Notes
to the Unaudited Condensed Interim Consolidated Financial Statements
Note
1 – Organization of Business and Going Concern:
Generex
Biotechnology Corporation (“Generex” or the “Company”), was formed in the State of Delaware on September
4, 1997 and its year-end is July 31. It is engaged primarily in the research and development of drug delivery systems and the
use of the Company’s proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal)
cavity using a hand-held aerosol applicator; and through the Company’s wholly-owned subsidiary, Antigen Express, Inc. (“Antigen”),
has undertaken work on immunomedicines incorporating proprietary vaccine formulations.
On
January 18, 2017, the Company closed an Acquisition Agreement pursuant to which the Company acquired a 51% interest in NuGenerex
Diagnostics LLC “NGDx,” formerly known as Hema Diagnostic Systems, LLC, a Florida limited liability company established
in December 2000 to market and distribute rapid test devices including infectious diseases. Since 2002, NGDx has been developing
an expanding line of rapid diagnostic tests (RDTs) including such diseases as Human Immunodeficiency Virus (HIV) – 1/2,
tuberculosis, malaria, hepatitis, syphilis, typhoid and dengue as well as other infectious diseases. Subsequently, on December
1, 2018, the Company exercised its call option and closed the acquisition of the remaining 49% interest in NGDx to become a wholly
owned subsidiary of the Company.
On
October 3, 2018, the Company entered into an Asset Purchase Agreement with Veneto Holdings, L.L.C. (“Veneto”) to purchase
certain assets of Veneto and its subsidiaries. The Agreement bifurcated the closing. On October 3, 2018 (the “First
Closing”), the Company purchased substantially all the operating assets of Veneto including (a)system of dispensing pharmacies,
(b) one central adjudicating pharmacy, (c) a wholesale pharmaceutical purchasing company, and (d) an in-network laboratory in
exchange for a secured promissory note in the principal amount of $15,000,000. On November 1, 2018 the Company consummated the
acquisition of the Second Closing Assets, consisting primarily of Veneto’s management services organization business and
two additional ancillary services. The aggregate price for the First Closing Assets and the Second Closing Assets was $30,000,000.
The Company issued a promissory note in the principal amount of $35,000,000 (the “
New Note
”) consisting of
the $30,000,000 purchase price and a $5,000,000 original issue discount, as the sole consideration payable on the Second Closing
Date. On January 15, 2019, the Company entered into an Amendment Agreement (the “
Amendment
”) with Veneto and
the equity owners of Veneto entered into restructuring payment of the Note.
On
March 28, 2019, the Company entered into an Amendment Agreement (the “
Amendment
”) with Veneto and the equity
owners of Veneto (the “Veneto Members”) to restructure the payment of the obligation that in satisfaction of all obligations
the Company would cause to be delivered 8,400,000 shares of the Company’s common stock (the “Generex Shares”)
to be delivered on or before April 22, 2019; plus an aggregate 5,500,000 shares of the Company’s subsidiary, common stock
of Antigen Express, Inc. The Company and the Veneto Members further agreed to certain downside protection between $2.50 per share
and $1.50 per share subject to terms and conditions contained in the agreement.
As
a result of the Amended Agreement entered into on March 28, 2019 (“the
Amendment
”) with Veneto and the equity
owners of Veneto (the “Veneto Members”) to restructure the Promissory Note referenced in Note 9, the Company was evaluated
for downside protection associated with the 8,400,000 issued shares in lieu of cash payments against the Promissory Note. Based
on the valuation as of the date of agreement on March 28, 2019, an allocation of $6,424,338 was allocated to derivative liability
for downside protection. As of April 30, 2019, the downside protection had a market change of $570,112 and held a value of $6,994,450.
In
March 2019, the Company changed its business model to no longer utilize their existing pharmacies. This shift resulted in breaking
their existing lease agreements with their pharmacies which resulted in a liability of $606,296 as of April 30, 2019 and disposing
the majority of applicable leasehold improvements, reduction of employees and no longer holding and selling inventory. Going forward
Veneto will conduct business exclusively through their management services organization and by entering into more ancillary provider
service agreements with third party pharmacies as an effort to reduce fixed costs and salaries. This was made practicable due
to the decrease in overall script volume coupled with delays in the Company being able to receive operating licenses from various
government agencies.
On
January 7, 2019, the Company closed two separate Acquisition Agreements pursuant to which the Company acquired a 51% interest
in both Regentys Corporation (“Regentys”) and Olaregen Therapeutix Inc. (“Olaregen”). Regentys is a regenerative
medicine company focused on developing novel treatments for patients with gastrointestinal (GI) disorders. Olaregen is a New York
based regenerative medicine company that is preparing to launch its proprietary, patented, wound conforming gel matrix, Excellagen,
an FDA 510K cleared wound healing product. The terms of the Regentys acquisition included an upfront payment of $400,000, plus
$14,600,000 to be paid according to a milestone-based schedule. The terms of the Olaregen acquisition included an upfront payment
of $400,000, plus $11,600,000 to be paid according to a milestone-based schedule.
Going
Concern
The
accompanying unaudited condensed interim consolidated financial statements have been prepared in conformity with US GAAP, which
contemplate continuation of the Company as a going concern. The Company has experienced recurring net losses and negative cash
flows from operations since inception and has an accumulated deficit of approximately $413 million and a working capital deficiency
of approximately $25 million at April 30, 2019. The Company has funded its activities to date almost exclusively from debt and
equity financings.
The
Company will continue to require substantial funds to implement its new investment acquisition plans. Management’s
plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common
stock, preferred stock offerings, and issuances of debt and convertible debt instruments. Management is also actively pursuing
financial and strategic alternatives, including strategic investments and divestitures, industry collaboration activities and
strategic partners.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months
from the balance sheet date. There are no assurances that such additional funding will be achieved and that the Company will succeed
in its future operations. The unaudited condensed interim consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company’s inability to obtain required funding in the near future
or its inability to obtain funding on favorable terms will have a material adverse effect on its operations and strategic development
plan for future growth. If the Company cannot successfully raise additional capital and implement its strategic development plan,
its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have
to cease operations.
Note
2 – Summary of Significant Accounting Policies:
Revenue
Recognition
—
It is the Company’s policy that revenues from product sales
is recognized in accordance with ASC 606 “Revenue Recognition.” Five basic steps must be followed before revenue
can be recognized; (1) Identifying the contract(s) with a customer that creates enforceable rights and obligations; (2) Identifying
the performance obligations in the contract, such as promising to transfer goods or services to a customer; (3) Determining the
transaction price, meaning the amount of consideration in a contract to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer; (4) Allocating the transaction price to the performance obligations in
the contract, which requires the company to allocate the transaction price to each performance obligation on the basis of the
relative standalone selling prices of each distinct good or services promised in the contract; and (5) Recognizing revenue when
(or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. The amount of
revenue recognized is the amount allocated to the satisfied performance obligation.
Revenue
from the pharmacy services is recognized when the prescription is dispensed (picked up by the patient or shipped to the patient
using common carrier or delivered by the pharmacies own personnel). At the time of dispensing each pharmacy has a contract with
the insurance payor (item (i)); the insurance payor has accepted the claim for reimbursement from the pharmacy (item ii) and informed
the pharmacy how much will be paid for the prescription (item (iii)); the insurance payor is now legally obligated to make payment
on the accepted claim within a given period proscribed by statute (item (iv)); and, the prescription has been taken from the pharmacy
inventory, placed into an individually labeled container specific to the patient, and the patient is able to take possession of
the prescription (item (v)). Shipment to or pick up by the patient is the first time that all criteria for revenue recognition
have been met.
Revenue
from the laboratory services is recognized upon the completion of accessions (the requested laboratory test has been performed
and the report has been issued to the requesting physician). After the test has been performed and reported, the insurance company
and/or patient has an obligation to pay for medically necessary laboratory tests (items (i) and (ii)). Unlike the pharmacy services
model, laboratory services are provided prior to insurance company approval; as a result, the seller’s price to buyer is
not known until payment is provided (items (iii) and (iv). Based on historical collections, the Company estimates the expected
revenues associated with similar tests and recognizes the revenue when testing results have been provided (v).
Revenue
from the provision of management services is recognized in accordance with the contractual terms of the relationship (item i);
however, the current agreements in place typically specify that a percentage of the gross margin associated with the third-parties’
sales that the Company facilitates is to be remitted (iii), and as such, the revenue is considered earned upon completion of the
third parties’ sales of such products (iv). Like pharmacy services described above, revenue is recognized when the prescription
is dispensed (picked up by the patient or shipped to the patient using common carrier or delivered by the pharmacies own personnel)
(v).
Provisions
for estimated sales returns and uncollectible accounts are recorded in the period in which the related sales are recognized based
on historical and anticipated rates.
The
Company determines whether it is the principal or agent for its retail pharmacy contract services on a contract by contract basis.
In the majority of its contracts, the Company has determined it is the principal due to it: (i) being the primary obligor in the
arrangement, (ii) having latitude in changing the product or performing part of the service, (iii) having discretion in supplier
selection, (iv) having involvement in the determination of product or service specifications, and (v) having credit risk. The
Company’s obligations under its client contracts for which revenues are reported using the gross method are separate and
distinct from its obligations to the third-party pharmacies included in its retail pharmacy network contracts. Pursuant to these
contracts, the Company is contractually required to pay the third-party pharmacies in its retail pharmacy network for products
sold, regardless of whether the Company is paid by its clients. The Company’s responsibilities under its client contracts
typically include validating eligibility and coverage levels, communicating the prescription price and the co-payments due to
the third-party retail pharmacy, identifying possible adverse drug interactions for the pharmacist to address with the prescriber
prior to dispensing, suggesting generic alternatives where clinically appropriate, and approving the prescription for dispensing.
Although the Company does not have credit risk with respect to Retail Co-Payments or inventory risk related to retail network
claims, management believes that all of the other applicable indicators of gross revenue reporting are present. For contracts
under which the Company acts as an agent, revenue is recognized using the net method.
In
March 2019, the Company changed its business model to no longer utilize their existing pharmacies. This shift resulted in breaking
their existing lease agreements with their pharmacies which resulted in a liability of $606,296 as of April 30, 2019 and disposing
the majority of applicable leasehold improvements, reduction of employees and no longer holding and selling inventory. Going forward
Veneto will conduct business exclusively through their management services organization and by entering into more ancillary provider
service agreements with third party pharmacies as an effort to reduce fixed costs and salaries. This was made practicable due
to the decrease in overall script volume coupled with delays in the Company being able to receive operating licenses from various
government agencies.
Cost
of Goods Sold
—Costs and directly related expenses to sell the Company’s products and services are recorded as
cost of goods sold when the related revenue is recognized. The Company records shipping and handling costs related to delivery
of products to customers within cost of goods sold.
Income
Taxes
— Income taxes are accounted for under the asset and liability method prescribed by FASB ASC Topic 740. These standards
require a company to determine whether it is more likely than not that a tax position will be sustained upon examination based
upon the technical merits of the position. If the more likely than not threshold is met, a company must measure the tax position
to determine the amount to recognize in the financial statements. Deferred income taxes are recorded for temporary differences
between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance
is provided if it is more likely than not that some or all of the deferred tax asset will not be realized. At April 30, 2019 and
July 31, 2018, the Company had a full valuation allowance equal to the amount of the net deferred tax asset. As a result of the
acquisition of Regentys and Olaregen, the purchase price allocation attributed to deferred tax liability in the amount of $889,782
and $1,040,173, respectfully. The Company did not offset the deferred tax liabilities since the Company acquired less than the
80% of both Regentys and Olaregen preventing the Company to consolidate its income tax returns with Regentys and Olaregen for
tax purposes. Therefore, the deferred tax liabilities will be reported separately until such time that the Company determines
otherwise.
Inventories
—Inventories,
which consist of both raw materials and finished goods, is valued at the lower of cost, determined by the first-in, first-out
method, or market value. Inventory costs are comprised primarily of product, labor, freight and duty. The Company writes down
inventory for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. For the nine months ending April 30, 2019, the Company had a write
down of inventory for $645,351 related to obsolescence which is classified as cost of goods sold.
Property
and Equipment
—Property, equipment and improvements to leased premises are depreciated using the straight-line method
over the estimated useful lives of the assets, or when applicable, the term of the lease, whichever is shorter. Major renewals
or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Property and equipment
are depreciated using the straight-line method over the estimated useful lives of the assets, which are generally as follows:
|
Leasehold
improvements
|
The
shorter of the expected useful life of the improvement or the lease term
|
|
|
|
|
Computers
and technological assets
|
3-5
years
|
|
Machinery
and equipment
|
3-5
years
|
|
Furniture
and fixtures
|
3-7
years
|
Assets
acquired through finance lease arrangements or long-term rental arrangements that transfer substantially all the risks and rewards
associated with ownership of the asset to the Company (as lessee) are capitalized.
Reclassifications
to Prior Period Financial Statements and Adjustments
Certain
reclassifications have been made in the Company’s condensed interim consolidated financial statements of the prior year
to conform to the current year presentation. These reclassifications have no impact on previously reported net income.
Redeemable
Non-Controlling Interest
As
a result of the acquisition of Regentys with redeemable convertible preferred stock classified as a mezzanine instrument outside
of the its equity accounts, such amounts are reclassified as redeemable non-controlling interest as the carrying value determined
by the purchase price allocation at the time of the acquisition of Regentys.
Derivative
Financial Instruments
As
a result of the early adoption of ASU 2017-11 in the second quarter of the fiscal year ended April 30, 2019, the Company has no
derivative financials instruments with down round features classified as a liability at April 30, 2019.
Adoption
of New Accounting Standards
We
have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof
that have effective dates during the periods reported and in future periods. The Company does not believe that any new or modified
principles will have a material impact on the Company’s reported financial position or operations in the near term. The
applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.
|
•
|
|
ASU
2014-09, “Revenue from Contracts with Customers (Topic 606)”
|
|
•
|
|
ASC
815-40 (formerly SFAS No. 133 “Accounting for derivative instruments and hedging
activities”), requires that embedded derivative instruments be bifurcated and assessed,
along with free-standing derivative instruments such as warrants, on their issuance date
and in accordance with ASC 815-40-15 (formerly EITF-00-19 “Accounting for
derivative financial instruments indexed to, and potentially settled in, a company’s
own stock”) to determine whether they should be considered a derivative liability
and measured at their fair value for accounting purposes. In determining the appropriate
fair value, the Company uses the Black-Scholes option pricing formula and present value
pricing. At April 30, 2019, the Company adjusted its derivative liability to its fair
value, and reflected the change in fair value, in its condensed interim consolidated
statement of operations and comprehensive loss.
|
|
•
|
|
ASU
2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net).”
|
|
•
|
|
ASU
2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing.”
|
|
•
|
|
ASU
2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815):
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16
Pursuant to Staff Announcements at the March 3, 2016 EITF (Emerging Issue Task Force)
Meeting.”
|
|
•
|
|
ASU
2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients.”
|
|
•
|
|
ASU
2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers.”
|
|
•
|
|
ASU
2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.”
|
|
•
|
|
ASU
2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers
(Topic 606), Leases (Topic 840) and Leases (Topic 842). Amendments to SEC Paragraphs
Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of
Prior SEC Staff Announcements and Observer Comments.”
|
The
standards provide companies with a single model for use in accounting for revenue arising from contracts with customers that supersedes
current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize
revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and
rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements
retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The
guidance was adopted as of August 1, 2018. The Company found that the adoption did not have a material effect on the Company’s
condensed interim consolidated financial statements and related disclosures.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments—Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
(“ASU 2016-01”). This standard affects the accounting for equity instruments,
financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. In
February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10)
– Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to clarify certain
narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU No. 2016-01, “Financial
Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This
includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its
measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election
that would apply to that security and all identical or similar investments of the same issued. The update is effective for fiscal
years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. The guidance
was adopted as of August 1, 2018 and did not have a material effect on the Company’s condensed interim consolidated financial
statements and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing
diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The
standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2)
settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds
from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions
received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable
cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2017 on a retrospective basis. The guidance was adopted as of August 1, 2018 and did not have a material
effect on the Company’s condensed interim consolidated financial statements and related disclosures.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires that a
statement of cash flows should include the total of cash, cash equivalents, and amounts generally described as restricted cash
or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The update is effective
for fiscal years beginning after December 15, 2017. The guidance was adopted as of August 1, 2018 and did not have a material
effect on the Company’s condensed interim consolidated financial statements and related disclosures.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
These amendments clarify the definition of a business. The amendments affect all companies and other reporting organizations that
must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including
acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance was adopted as
of August 1, 2018 and did not have a material effect on the Company’s condensed interim consolidated financial statements
and related disclosures.
In
May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation” (Topic 718): Scope of Modification Accounting.
The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require
an entity to apply modification accounting under Topic 718 Compensation-Stock Compensation. An entity should account for the effects
of a modification unless all the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative
measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such
an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification
does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required
to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same
as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the
modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the original award is modified. The ASU is effective for all entities for annual periods, including interim periods within
those annual periods, beginning after December 15, 2017. The guidance was adopted as of August 1, 2018 and did not have a material
effect on the Company’s condensed interim consolidated financial statements and related disclosures.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). In January 2018, the FASB
issued ASU 2018-01, which provides additional implementation guidance on the previously issued ASU 2016-02. Under the new guidance,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted
basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified
asset for the lease term. The Company is required to adopt ASU 2016-02 for fiscal years, and for interim periods within those
fiscal years, beginning after December 15, 2018.
In
January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(Topic 350), which eliminates
Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting
unit. The Company will adopt the standard effective October 1, 2020. The Company is evaluating the effect that ASU 2017-04 will
have on its condensed interim consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Non-controlling Interests with a Scope Exception.
Part I of this update addresses the complexity
of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked
instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants
and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion
option. Part II of this update addresses the difficulty of navigating
Topic 480, Distinguishing Liabilities from
Equity
, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending
content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments
of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II
of this update do not have an accounting effect. This ASU is effective for interim and annual reporting periods beginning after
December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company early adopted the ASU
2017-11 in the second quarter as of January 31, 2019.
In
February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which was issued to address the income
tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing
due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment
of the TCJA on December 22, 2017 that changed the Company’s federal income tax rate from 35% to 21%. The ASU changed
current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income
to retained earnings. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15,
2018. Early adoption is permitted, including adoption in an interim period. Adoption of this ASU is to be applied either in the
period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized.
The Company is currently evaluating the impact, if any, ASU 2018-02 will have on its financial position, results of
operations, and its consolidated financial statement disclosures. The Company’s evaluation process includes, but is not
limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for
these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a
result of the guidance. The Company is evaluating the effect that ASU 2018-02 will have on its condensed interim consolidated
financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement”, which adds disclosure requirements to Topic 820 for the range and weighted average
of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for interim and annual
reporting periods beginning after December 15, 2019. The Company is evaluating the effect that ASU 2018-13 will have on its condensed
interim consolidated financial statements.
Note
3 - Loans from Related Parties
NGDx
received substantially all of its funding from a shareholder, who owned 98.9% of NGDx prior to the acquisition of NGDx by the
Company. The loan is unsecured, matures on December 31, 2019 and bears interest at 0.75% per annum through January 19, 2017, and
bears no interest thereafter. Upon acquisition of NGDx by the Company (see Note 9), the outstanding principal balance was $13,239,837
and total accrued interest of $191,869. This loan was subject to a call option (Note 9) which, if exercised, the principal and
accrued interest through January 18, 2017 would be eliminated.
Pursuant
to the January 18, 2017 Acquisition, Mr. Berkman, previous owner of NGDx and debt holder, agreed, under certain conditions to
transfer the remaining 49% of the NGDx equity to the Company for a consideration of $1.00. On December 1, 2018, the Company and
Mr. Berkman entered into an Agreement, Assignment and Release, pursuant to which Mr. Berkman transferred the remaining NGDx equity
interests to the Company, waiving and releasing any conditions to such transfer. NGDx is now a wholly owned subsidiary of the
Company. In addition to the assignment of the NGDx interests, Mr. Berkman released these loans in exchange for shares of the Company’s
common stock valued at the aggregate of such amount using the closing price for the common stock on November 30, 2018. The closing
price was $18.99, resulting in 32,881 shares issuable to Mr. Berkman. This transaction resulted in Mr. Berkman’s advances
of $624,404 plus the loan and call option which resulted in additional paid in capital of $13,431,705 which was reclassified to
the Company’s stockholders’ equity as an extinguishment of debt for $14,056,109.
Pursuant
to the January 7, 2019 acquisition of Regentys Corporation (“Regentys”), the Company assumed $16,505 of loans payable
to Regentys shareholders which had a principal balance of $13,200 as of April 30, 2019.
Note
4 - Commitments and Contingencies:
Pending
Litigation
The
Company is a defendant in one legal proceeding relating to alleged breach of contract and claims against certain of the Company’s
original buccal delivery patents. The Company is also a defendant in two legal proceedings brought by a former executive officer
and her affiliate. These legal proceedings have been reported in the Company’s prior periodic reports. No activity has occurred
in these cases in several years, and the Company now considers them dormant.
In
December 2011, a vendor of the Company commenced an action against the Company and its subsidiary, Generex Pharmaceuticals, Inc.,
in the Ontario Superior Court of Justice claiming damages for unpaid invoices including interest in the amount of $429,000, in
addition to costs and further interest. The Company responded to this statement of claim and also asserted a counterclaim
in the proceeding for $200,000 arising from the vendor’s breach of contract and detinue, together with interest and costs.
On November 16, 2012, the parties agreed to settle this action and the Company has agreed to pay the plaintiff $125,000, following
the spinout of its subsidiary Antigen, from the proceeds of any public or private financing related to Antigen subsequent to such
spinout. Each party agreed to execute mutual releases to the claim and counterclaim to be held in trust by each party’s
counsel until payment of the settlement amount. Following payment to the plaintiff, the parties agree that a Consent Dismissal
Order without costs will be filed with the court. If the Company fails to make the payment following completion of any post-spinout
financing related to Antigen or any other subsidiaries, the Plaintiffs may take out a judgment in the amount of the claim plus
interest of 3% per annum and costs fixed at $25,000. This has been accrued in the unaudited condensed interim consolidated financial
statements.
On
August 22, 2017, Generex received a letter from counsel for Three Brothers Trading LLC, d/b/a Alternative Execution Group (“AEXG”),
claiming breach of a Memorandum of Understanding (“MOU”) between Generex and AEXG. The MOU related to AEXG referring
potential financing candidate to Generex. The letter from AEXG counsel claimed that Generex’s acceptance of $3,000,000
in financing from Pharma Trials, LLC, in March 2017, violated the provisions of the MOU prohibiting Generex from seeking other
financing, with certain exceptions, for a period of 60 days after execution of the MOU. AEXG has demanded at least $210,000 in
cash and 84,000 warrants for Generex stock convertible at $2.50 per share, for attorney’s fees and costs. On December 2,
2018, an arbitrator awarded Three Brothers Trading LLC, d/b/a Alternative Execution Group (“AEXG”) an aggregate of
$315,695 in damages, costs and fees as well as warrants exercisable for 84,000 shares of Generex Common Stock at an exercise price
of $2.50 per share. The awards were made pursuant to claims under a Memorandum of Understanding (“MOU”) between Generex
and AEXG related to AEXG referring potential financing candidate to Generex. AEXG filed a petition to confirm the arbitrator’s
award in the United States District Court for the Southern District of New York. The petition includes a demand of $3,300,360
as the value of the Warrants. The arbitrator did not award the specific amount of $3.3 million, but only liquidated damages in
the amount of $220,000 and the value of 84,000 warrants “as of today” (the date of the award) plus attorney’s
fees, certain costs, prejudgment and post-judgment interest (which continues to run on a daily basis) and arbitration fees. As
of April 30, 2019, the value of the warrants have a market value of $65,613. Between the warrants and the $220,000 of liquidated
damages, the Company has accrued $285,613 related to this matter.
On
June 28, 2018, the Company was named in respect of a claim by Burrard Pharmaceutical Enterprises Ltd. and Moa’yeri Kayhan
for unspecified damages and other remedies issued by the Supreme Court of British Columbia. The claim is made in connection with
one advanced against Burrard and Kayhan by Middle East Pharmaceutical Factory L.L.C., a foreign corporation, for fraudulent or
negligent misrepresentation. Middle East alleges that it was misled by Burrard and Kayhan into believing that Burrard had rights
to distribute Generex product in the Middle East. Burrard and Kayhan allege that they did have rights in that regard, which the
Company denies. The matter remains at the pleadings stage and the Company is investigating the facts.
On
October 26, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to
sell and sold its Note Due October 26, 2019 (“Note”) in the principal amount of $682,000
.
On January 25, 2019,
Generex received a letter from the purchaser’s counsel stating that the Note was in default because Generex’s common
stock was not listed on NASDAQ within 90 days after the issuance of the Note. The letter demanded repayment in full. On February
12, 2019, the Purchaser filed a Motion for Summary Judgment in lieu of complaint in the Supreme Court of New York, demanding
the aggregate principal amount, default interest and costs. Counsel for Generex and Alpha have engaged in settlement discussions.
On
March 21, 2019 Compass Bank filed suit against NuGenerex Distributions Solutions 2, L.L.C. in the District Court of Dallas County,
Texas requesting damages of $3,413,000. In connection with the closing of the Veneto acquisition, Compass Bank had a lien on certain
assets that were supposed to be transferred into the ownership of NuGenerex, a subsidiary of Generex. Those assets were never
transferred due to regulatory impositions. Generex had listed Compass Bank as an intended third party beneficiary to the transaction
in relation to the assets liened and Veneto ceased payments upon the loan which the lien generated from. Compass bank filed suit
against 6 parties involved in the transaction to collect on the loan, including NuGenerex. NuGenerex’s position is the contract
was frustrated by the assets that were liened were never transferred, NuGenerex did not receive any benefit from the agreement,
and thus NuGenerex is not responsible to Compass Bank for repayment of a loan on assets not transferred. Generex intends to implead
Brooks Houghton for indemnification who was retained to perform due diligence on the transaction.
In
May 2019 Brooks Houghton threatened litigation by way of a FINRA Dispute Resolution. Brooks Houghton, who the managing representative
is Mr. Centonfanti a prior board member, was under contract to perform due diligence on the Veneto transaction, as well as other
unrelated items. The Veneto transaction closed three times, each time with a reduction in price due to material negative circumstances.
Brook Houghton, who was under contract to perform due diligence, claims their fee should be paid on the initial closing price
not the ultimate resolution of the matter. The company offered to compensate Brooks Houghton pursuant to agreement, 3% on the
most recent closing price for Veneto for which Brooks Houghton may have performed some level of work on, payable in kind, and
Brooks Houghton declined the offer. Brooks Houghton is claiming $450,000 for the first closing of Veneto, $714,000 for the second
closing of Veneto, $882,353 for the Regentys acquisition, and $705,882 for Olaregen. The company is awaiting service. As
of April 30, 2019, the Company has accrued for the full $2,752,235 balance.
With
respect to all litigation, as additional information concerning the estimates used by the Company becomes known, the Company reassesses
its position both with respect to accrued liabilities and other potential exposures.
Commitments
Lease
Agreements
There
are rental agreements in effect at Hema Diagnostics Systems, Empire State Pharmacy Inc., Regentys Corporation and Olaregen Therapeutix
Inc. which have the following commitments as of April 30, 2019: $44,700 remaining in fiscal year 2019, $82,469 in fiscal year
2020 and $9,403 in fiscal year 2021.
Intellectual
Property
In
connection with the Company’s acquisition of Olaregen, intellectual property was acquired that had a valuation of $650,000
prior to being acquired and revalued. This initial $650,000 valuation represented the initial payment remitted by Olaregen in
accordance with the $4 million signed commitment agreement entered into with Activation Therapeutics, Inc. The remaining $3.35
million balance is to be paid in quarterly installments equal to 10% of quarterly net sales generated by Activation Therapeutics
assuming the Exellagen average selling price per unit exceeds $800. In the event that the average selling price per unit is less
than $800 per unit, cost of goods sold shall be excluded from the computation of net sales.
Note
5 - Net Income Per Share (“EPS”):
Basic
net income or loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted
net income per share is calculated by dividing income available to common shareholders by the weighted average number of common
shares outstanding for the period and, when dilutive, potential shares from stock options and warrants to purchase common stock,
using the treasury stock method. Common stock equivalents are included in the diluted income per share calculation only when option
exercise prices are lower than the average market price of the common shares for the period presented.
The
weighted average number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive,
was 16,016,231 for the three and nine months ended April 30, 2019.
|
|
|
Three
Months Ended
April
30,
|
|
Three
Months Ended
April
30,
|
|
|
|
2019
|
|
2018
|
|
Weighted average number of
common shares outstanding - Basic
|
|
|
60,362,163
|
|
|
|
22,430,100
|
|
|
Potentially
dilutive common stock equivalents
|
|
|
—
|
|
|
|
32,016,936
|
|
|
Weighted average
number of common and equivalent shares outstanding-Diluted
|
|
|
60,362,163
|
|
|
|
54.447,036
|
|
|
|
|
Nine
Months Ended
April
30,
|
|
Nine
Months Ended
April
30,
|
|
|
|
2019
|
|
2018
|
|
Weighted average number of
common shares outstanding - Basic
|
|
|
44,203,218
|
|
|
|
22,430,100
|
|
|
Potentially
dilutive common stock equivalents
|
|
|
—
|
|
|
|
32,016,936
|
|
|
Weighted average
number of common and equivalent shares outstanding-Diluted
|
|
|
44,,203,218
|
|
|
|
54.447,036
|
|
Note
6 - Stockholders’ Equity:
Common
Stock
On
November 13, 2018, the Company declared a stock dividend on its outstanding Common Stock for stockholders of record date to be
determined (the “Record Date”). As a result, all stockholders on the Record Date received twenty new shares of Common
Stock for each share of Common Stock owned by them as of that date. Proportional adjustments for the reverse stock split were
made to the Company’s outstanding stock options, and warrants including all share and per-share data, for all amounts and
periods presented in the condensed interim consolidated financial statements.
On
January 18, 2017, the Company issued 1,117,431 shares of common stock for the acquisition of 51% of NGDx and is obligated to issue
4,830,000 shares of common stock upon the conclusion of the Company’s reverse stock split. On October 26, 2018, 4,830,000
shares were issued.
On
January 30, 2019, the Company declared a dividend to holders of Generex common shares of its subsidiary Antigen Express, Inc.,
d/b/a NuGenerex Immuno-Oncology. On February 25, 2019, Generex shareholders received a dividend of one share of Antigen Express,
Inc. for every four shares of Generex common stock which amounted to an issuance of 15,076,849 shares, representing approximately
3.77% ownership of Antigen. The fair value of the shares issued amounted to $1,070,456 and was recorded as a dividend with a corresponding
increases to noncontrolling interest.
During
the nine months ended April 30, 2019, 1,238,517 shares of common stock payable were issued. As of April 30, 2019, 349,545 shares
remain to be issued resulting in common stock payable $201,294.
Series
H and Series I Convertible Preferred Stock
The
Company has authorized 109,000 shares of designated non-voting Series H Convertible Preferred Stock with a stated value of $1,000
per share and authorized 6,000 shares of designated non-voting Series I Convertible Preferred Stock with a stated value of $47.61
per share pursuant to the Purchase Agreement dated March 27, 2017. The Series H Preferred Stock was scheduled to be sold in four
tranches to the Purchaser. Under the Securities Purchase Agreement, in the event the Purchaser failed to purchase 100% of the
shares of Preferred Stock at any given Closing, the Company can decline to sell any further securities to the Purchaser (the “Purchase
Agreement”).
The
Series H and Series I Convertible Preferred Stock are convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price of $.12 per share.
Neither
Series H nor Series I Convertible Preferred Stock have special dividend rights. If the Company pays dividends on its common stock,
the holders of the preferred stock will receive dividends in the amount they would have received had they converted the preferred
stock to common stock.
At
closing of the first tranche on March 28, 2017, the Company issued 63,000 shares of Series H Preferred Stock for a purchase price
of $3,000,000. The proceeds of this sale were paid directly on the Company’s behalf to Emmaus as an additional deposit under
the Company’s Emmaus LOI. The full amount of such proceeds was repaid to the Company in July 2017 upon termination of the
Emmaus LOI. On December 1, 2018, after payment of the dividend, B-H Sanford, LLC, converted all of its holding of the Company’
Series H Convertible Preferred Stock owned by it into 25,200,000 shares of common stock.
Prior
to payment of Generex’s 20 for 1 common stock dividend, on November 30, 2018, Joseph Moscato, the Company’s President
and Chief Executive Officer, and Lawrence Salvo, a member of the Company’s Board of Directors, converted all shares
of the Company’ Series I Convertible Preferred Stock owned by them. Mr. Moscato received 3,276,000 shares of the
Company’s Common Stock upon conversion. Mr. Salvo received 3,354,645 shares of the Company’s Common Stock
upon conversion.
Non-controlling
Interest
Mr.
Berkman agreed, under certain conditions to transfer the remaining 49% of the NGDx equity to the Company for a consideration of
$1.00. On December 1, 2018, the Company and Mr. Berkman entered into an Agreement, Assignment and Release, pursuant to which Mr.
Berkman transferred the remaining NGDx equity interests to the Company, waiving and releasing any conditions to such transfer.
As of December 1, 2018, NGDx is a wholly owned subsidiary of the Company. During the nine months ended in April 30, 2019, there
was a net loss attributable to the non-controlling interest (49%) in NGDx of $122,692 and contributions made of $133,679. As of
April 30, 2019, and July 31, 2018, the non-controlling interest in NGDx was $0 and $5,576,272, respectively.
Pursuant
to the Company’s acquisition of Regentys on January 7, 2019 to acquire a 51% interest, the Company was issued 12,048,161
shares of Regentys common stock. As of April 30, 2019, Regentys had a total of 18,623,278 shares of common stock and 2,793,192
Series A voting preferred stock for a total of 21,416,470 total voting shares outstanding. As such, there are 9,368,309 of shares
that belong to non-controlling interest shareholders which represents a 43.74% non-controlling interest.
Pursuant
to the Company’s acquisition of Olaregen on January 7, 2019 to acquire a 51% interest, the Company was issued 3,282,632
shares of Olaregen common stock. As of April 30, 2019, Olaregen had a total of 5,648,819 shares of common stock and 592,683 Series
A voting preferred stock for a total of 6,241,502 total voting shares outstanding. As such, there are 2,958,870 of shares that
belong to non-controlling interest shareholders which represents a 47.41% non-controlling interest.
On
November 1, 2018, the Company completed its second closing of Veneto Holdings, L.L.C. (“Veneto”) which granted the
Company Rapport Services, LLC (“Rapport”) through the ownership of the units of Class B membership interests providing
control of Rapport as only the Class B Member is entitled to elect the nominees to the Board of Managers, which constitute a one
percent (1%) ownership in Rapport. The remaining interests represent a 99% non-controlling interest.
Note
7 – Redeemable Non-Controlling Interest:
Pursuant
to the Company’s acquisition of 51% of the outstanding capital stock of Regentys, Regentys had authorized 7,500,000 shares
of redeemable Series A Convertible Preferred Stock (“Preferred Stock A”), with a par value of $0.0001 and redemption
value of $0.65 per share of which 2,793,192 Preferred Stock A was outstanding as of the date of acquisition and as of April 30,
2019. Preferred Stock may be converted into common stock at the initial conversion ratio of 1:1 which ratio shall be adjusted
in accordance with stock dividends, splits, combinations and other similar events, including the sale of additional shares of
common or preferred stock and the holders of Preferred Stock A are entitled to vote, together with the holders of Regentys common
stock, on all matters submitted to stockholders of Regentys for a vote. At any time after November 1, 2026, the holders of
the Company’s Series A Preferred Stock will have the right to require the Company to redeem all or a portion of their shares
for cash at a redemption price equal to its liquidation value. Accordingly, this Preferred Stock A was valued to be $4,073,898
at the time of acquisition of Regentys and reclassified as Redeemable Non-Controlling Interest outside of stockholders’
deficit on the condensed interim consolidated balance sheets.
Note
8 - Stock-Based Compensation
:
Stock
Option Plans
As
of April 30, 2019, the Company had three stockholder-approved stock incentive plans under which shares and options exercisable
for shares of common stock have been or may be granted to employees, directors, consultants and advisors. A total of 2,835,000
shares of common stock are reserved for issuance under the 2006 Stock Plan as amended (the 2006 Plan) and 240,000,000 shares of
common stock reserved for issuance under the 2017 Stock Option Plan (the 2017 Plan) and 1,200,000 shares of common stock reserved
for issuance under the 2019 Stock Option Plan (the 2019 Plan). At April 30, 2019, there were 2,823,450, 234,492,875, 1,200,000
shares of common stock reserved for future awards under the 2006 Plan, 2017 Plan and 2019 Plan, respectively. The Company issues
new shares of common stock from the shares reserved under the respective Plans upon conversion or exercise of options and issuance
of restricted shares.
The
2006, 2017 and 2019 Plans (the Plans) are administered by the Board of Directors (the Board). The Board is authorized to select
from among eligible employees, directors, advisors and consultants those individuals to whom options are to be granted and to
determine the number of shares to be subject to, and the terms and conditions of the options. The Board is also authorized to
prescribe, amend and rescind terms relating to options granted under the Plans. Generally, the interpretation and construction
of any provision of the Plans or any options granted hereunder is within the discretion of the Board.
The
Plans provide that options may or may not be Incentive Stock Options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive ISOs, while employees and non-employee directors, advisors
and consultants are eligible to receive options which are not ISOs, i.e. “Non-Qualified Options.” The options granted
by the Board in connection with its adoption of the Plans were Non-Qualified Options. In addition, the 2006 Plan also provides
for restricted stock grants.
The
fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model or the value of
the services provided, whichever is more readily determinable. The Black-Scholes option pricing model takes into account, as of
the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest rate for the term of the option.
The
following is a summary of the common stock options granted, forfeited or expired and exercised under the Plan:
|
|
|
Options
|
|
Weighted
Average Exercise Price per Share
|
|
Weighted
Average Remaining Life (Years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding - July 31, 2018
|
|
|
232,218
|
|
|
$
|
1.46
|
|
|
|
0.22
|
|
|
|
380,247
|
|
|
Granted
|
|
|
6,650,625
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,364,168
|
)
|
|
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding - April 30, 2019
|
|
|
5,518,675
|
|
|
$
|
0.68
|
|
|
|
9.15
|
|
|
|
3,157,178
|
|
The
intrinsic value is calculated as the difference between the market value and the exercise price of the shares on April 30, 2019.
The market values as of April 30, 2019 was $1.14 based on the closing bid price for April 30, 2019.
The
5,518,675 outstanding options at April 30, 2019 had a weighted average remaining contractual term of 9.15 years.
There
were 2,345,175 vested common stock options under the Plan for the period ended April 30, 2019. The compensation expense was $1,526,609
for the nine months ended April 30, 2019. There was additional compensation expense pertaining to the Regentys acquisition of
$3,703 for the nine months ended April 30, 2019 for total compensation expense of $1,530,312. The Company had $1,728,688 of unrecognized
compensation costs related to non-vested share-based compensation arrangements granted under the Plan at April 30, 2019 to be
recognized over an average of 2.22 years.
The
Company granted 6,650,625 options during the nine months ended April 30, 2019 and none during the year ended July 31, 2018.
The
Company estimated the fair value of each stock option on the grant date using a Black-Scholes option-pricing model. Black-Scholes
option-pricing models requires the Company to make predictive assumptions regarding future stock price volatility, recipient exercise
behavior, and dividend yield. The Company estimated the future stock price volatility using the historical volatility over the
expected term of the option. The following assumptions were used in the Black-Scholes option-pricing model:
|
|
|
|
April
30,
2019
|
|
|
Exercise price
|
|
|
$0.64
– 1.85
|
|
|
Expected term
|
|
|
5
to 10 years
|
|
|
Risk-free interest
rate
|
|
|
2.56%
- 3.15
|
%
|
|
Estimated volatility
|
|
|
135.2%
- 222.2
|
%
|
|
Expected dividend
|
|
|
—
|
|
|
Stock price at valuation
date
|
|
|
$0.64
– $1.85
|
|
Note
9 – Acquisitions:
NuGenerex
Diagnostics LLC:
On
January 18, 2017, the Company acquired a 51% interest in NuGenerex Diagnostics LLC (“NGDx”), formerly Hema Diagnostic
Systems, LLC, pursuant to the Acquisition Agreement. At closing, the Company acquired 4,950 of NGDx’s 10,000 previously
outstanding limited liability company units in exchange for 1,117,011 shares of Generex common stock valued at $253,721, plus
420 shares of Generex common stock issued to NGDx in exchange for 300 new limited liability company units. The Acquisition Agreement
also provides the Company with a call option to acquire the remaining 49% of NGDx and a retirement of NGDx shareholder loans in
the amount of $13,431,706 (including interest) (the “Call Option”) for the aggregate purchase price of $1. On November
30, 2018, the call option was exercised, and the Company acquired the remaining 49% of NGDx.
Following
the closing and the completion of Company’s reverse stock split, the Company was required to issue an additional 4,830,000
shares of common stock and issue a warrant to a former shareholder of NGDx to acquire 15,000,000 additional shares of Generex
common stock for $2.50 per share. The issue of this warrant is contingent upon the Company obtaining approval from its shareholders
for an increase in its authorized share capital. The total consideration was valued at $1,350,916 on the date of the acquisition.
As of April 30, 2019, all warrants relating to this acquisition have been issued which resulted in additional paid in capital
of $9,032,435.
Fair
Value of the NGDx Assets
The
intangibles assets acquired include In–Process Research & Development (“IPR&D”). The Fair Value of the
IPR&D intangible asset using an Asset Cost Accumulation methodology as of January 18, 2017 (the “Valuation Date”)
was determined to be $2,911,377. Intangible assets are generally amortized on a straight-line basis over the useful lives of the
assets. The Company is currently not amortizing the in-process research and development until it becomes commercially viable and
placed in service. At the time when the intangible assets are placed in service the Company will determine a useful life.
The
net purchase price of NGDx was determined to be as follows:
|
|
|
Stock
Price at Closing
|
|
Shares
|
|
Fair
Value
|
|
Purchase price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock at closing
|
|
$
|
.23
|
|
|
|
1,117,011
|
|
|
$
|
253,721
|
|
|
Common
Stock after closing
|
|
$
|
.23
|
|
|
|
420
|
|
|
|
95
|
|
|
Common
Stock post reverse stock split
|
|
$
|
.23
|
|
|
|
4,830,000
|
|
|
|
1,097,100
|
|
|
Total
purchase price
|
|
|
|
|
|
|
5,947,431
|
|
|
$
|
1,350,916
|
|
As
of January 18, 2017, the issue of the warrant to acquire 15,000,000 additional common shares of Generex was contingent upon shareholder
approval of an increase in the Company’s authorized capital stock. No warrant could be issued by the Company until such
time that an increase in authorized capital has been approved. At the time of closing, management was not of the opinion that
it is more likely than not that the warrant will be issued and the Call Option will be exercised, accordingly no values have been
attributed to the warrant and Call Option at closing. During 2017, management made a redetermination and estimated that it was
more likely than not that the shareholder approval to increase authorized share capital would be obtained and the Call Option
would be exercised.
On
December 1, 2018, pursuant to the Acquisition Agreement the Company issued the warrant to 15,000,000 additional common shares
of Generex to Stephen L. Berkman. The Warrant is exercisable until December 1, 2019 at an exercise price of $2.50 per share. The
Warrant contains a provision prohibiting the exercise of the Warrant to the extent that, after exercise, Mr. Berkman would own
more than 9.99% of the Company’s common stock. The Warrant was issued pursuant to the January 18, 2017 Acquisition Agreement
among the Company, NuGenerex Diagnostics LLC (“NGDx”), formerly Hema Diagnostic Systems, LLC, Stephen L. Berkman and
the other equity owners of NGDx.
Simultaneously,
on December 1, 2018, Company exercised the Call Option and acquired the remaining 49% non-controlling interest in NGDx. Accordingly,
the fair values of the warrants and call option was updated through the issuance and exercise date and the change in the fair
value of the contingent purchase consideration of a loss of $4,397,507 and a gain of $15,147,591 was recorded and included in
the condensed interim consolidated statements of operations and comprehensive income for the nine-months ending April 30, 2019.
The Company adopted a sequencing policy and determined that the warrants with fixed exercise
price were excluded from derivative consideration.
The
remaining fair value of the call option and the warrant payable remaining at the time of exercise of the call option and issuance
of the warrant was charged against additional paid-in capital as an elimination of non-controlling interest for a loss of $6,951,015.
Fair
Value Assumptions Used in Accounting for the Warrant
The
Company used the Black-Scholes option-pricing model to calculate the fair value of the warrant as of April 30, 2019. The Black-Scholes
option-pricing model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest
rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. The key inputs
used in the fair value calculations were as follows:
|
|
|
December
1,
2018
|
|
July
31,
2018
|
|
Exercise price
|
|
|
2.50
|
|
|
|
2.50
|
|
|
Time to expiration
|
|
|
3.14
years
|
|
|
|
3.47
years
|
|
|
Risk-free interest
rate
|
|
|
3.01
|
%
|
|
|
2.77
|
%
|
|
Estimated volatility
|
|
|
138.61
|
%
|
|
|
143.97
|
%
|
|
Dividend
|
|
|
—
|
|
|
|
—
|
|
|
Stock price at valuation
date
|
|
$
|
0.9
|
|
|
$
|
0.1
|
|
Fair
Value Assumptions Used in Accounting for Call Option
The
Company used the Monte Carlo model to calculate the fair value of the call option as of nine months ended April 30, 2019. The
valuations are based on assumptions as of the valuation date with regard to the value of the asset acquired net of impairment,
the risk-free interest rate, the estimated volatility of the stock price in the future, the time to expiration and the stock price
at the date of valuation.
The
following assumptions were used in estimating the value of the Call Option:
|
|
|
December
1,
2018
|
|
July
31,
2018
|
|
Risk-free
interest rate
|
|
|
2.52
|
%
|
|
|
2.44
|
%
|
|
Estimated volatility
|
|
|
164.43
|
%
|
|
|
129.95
|
%
|
|
Remaining Term
|
|
|
1.13
years
|
|
|
|
1.47
years
|
|
|
Stock price at valuation
date
|
|
$
|
0.9043
|
|
|
$
|
0.0976
|
|
Grainland
and Empire Pharmacies:
On
December 28, 2017, the Company through its wholly owned subsidiary NuGenerex, completed the acquisition of the assets and 100%
of the membership interests of two pre-operational pharmacies, Empire State Pharmacy Holdings, LLC and Grainland Pharmacy Holdings,
LLC, pursuant to the bills of sale for a consideration of $320,000 Promissory Note due and payable in full on June 28, 2018 bearing
an annual interest rate of 3%. The note was extended by six months and set to mature with the same terms on December 28, 2018.
The note remains active and interest has continued to accrue while new terms of the note are in process of being negotiated.
We
finalized our allocation of the purchase price as of January 31, 2019. The final allocation of the purchase price as of January
31, 2019, is as follows:
|
|
|
Preliminary
Allocation as of December 28,
2017
|
|
Allocation
Adjustments
|
|
Final
Allocation
|
|
Intangible
assets (licenses)
|
|
$
|
276,380
|
|
|
$
|
—
|
|
|
$
|
276,380
|
|
|
Property and equipment
|
|
|
19,879
|
|
|
|
—
|
|
|
|
19,879
|
|
|
Computer software acquired
|
|
|
5,980
|
|
|
|
—
|
|
|
|
5,980
|
|
|
Leasehold
Improvements
|
|
|
17,761
|
|
|
|
—
|
|
|
|
17,761
|
|
|
Total
assets acquired
|
|
|
320,000
|
|
|
|
—
|
|
|
|
320,000
|
|
|
Consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Payable
|
|
|
320,000
|
|
|
|
|
|
|
|
320,000
|
|
|
Goodwill
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
The
entire value of the intangible assets represent the licenses obtained to operate a pharmacy in the respective state of each of
the acquired pharmacies. Intangible assets are generally amortized on a straight-line basis over the useful lives of the assets.
The Company is currently not amortizing the pharmacy license until the pharmacies becomes commercially viable and operations begin
in the acquired pharmacies. At the time, when the licenses are placed in service, the Company will determine a useful life.
Since
acquisition, Grainland Pharmacy Holdings, LLC ceased to operate. Accordingly, the value allocated to its tangible assets, leasehold
improvements and licenses acquired for $99,519 was charged to impairment of long-lived assets.
Veneto:
On
October 3, 2018, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Veneto Holdings, L.L.C.
(“Veneto”) to purchase certain assets of Veneto.
Effective
as at October 3, 2018, NuGenerex Distribution Solutions, LLC assigned the Veneto Asset Purchase Agreement to NuGenerex Distribution
Solutions 2, LLC. The sole member of that LLC is NuGenerex Management Services, Inc., a wholly-owned subsidiary of Generex
Biotechnology Corporation.
The
aggregate purchase price for the Assets is $35,000,000 including the Promissory Note. At the Second Closing, the Company will
pay the principal of the Promissory Note plus interest to Veneto, (i) $9,000,000 will be paid by the Company into a trust or other
fiduciary account acceptable to Veneto to be used exclusively for satisfaction of certain contingent liabilities of Veneto and
subsidiaries of Veneto not being acquired by the Company, (ii) $3,000,000 will be paid by the Company into an escrow account to
secure potential obligations of Veneto in respect of the Second Closing date working capital and under the indemnification provisions
of the Agreement and (iii) the balance will be payable directly to Veneto in cash.
The
Company had also entered into a temporary fee-for-service arrangement with Veneto and one of its subsidiaries for Veneto to provide
management, personnel, operational, administrative and other services with respect to the First Closing Assets pending the Second
Closing. At the Second Closing, all of Veneto personnel providing these services became employees or consultants of the Company,
and, therefore, Veneto no longer provides these services.
At
the First Closing, the Promissory Note issued to Veneto in the original principal amount of $15,000,000 with interest at an annual
rate of 5.0% and guaranteed by Generex and Joseph Moscato, and secured by a first priority security interest in the Company’s
assets other than the First Closing Assets was subsequently cancelled upon the issuance of the new promissory note on the Second
Closing in the principal amount of $35,000,000 with an annual of 12.0% and guaranteed by Generex and Joseph Moscato.
On
November 1, 2018 the Company consummated the acquisition of the Second Closing Assets, consisting primarily of Veneto’s
management services organization business and two additional ancillary services. The aggregate price for the First Closing Assets
and the Second Closing Assets was $30,000,000. The Company issued a promissory note in the principal amount of $35,000,000 (the
“
New Note
”) consisting of the $30,000,000 purchase price and a $5,000,000 original issue discount, as the sole
consideration payable on the Second Closing Date. In addition, we agreed to assume approximately $3.8 million in outstanding institutional
debt of Veneto subsidiaries, but will have the use of Veneto cash which would otherwise have been applied to paying down the debt.
There
was $62,500 of accrued interest on the first closing $15,000,000 note and an additional $1,716,129 of accrued interest on the
second closing $35,000,000 promissory note for a total of $1,778,629 accrued interest through March 28, 2019 when the Company
entered into an Amendment Agreement (the “
Amendment
”).
On
March 28, 2019, the Company entered into an Amendment Agreement (the “
Amendment
”) with Veneto and the equity
owners of Veneto (the “Veneto Members”) to restructure the payment of the obligation that in satisfaction of all obligations
the Company would cause to be delivered 8,400,000 shares of the Company’s common stock (the “Generex Shares”)
to be delivered on or before April 22, 2019; plus an aggregate 5,500,000 shares of the Company’s subsidiary, common stock
of Antigen Express, Inc. The Company and the Veneto Members further agreed to certain downside protection between $2.50 per share
and $1.50 per share subject to terms and conditions contained in the agreement.
As
a result of the Amended Agreement entered into on March 28, 2019 (“the
Amendment
”) with Veneto and the equity
owners of Veneto (the “Veneto Members”) to restructure the Promissory Note, the Company was evaluated for downside
protection associated with the 8,400,000 issued shares in lieu of cash payments against the Promissory Note. Based on the valuation
as of the date of agreement on March 28, 2019, an allocation of $6,424,338 was allocated to derivative liability for downside
protection. As of April 30, 2019, the downside protection had a market change of $570,112 and held a value of $6,994,450.
Fair
Value of the Veneto Acquisition
The
following table summarizes the allocation of the preliminary purchase price as of the Veneto acquisition as of the First Closing
and the Second Closing:
|
|
|
“First
Closing” completed on
October 3, 2018
|
|
“Second
Closing” completed on
November 1, 2018
|
|
Total
|
|
Cash
and cash equivalents
|
|
$
|
2,410,150
|
|
|
$
|
—
|
|
|
$
|
2,410,150
|
|
|
Accounts
receivable, net
|
|
|
1,935,078
|
|
|
|
—
|
|
|
|
1,935,078
|
|
|
Inventory,
net
|
|
|
1,068,856
|
|
|
|
—
|
|
|
|
1,068,856
|
|
|
Prepaid
expenses
|
|
|
95,804
|
|
|
|
—
|
|
|
|
95,804
|
|
|
Property
and equipment, net
|
|
|
652,590
|
|
|
|
—
|
|
|
|
652,590
|
|
|
Other
receivables
|
|
|
1,014,316
|
|
|
|
—
|
|
|
|
1,014,316
|
|
|
Notes
receivable - LT
|
|
|
1,387,763
|
|
|
|
—
|
|
|
|
1,387,763
|
|
|
Other
assets, net
|
|
|
25,745
|
|
|
|
—
|
|
|
|
25,745
|
|
|
Intangible
assets, net
|
|
|
35,603
|
|
|
|
7,110,000
|
|
|
|
7,145,603
|
|
|
Total
assets acquired
|
|
|
8,625,905
|
|
|
|
7,110,000
|
|
|
|
15,735,905
|
|
|
Total
current liabilities
|
|
|
2,509,887
|
|
|
|
—
|
|
|
|
2,509,887
|
|
|
Notes
payable
|
|
|
—
|
|
|
|
3,403,948
|
|
|
|
3,403,948
|
|
|
Total
liabilities assumed
|
|
|
2,509,887
|
|
|
|
3,403,948
|
|
|
|
5,913,835
|
|
|
Net
identifiable assets acquired
|
|
|
6,116,018
|
|
|
|
3,706,052
|
|
|
|
9,822,070
|
|
|
Goodwill
|
|
|
8,883,982
|
|
|
|
16,293,948
|
|
|
|
25,177,930
|
|
|
Total
consideration transferred
|
|
$
|
15,000,000
|
|
|
$
|
20,000,000
|
|
|
$
|
35,000,000
|
|
The
following table summarizes the allocation of the revalued purchase price as of the Veneto acquisition as of the First Closing
and the Second Closing during the quarter ending April 30, 2019:
|
|
|
“First
Closing” completed on
October 3, 2018
|
|
“Second
Closing” completed on
November 1, 2018
|
|
Total
|
|
Cash
and cash equivalents
|
|
$
|
2,410,150
|
|
|
$
|
—
|
|
|
$
|
2,410,150
|
|
|
Accounts
receivable, net
|
|
|
1,430,638
|
|
|
|
—
|
|
|
|
1,490,638
|
|
|
Inventory,
net
|
|
|
1,068,856
|
|
|
|
—
|
|
|
|
1,068,856
|
|
|
Prepaid
expenses
|
|
|
95,804
|
|
|
|
—
|
|
|
|
95,804
|
|
|
Property
and equipment, net
|
|
|
652,590
|
|
|
|
—
|
|
|
|
652,590
|
|
|
Other
receivables
|
|
|
1,014,316
|
|
|
|
—
|
|
|
|
1,014,316
|
|
|
Notes
receivable - LT
|
|
|
1,387,763
|
|
|
|
—
|
|
|
|
1,387,763
|
|
|
Other
assets, net
|
|
|
25,745
|
|
|
|
—
|
|
|
|
25,745
|
|
|
Intangible
assets, net
|
|
|
35,603
|
|
|
|
2,277,000
|
|
|
|
2,312,603
|
|
|
Total
assets acquired
|
|
|
8,181,465
|
|
|
|
2,277,000
|
|
|
|
10,458,465
|
|
|
Total
current liabilities
|
|
|
2,065,448
|
|
|
|
—
|
|
|
|
2,065,448
|
|
|
Notes
payable
|
|
|
—
|
|
|
|
3,403,948
|
|
|
|
3,403,948
|
|
|
Total
liabilities assumed
|
|
|
2,065,448
|
|
|
|
3,403,948
|
|
|
|
5,469,396
|
|
|
Net
identifiable assets acquired
|
|
|
6,116,017
|
|
|
|
(1,126,948
|
)
|
|
|
4,989,069
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
13,585,769
|
|
|
Total
consideration tranferred
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,574,838
|
|
The
note receivable for $1,387,763 acquired during the first closing of Veneto on October 3, 2018 has since accrued additional interest
and holds a balance of $1,426,164 as of April 30, 2019.
The
significant intangible assets identified in the purchase price allocation discussed above include developed software and technology,
referral base (recurring revenue from the MSO investments and their use of Company owned pharmacies) and non-compete agreements
with continued employment of key employees. Tradenames and trademarks were not valued as tradenames and trademarks will not be
maintained going forward. To value the developed software and technology, the Company utilized the relief from royalty method,
a form of the income approach to value the developed software and technology which assumes a limited technology life and market
share adjusted by assumed obsolescence with a terminal value. The referral base was valued using a multi-period excess earnings
method, a form of the income approach. The Company utilized the with and without method, a form of the income approach to value
non-compete agreements with Generex.
The
preliminary amounts assigned to the identifiable intangible assets, the estimated useful lives, and the estimated amortization
expense related to these identifiable intangible assets are as follows:
|
|
|
Preliminary
Fair
Value
|
|
Average
Estimated
Life
|
|
Developed
Software/Technology
|
|
$
|
780,000
|
|
|
|
5
|
|
|
Referral Base
|
|
|
3,920,000
|
|
|
|
15
|
|
|
Non-compete
agreements
|
|
|
2,410,000
|
|
|
|
3
|
|
|
|
|
$
|
7,110,000
|
|
|
|
|
|
Intangible
assets are generally amortized on a straight-line basis over the useful lives of the assets.
Goodwill
initially represented the excess of the purchase price over the fair market value of net assets acquired. Goodwill for Veneto
Acquisition was $8.9 million as of the date of the First Closing and $16.3 million as of the date of the Second Closing. Based
on the Amended Agreement (the “
Amendment
”) entered into on March 28, 2019 referred to above which stipulated
that in lieu any cash payments, the Company would deliver shares of the Company’s common stock (the “Generex Shares”).
Additionally, in pursuant to ASC 805 and specifically, ASC 805-10-25-14, the Company recognized the change in assets and liabilities
as a result of facts and circumstances that existed as of the acquisition date that would have resulted in the recognition of
the assets and liabilities with the corresponding decrease of goodwill from $24.2 million to $13.6 million.
During
the quarter ending April 30, 2019, the amounts assigned to the identifiable intangible assets, the estimated useful lives, and
the estimated amortization expense related to these identifiable intangible assets were revalued as follows:
|
|
|
Preliminary
Fair
Value
|
|
Average
Estimated
Life
|
|
Developed
Software/Technology
|
|
$
|
397,000
|
|
|
|
5
|
|
|
Referral Base
|
|
|
10,000
|
|
|
|
15
|
|
|
Non-compete
agreements
|
|
|
1,870,000
|
|
|
|
3
|
|
|
|
|
$
|
2,277,000
|
|
|
|
|
|
Regentys
and Olaregen:
On
January 7, 2019, the Company closed two separate Acquisition Agreements pursuant to which the Company acquired a 51% interest
in both Regentys Corporation (“Regentys”) and Olaregen Therapeutix Inc. (“Olaregen”).
The
Company accounted for the acquisitions of both Regentys and Olaregen as business combinations using the purchase method of accounting
as prescribed in Accounting Standards Codification 805, Business Combinations (“ASC 805”) and ASC 820 – Fair
Value Measurements and Disclosures (“ASC 820”). In accordance with ASC 805 and ASC 820, the Company used its best
estimates and assumptions to accurately assign fair value to the tangible assets acquired, identifiable intangible assets and
liabilities assumed as of the acquisition dates. Goodwill as of the acquisition date is measured as the excess of purchase consideration
over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed.
The
fair values assigned to Regentys’ and Olaregen’s tangible and identifiable intangible assets acquired, and liabilities
assumed are based on management’s estimates and assumptions. The estimated fair values of these assets acquired, and liabilities
assumed are considered preliminary and are based on the information that was available as of the date of the acquisition. The
preliminary estimated fair values of assets acquired, and liabilities assumed, and identifiable intangible assets may be subject
to change as additional information is received. Thus, the provisional measurements of fair value are subject to change. The Company
expects to finalize the valuations as soon as practicable, but not later than one year from the closing date.
Regentys:
On
November 28, 2018, Generex and Regentys closed the acquisition of 51% of the outstanding capital stock of Regentys for a total
consideration of fifteen million dollars ($15,000,000). On January 7, 2019 the Company completed a definitive Stock Purchase Agreement
and related documents effecting the transactions contemplated by the LOI.
Pursuant
to a Stock Purchase Agreement between the Company and Regentys (the “Purchase Agreement”) the Company acquired 12,048,161
newly issued shares of the Regentys common stock representing 51% percent of the issued and outstanding capital stock of Regentys
(“Regentys Shares”).
In
addition to $400,000 paid to Regentys upon signing of the LOI, the purchase price for the Regentys Shares will consist of the
following cash payments, with the proceeds intended to be used for specific purposes, as noted:
|
•
|
|
$3,450,000
to initiate pre-clinical activities on or before January 15, 2018. As of the date this quarterly report was filed, the Company
has paid $650,000 and the remaining balance of $2,800,000 is payable on or before June 30, 2019 per extension in amended agreement.
|
|
•
|
|
$2,000,000
to initiate patient recruitment activities on or before May 1, 2019. As of the date this quarterly report was filed, the Company
has not yet paid this installment and the full balance of $2,000,000 is payable on or before June 30, 2019 per extension in
amended agreement.
|
|
•
|
|
$3,000,000
to initiate a first-in-human pilot study on or before September 1, 2019.
|
|
•
|
|
$5,000,000
to initiate a human pivotal study on or before February 1, 2020.
|
|
•
|
|
$1,150,000
to submit a 510(k) de novo submission to the FDA on or about February 1, 2021.
|
The
Company issued its Promissory Note in the amount of $14,600,000 (the “Note’) representing its obligation to pay the
above amounts. The Note is secured by a pledge of the Regentys shares pursuant to a Pledge and Security Agreement. In the event
that Generex does not make any of the first three payments listed above, at Regentys’ option either:
|
•
|
|
Generex
will forfeit all of the Regentys shares issued with no refund of amounts paid; or
|
|
•
|
|
Generex
will issue shares of its common stock to Regentys equivalent to 110% of the value of the missing payment, which shares will
be registered for resale.
|
In
the event Generex does not make either or both of the fourth and fifth payments, its share ownership of Regentys will be proportionately
reduced.
On
March 14, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the first tranche of Guaranteed Payments amounting to $2,800,000 on or before April 1, 2019. On May 22, 2019,
the Company and Regentys signed a second extension to extend the due date on or before June 30, 2019. The extensions of the due
date have no impact on the existing schedule of future payments or any additional terms within the Note. Regentys has not filed
any notice of default as of the date of publication, and Generex continues to provide Regentys with business opportunities continuing
the relationship.
Fair
Value of the Regentys Acquisition
The
following table summarizes the allocation of the preliminary purchase price as of the Regentys acquisition:
|
|
|
Preliminary
Allocations as of
January 7,
2019
|
|
Cash
and cash equivalents
|
|
$
|
61,857
|
|
|
Other
current assets
|
|
|
13,138
|
|
|
Property
and equipment, net
|
|
|
444
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,181,375
|
)
|
|
Notes
payable
|
|
|
(639,009
|
)
|
|
Loans
from related parties
|
|
|
(16,506
|
)
|
|
In-process
research & development
|
|
|
3,510,680
|
|
|
Deferred
tax liability
|
|
|
(889,782
|
)
|
|
Total
Fair Value of Assets Acquired
|
|
|
859,447
|
|
|
Consideration:
|
|
|
|
|
|
Note
receivable from Generex
|
|
|
14,345,205
|
|
|
Goodwill
|
|
$
|
13,485,758
|
|
The
redeemable non-controlling interest of $4,073,898, representing the Series Stock A, was determined by deducting the total consideration
paid of $14,745,205 from the total purchase value totaling $28,689,865 based on a convergence method in an Option Pricing Model
using the Regentys capital structure with 12,048,161 newly issued shares of the Regentys common stock representing 51% percent
of the issued and outstanding capital stock of Regentys. See Note 7 –
Redeemable Non-Controlling Interest.
Olaregen:
On
November 27, 2018, Generex and Olaregen entered into a binding letter of intent (“LOI”) contemplating the Company’s
acquisition of 51% of the outstanding capital stock of Olaregen for a total consideration of twelve million dollars ($12,000,000).
As of January 7, 2019, the Company completed a definitive Stock Purchase Agreement (“Purchase Agreement”) and related
documents effecting the transactions contemplated by the LOI.
The
Company acquired 3,282,632 newly issued shares of the Olaregen common stock representing 51% percent of the issued and outstanding
capital stock of Olaregen (“Olaregen Shares”).
In
addition to $400,000 paid to Olaregen upon signing of the LOI, the purchase price for the Olaregen Shares will consist of the
following cash payments:
|
•
|
|
$800,000
on or before January 15, 2019. The Company has paid this installment.
|
|
•
|
|
$800,000
on or before January 31, 2019. As of the date this quarterly report was filed, the Company has paid $438,500 of this installment
and remaining balance of $361,500 is payable on or before June 30, 2019 per extension in amended agreement.
|
|
•
|
|
$3,000,000
on or before April 1, 2019. As of the date this quarterly report was filed, the Company has not yet paid this installment
and the full balance of $3,000,000 is payable on or before June 30, 2019 per extension in amended agreement.
|
|
•
|
|
$1,000,000.
On or before May 31, 2019. As of the date this quarterly report was filed, the Company has not yet paid this installment and
the full balance of $1,000,000 is payable on or before June 30, 2019 per extension in amended agreement.
|
|
•
|
|
$6,000,000.00
on or before September 30, 2019.
|
The
Company issued its Promissory Note in the amount of $11,600,000 (the “Note’) representing its obligation to pay the
above amounts. The Note is secured by a pledge of the Olaregen shares pursuant to a Pledge and Security Agreement. In the event
that Generex fails to pay the installment due on September 30, 2019, Generex will forfeit the shares allocated to that installment
(1,600,000 Olaregen shares) and Olaregen will be entitled to “claw back” fifty percent (50%) of any and all shares
paid for by the prior payments.
On
March 14, 2019, the Company and Olaregen amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the second tranche of Guaranteed Payments amounting to $600,000 on or before April 1, 2019. The Company remitted
additional payments of $200,000 on April 30, 2019 and $38,500 on May 17, 2019. On May 22, 2019, the Company and Olaregen amended
the agreement to extend the due date of the remaining balance of the second tranche of Guaranteed Payments amounting to $361,500,
the full balance of the third tranche amounting to $3,000,000 and the full balance of the fourth tranche amounting to $1,000,000
(total of $4,361,500) on or before June 30, 2019. The extensions of the due date have no impact on the existing schedule of future
payments or any additional terms within the Note. Olaregen has not filed any notice of default as of the date of publication,
and Generex continues to provide Olaregen with business opportunities continuing the relationship.
In
the event Generex does not make any other payments, its share ownership of Olaregen will be proportionately reduced.
Based
on the Note, in the event any incremental payment is not paid when due, Olaregen has the option to increase the per share purchase
price for all remaining purchased shares to $4.00 per share. Based on $1,400,000 of remitted payments and a Promissory Note balance
of $10,400,000 prior to the first extension agreement on March 14, 2019, Olaregen elected the option to proportionally increase
the per share purchase price to $4.00 for the remaining 2,899,658 of the total 3,282,632 shares to be acquired. The resulting
penalty amounts to an additional $998,633 which has been accrued for the Company to remit to Olaregen pursuant to the acquisition.
Generex
has a limited anti-dilution right under the Purchase Agreement, to ensure that Generex will retain 51% ownership in Olaregen for
a period of time.
Fair
Value of the Olaregen Acquisition
The
following table summarizes the allocation of the preliminary purchase price as of the Olaregen acquisition:
|
|
|
Preliminary
Allocation as of
January 7,
2019
|
|
Cash
and cash equivalents
|
|
$
|
608,419
|
|
|
Prepaid
expenses
|
|
|
20,488
|
|
|
Inventory
|
|
|
408,501
|
|
|
Other
current assets
|
|
|
37,950
|
|
|
Accounts
payable
|
|
|
(216,670
|
)
|
|
Accrued
liabilities
|
|
|
(216,694
|
)
|
|
In-process
research & development
|
|
|
3,980,000
|
|
|
Non-compete
agreement
|
|
|
790,000
|
|
|
Deferred
tax liability
|
|
|
(1,040,173
|
)
|
|
Total
Fair Value of Assets Acquired
|
|
$
|
3,844,925
|
|
|
Consideration:
|
|
|
|
|
|
Cash
paid prior to the time of closing
|
|
|
400,000
|
|
|
Note
receivable from Generex
|
|
|
11,472,663
|
|
|
Goodwill
|
|
$
|
8,027,738
|
|
The
components of the acquired intangible assets were as follows:
|
|
|
Preliminary
Fair
Value
|
|
Average
Estimated Life
|
|
In-process
research and development
|
|
$
|
3,980,000
|
|
|
|
—
|
|
|
Non-compete
agreement
|
|
|
790,000
|
|
|
|
3
|
|
|
|
|
$
|
4,770,000
|
|
|
|
|
|
Deferred
Tax Liability
As
a result of the acquisition of Regentys and Olaregen, the purchase price allocation attributed to deferred tax liability was $889,782
and $1,040,173, respectfully. The Company has deferred tax assets of over $64 million with a full allowance equally to the to
the amount of the deferred tax asset. Although the Company deferred tax assets are in excess of deferred tax liabilities totaling
$1,929,955, the Company cannot offset the deferred tax liabilities against its deferred tax assets since the Company acquired
less than the 80% of both Regentys and Olaregen preventing the Company to consolidate its income tax returns with Regentys and
Olaregen for tax purposes. Therefore, the deferred tax liabilities will be reported separately until such time that the Company
determines otherwise. In addition, the Company acquired approximately 51% of each of Regentys and Olaregen, less than the 80%
required to permit the Company to consolidate with Regentys and Olaregen for tax purposes. Therefore, the deferred tax liabilities
will be reported separately until such time that the Company determines otherwise.
Unaudited
Supplemental Pro Forma Data
Unaudited
pro forma results of operations for the nine months ended April 30, 2019 and 2018 as though the Company acquired Veneto, Olaregen
and Regentys (the “Acquired Companies”) on the first day of each fiscal year are set forth below.
|
|
|
Nine
months Ended
April
30
|
|
|
|
2019
|
|
2018
|
|
Revenues
|
|
$
|
9,434,017
|
|
|
$
|
30,045,595
|
|
|
Cost
of revenues
|
|
|
4,151,810
|
|
|
|
12,011,144
|
|
|
Gross profit
|
|
|
5,282,207
|
|
|
|
18,034,451
|
|
|
Operating
expenses
|
|
|
12,597,408
|
|
|
|
20,674,120
|
|
|
Operating loss
|
|
|
(7,315,201
|
)
|
|
|
(2,639,669
|
)
|
|
Other
income (expense)
|
|
|
245,096
|
|
|
|
(85,809
|
)
|
|
Net loss
|
|
|
(7,070,105
|
)
|
|
|
(2,725,478
|
)
|
|
Net
loss attributable to noncontrolling interests
|
|
|
(1,712,060
|
)
|
|
|
(123,379
|
)
|
|
Net
loss available to common stockholders
|
|
|
(5,358,045
|
)
|
|
|
(2,602,099
|
)
|
|
Comprehensive
net loss
|
|
$
|
(5,358,045
|
)
|
|
$
|
(2,602,099
|
)
|
|
Basic
and diluted net loss per common share
|
|
|
(0.09
|
)
|
|
|
(0.12
|
)
|
Note
10 – Inventory
Inventory
consists of the following components:
|
|
|
April
30,
|
|
July
31,
|
|
|
|
2019
|
|
2018
|
|
Raw materials
|
|
$
|
108,060
|
|
|
$
|
—
|
|
|
Finished
goods
|
|
|
141,961
|
|
|
|
12,075
|
|
|
Total
Inventory
|
|
$
|
250,021
|
|
|
$
|
12,075
|
|
Note
11 – Property and Equipment
Property
and equipment, net consisted of the following:
|
|
|
April
30,
|
|
July
31,
|
|
|
|
2019
|
|
2018
|
|
Computers
and technological assets
|
|
$
|
168,286
|
|
|
$
|
11,365
|
|
|
Machinery and equipment
|
|
|
373,803
|
|
|
|
—
|
|
|
Furniture and fixtures
|
|
|
76,988
|
|
|
|
19,879
|
|
|
Leasehold
Improvements
|
|
|
47,144
|
|
|
|
21,501
|
|
|
|
|
|
666,221
|
|
|
|
52,745
|
|
|
Less
accumulated depreciation
|
|
|
(109,945
|
)
|
|
|
(21,209
|
)
|
|
|
|
$
|
556,276
|
|
|
$
|
31,536
|
|
Depreciation
expense related to property and equipment for the nine months ended April 30, 2019 and April 30, 2018 was $150,744 and $15,016,
respectively.
For
the nine months ended April 30, 2019, the Company had $252,012 of disposals and $11,208 of impairment of long-lived assets. The
$252,012 of disposals pertains to Veneto and was mostly the result of their shift in business operations during March 2019 described
in Notes 1 and 2. The $11,208 impairment of long-lived assets pertains to Grainland Pharmacies Holdings, LLC which ceased to operate
– see Note 9.
Note
12 – Goodwill and Intangible Assets
Goodwill
and Intangible Assets
The
change in the carrying amount of goodwill and other intangible assets for the year ended July 31, 2018 and nine-month period ended
April 30, 2019, is as follows:
|
|
|
Total
|
|
Goodwill
|
|
Other
Intangibles, net
|
|
Balance
as of July 31, 2018
|
|
$
|
3,187,757
|
|
|
$
|
—
|
|
|
$
|
3,187,757
|
|
|
Acquisition of Veneto
(revaluation)
|
|
|
15,898,371
|
|
|
|
13,585,769
|
|
|
|
2,312,602
|
|
|
Purchase of intangible
assets
|
|
|
26,488
|
|
|
|
—
|
|
|
|
26,488
|
|
|
Disposal of intangible
assets
|
|
|
(62,091
|
)
|
|
|
—
|
|
|
|
(62,091
|
)
|
|
Acquisition of Regentys
|
|
|
16,996,438
|
|
|
|
13,485,758
|
|
|
|
3,510,680
|
|
|
Acquisition of Olaregen
|
|
|
12,797,737
|
|
|
|
8,027,737
|
|
|
|
4,770,000
|
|
|
Close of Grainland
Pharmacy
|
|
|
(88,311
|
)
|
|
|
—
|
|
|
|
(88,311
|
)
|
|
Amortization of
Veneto developed software/technology
|
|
|
(39,700
|
)
|
|
|
—
|
|
|
|
(39,700
|
)
|
|
Amortization of
Veneto referral base (initial valuation)
|
|
|
(333
|
)
|
|
|
—
|
|
|
|
(333
|
)
|
|
Amortization of
Veneto non-compete agreement (initial valuation)
|
|
|
(311,667
|
)
|
|
|
—
|
|
|
|
(311,667
|
)
|
|
Amortization
of Olaregen non-compete agreement
|
|
|
(81,525
|
)
|
|
|
—
|
|
|
|
(81,525
|
)
|
|
Balance
as of April 30, 2019
|
|
$
|
48,323,164
|
|
|
$
|
35,099,264
|
|
|
$
|
13,223,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets are generally amortized on a straight-line basis over the useful lives of the assets. The Company is currently not amortizing
the in-process research and development until it becomes commercially viable and placed in service. At the time when the intangible
assets are placed in service the Company will determine a useful life.
Goodwill
represents the excess of the purchase price over the fair market value of net assets acquired. Goodwill for NGDx was $13.4 million
as of the date of the acquisition. When the acquisition transaction closed in January 2017, NGDx was a development-stage entity
and its liabilities exceeded the aggregate value of its assets. Utilizing discounted cash flow (DCF) valuation methodology, Generex
determined that NGDx has forecasted losses throughout the reasonably foreseeable future with a nominal terminal value. In addition,
there was a high degree of uncertainty as to the future cash flows of NGDx. Therefore, the Company concluded that the implied
goodwill arising out of the acquisition was zero and should be properly characterized as fully impaired as of July 31, 2018.
Goodwill
for Veneto was $8,883,982 during first closing and $16,293,948 during the second closing for total goodwill of $25,177,930 pertaining
to the acquisition. Based on the Amended Agreement (the “
Amendment
”) entered into on March 28, 2019 which stipulated
that in lieu any cash payments, the Company would deliver shares of the Company’s common stock (the “Generex Shares”),
the goodwill was revalued. Refer to Note 9 for additional details of the Amendment. Based on the updated analysis valuation, Veneto
goodwill was deemed to have been $13,538,629 as of April 30, 2019.
Note
13 – Notes Payable
On
October 26, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to
sell and sold its Note Due October 26, 2019 (“Note”) in the principal amount of $682,000
.
The purchase
price of the Note was $550,000 from which Generex was required to pay the $15,000 fee of the investor’s counsel. The remaining
$147,000 of principal amount represents original issue discount. The Note does not bear any stated interest in addition to the
original issue discount. The effective interest is 27.5%.
On
November 25, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed
to sell and sold its Note Due November 26, 2019 (“Note”) in the principal amount of $1,060,000. The purchase price
of the Note was $1,000,000. The remaining $60,000 of principal amount represents original issue discount. The Note does not bear
any stated interest in addition to the original issue discount.
On
January 24, 2019, Generex entered into Securities Purchase Agreements with three investors pursuant to which the Company agreed
to sell and sold convertible notes bearing interest at 10% per annum (the “Notes”) in the aggregate principal amount
of $2,110,000. The purchase price of the Notes was $2,010,000 and the remaining $100,000 of principal amount represents original
issue discount. Pursuant to the Securities Purchase Agreements, Generex also sold warrants to the investors to purchase up to
an aggregate 120,570 shares of common stock with the fair value of the warrants as of the date of issuance in excess of the Notes
(Note 14) resulting in full discount of the Notes.
On
February 4, 2019, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to
sell and sold a convertible note bearing interest at 10% per annum (the “Note”) in the principal amount of $750,000.
The purchase price of the Note was $712,500 and the remaining $37,500 of principal amount represents original issue discount.
Pursuant to the Securities Purchase Agreements, the Company also sold to the Investor warrants to purchase up to an aggregate
45,000 shares of common stock with the fair value of the warrants as of the date of issuance in excess of the Notes (Note 14)
resulting in full discount of the Notes.
On
February 15, 2019, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed
to sell and sold a convertible note bearing interest at 10% per annum (the “Note”) in the principal amount of $750,000
.
The
purchase price of the Note was $712,500 and the remaining $37,500 of principal amount represents original issue discount. Pursuant
to the Securities Purchase Agreements, the Company also sold to the Investor warrants to purchase up to an aggregate 57,143 shares
of common stock with the fair value of the warrants as of the date of issuance in excess of the Notes (Note 14) resulting in full
discount of the Notes.
On
April 8, 2019, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to sell
and sold a convertible note bearing interest at 10% per annum (the “Note”) in the principal amount of $530,000
.
The
purchase price of the Note was $505,500 and the remaining $25,000 of principal amount represents original issue discount. Pursuant
to the Securities Purchase Agreements, the Company also sold to the Investor warrants to purchase up to an aggregate 92,842 shares
of common stock with the fair value of the warrants as of the date of issuance in excess of the Notes (Note 14) resulting in full
discount of the Notes.
On
April 23, 2019, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to
sell and sold a convertible note bearing interest at 10% per annum (the “Note”) in the principal amount of $530,000
.
The
purchase price of the Note was $505,500 and the remaining $25,000 of principal amount represents original issue discount. Pursuant
to the Securities Purchase Agreements, the Company also sold to the Investor warrants to purchase up to an aggregate 84,126 shares
of common stock with the fair value of the warrants as of the date of issuance in excess of the Notes (Note 14) resulting in full
discount of the Notes.
For
the three months ended April 30, 2019, the Company issued 279,111 warrants to investors of convertible notes disclosed above.
For the nine months ended April 30, 2019, the Company issued 15,483,681 warrants which consisted of 399,681 issued to
investors of convertible notes disclosed above, 15,000,000 issued to a former shareholder of NGDx upon acquisition of the
remaining 49% interest of the entity (Note 9) and 84,000 issued to AEXG in connection with an arbitrator’s award (Note
4). With the exception of the 84,000 warrants issued to AEXG, all other granted warrants vested immediately upon
issuance.
Pursuant
to its wholly owned subsidiary NuGenerex, the Company completed the acquisition of the assets and 100% of the membership interests
of two pre-operational pharmacies, Empire State Pharmacy Holdings, LLC and Grainland Pharmacy Holdings, LLC, pursuant to the bills
of sale for a consideration of $320,000 Promissory Note. Refer to Note 9 for details.
Pursuant
to the second closing of the acquisition of certain operating assets of Veneto Holdings, L.L.C. and its affiliates, Generex’s
wholly owned subsidiary agreed to assume outstanding debt of Veneto subsidiaries to Compass Bank, including obligations under
a term loan and a revolving line of credit. Claiming three separate types of default, Compass Bank has demanded payment in full
of amounts due under the term loan and revolving line of credit, in an aggregate amount of approximately $3,404,000. Generex believes
it has defenses to such demand, including that the bank was not an intended beneficiary of the subsidiary’s agreement to
assume the debt.
Pursuant
to its acquisition of Regentys, the Company inherited convertible notes with several investors which collectively holds a principal
plus discount balance of $611,761 and has accrued interest of $12,899 as of April 30, 2019.
Note
14 – Derivative Liability
The
Company issued debts that consist of the issuance of convertible notes with variable conversion provisions. The conversion terms
of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock.
The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number
of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of
shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted and
all additional convertible debentures and warrants are included in the value of the derivative. Pursuant to ASC 815-15 Embedded
Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative
liabilities on the issuance date.
Based
on the various convertible notes described in Note 13, the fair value of applicable derivative liabilities on notes, warrants
and change in fair value of derivative liability are as follows as of April 30, 2019:
|
Note
|
|
Date
of Issuance
|
|
Convertible
Note Balance
|
|
Derivative
Liability on Convertible Notes
|
|
Derivative
Liability on Warrants
|
|
Change
in FV of Derivative Liability
|
|
|
A
|
|
|
|
January
24, 2019
|
|
|
$
|
2,110,000
|
|
|
$
|
1,757,644
|
|
|
$
|
56,707
|
|
|
$
|
874,184
|
|
|
|
B
|
|
|
|
February
4, 2019
|
|
|
|
750,000
|
|
|
|
618,349
|
|
|
|
3,660
|
|
|
|
192,037
|
|
|
|
C
|
|
|
|
February
15, 2019
|
|
|
|
750,000
|
|
|
|
571,659
|
|
|
|
48,586
|
|
|
|
52,437
|
|
|
|
D
|
|
|
|
April
8, 2019
|
|
|
|
530,000
|
|
|
|
496,701
|
|
|
|
77,992
|
|
|
|
4,001
|
|
|
|
E
|
|
|
|
April
23, 2019
|
|
|
|
530,000
|
|
|
|
493,160
|
|
|
|
70,533
|
|
|
|
7,508
|
|
|
|
|
|
|
|
Totals
|
|
|
$
|
4,670,000
|
|
|
$
|
3,937,513
|
|
|
$
|
257,478
|
|
|
$
|
1,130,167
|
|
Note
A
Subject
to certain ownership limitations, the Notes will be convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price determined as follows: the lesser of
|
•
|
|
A
price determined as of the date of closing; and
|
|
•
|
|
70%
of the lowest volume weighted average trading price of the common stock on the ten days prior to conversion.
|
Note
B
Subject
to certain ownership limitations, the Note will be convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price determined as follows: the lesser of
|
•
|
|
Average
price for the ten days prior to closing; and
|
|
•
|
|
70%
of the lowest volume weighted average trading price of the common stock on the ten days prior to conversion.
|
Note
C
Subject
to certain ownership limitations, the Note will be convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price determined as follows: the lesser of
|
•
|
|
70%
of the lowest volume weighted average trading price of the common stock on the ten days prior to the date a notice of conversion
is received.
|
Note
D
Subject
to certain ownership limitations, the Note will be convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price determined as follows: the lesser of
|
•
|
|
A
price determined as of the date of closing; and
|
|
•
|
|
70%
of the lowest volume weighted average trading price of the common stock on the ten days prior to (and including) the date
a notice of conversion is received.
|
Note
E
Subject
to certain ownership limitations, the Note will be convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price determined as follows: the lesser of
|
•
|
|
A
price determined as of the date of closing; and
|
|
•
|
|
70%
of the lowest volume weighted average trading price of the common stock on the ten days
prior to (and including) the date a notice of conversion is received.
|
As
a result of the Amended Agreement entered into on March 28, 2019 (“the
Amendment
”) with Veneto and the equity
owners of Veneto (the “Veneto Members”) to restructure the Promissory Note referenced in Note 9, the Company was evaluated
for Veneto Downside Protection associated with the 8,400,000 issued shares in lieu of cash payments against the Promissory Note.
Based on the valuation as of the date of agreement on March 28, 2019, an allocation of $6,424,338 was allocated to derivative
liability for downside protection. As of April 30, 2019, the downside protection had a market change of $570,112 and held a value
of $6,994,450.
Note
15 – Income Taxes:
The
Company has incurred losses since inception, which have generated net operating loss (“NOL”) carryforwards. The NOL
carryforwards arise from both United States and Canadian sources. Pre-tax gain or (loss) arising from domestic operations (United
States) were $(5,415,726) and $35,948,698 for the nine months ended April 30, 2019 and the year ended July 31, 2018, respectively.
Pre-tax (losses) arising from foreign operations (Canada) were $(339,586) and $(150,394) for the nine months ended April 30, 2019
and the year ended July 31, 2018, respectively.
As
of April 30, 2019, the Company has NOL carryforwards in Generex Biotechnology Corporation of approximately $215 million, of which
$200 million will expire in 2019 through 2037, and $14.8 million will not expire. The non-expiring portion is limited to 80% of
the current year taxable income of the respective entity. Generex Pharmaceuticals Inc. has NOL carryforwards of approximately
$36.4 million, which expire in 2024 through 2039. Antigen Express, Inc. has NOL carryforwards of approximately $36.7 million,
of which $35.1 will expire in 2019 through 2038. Regentys Corporation has NOL carryforwards of approximately $6.1 million, of
which $3.5 million will expire in 2033 through 2038. Olaregen Therapeutics, Inc. has NOL carryforwards of $1.6 million which will
not expired. Some of these loss carryforwards are subject to limitation due to the acquisition of Regentys, Olaregen and Antigen
and may be limited in future years due to certain structural ownership changes which have occurred over the last several years
related to the Company’s equity and convertible debenture financing transactions.
As
of April 30, 2019, the Company had no tax benefits which have not been fully allowed for, and no adjustment to its financial position,
results of operations or cash flows was required. The Company has deferred tax assets of over $67 million with a full allowance
equally to the to the amount of the deferred tax asset. The Company does not expect that unrecognized tax benefits will increase
within the next twelve months. As referenced in Note 9, the acquisition of Regentys and Olaregen resulted in the purchase price
allocation attributed to deferred tax liability was $889,782 and $1,040,173, respectfully. Although the Company deferred tax assets
are in excess of deferred tax liabilities totaling $1,929,955, the Company cannot offset the deferred tax liabilities against
its deferred tax assets since the Company acquired less than the 80% of both Regentys and Olaregen preventing the Company to consolidate
its income tax returns with Regentys and Olaregen for tax purposes. Therefore, the deferred tax liabilities will be reported separately
until such time that the Company determines otherwise.
The
Company records interest and penalties related to tax matters within other expense on the accompanying consolidated statement
of operations. These amounts are not material to the consolidated financial statements for the years presented. Generally, tax
years 2015 to 2018 remain open to examination by the Internal Revenue Agency or other tax jurisdictions to which the Company is
subject. The Company’s Canadian tax returns are subject to examination by federal and provincial taxing authorities in Canada.
Generally, tax years 2010 to 2018 remain open to examination by the Canada Revenue Agency or other tax jurisdictions to which
the Company is subject.
Note
16 - Subsequent Events:
The
Company has evaluated subsequent events occurring after the balance sheet date through the date the unaudited condensed interim
consolidated financial statements were issued.
On
May 10, 2019, 4,000,000 shares of Generex common stock was transferred out of the Friends of Generex Biotechnology Investment
Trust (the “Trust”) in consideration of 592,683 Series A voting preferred of Olaregen held by an existing shareholder
in Olaregen. A $2,000,000 promissory note from Genrex to the existing shareholder in Olaregen remains outstanding. The 592,683
represents approximately 10% voting control of Olaregen. The $2,000,000 was extended to have a maturity date of August 1, 2019.
Subsequent to this transaction, there are 2,366,187 Olaregen shares that belong to non-controlling interest shareholders which
represents a 37.9% non-controlling interest.
On
May 10, 2019, the Trust transferred 400,000 shares of Generex common stock to an investor to to satisfy a $1,000,000 obligation.
On
May 22, 2019, the Company and Olaregen amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the second payment and the full balance of the third and fourth guaranteed payments amounting to $4,361,500
on or before June 30, 2019.
On
May 22, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the first tranche of and the full balance of the second guaranteed payments amounting to $4,800,000 on or
before June 30, 2019.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As
used herein, the terms the “Company,” “Generex,” “we,” “us,” or “our”
refer to Generex Biotechnology Corporation, a Delaware corporation. The following discussion and analysis by management provides
information with respect to our financial condition and results of operations for the nine-month periods ended April 30, 2019
and 2018. We engaged in certain acquisition transactions during the nine months ended April 30, 2019 as follows:
|
•
|
|
Effective
October 3, 2018, we purchased certain assets of Veneto Holdings, L.L.C. (“Veneto”),
and its subsidiaries (the “First Closing Assets”). We acquired additional
assets of Veneto effective November 1, 2018 (the “Second Closing Assets”
and together with the First Closing Assets, the “Acquired Veneto Assets.”).
Our balance sheet at April 30, 2019 includes our interest in the Acquired Veneto Assets,
the obligations issued in connection with the purchase of the Acquired Veneto Assets.
Our interest in the results of operations of the First Closing Assets since October 3,
2018 and the Second Closing Assets since November 1, 2018 is included in our Condensed
Interim Consolidated Statement of Operations and Comprehensive Loss for the quarter ended
April 30, 2019.
|
|
•
|
|
Effective
January 7, 2019, we purchased a majority interest in the capital stock of Regentys Corporation.
(“Regentys”). Our balance sheet at April 30, 2019 includes our interest in
Regentys and our interest in the results of operations of Regentys for the period January
7, 2019 through April 30, 2019 is included in our Condensed Interim Consolidated Statement
of Operations and Comprehensive Loss for the nine months ended April 30, 2019.
|
|
•
|
|
Effective
January 7, 2019, we purchased a majority interest in the capital stock of Olaregen Therapeutix
Inc. (“Olaregen”). Our balance sheet at January 31, 2019 includes our interest
in Olaregen and our interest in the results of operations of Olaregen for the period
January 7, 2019 through April 30, 2019 is included in our Condensed Interim Consolidated
Statement of Operations and Comprehensive Loss for the nine months ended April 30, 2019.
|
This
discussion should be read in conjunction with the information contained in
Part I, Item 1A - Risk Factors
and
Part II,
Item 8 - Financial Statements and Supplementary Data
in our Annual Report on Form 10-K for the year ended July 31, 2018, as
amended, and the information contained in
Part I, Item 1 - Financial Statements
in this Quarterly Report on Form 10-Q for
the fiscal quarter ended April 30, 2019.
Forward-Looking
Statements
We
have made statements in this
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
and elsewhere in this Quarterly Report on Form 10-Q of Generex Biotechnology Corporation for the fiscal quarter ended April
30, 2019 that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 (the "Act"). The Act limits our liability in any lawsuit based on forward-looking statements that we have
made. All statements, other than statements of historical facts, included in this Quarterly Report that address activities, events
or developments that we expect or anticipate will or may occur in the future, including such matters as our projections, future
capital expenditures, business strategy, competitive strengths, goals, expansion, market and industry developments and the growth
of our businesses and operations, are forward-looking statements. These statements are based on currently available operating,
financial and competitive information. These statements can be identified by introductory words such as “may,” "expects,"
“anticipates,” "plans," "intends," "believes," "will," "estimates"
or words of similar meaning, and by the fact that they do not relate strictly to historical or current facts. Our forward-looking
statements address, among other things:
|
•
|
|
our
expectations concerning product candidates for our technologies;
|
|
•
|
|
our
expectations concerning funding of obligations related to potential acquisitions and
generally completing acquisitions;
|
|
•
|
|
our
expectations concerning existing or potential development and license agreements for
third-party collaborations, acquisitions and joint ventures;
|
|
•
|
|
our
expectations concerning product candidates for our technologies;
|
|
•
|
|
our
expectations regarding the cost of raw materials and labor, consumer preferences, the
effect of government regulations on the Company’s business, the Company’s
ability to compete in its industry, as well as future economic and other conditions both
generally and in the Company’s specific geographic markets;
|
|
•
|
|
our
expectations of when regulatory submissions may be filed or when regulatory approvals
may be received; and
|
|
•
|
|
our
expectations of when commercial sales of our products in development may commence and
when actual revenue from the product sales may be received.
|
Any
or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions that we might
make or by known or unknown risks and uncertainties. Actual outcomes and results may differ materially from what is expressed
or implied in our forward-looking statements. Among the factors that could affect future results are:
|
•
|
|
the
inherent uncertainties of product development based on our new and as yet not fully proven
technologies;
|
|
•
|
|
the
risks and uncertainties regarding the actual effect on humans of seemingly safe and efficacious
formulations and treatments when tested clinically;
|
|
•
|
|
the
inherent uncertainties associated with clinical trials of product candidates;
|
|
•
|
|
the
inherent uncertainties associated with the process of obtaining regulatory approval to
market product candidates;
|
|
•
|
|
the
inherent uncertainties associated with commercialization of products that have received
regulatory approval;
|
|
•
|
|
the
decline in our stock price; and
|
|
•
|
|
our
current lack of financing for operations and our ability to obtain the necessary financing
to fund our operations and effect our strategic development plan.
|
Additional
factors that could affect future results of our historical business are set forth in
Part I, Item 1A Risk Factors
of our
Annual Report on Form 10-K for the year ended July 31, 2018, as amended. We caution investors that the forward-looking statements
contained in this Quarterly Report must be interpreted and understood in light of conditions and circumstances that exist as of
the date of this Quarterly Report. We expressly disclaim any obligation or undertaking to update or revise forward-looking statements
to reflect any changes in management's expectations resulting from future events or changes in the conditions or circumstances
upon which such expectations are based.
Executive
Summary
Preliminary
Note
On
January 17, 2017, we acquired a 51% interest in NuGenerex Diagnostics LLC (“NGDx”), formerly Hema Diagnostic Systems.
On December 1, 2018, we acquired the remaining equity of NGDx, and NGDx became a wholly owned subsidiary. We intend to focus resources
on NGDx’ business as well as other potential acquisition candidates going forward, but do not intend to discontinue our
pre-Acquisition activities.
We
intend to focus resources on NGDx’s business, and on the businesses of Regentys, Olaregen and the MSAO business acquired
from Veneto, as well as additional acquisition targets, but do not intend to discontinue our historical activities. However, we
will not pursue our historical business if we do not receive substantial financing for that purpose. Olaregen is launching an
FDA 5 a wound healing product.
On
October 3, 2018, we acquired the First Closing Assets from Veneto, primarily consisting of the operating assets of (a) system
dispensing pharmacies, (b) a central adjudicating pharmacy, (c)a wholesale pharmaceutical purchasing company, and (d) an in-network
laboratory.
On
November 1, 2018 we consummated the acquisition of the Second Closing Assets, consisting primarily of Veneto’s management
services organization business and two additional ancillary services. The aggregate price for the First Closing Assets and the
Second Closing Assets was $30,000,000. We issued a promissory note in the principal amount of $35,000,000 (the “
New Note
”)
consisting of the $30,000,000 purchase price and a $5,000,000 original issue discount, as the sole consideration payable on the
Second Closing Date. In addition, we agreed to assume approximately $3.4 million in outstanding institutional debt of Veneto subsidiaries,
but will have use of Veneto cash which would otherwise have been applied to paying down the debt.
On
March 28, 2019, the Company entered into an Amendment Agreement (the “Amendment”) with Veneto and the equity owners
of Veneto (the “Veneto Members”) entered into restructuring the payment of the New Note that provided in lieu of any
cash payments, the Company would delivery 8,400,000 shares of the Company’s common stock (the “Generex Shares”)
to be delivered on or before April 22, 2019; plus an aggregate 5,500,000 shares of the Company’s common stock of the Company’s
subsidiary, Antigen Express, Inc.
|
•
|
|
The
Company and the Veneto Members established a value of the Company’s common stock
related to this conversion of debt at $2.50/share, but upon a final pay date of June
14, 2020 (the “Pay Date”) the Veneto Members will receive additional compensatory
shares if following results in a positive number: $2.50 (the “Strike Price")
per Generex Shares times the shares issued (8,400,000) minus the Sale Price of the proceeds
of sale of any Generex Shares by the Members in the interim (“Sale Price”)
times the number of Generex Shares sold (“Shares Sold”) divided by the Spot
Price of the price of the common voting shares of the Company’s common stock on
the Pay Date (“Spot Price”). Any sale above the Strike Price shall be discarded.
|
|
•
|
|
The
Sale Price shall, for calculation under this agreement shall be no less than $1.50 per
share. Any actual proceeds of sale that are less than $1.50 per shares shall be calculated
at $1.50 regardless of the actual proceeds of sale. As such, the Veneto Members shall
have downside protection from $2.50 to $1.50.
|
|
•
|
|
The
downside protection lapses if the volume weighted average price of the Generex Shares,
in any period of 90 consecutive trading days, is over $5 per share.
|
On
January 7, 2019, we acquired a majority interest in Regentys Corporation for an aggregate of $15,000,000. $400,000 was paid in
cash and the remainder was paid by the issuance of a promissory note. $650,000 principal was paid against the note as of April
30, 2019 in addition to the $400,000 initial payment. Regentys is developing a non-surgical treatment for inflammatory bowel diseases
such as ulcerative colitis and Crohn’s disease.
On
January 7, 2019, we acquired a majority interest in Olaregen Therapeutix Inc. (“Olaregen”) for an aggregate of $12,000,000.
$400,000 was paid in cash and the remainder was paid by the issuance of a promissory note. $1,200,000 principal was paid against
the note as of April 30, 2019 and an additional $38,500 was paid subsequently for a total aggregate of $1,238,500 of principal
payments in addition to the $400,000 initial payment. Olaregen is launching an FDA-510(k) cleared wound care product.
Overview
of Business
NGDx
Diagnostic Products
.
Our
majority owned subsidiary, NuGenerex Diagnostics LLC (“NGDx”), formerly Hema Diagnostic Systems, is in the business
of developing, manufacturing, and distributing of in-vitro medical diagnostics for infectious diseases administered at the point
of care level with results as soon as 10-15 minutes. We manufacture and sell rapid diagnostic devices based upon our own proprietary
EXPRESS platforms as well as cassette devices based on customary designs used generally in the industry.
Since
its founding, NGDx has been developing and continues to develop an expanding line of Rapid Diagnostic Tests (RDTs) including those
for the following infectious diseases such as Human Immunodeficiency Virus (HIV) – ½ w/p24Ab, tuberculosis-XT, malaria,
hepatitis, syphilis, typhoid, dengue and other infectious diseases.
Today,
we have developed a substantial line of RDT’s known as ready to “go-to-market.”
Due
to the potential infectious character of the whole blood test sample, our Express series of RDTs are designed to perform and deliver
test results while sealed within the Express housing, carefully controlling the potentially infectious test sample. This design
helps to increase our ability to control the possibility of cross-contamination. Most of our competitors’ products, while
inexpensive, are not as user-friendly allowing for increased user-error and requires substantially more training and have greater
risk of cross-contamination.
We
have been designing and engineering delivery systems that incorporate advanced technologies of rapid test strips for use in our
Express series of devices and which yield a rapid response for point-of-care patient testing and treatment.
Each
RDT incorporates an accurate test strip that has been striped with specific antigens or antibodies combined in a proprietary cocktail
and then incorporated into an easy-to-use and user-friendly delivery system. The NGDx delivery systems include our standard “cassette”
design, our patented “Express” housing device as well as our new “Express II”.
Each
system delivers its own advantages which enhance the use, application and performance of each diagnostic. This ease of use in
the Express delivery systems ensure that our RDTs perform efficiently and effectively providing the most accurate and repeatable
test results available while, at the same time, minimizing the transference of a potentially infected blood sample.
The
Company maintains a Federal Drug Administration (FDA) registered facility in Miramar, Florida and is certified under both ISO9001
and ISO13485 for the Design, Development, Production and Distribution of the in-vitro devices. Approval of our HIV rapid test
has been issued by the United States Agency for International Development (USAID). Additionally, some of our products qualified
for and carry the European Union “CE” Mark, which allow us to enter into CE Member countries subject to individual
country requirements. Currently, we have two malaria rapid tests approved under World Health Organization (WHO) guidelines. Our
NGDx products have also received registrations and approvals issued by other foreign governments. NGDx is currently in the planning
phase for entering into the newly announced, WHO “Pre-Qualified Approval” process for other NGDx tests. This process
allows expedited approval of rapid tests, reducing the current 24-30 month process down to approximately 6-9 months. WHO approval
is necessary for our products to be used in those countries which rely upon the expertise of the WHO, as well as for NGO funding
for the purchase of diagnostic products.
Pharmacy
and MSO Business
On
October 3, 2018, we acquired from Veneto the operating assets of system dispensing pharmacies, (b) a central adjudicating pharmacy,
(c) a wholesale pharmaceutical purchasing company, and (d) an in-network laboratory.
On
November 1, 2018, we acquired Veneto’s management services organization (MSO) business and two additional ancillary services.
Regentys
Business
Regentys
is a development stage, regenerative medicine company focused on developing treatments for patients with gastrointestinal (GI)
disorders. Their first product, ExtraCellular Matrix Hydrogel (ECMH), is a first-in-class, non-pharmacologic, non-surgical treatment
option for patients suffering from Ulcerative Colitis.
Olaregen
Business
.
Olaregen’s
primary product, Excellagen, is an FDA-510(k) cleared aseptically-manufactured, syringe-based, ready to use 3-dimensional wound
conforming matrix that supports a favorable wound healing environment. Excellagen is indicated for the management of wounds including;
partial and full-thickness wounds, pressure ulcers, venous ulcers, diabetic ulcers, chronic vascular ulcers, tunneled/undermined
wounds, surgical wounds (donor sites/graft, post-Mohs surgery, post-laser surgery, podiatric, wound dehiscence), trauma wounds
(abrasions, lacerations, second-degree burns and skin tears) and draining wounds.
Generex
Historical Business
We
have historically engaged primarily in the research and development of drug delivery systems and technologies. Our primary focus
at the present time is our proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal)
cavity using a hand-held aerosol applicator. Through our wholly-owned subsidiary, Antigen, we have expanded our focus to include
immunomedicines incorporating proprietary vaccine formulations. On January 18, 2017, we acquired a majority of the equity interests
in NuGenerex Diagnostics LLC (“NGDx”), formerly Hema Diagnostic Systems, LLC. On December 1, 2018, we acquired the
remainder of the NGDx equity interests for nominal consideration provided that the Generex stock and warrants issued to the NGDx
equity owners in connection with the initial acquisition have a specified value and we have registered for resale the Company’s
shares issued to the NGDx equity owners. NGDx is in the business of developing, manufacturing, and distributing of in-vitro medical
diagnostics for infectious diseases administered at the point of care level with results as soon as 10-15 minutes. NGDx manufactures
and sells rapid diagnostic devices based upon our own proprietary EXPRESS technology as well as cassette devices based on customary
designs used generally in the industry. We intend to focus on NGDx’s business and in identifying other areas for expansion,
but do not intend to discontinue our pre-Acquisition activities.
We
believe that our buccal delivery technology is a platform technology that has application to many large molecule drugs and provides
a convenient, non-invasive, accurate and cost-effective way to administer such drugs. We have identified several large molecule
drugs as possible candidates for development, including estrogen, heparin, monoclonal antibodies, human growth hormone and fertility
hormones, but to date have focused our development efforts primarily on one pharmaceutical product, Generex Oral-lyn™, an
insulin formulation administered as a fine spray into the oral cavity using our proprietary hand-held aerosol spray applicator
known as RapidMist™.
Our
subsidiary, Antigen, concentrates on developing proprietary vaccine formulations that work by stimulating the immune system to
either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self-proteins
and allergens). Our immunomedicine products are based on two platform technologies and are in the early stages of development.
Prior to exhausting our funds, we continued clinical development of Antigen’s synthetic peptide vaccines designed to stimulate
a potent and specific immune response against tumors expressing the HER-2/neu oncogene for patients with HER-2/neu positive breast
cancer in a Phase II clinical trial and patients with prostate cancer and against avian influenza in two Phase I clinical trials.
We also initiated an additional Phase I clinical trial in patients with either breast or ovarian cancer. The synthetic
vaccine technology has certain advantages for pandemic or potentially pandemic viruses, such as the H5N1 avian and H1N1 swine
flu. We have established collaborations with clinical investigators at academic centers to advance these technologies.
We
operate in three segments. Our historical business operates in the research and development of drug delivery systems and technologies
for metabolic and immunological diseases. NGDx operates in the development, manufacture and distribution of in-vitro medical diagnostic
devices (RDTs) administered at the point of care level. Our subsidiary, NuGenerex Distribution Solutions 2, LLC, which acquired
the Veneto assets, operates in pharmaceutical services.
Accounting
for Research and Development Projects
Our
major research and development projects are the refinement of our platform buccal delivery technology, our buccal insulin project
(Generex Oral-lyn™) and Antigen’s peptide immunotherapeutic vaccines.
We
did not expend any material resources on our buccal insulin (Generex Oral-lyn™) or other oral delivery products in the fiscal
quarters ended April 30, 2019 and 2018 due to lack of funds. The completion of further late-stage trials in Canada and the United
States may require significantly greater funds than we currently have on hand.
During
the nine months ended April 30, 2019 and 2018, we paid $342,000 to NSABP for clinical trials for additional research and development
relating to Antigen’s peptide immune therapeutic vaccines and related technologies due to our lack of cash. One Antigen
vaccine is currently in Phase II clinical trials in the United States involving patients with HER-2/neu positive breast cancer,
and we have completed a Phase I clinical trial for an Antigen vaccine for H5N1 avian influenza which was conducted at the Lebanese-Canadian
Hospital in Beirut. Antigen’s prostate cancer vaccine based on AE37 has been tested in a completed (August 2009) Phase I
clinical trial in Greece.
During
the nine months April 30, 2019 and 2018, NGDx expended $443,504 and $380,781 on research and development relating to its rapid
diagnostic tests. NGDx expects to expend resources on its rapid diagnostic test during the remainder fiscal year ending July 31,
2019.
Because
of various uncertainties, we cannot predict the timing of completion and commercialization of our buccal insulin or Antigen’s
peptide immunotherapeutic vaccines or related technologies. These uncertainties include the success of current studies net operating
losses attributed to NGDx, our ability to obtain the required financing and the time required to obtain regulatory approval even
if our research and development efforts are completed and successful, our ability to enter into collaborative marketing and distribution
agreements with third-parties, and the success of such marketing and distribution arrangements. For the same reasons, we cannot
predict when any products may begin to produce net cash inflows.
Critical
Accounting Policies
There
are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of our Form 10-K for the year ended July 31, 2018 filed with the SEC on October
26, 2018, except as follows:
We
have adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities
is necessary pursuant to ASC 815 due to our inability to demonstrate we have sufficient authorized shares, shares will be allocated
on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation
of authorized but unissued shares, and all future instruments being classified as a derivative liability, with the exception of
instruments related to share-based compensation issued to employees or directors.
Our
discussion and analysis of our financial condition and results of operations is based on our condensed interim consolidated financial
statements which have been prepared in conformity with accounting principles generally accepted in the United States of America.
It requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
We
consider certain accounting policies related to impairment of long-lived assets, intangible assets and accrued liabilities to
be critical to our business operations and the understanding of our results of operations:
Going
Concern.
As shown in the accompanying condensed interim consolidated financial statements, we have not been profitable
and have reported recurring losses from operations. These factors raise substantial doubt about our ability to continue
to operate in the normal course of business. The accompanying consolidated financial statements do not include any
adjustments that might be necessary should we be unable to continue as a going concern.
Impairment
of Long-Lived Assets
. Management reviews for impairment whenever events or changes in circumstances indicate that the carrying
amount of property and equipment may not be recoverable under the provisions of accounting for the impairment of long-lived assets.
If it is determined that an impairment loss has occurred based upon expected future cash flows, the loss is recognized in the
Condensed Interim Consolidated Statement of Operations.
Intangible
Assets
. We have intangible assets related to patents. The determination of the related estimated useful lives and whether
or not these assets are impaired involves significant judgments. In assessing the recoverability of these intangible assets, we
use an estimate of undiscounted operating income and related cash flows over the remaining useful life, market conditions and
other factors to determine the recoverability of the asset. If these estimates or their related assumptions change in the future,
we may be required to record impairment charges against these assets
Inventory
.
Inventories, which consist of both raw materials and finished goods, is valued at the lower of cost, determined by the first-in,
first-out method, or market value. Inventory costs are comprised primarily of product, labor, freight and duty. The Company writes
down inventory for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. For the nine months ending April 30, 2019, the Company had a
write down of inventory for $645,351 related to obsolescence which is classified as cost of goods sold.
Share-based
compensation.
Management determines value of stock-based compensation to employees in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation. Management determines
value of stock-based compensation to non-employees and consultants in accordance with and ASC 505, Equity-Based Payments to Non-Employees.
Derivative
warrant liability
. FASB ASC 815, Derivatives and Hedging, requires all derivatives to be recorded on the condensed
interim consolidated balance sheet at fair value for fiscal years beginning after December 15, 2008. As a result, certain
derivative warrant liabilities (namely those with a price protection feature) are now separately valued as of August 1, 2009 and
accounted for on our balance sheet, with any changes in fair value recorded in earnings. On our condensed interim consolidated
balance sheets as of April 30, 2019 and July 31, 2018, we used the binomial lattice model to estimate the fair value of these
warrants. Key assumptions of the binomial lattice option-pricing model include the market price of our stock, the exercise price
of the warrants, applicable volatility rates, risk-free interest rates, expected dividends and the instrument’s remaining
term. These assumptions require significant management judgment. In addition, changes in any of these variables during
a period can result in material changes in the fair value (and resultant gains or losses) of this derivative instrument.
As
reported above, the Company has a sequencing policy regarding share settlement wherein instruments with the earliest issuance
date would be settled first. The sequencing policy also considers contingently issuable additional shares, such as those issuable
upon a stock split, to have an issuance date to coincide with the event giving rise to the additional shares.
On
January 24, 2019, the company entered into a note payable with an unrelated party at a percentage discount (variable) exercise
price which causes the number to be converted into a number of common shares that “approach infinity”, as the underlying
stock price could approach zero. Accordingly, all convertible instruments issued after January 24, 2019 are considered derivatives
according to the Company’s sequencing policy.
Results
of Operations
Three
months ended April 30, 2019 compared to three months ended April 30, 2018
We had a net loss for the three months ended
April 30, 2019 of $11,153,308 and income of $3,432,093 in the corresponding three months of the prior fiscal year. The net loss
for the three months ended April 30, 2019 was caused primarily by general and administrative expenses which was $8,656,877 which
represented a $7,972,487 increase compared to the three months of the prior fiscal year which had a balance of $684,390. The income
for the three months of the prior fiscal year was caused primarily by the change in fair value of contingent purchase consideration
which was $4,573,493 compared to the three months ended April 30, 2019 which had a balance of $0.
Of the $7,972,487 increase in general and administrative
expenses in the quarter ended April 30, 2019 versus the comparative previous fiscal quarter, $3,006,813 was due to the acquisitions
of Veneto, Regentys and Olaregen which had not yet been acquired in the previous fiscal year. The increase in general and administrative
expenses is also attributed to an increase of $3,103,120 in professional services which is mostly comprised of legal fees due to
the newly acquired entities. Due diligence fees alone accounted for $2,752,235 of these fees.
The change in fair value of contingent purchase
consideration in the three months ended April 30, 2019 was $0 compared to the previous year’s fiscal three months of $4,573,493
due to the change in fair value of the warrant and Call Option related to purchasing the remaining interest of NuGenerex Diagnostics
LLC (“NGDx”), formerly Hema Diagnostic Systems, LLC. The Call Option was exercised November 30, 2018.
Our interest expense in the three months ended April 30, 2019 was $2,328,703 compared to the previous year’s
fiscal three months of $149,590 which is due to the increase of debt during the current fiscal year as the Company has entered
into various new promissory notes during the current fiscal year.
Nine
months ended April 30, 2019 compared to nine months ended April 30, 2018
We had a net loss for the nine months ended
April 30, 2019 of $5,755,312 and income of $21,129,021 in the corresponding nine months of the prior fiscal year. The net loss
for the nine months ended April 30, 2019 was caused primairy by general and administrative expenses which was $17,428,182 which
represented a $15,627,742 increase compared to the nine months of the prior fiscal year which had a balance of $1,800,440. The
income for the nine months of the prior fiscal year was caused primarily by the change in fair value of contingent purchase consideration
which was $23,350,122 which represented an $8,202,531 increase compared to the nine months ended April 30, 2019 which had a balance
of $15,147,591.
Of the $15,627,742 increase in general and
administrative expenses in the nine months ended April 30, 2019 versus the comparative previous fiscal quarter, $8,211,184 was
due to the acquisitions of Veneto, Regentys and Olaregen which had not yet been acquired in the previous fiscal year. The increase
in general and administrative expenses is also attributed to an increase of $3,701,982 in professional services which is mostly
comprised of legal fees due to the newly acquired entities. Due diligence fees alone accounted for $2,752,235 of these fees.
The change in fair value of contingent purchase
consideration in the nine months ended April 30, 2019 was $15,147,591 compared to the previous year’s fiscal three months
of $23,350,122 due to the change in fair value of the warrant and Call Option related to purchasing the remaining interest of NuGenerex
Diagnostics LLC (“NGDx”), formerly Hema Diagnostic Systems, LLC. The Call Option was exercised November 30, 2018.
Our interest expense in the nine months ended April 30, 2019 was $4,591,639 compared to the previous year’s
fiscal nine months of $426,780 which is due to the increase of debt during the current fiscal year as the Company has entered
into various new promissory notes.
Financial
Condition, Liquidity and Resources
Sources
of Liquidity
To
date we have financed our development stage activities primarily through private placements of our common stock, securities convertible
into our common stock, and investor loans. We will require additional funds to support our working capital requirements and any
development or other activities. NGDx will require additional funds to support its working capital requirements and any development
or other activities or will need to curtail its research and development and other planned activities or suspend operations. NGDx
will no longer be able to rely on its former primary owner for necessary financing. Going forward, NGDx will rely on Generex financing
activities to fund NGDx operations, development and other activities.
Our
April 30, 2019 cash position was not sufficient for 12 months of operations. Anticipated revenues associated with the Veneto acquisition
are expected to alter the cash flow landscape.
While
we have financed our development stage activities to date primarily through private placements of our common stock and securities
convertible into our common stock, as well as investor notes, and raised approximately $4,000,000 during fiscal 2017 (including
proceeds from warrant exercises, short term loans and the issuance of preferred stock), our cash balances have been low throughout
fiscal 2018. We did not raise any cash from the sale of our securities in fiscal 2018.
Management
may seek to meet all or some of our operating cash flow requirements through financing activities, such as private placement of
our common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or
acquisition opportunities.
In
addition, management is actively pursuing financial and strategic alternatives, including strategic investments and divestitures,
industry collaboration activities, and potential strategic partners. Management has sold non-essential real estate assets which
are classified as Assets Held for Investment to augment the company’s cash position and reduce its long-term debt.
We
will continue to require substantial funds to continue research and development, including preclinical studies and clinical trials
of our product candidates, further clinical trials for Oral-lyn™ and to commence sales and marketing efforts if the FDA
or other regulatory approvals are obtained.
Financings
Following
is a summary of the financing activities that we have completed since the end of fiscal 2018.
Financing
– October 2018
Investor
Note Secured by CEO’s Stock
On
October 26, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to
sell and sold its Note Due October 26, 2019 (“Note”) in the principal amount of $682,000
.
The purchase
price of the Note was $550,000 from which Generex was required to pay the $15,000 fee of the investor’s counsel. The remaining
$147,000 of principal amount represents original issue discount. The Note does not bear any stated interest in addition to the
original issue discount.
Joseph
Moscato, the Company’s President & Chief Executive Officer, has guaranteed the Company’s obligations under the
Note. In addition, Mr. Moscato has pledged as collateral for the guaranty 156,400 shares of the Company’s common stock.
The
Note provided it would become due and payable prior to maturity if the Company’s common stock is not listed for trading
on a NASDAQ market on or before ninety (90) days after the date of the Note. The listing has not occurred. In January 2019, the
Note holder demanded repayment on this basis and in March 2019, filed suit to recover the principal amount of the Note plus interest. The
Company has filed its response.
Financing
– November 2018
Investor
Note Secured by CEO’s Stock
On
November 25, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed
to sell and sold its Note due November 26, 2019 (“Note”) in the principal amount of $1,060,000
.
The purchase
price of the Note was $1,000,000. The remaining $60,000 of principal amount represents original issue discount. The Note does
not bear any stated interest in addition to the original issue discount.
Joseph
Moscato, the Company’s President & Chief Executive Officer, has guaranteed the Company’s obligations under the
Note. In addition, Mr. Moscato has pledged as collateral for the guaranty 400,000 shares of the Company’s post-stock dividend
Common Stock owned by him. At the option of either the investor or Mr. Moscato, all or any part of the loan can be paid with shares
of the pledged stock valued at $2.50 per share, without default.
The
Company will become obligated to repay the Note prior to maturity upon the occurrence of certain other triggering events, including,
breach of the covenants under the Note or Securities Purchase Agreement, breach of certain other contractual obligations, and
the occurrence of a change in control of the Company.
If
any of these events occur, or if the Company does not pay the principal amount when due, interest will accrue at the rate of 24%
per annum on outstanding balance under the Note until paid in full. Late fees will apply on all amounts not paid within five trading
days of the payment date.
January
– April 2019 Convertible Note Transactions
Between
January 24, 2019 and January 31, 2019, the Company issues convertible notes bearing interest at 10% per annum (the “Notes”)
in the aggregate principal amount of $2,110,000
.
The purchase price of the Notes was $1,990,000 and the remaining
$120,000 of principal amount represents original issue discount. Pursuant to the Securities Purchase Agreements, the Company also
sold to the investors warrants to purchase up to an aggregate 120,570 shares of common stock.
Between
February 4 and February 18, 2019, the Company issued two Notes with a combined aggregate principal amount of $1,500,000. Pursuant
to the Securities Purchase Agreements, the Company also sold to the investors warrants to purchase up to an aggregate 102,143
shares of common stock.
Between
April 8 and April 23, 2019, the Company issued two Notes with a combined aggregate principal amount of $1,060,000. Pursuant to
the Securities Purchase Agreements, the Company also sold to the investors warrants to purchase up to an aggregate 176,968 shares
of common stock
Subject
to certain ownership limitations, the Notes will be convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price determined as the lesser of:
|
•
|
|
A
price determined as of the date of closing; and
|
|
•
|
|
70%
of the lowest volume weighted average trading price of the common stock on the ten days
prior to conversion.
|
Cash
Flows for the Nine Months ended April 30, 2019
For
the fiscal quarter ended April 30, 2019, we used $8,058,387 in cash to fund our operating activities. The use for operating activities
included a net loss of $5,755,312, changes in fair value of contingent purchase consideration of $15,147,591, changes in fair
value of derivative liabilities - convertible notes of $1,034,180 and change in derivative liabilities – warrants of $95,986.
Changes to working capital included an increase of $6,663,603 related to accounts payable and accrued expenses.
The
use of cash was offset by non-cash expenses of $550,285 related to depreciation and amortization, $1,530,312 related to the issuance
of stock options as compensation, $99,519 impairment of long-lived assets, $1,128,613 amortization of debt discount, $959,974
non-cash interest expense from issuance on debt (derivative) and $570,112 change in fair value of downside protection.
In
the nine months ended April 30, 2019, we had net cash used in investing activities of $2,282,371 primarily relating to cash received
in the acquisition of Veneto.
We
had cash provided by financing activities in the nine months ended April 30, 2019 of $6,128,146, most of which pertained to proceeds
from investors of $5,929,910.
Our
net working capital April 30, 2019 declined to negative $25,160,088 from negative $24,040,769 at July 31, 2018, which was attributed
primarily to an increase in accounts payable and accrued expenses as well as notes payable.
Funding
Requirements and Commitments
In
addition to our commitments under the financings described above, we have the following obligations:
Veneto
Acquisition Related Debt
On
November 1, 2018, in connection with the completion of the acquisition of the pharmacy, management service organization and other
assets of Veneto, the Company’s subsidiary, NuGenerex Distribution Solutions 2, LLC (“NuGenerex”), issued Veneto
a promissory note in the principal amount of $35,000,000. The note calls for payment in full on or before January 15, 2019 with
interest at an annual rate of 12% on the $30,000,000 portion of the new note representing the purchase price of the assets. The
note is guaranteed by Generex and Joseph Moscato and secured by a first priority security interest in all of Generex’s assets.
Mr. Moscato’s guaranty is limited to the principal amount of $15,000,000.
On
January 15, 2019, we entered into an Amendment Agreement (the “
Amendment
”) with Veneto and the equity owners
of Veneto entered into restructuring payment of the note as follows:
|
•
|
|
Payment
of $15,750,000 by delivery of Generex common stock, initially valued at $2.50 per share.
|
|
•
|
|
If,
on the first to occur of (i) the ninetieth (90
th
) day after closing under
the Amendment and (ii) the effective date of a registration statement filed with the
SEC including the Generex shares pursuant to the Amendment, the average volume weighted
average price (“VWAP”) of Generex common stock for the preceding five (5)
trading days is less than $2.50 share, Generex will deliver additional Generex Shares
such that the aggregate number of shares delivered under this Agreement equals $15,750,000
÷ such average VWAP.
|
|
•
|
|
The
remainder of the principal and interest under the note shall be payable on April 15,
2019; provided that on that maturity date, Veneto shall have the option of (i) payment
of principal and interest in cash and (ii) payment of principal and interest by Generex’s
delivery of Generex Shares valued at $2.50 per share.
|
|
•
|
|
All
Generex shares issued pursuant to the Amendment will be delivered pro rata to the six
equity owners of Veneto as distributions from Veneto.
|
On
March 28, 2019, the Company entered into an Amendment Agreement (the “
Amendment
”) with Veneto and the equity
owners of Veneto (the “Veneto Members”) to restructure the payment of the New Note that provided in lieu of any cash
payments, the Company would deliver 8,400,000 shares of the Company’s common stock (the “Generex Shares”) to
be delivered on or before April 22, 2019; plus an aggregate 5,500,000 shares of the Company’s subsidiary, common stock of
Antigen Express, Inc. The Company and the Veneto Members established a value of the Company’s common stock related to this
conversion of debt at $2.50/share, but upon a final pay date of June 14, 2020 (the “Pay Date”) the Veneto Members
will receive additional compensatory shares if following results in a positive number: $2.50 (the “Strike Price") per
Generex Shares times the shares issued (8,400,000) minus the Sale Price of the proceeds of sale of any Generex Shares by the Members
in the interim (“Sale Price”) times the number of Generex Shares sold (“Shares Sold”) divided by the Spot
Price of the price of the common voting shares of the Company’s common stock on the Pay Date (“Spot Price”).
Any sale above the Strike Price shall be discarded. The Sale Price shall, for calculation under this agreement shall be no less
than $1.50 per share. Any actual proceeds of sale that are less than $1.50 per shares shall be calculated at $1.50 regardless
of the actual proceeds of sale. As such, the Veneto Members shall have downside protection from $2.50 to $1.50. The downside protection
lapses if the volume weighted average price of the Generex Shares, in any period of 90 consecutive trading days, is over $5 per
share.
As
a result of the Amended Agreement entered into on March 28, 2019 (“the
Amendment
”) with Veneto and the equity
owners of Veneto (the “Veneto Members”) to restructure the Promissory Note referenced in Note 9, the Company was evaluated
for Veneto Downside Protection associated with the 8,400,000 issued shares in lieu of cash payments against the Promissory Note.
Based on the valuation as of the date of agreement on March 28, 2019, an allocation of $6,424,338 was allocated to derivative
liability for Veneto Downside Protection. As of April 30, 2019, the downside protection had a market change of $570,112 and held
a value of $6,994,450.
As
of the date of filing this quarterly report, we had not yet delivered the shares of Generex Common Stock to the Veneto equity
owners and the Amendment Agreement has not closed and subject to change.
In
addition, pursuant to the Amendment, NuGenerex agreed to assume approximately $3.8 million in outstanding institutional debt of
Veneto subsidiaries.
Olaregen
and Regentys Acquisitions
Olaregen
As
of January 7, 2019, the Company completed a definitive Stock Purchase Agreement and related documents relating to the Company’s
purchase of 3,282,632 newly issued shares of the Olaregen common stock representing 51% percent of the issued and outstanding
capital stock of Olaregen for an aggregate $12,000,000.
In
addition to $400,000 paid to Olaregen upon signing of the LOI, the purchase price for the Olaregen shares will consist of the
following cash payments:
|
•
|
|
$800,000
on or before January 15, 2019. The Company has paid this installment.
|
|
•
|
|
$800,000
on or before January 31, 2019. As of the date this quarterly report was filed, the Company
has paid $438,500 of this installment and remaining balance of $361,500 is payable on
or before June 30, 2019 per extension in amended agreement.
|
|
•
|
|
$3,000,000
on or before February 28, 2019. As of the date this quarterly report was filed, the Company
has not paid this installment. As of the date is quarterly report was filed, the Company
has not yet paid this installment and the full balance of $3,000,000 is payable on or
before June 30, 2019 per extension in amended agreement.
|
|
•
|
|
$1,000,000
on or before May 31, 2019. As of the date this quarterly report was filed, the Company
has not paid this installment. As of the date is quarterly report was filed, the Company
has not yet paid this installment and the full balance of $1,000,000 is payable on or
before June 30, 2019 per extension in amended agreement.
|
|
•
|
|
$6,000,000
on or before September 30, 2019.
|
Generex
issued its promissory note in the amount of $11,600,000 (the “Note’) representing its obligation to pay the above
amounts. The Note is secured by a pledge of the Olaregen Shares pursuant to a Pledge and Security Agreement.
On
March 14, 2019, the Company and Olaregen amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the first tranche of Guaranteed Payments amounting to $600,000 on or before April 1, 2019. The Company remitted
additional payments of $200,000 on April 30, 2019 and $38,500 on May 17, 2019. On May 22, 2019, the Company and Olaregen amended
the agreement to extend the due date of the remaining balance of the second tranche of Guaranteed Payments amounting to $361,500,
the full balance of the third tranche amounting to $3,000,000 and the full balance of the fourth tranche amounting to $1,000,000
(total balance of $4,361,500) on or before June 30, 2019. The extension of this due date has no impact on the existing schedule
of future payments or any additional terms within the Note. Olaregen has not filed any notice of default as of the date of publication,
and Generex continues to provide Olaregen with business opportunities continuing the relationship.
In
the event Generex does not make any other payments, its share ownership of Olaregen will be proportionately reduced.
Based
on the Note, in the event any incremental payment is not paid when due, Olaregen has the option to increase the per share purchase
price for all remaining purchased shares to $4.00 per share. Based on $1,400,000 of remitted payments and a Promissory Note balance
of $10,400,000 prior to the first extension agreement on March 14, 2019, Olaregen elected the option to proportionally increase
the per share purchase price to $4.00 for the remaining 2,899,658 of the total 3,282,632 shares to be acquired. This will result
in an additional $998,633 which has been accrued for the Company to remit to Olaregen pursuant to the acquisition. This additional
amount will be penalty amounts will be paid out proportionately with future payments. For example, the $361,500 balance of the
second tranche, at the original purchase price of $3.65 per share, would have paid for 99,041 Olaregen shares. The Company will
now be required to pay 99,041 x $4.00 = 396,164 to complete the second tranche.
Generex
has a limited anti-dilution right under the Purchase Agreement, to ensure that Generex will retain 51% ownership in Olaregen for
a period of time.
Regentys
On
January 7, 2019 the Company completed a definitive Stock Purchase Agreement and related documents relating to the Company’s
purchase of 12,048,161 newly issued shares of the Regentys common stock representing 51% percent of the issued and outstanding
capital stock of Regentys (“Regentys Shares”) for an aggregate of $15,000,000.
In
addition to $400,000 paid to Regentys upon signing of the LOI, the purchase price for the Regentys shares consist of the following
cash payments, with the proceeds intended to be used for specific purposes, as noted:
|
•
|
|
$3,450,000
to initiate pre-clinical activities on or before January 15, 2018. As of the date this
quarterly report was filed, the Company has paid $650,000 and the remaining balance of
$2,800,000 is payable on or before June 30, 2019.
|
|
•
|
|
$2,000,000
to initiate patient recruitment activities on or before May 1, 2019. As of the date this
quarterly report was filed, the Company has not yet paid this installment and the full
balance of $2,000,000 is payable on or before June 30, 2019 per extension in amended
agreement.
|
|
•
|
|
$3,000,000
to initiate a first-in-human pilot study on or before September 1, 2019.
|
|
•
|
|
$5,000,000
to initiate a human pivotal study on or before February 1, 2020.
|
|
•
|
|
$1,150,000
to submit a 510(k) de novo submission to the FDA on or about February 1, 2021.
|
The
Company issued its promissory note in the amount of $14,600,000 (the “Note’) representing its obligation to pay the
above amounts. The Note is secured by a pledge of the Regentys pursuant to a Pledge and Security Agreement.
On
March 14, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the first tranche of Guaranteed Payments amounting to $2,800,000 on or before April 1, 2019. On May 22, 2019,
the Company and Regentys signed a second extension to extend the due date on or before June 30, 2019. The extension of this due
date has no impact on the existing schedule of future payments or any additional terms within the Note. Regentys has not filed
any notice of default as of the date of publication, and Generex continues to provide Regentys with business opportunities continuing
the relationship.
If
we obtain necessary financing, we expect to expend resources towards additional acquisitions and regulatory approval and commercialization
of Generex Oral-lyn™ and further clinical development of our immunotherapeutic vaccines.
In
addition to our future funding requirements, commitments and our ability to raise additional capital will depend on factors that
include:
|
•
|
|
the
timing and amount of expenses incurred to complete our clinical trials;
|
|
•
|
|
the
costs and timing of the regulatory process as we seek approval of our products in development;
|
|
•
|
|
the
advancement of our products in development;
|
|
•
|
|
our
ability to generate new relationships with industry partners throughout the world that
will provide us with regulatory assistance and long-term commercialization opportunities;
|
|
•
|
|
the
timing, receipt and amount of sales, if any, from Generex Oral-lyn™ in India, Lebanon,
Algeria and Ecuador;
|
|
•
|
|
the
cost of manufacturing (paid to third parties) of our licensed products and the cost of
marketing and sales activities of those products;
|
|
•
|
|
the
costs of prosecuting, maintaining, and enforcing patent claims, if any claims are made;
|
|
•
|
|
our
ability to maintain existing collaborative relationships and establish new relationships
as we advance our products in development;
|
|
•
|
|
our
ability to obtain the necessary financing to fund our operations and effect our strategic
development plan; and
|
|
•
|
|
the
receptivity of the financial market to biopharmaceutical companies.
|
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors, and we do not have any non-consolidated special purpose entities.
Tabular
Disclosure of Contractual Obligations
Generex
is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required
under this item.
Recently
Issued Accounting Pronouncements
The
FASB issued several updates on Topic 606 “Revenue from Contracts with Customers”, including:
|
•
|
|
ASU
2014-09, “Revenue from Contracts with Customers (Topic 606)”
|
|
•
|
|
ASU
2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net).”
|
|
•
|
|
ASU
2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing.”
|
|
•
|
|
ASU
2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815):
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16
Pursuant to Staff Announcements at the March 3, 2016 EITF (Emerging Issue Task Force)
Meeting.”
|
|
•
|
|
ASU
2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients.”
|
|
•
|
|
ASU
2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers.”
|
|
•
|
|
ASU
2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers
(Topic 606), Leases (Topic 840) and Leases (Topic 842). Amendments to SEC Paragraphs
Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of
Prior SEC Staff Announcements and Observer Comments.”
|
The
standards provide companies with a single model for use in accounting for revenue arising from contracts with customers that supersedes
current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize
revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and
rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements
retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The
guidance was adopted as of August 1, 2018 and did not have a material effect on the Company’s condensed interim consolidated
financial statements and related disclosures.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments—Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
(“ASU 2016-01”). This standard affects the accounting for equity instruments,
financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. In
February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10)
– Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to clarify certain
narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU No. 2016-01, “Financial
Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This
includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its
measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election
that would apply to that security and all identical or similar investments of the same issued. The update is effective for fiscal
years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. The guidance
was adopted as of August 1, 2018 and did not have a material effect on the Company’s condensed interim consolidated financial
statements and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing
diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The
standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2)
settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds
from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions
received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable
cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period.
The guidance was adopted as of August 1, 2018 and did not have a material effect on the Company’s condensed interim consolidated
financial statements and related disclosures.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires that a
statement of cash flows should include the total of cash, cash equivalents, and amounts generally described as restricted cash
or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The Company is evaluating
the effect that ASU 2016-18 will have on its consolidated financial statements and is considering early adoption of the standard.
The update is effective for fiscal years beginning after December 15, 2017. The guidance was adopted as of August 1, 2018 and
did not have a material effect on the Company’s condensed interim consolidated financial statements and related disclosures.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
These amendments clarify the definition of a business. The amendments affect all companies and other reporting organizations that
must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including
acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance was adopted as
of August 1, 2018 and did not have a material effect on the Company’s condensed interim consolidated financial statements
and related disclosures.
In
May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation” (Topic 718): Scope of Modification Accounting.
The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require
an entity to apply modification accounting under Topic 718 Compensation-Stock Compensation. An entity should account for the effects
of a modification unless all the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative
measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such
an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification
does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required
to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same
as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the
modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the original award is modified. The ASU is effective for all entities for annual periods, including interim periods within
those annual periods, beginning after December 15, 2017. The guidance was adopted as of August 1, 2018 and did not have a material
effect on the Company’s condensed interim consolidated financial statements and related disclosures.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Generex
is a smaller reporting company and not required to provide Quantative and Qualitative Disclosures about Market Risk pursuant to
Regulation S-K 305 (e).
Item 4.
Controls and Procedures
As of April 30, 2019, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) and concluded that, subject to the inherent limitations, our disclosure controls and procedures were not effective due to
the existence of several significant deficiencies culminating in material weaknesses in our internal control over financial reporting
because of inadequate segregation of duties over authorization, review and recording of transactions, as well as the financial
reporting of such transactions.
We
have been working and are currently working to remediate the material weaknesses described above, including assessing the need
for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the
material weaknesses. We believe we have taken appropriate and reasonable steps to make the necessary improvements to remediate
these deficiencies, however we cannot be certain that our remediation efforts will ensure that our management designs, implements
and maintains adequate controls over our financial processes and reporting in the future or that the changes made will be sufficient
to address and eliminate the material weaknesses previously identified. Our inability to remedy any additional deficiencies or
material weaknesses that may be identified in the future could, among other things, have a material adverse effect on our business,
results of operations and financial condition, as well as impair our ability to meet our quarterly, annual and other reporting
requirements under the Securities Exchange Act of 1934 in a timely manner, and require us to incur additional costs or to divert
management resources.
PART
II - OTHER INFORMATION