355,500 and was charged to
operations.
In conjunction with raising capital, the Company issued a warrant to
its underwriter to purchase 47,059 units, with an exercise price of
$4.25 per unit. Each unit, until January 6, 2003, consists of one
share of the Company's common stock and three quarters of one of the
Company's Series CU warrants. On or after January 7, 2003 until
January 7, 2005, the holder shall be entitled to only receive shares
of the Company's common stock.
Attached to each share of common stock sold during the private
placement of 470,590 shares in January 2000, was three quarters of
one of the Company's Series CU warrants. Each CU warrant has an
exercise price of $7.00 and expires in January 2003.
During the nine month period ended April 30, 2000, warrants with
exercise prices ranging from $5.50 to $7.50 were exercised for 41,091
shares of the Company's common stock.
9. Stock Based Compensation
The Company granted 1,280,000 Incentive Stock Options (ISOs) to
employees, of which 985,000 vested upon grant, 265,000 on January 3,
2001, 15,000 on January 3, 2002 and 15,000 on January 3, 2003. The
exercise price for all 1,280,000 is $5.00 per share. Since the
Company accounts for its options under APB No. 25, no compensation
cost was recognized.
The Company granted 155,000 stock options to consultants, which
vested upon grant with an exercise price of $5.00 - $5.50 per share.
The options granted were determined to have a value of $366,350 and
was charged to operations.
In exchange for services rendered, the Company issued a stock option
to purchase 125,000 shares of the Company's common stock at a price
of $8.00 per share, with an expiration date of June 15, 2004. The
options granted were determined to have a value of $202,500 and was
charged to operations.
The Company granted 15,000 ISOs to employees, which vested in three
equal increments on April 14, 2000, April 14, 2001 and April 14,
2002, with an exercise price of $5.50. Since the Company accounts for
its operations under APB No. 25, no compensation cost was recognized.
9
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Subsequent Events
Subsequent events occurring after April 30, 2000 consist of the
following:
On May 31, 2000, the Company sold 1,041,670 shares of common stock
for net proceeds of $5,885,407. Financing costs associated with this
placement amounted to $364,601.
Attached to each share of common stock was a warrant to purchase one
share of common stock at an exercise price of $8.6625 with an
expiration date of May 31,2003.
In conjunction with raising capital, the Company issued warrants to
purchase 150,000 shares of the Company's common stock at a price of
$10.00 per share, with an expiration date of May 31, 2005. These
warrants were determined to have a value of $631,500.
10
<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
11
<PAGE>
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.
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 and absorbed in the mouth and back of
the throat. This product is presently undergoing clinical trials in the United
States, Canada and Europe.
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, and we do not expect to receive any
such payments in our current fiscal year.
Results of Operations - Three months ended April 30, 2000 and 1999
We have been in the development stage since inception and have not
generated any operating revenues to date. Through April 30, 2000, we accumulated
an operating deficit of $19,319,855 as a result of research and development and
general and administrative expenses incurred during the development stage.
Our accumulated operating deficit at April 30, 2000, includes a net loss of
$2,291,130 for the quarter then ended. In the corresponding quarter of the prior
year our net loss was $1,709,431. The principal reasons for the increase in our
loss in the quarter ended April 30, 2000, versus the quarter ended April 30,
1999, were increases in research and development expenses (to $1,084,295 from
$588,726) and in general and administrative expenses (to $1,238,806 from
$1,127,288). We had net interest income of $31,971 in the quarter ended April
30, 2000, versus net interest income of $6,583 in the corresponding quarter of
1999.
The increase in research and development expense in the current period
reflects a substantial increase in scope of Phase II clinical trials of our oral
insulin formulation compared
12
<PAGE>
to the corresponding 1999 period. Clinical trials are now being conducted at
seven sites versus two sites at the end of the third quarter of 1999.
The increase in general and administrative expenses in the quarter ended
April 30, 2000, represents primarily increased legal expenses related to the
preparation, filing and processing of patent applications and related patent
services, and increased travel costs associated with the administration of
clinical trials.
Results of Operations - Nine months ended April 30, 2000 and 1999
Our net loss for the nine months ended April 30, 2000, was $6,288,775,
compared to a loss of $4,686,757 in the first nine months of the prior fiscal
year.
The principal reasons for the increase in our loss in the nine month period
ended April 30, 2000, were increases in research and development expenses to
$2,520,467 in the nine month period ended April 30, 2000, from $1,829,703 for
the nine month period ended April 30, 1999, and an increase in general and
administrative expenses to $3,898,972 in the nine months ended April 30, 2000
versus $2,830,063 in the year earlier period. We had net interest income of
$130,664 in the nine month period ended April 30, 2000, versus net interest
expense of $26,991 in the comparable nine month period ended April 30, 1999.
The increase in research and development expense in the nine months ended
April 30, 1999, reflects increases in such expenses in the second and third
quarters relating to clinical trials of our oral insulin formulation, as
discussed above.
The increase in general and administrative expenses during the nine months
of the current year are primarily the result of increase in salaries, consulting
and professional expenses (including legal expenses related to pending
litigation) in the first and second quarter of this year versus the first six
months of the prior year, a litigation reserve established in the second
quarter, and increased legal expenses related to patents and increased travel
expenses associated with the administration of clinical trials and participation
in industry seminars throughout the nine month period.
Liquidity and Capital Resources
To date we have financed our development stage activities primarily through
private placements of common stock. We had approximately $3,394,805 of cash and
short term investments on hand at April 30, 2000 (versus approximately
$5,865,546 in cash and short term investments on hand at July 31, 1999). In May
of this year, we raised an additional $6.25 million of equity capital to support
our research and development and other activities. We also have refinanced two
mortgages that appeared as long term debt on our balance sheet at April 30,
2000, and this indebtedness (approximately $800,000 CDN) is now due in 2005.
We believe that our cash on hand is sufficient to complete the Phase II
clinical programs for our oral insulin formulation, to initiate Phase III
clinical trials in Canada later this calendar year, to fund expected general and
administrative expenses and anticipated capital costs through the end of this
calendar year, and to initiate and carry out pre-clinical studies of additional
applications of our platform large molecule drug delivery technology during the
second half of
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this calendar year. Additional funds will be required, however, to initiate and
carry out Phase III clinical trials of our oral insulin formulation in the
United States, and to continue to fund other research and development activities
and general and administrative expenses in 2001. We expect to raise additional
equity capital in the fourth quarter of this year and in the first half of next
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 a significant portion of our Phase III clinical program costs in
the United States, and clinical programs related to other applications of our
large molecule drug delivery technology, to be obtained through licensing income
and/or 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
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 June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in either assets or
liabilities. As amended in June 1999 by SFAS No. 137 this statement is effective
for all fiscal years beginning after June 15, 2000, and is not to be applied
retroactively to financial statements for prior periods. The impact of the
adoption of the standard has not been determined.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) Sands Brothers Litigation. 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 March 2000, the Court affirmed the
award. We have appealed this decision to the Appellate Division of the New York
Supreme Court.
If we are unsuccessful in our effort to vacate the arbitration award
obtained by Sands 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.
(b) Sparks Litigation. In February 1997, a claim of wrongful dismissal by a
former employee seeking damages of CDN$450,000 was brought in Ontario Court in
Toronto, Ontario (Lorne Sparks v. Generex Pharmaceuticals, Inc.). This case was
tried without a jury in October 1999, and a decision in favor of the plaintiff
in the amount of CDN $193,981.80 (approximately US$131,908), plus interest and
costs, was rendered against us in December 1999. We have appealed this decision.
(c) Acepharm, Inc. Litigation. 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
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value of their shares in Acepharm, Inc. (approximately $680,000 U.S.), and
punitive damages (approximately $3.4 million U.S.). In one paragraph,
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, and applied to the court to have the
notice of default set aside, and for leave to file a Statement of Defense. Our
application was referred to a Master, who denied our application to set the
Noting of Default aside, primarily because of our delay in seeking relief. We
have now moved to seek a new hearing before a judge, which in essence is a new
proceeding at which new evidence can be introduced.
If we do not succeed in setting aside the notice of default, 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.
(d) MQS Litigation. In February 1999, MQS, Inc., a former consultant of
ours, 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 claimed that we 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 denied that MQS is entitled to the relief that it seeks, or that any of
our products or technology incorporates any proprietary technology belonging to
MQS. We also filed a counterclaim against MQS for breach of contract.
In December 1999, we filed a motion with the court to amend our answer and
counterclaim to add additional claims against MQS, including claims based upon
unauthorized use and misappropriation of our trade secrets and technology by
MQS, and to add additional parties as counterclaim defendants. Subsequent to our
filing, MQS filed a motion to amend its complaint to add certain of our officers
as individual defendants on the claims previously made against us. We and MQS
each agreed to allow the other to amend its pleadings in the manner sought, and
the pleadings were completed in May of this year. We now expect the discovery
phase of this litigation to proceed through the end of this year, and are unable
to predict the outcome of this litigation at this time.
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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 2. Changes in Securities and Use of Proceeds
Paragraphs (a) and (b) of Part II, Item 2 are inapplicable.
(c) Issuance of Unregistered Securities
In May 2000, we sold 1,041,669 units of securities ("Units") for cash at a
price of $6.00 per Unit. Each Unit consisted of a share of Common Stock and a
warrant to purchase a share of Common Stock at an initial exercise price of
$8.6625 per share. The Units were purchased by eight investors, as follows:
--------------------------------------------------------------------
Consideration
Purchaser Units Purchased ($)
--------------------------------------------------------------------
Protius Overseas Limited 483,333 $2,900,000
--------------------------------------------------------------------
Photon Fund, Ltd. 166,667 $1,000,000
--------------------------------------------------------------------
Castle Creek Healthcare LLC 133,334 $ 800,004
--------------------------------------------------------------------
Ram Trading, Ltd. 100,000 $ 600,000
--------------------------------------------------------------------
Montrose Investments Ltd. 83,334 $ 500,000
--------------------------------------------------------------------
CCL Fund LLC 33,334 $ 200,004
--------------------------------------------------------------------
Velocity Investment Partners Ltd 25,000 $ 150,000
--------------------------------------------------------------------
Ivan Lieberburg 16,667 $ 100,000
--------------------------------------------------------------------
Two registered broker dealers, The Shemano Group, Inc. and Pali Capital
Inc., received compensation for their services to us in connection with this
placement. Such compensation consisted of cash compensation of $180,000 to Pali
Capital, cash compensation of $164,500 to The Shemano Group, and warrants to
purchase a total of 39,168 shares of Common Stock to The Shemano Group. The
Shemano Group assigned its right to receive such warrants to two of its
officers, Gary J. Shemano and William Corbett.
No general solicitation was made in connection with the placement. All
securities sold were acquired for investment, and appropriate restrictions have
been placed upon the resale of any of the securities consistent, including
restrictive legends on the face of the securities and stop orders on the
Registrant's stock and warrant registers. The securities were sold without
registration under the Securities Act of 1933 (the "1933 Act") in reliance upon
the exemption from registration provided in Section 4(2) thereof and Rule 506,
Regulation D promulgated thereunder, and in the case of the sales to Protius
Overseas Limited and Photon Fund Ltd., on Regulation S promulgated under the
1933 Act. We have agreed to register for resale under the 1933 Act all shares of
Common Stock sold in the placement and issuable upon exercise of warrants
included in the Units sold, and intend to do so during the current fiscal
quarter.
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The terms of the warrants purchased by investors and issued to The Shemano
Group are as follows:
--------------------------------------------------------------------------------
Expiration Exercise Securities Issuable
Date Price per Issuable Upon Exercise
Warrant per Warrant
--------------------------------------------------------------------------------
Investor Warrants 5/17/2005 $8.6625 1 share of Common Stock
--------------------------------------------------------------------------------
The Shemano Group Warrants 5/17/2005 $10.00 1 share of Common Stock
--------------------------------------------------------------------------------
(d) Use of Proceeds from Sales of Registered Securities
The Registration Statement to which the following disclosures pertain is
Registration Statement on Form S-1 (Registration No. 333-82667) effective
November 19, 1999 (the "Registration Statement"). From the effective date of the
Registration Statement through April 30, 2000, net proceeds from the sale of
securities pursuant to the Registration Statement have been applied as follows*:
(1) Construction of plant, building and $ 0
facilities
(2) Purchase and installation of machinery and equipment 0
(3) Purchase of real estate 0
(4) Acquisition of other businesses 0
(5) Repayment of debt 0
(6) Working capital 243,000
(7) Temporary investments 0
(8) Any other purpose expected to involve $100,000 or more 0
(9) Research and development 0
Total applied through April 30, 2000* 0
*The Registration Statement registered shares of outstanding Common Stock
for sale by certain of our stockholders, and we will receive no proceeds from
such sales. The registration statement also registered shares of common Stock
for sale by us upon the exercise of certain outstanding warrants. At April 30,
2000, 41,091 of such warrants had been exercised. The resales of all such shares
is now covered by Registration Statement No. 333-33556 effective May 26, 2000.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Exhibit Title
------- -------------
4.1 Form of Securities Purchase Agreement entered into with Protius
Overseas Limited and Photon Fund, Ltd. on May 17, 2000
4.2 Form of Securities Purchase Agreement entered into with Castle Creek
Healthcare LLC, Ram Trading Ltd., Montrose Investments Ltd., CCL Fund
LLC, Velocity Investment Partners Ltd. and Ivan Lieberburg between
May 17, 2000 and May 31, 2000
4.3 Form of Registration Rights Agreement entered into by Protius Overseas
Limited and Photon Fund, Ltd. on May 17, 2000
4.4 Form of Registration Rights Agreement entered into with Castle Creek
Healthcare LLC, Ram Trading Ltd., Montrose Investments Ltd., CCL Fund
LLC, Velocity Investment Partners Ltd. and Ivan Lieberburg between
May 17, 2000 and May 31, 2000
4.5 Form of Warrant issued to Protius Overseas Limited and Photon Fund,
Ltd. in May 2000 Units Placement
4.6 Form of Warrant issued to Castle Creek Healthcare LLC, Ram Trading
Ltd., Montrose Investments Ltd., CCL Fund LLC, Velocity Investment
Partners Ltd. and Ivan Lieberburg in May 2000 Units Placement
4.7 Form of Warrant issued to The Shemano Group, Inc. in connection with
May 2000 Units Offering
27 Financial Data Schedule
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(b) Reports on Form 8-K.
On March 27, 2000, we filed a Current Report on Form 8-K in response to
Item 5 of Form 8-K - "Other Events" to report recent developments in our
litigation with Sands Brothers & Co. Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we
have duly caused this report to be signed on our behalf by the undersigned.
DATE: June 13, 2000
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ E. Mark Perri
------------------------------------
E. Mark Perri
Chairman and Chief Financial Officer
