Item
1. Financial Statements
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
UNAUDITED
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
October
31, 2019
|
|
|
|
July
31,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
540,254
|
|
|
$
|
298,485
|
|
Accounts
receivable, net
|
|
|
154,575
|
|
|
|
36,311
|
|
Inventory,
net
|
|
|
727,263
|
|
|
|
363,008
|
|
Other
current assets
|
|
|
451,344
|
|
|
|
275,731
|
|
Total
current assets
|
|
|
1,873,436
|
|
|
|
973,535
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
531,888
|
|
|
|
499,993
|
|
Goodwill
|
|
|
38,901,126
|
|
|
|
38,297,573
|
|
Intangible
assets
|
|
|
10,802,442
|
|
|
|
9,834,269
|
|
Operating
lease right-of-use assets - net
|
|
|
97,553
|
|
|
|
—
|
|
Other
assets, net
|
|
|
33,804
|
|
|
|
30,621
|
|
TOTAL
ASSETS
|
|
$
|
52,240,249
|
|
|
$
|
49,635,991
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
22,447,533
|
|
|
$
|
19,055,822
|
|
Notes
payable, current
|
|
|
10,163,610
|
|
|
|
8,368,379
|
|
Loans
from related parties
|
|
|
72,612
|
|
|
|
19,700
|
|
Operating
lease liabilities - current
|
|
|
75,892
|
|
|
|
—
|
|
Deferred
tax liability
|
|
|
1,502,122
|
|
|
|
1,502,122
|
|
Total
Current Liabilities
|
|
|
34,261,769
|
|
|
|
28,946,023
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
|
8,797,354
|
|
|
|
7,820,283
|
|
Common
stock payable
|
|
|
215,793
|
|
|
|
1,123,188
|
|
Operating
lease liabilities - net of current portion
|
|
|
22,048
|
|
|
|
—
|
|
Total
Liabilities
|
|
|
43,296,964
|
|
|
|
37,889,494
|
|
|
|
|
|
|
|
|
|
|
Redeemable
non-controlling interest (Note 12)
|
|
|
4,073,898
|
|
|
|
4,073,898
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (Note 11)
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; authorized 750,000,000 shares; 44,336,023 and 62,290,940 issued and outstanding at October 31, 2019
and July 31, 2019, respectively
|
|
|
44,335
|
|
|
|
62,290
|
|
Additional
paid-in capital
|
|
|
417,081,503
|
|
|
|
408,566,529
|
|
Accumulated
deficit
|
|
|
(427,853,820
|
)
|
|
|
(418,727,875
|
)
|
Accumulated
other comprehensive income
|
|
|
796,922
|
|
|
|
797,216
|
|
Non-controlling
interest
|
|
|
14,800,447
|
|
|
|
16,974,439
|
|
Total
Stockholders’ Equity
|
|
|
4,869,387
|
|
|
|
7,672,599
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
52,240,249
|
|
|
$
|
49,635,991
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
|
GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
|
2019
|
|
2018
|
Revenue
|
|
$
|
721,661
|
|
|
$
|
1,719,148
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
133,618
|
|
|
|
870,621
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
588,043
|
|
|
|
848,527
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
338,734
|
|
|
|
180,067
|
|
Bad debt expense
|
|
|
10,981
|
|
|
|
—
|
|
General and administrative
|
|
|
4,787,039
|
|
|
|
2,272,641
|
|
Total operating expenses
|
|
|
5,316,754
|
|
|
|
2,452,708
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(4,548,711
|
)
|
|
|
(1,604,181
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,516,113
|
)
|
|
|
(165,716
|
)
|
Interest income
|
|
|
452
|
|
|
|
6,660
|
|
Changes in fair value of contingent purchase consideration
|
|
|
—
|
|
|
|
19,545,098
|
|
Change in fair value of derivative liability
|
|
|
(1,836,208
|
)
|
|
|
—
|
|
Loss on settlement of debt
|
|
|
(403,214
|
)
|
|
|
—
|
|
Other income, net
|
|
|
(8,753
|
)
|
|
|
3,886
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
|
(9,312,547
|
)
|
|
|
17,785,747
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
(186,602
|
)
|
|
|
(88,256
|
)
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Available to Common Stockholders
|
|
$
|
(9,125,945
|
)
|
|
$
|
17,874,003
|
|
|
|
|
|
|
|
|
|
|
Net Income per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.17
|
)
|
|
$
|
0.78
|
|
Diluted
|
|
$
|
(0.17
|
)
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Shares Used to Compute Income per Share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,186,407
|
|
|
|
22,806,777
|
|
Diluted
|
|
|
53,186,407
|
|
|
|
54,699,198
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(9,125,945
|
)
|
|
$
|
17,874,003
|
|
Change in foreign currency translation adjustments
|
|
|
(294
|
)
|
|
|
1,626
|
|
Comprehensive (Loss) Income Available to Common Stockholders
|
|
$
|
(9,126,239
|
)
|
|
$
|
17,875,629
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
|
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
UNAUDITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Common
Stock Payable
|
|
|
|
Additional
Paid-in
Capital
|
|
|
|
Accumulated
Deficit
|
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
|
Sub
Total
|
|
|
|
Non-controlling
Interest
|
|
|
|
Stockholders’
Equity
|
|
Balance
at July 31, 2018
|
|
|
79,590
|
|
$
|
4
|
|
|
|
22,430,121
|
|
|
$
|
22,430
|
|
|
$
|
2,168,951
|
|
|
$
|
368,388,265
|
|
|
$
|
(409,386,468
|
)
|
|
$
|
798,422
|
|
|
$
|
(38,008,396
|
)
|
|
$
|
(5,576,272
|
)
|
|
$
|
(43,584,668
|
)
|
Investment
in subsidiary by noncontrolling interest
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
91,027
|
|
|
|
91,027
|
|
Issuance
of common stock payable
|
|
|
—
|
|
|
—
|
|
|
|
5,996,928
|
|
|
|
5,997
|
|
|
|
(1,917,334
|
)
|
|
|
1,911,337
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
of stock options
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
103,194
|
|
|
|
—
|
|
|
|
—
|
|
|
|
103,194
|
|
|
|
—
|
|
|
|
103,194
|
|
Currency
translation adjustment
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,626
|
|
|
|
1,626
|
|
|
|
—
|
|
|
|
1,626
|
|
Net
Income (Loss)
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,874,003
|
|
|
|
|
|
|
|
17,874,003
|
|
|
|
(88,256
|
)
|
|
|
17,785,747
|
|
Balance
at October 31, 2018
|
|
|
79,590
|
|
$
|
4
|
|
|
|
28,427,049
|
|
|
$
|
28,427
|
|
|
$
|
251,617
|
|
|
$
|
370,402,796
|
|
|
$
|
(391,512,465
|
)
|
|
$
|
800,048
|
|
|
$
|
(20,029,573
|
)
|
|
$
|
(5,573,501
|
)
|
|
$
|
(25,603,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at July 31, 2019
|
|
|
—
|
|
$
|
—
|
|
|
|
62,290,940
|
|
|
$
|
62,290
|
|
|
$
|
—
|
|
|
$
|
408,566,529
|
|
|
$
|
(418,727,875
|
)
|
|
$
|
797,216
|
|
|
$
|
(9,301,840
|
)
|
|
$
|
16,974,439
|
|
|
$
|
7,672,599
|
|
Stock
compensation expense
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
787,458
|
|
|
|
—
|
|
|
|
—
|
|
|
|
787,458
|
|
|
|
—
|
|
|
|
787,458
|
|
Issuance
of common stock payable
|
|
|
—
|
|
|
—
|
|
|
|
296,793
|
|
|
|
297
|
|
|
|
—
|
|
|
|
921,598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
921,895
|
|
|
|
—
|
|
|
|
921,895
|
|
Conversion
of debt to equity
|
|
|
—
|
|
|
—
|
|
|
|
1,164,190
|
|
|
|
1,164
|
|
|
|
—
|
|
|
|
1,735,673
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,736,837
|
|
|
|
—
|
|
|
|
1,736,837
|
|
Issuance
of common stock for acquisitions
|
|
|
—
|
|
|
—
|
|
|
|
960,000
|
|
|
|
960
|
|
|
|
—
|
|
|
|
1,150,992
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,151,952
|
|
|
|
—
|
|
|
|
1,151,952
|
|
Reduction
of derivative liabilities
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,911,487
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,911,487
|
|
|
|
—
|
|
|
|
1,911,487
|
|
Cancellation
of shares
|
|
|
—
|
|
|
—
|
|
|
|
(20,375,900
|
)
|
|
|
(20,376
|
)
|
|
|
—
|
|
|
|
20,376
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase
of shares in subsidiary
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,987,390
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,987,390
|
|
|
|
(1,987,390
|
)
|
|
|
—
|
|
Currency
translation adjustment
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(294
|
)
|
|
|
(294
|
)
|
|
|
—
|
|
|
|
(294
|
)
|
Net
Income (Loss)
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,125,945
|
)
|
|
|
—
|
|
|
|
(9,125,945
|
)
|
|
|
(186,602
|
)
|
|
|
(9,312,547
|
)
|
Balance
at October 31, 2019
|
|
|
—
|
|
$
|
—
|
|
|
|
44,336,023
|
|
|
$
|
44,335
|
|
|
$
|
—
|
|
|
$
|
417,081,503
|
|
|
$
|
(427,853,820
|
)
|
|
$
|
796,922
|
|
|
$
|
(9,931,060
|
)
|
|
$
|
14,800,447
|
|
|
$
|
4,869,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
|
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
UNAUDITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
Three
Months Ended October 31,
|
|
|
|
2019
|
|
|
|
2018
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$
|
(9,312,547
|
)
|
|
$
|
17,785,747
|
|
Adjustments
to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
203,273
|
|
|
|
25,664
|
|
Amortization
of operating lease right-of-use assets
|
|
|
18,887
|
|
|
|
—
|
|
Stock
compensation expense
|
|
|
787,458
|
|
|
|
103,194
|
|
Loss
on settlement of debt
|
|
|
403,214
|
|
|
|
—
|
|
Changes
in fair value of contingent purchase consideration
|
|
|
—
|
|
|
|
(19,545,097
|
)
|
Amortization
of debt discount
|
|
|
2,065,835
|
|
|
|
—
|
|
Change
in fair value of derivative liabilities - convertible notes
|
|
|
(1,131,156
|
)
|
|
|
—
|
|
Change
in fair value of derivative liabilities - convertible warrants
|
|
|
(66,456
|
)
|
|
|
—
|
|
Change
in fair value of derivative liabilities - downside protection
|
|
|
3,033,820
|
|
|
|
—
|
|
Bad
debt expense
|
|
|
10,981
|
|
|
|
—
|
|
Changes
in operating assets and liabilities, net of effect of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,024
|
|
|
|
721
|
|
Inventory
|
|
|
(98,184
|
)
|
|
|
242,235
|
|
Accounts
payable and accrued expenses
|
|
|
2,366,230
|
|
|
|
1,006,344
|
|
Loans
from related parties
|
|
|
52,912
|
|
|
|
|
|
Other
current assets
|
|
|
(163,596
|
)
|
|
|
24,605
|
|
Other
current liabilities
|
|
|
(18,500
|
)
|
|
|
—
|
|
Net
cash used in operating activities
|
|
|
(1,843,805
|
)
|
|
|
(356,587
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(4,451
|
)
|
|
|
(6,168
|
)
|
Cash
received in acquisition of a business, net of cash paid
|
|
|
49,305
|
|
|
|
1,052,537
|
|
Net
cash provided by investing activities
|
|
|
44,854
|
|
|
|
1,046,369
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payment
of notes payable
|
|
|
(935,731
|
)
|
|
|
—
|
|
Proceeds
from note payable
|
|
|
2,976,745
|
|
|
|
534,940
|
|
Investment
in subsidiary by noncontrolling interest
|
|
|
—
|
|
|
|
91,027
|
|
Net
cash provided by financing activities
|
|
|
2,041,014
|
|
|
|
625,967
|
|
|
|
|
|
|
|
|
|
|
Effects
of currency translation on cash and cash equivalents
|
|
|
(294
|
)
|
|
|
1,626
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
241,769
|
|
|
|
1,317,375
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
298,485
|
|
|
|
1,046,365
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
540,254
|
|
|
$
|
2,363,740
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Reduction
of derivative liabilities
|
|
$
|
1,911,487
|
|
|
$
|
—
|
|
Discount
on derivative liability upon issuance of debt
|
|
$
|
1,052,349
|
|
|
$
|
—
|
|
Issuance
of common stock for conversion of debt
|
|
$
|
1,694,851
|
|
|
$
|
—
|
|
Recording
of Right of Use Asset and Liability
|
|
$
|
116,440
|
|
|
$
|
—
|
|
Increase
common stock payable
|
|
$
|
14,500
|
|
|
$
|
—
|
|
Issuance
of shares--common stock payable
|
|
$
|
921,895
|
|
|
$
|
—
|
|
Note
payable issued for acquisition of a business
|
|
$
|
—
|
|
|
$
|
15,000,000
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
|
Generex
Biotechnology Corporation and Subsidiaries
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 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. 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.
In
March 2019, the Company changed its business model to no longer utilize their existing pharmacies. Going forward Veneto will conduct
business exclusively through their management services organization (“MSO”) 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. In the first quarter of 2020 the Company acquired increased its ownership of Olaregen
to 77%.
On August 1, 2019, the Company, through its
wholly owned subsidiary NDS, closed on Asset Purchase Agreements (the “APAs”) for the purchase of substantially all
the operating assets of MediSource Partners, LLC (“MediSource”) and Pantheon Medical - Foot & Ankle, LLC (“Pantheon”)
(Note – 16).
MediSource contracts with vendors (including
Pantheon) for nationwide distribution of implants and devices for spine, hips, knees, foot, ankle, hand, and wrist surgeries.
Additional product lines include biologics (blood, bone, tissue, and stem cells), durable medical equipment, and soft goods. MediSource
also supplies kits to process bone marrow aspirates and platelet rich plasma biologics at the time of surgery.
Pantheon
sells a physician friendly, “all-in-one,” integrated kit that includes plates, screws, and tools required for orthopedic
surgeons and podiatrists conducting foot and ankle surgeries. Over the next three years, Pantheon expects to develop and submit
several new product lines to the FDA, which will include cannulated surgical screws and surgical staples, as well as a proprietary
Hammertoe System.
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 $428 million and a working capital deficiency
of approximately $32.5 million at October 31, 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:
Basis
of Presentation
The accompanying unaudited consolidated financial
statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in
the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments,
considered necessary for a fair presentation have been included.
The Company’s fiscal year ends on July 31
of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated.
Operating results for the three months ended
October 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2020.
The balance sheet at October 31, 2019 does not include all of the information and footnotes required by U.S. GAAP for complete
financial statements. Therefore, these condensed financial statements should be read in conjunction with the Company’s audited
financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31,
2019 as filed with the U.S. Securities and Exchange Commission (“SEC”).
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Business
Combinations
Acquisition
cost is measured as the aggregate of the fair value at the date of acquisition of the assets given, equity instruments issued,
or liabilities incurred or assumed. Acquisition related costs are expensed as incurred (except for those costs arising on the
issue of equity instruments which are recognized directly in equity). Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is measured
as the excess of the acquisition cost and the amount of any non-controlling interest, over the fair value of the identifiable
net assets acquired.
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. Adoption of ASC
606 has not changed the timing and nature of the Company’s revenue recognition and there has been no material effect on
the Company’s financial statements.
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 NGDx is recognized upon
payment at the time the product(s) is released (shipment delivered using a common carrier), and the control is transferred which
is simultaneous to when payment received and accepted.
Revenue from product sales of Olaregen’s
Excellagen® is recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration
that result from coupons, discounts, chargebacks and distributor fees, processing fees, as well as allowances for returns and government
rebates. The Company constrains revenue by giving consideration to factors that could otherwise lead to a probable reversal of
revenue. Where appropriate, the Company utilizes the expected value method to determine the appropriate amount for estimates of
variable consideration based on factors such as the Company’s historical experience, contractual arrangement and specific
known market events and trends. Collectability of revenue is reasonably assured based on historical evidence of collectability
between the Company and its customers.
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.
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.
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. On August 1, 2019, we adopted ASU 2016-02 and its related amendments, which changed
our accounting for leases. As a result of this change, we recognized right-of-use assets and lease liabilities on the consolidated
balance sheet for all leases with a term longer than 12 months and classified them as operating leases. The right-of-use assets
and lease liabilities have been measured by the present value of remaining lease payments over the lease term using our incremental
borrowing rates or implicit rates, when readily determinable. See Note 5 of Notes to Unaudited Condensed Consolidated Financial
Statements contained elsewhere in this report for additional details related to our adoption of the new lease accounting standard.
Recently
Issued Accounting Standards
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 August 1, 2020. The Company is evaluating the effect that ASU 2017-04 will
have on its 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% effective January
1, 2018 and the establishment of a territorial-style system for taxing foreign-source income of domestic multinational corporations.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Act (“SAB118”),
which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment. The
Company remeasured its deferred tax assets and liabilities as of July 31, 2018, applying the reduced corporate income tax rate
and recorded a provisional decrease to the deferred tax assets of $31,876,520, with a corresponding adjustment to the valuation
allowance. In the fourth quarter of fiscal year ended July 31, 2019, we completed our analysis to determine the effect of the
Tax Act and there were no material adjustments as of July 31, 2019.
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 consolidated
financial statements.
Note
3 - Loans from Related Parties
Pursuant
to the acquisitions of Regentys, the Company assumed $19,700 of loans payable to Regentys shareholders. As part of the assets
purchase agreement for Pantheon, the Company acquired 50% of the open accounts receivable. The amount collected on accounts receivable
excluded from the acquisition, that is due to the prior owner of Pantheon, was $52,912. The balance of loans from related parties
was $72,612 as of October 31, 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. The
petition to confirm the arbitrator’s award and Generex’s opposition were remanded by the Court to the arbitrator and
returned for clarification. The arbitrator stated that he was unable to add any clarification, as he did not take evidence on
the issue of warrant valuation. The parties are awaiting the court’s response to the Arbitrator’s statement. As of
October 31, 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 October 31, 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
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 – Leases
The Company has various operating lease agreements
with terms up to 2 years, including leases of office space. Some leases include purchase, termination or extension options for
one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.
The Company adopted ASC 842 effective August
1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective
date without adjusting the comparative periods presented. The Company adopted the following practical expedients and elected the
following accounting policies related to this standard update:
•
|
|
The option to not reassess prior conclusions related to the identification, classification
and accounting for initial direct costs for leases that commenced prior to January 1, 2019.
|
•
|
|
Short-term lease accounting policy election allowing lessees to not recognize right-of-use
assets and liabilities for leases with a term of 12 months or less; and
|
•
|
|
The option to not separate lease and non-lease components for certain equipment lease
asset categories such as freight car, vehicles and work equipment.
|
•
|
|
The package of practical expedients applied to all of its leases, including (i) not
reassessing whether any expired or existing contracts are or contain leases, (ii) not reassessing the lease classification for
any expired or existing leases, and (iii) not reassessing initial direct costs for any existing leases.
|
The
assets and liabilities from operating and finance leases are recognized at the commencement date based on the present value of
remaining lease payments over the lease term using the Company’s incremental borrowing rates or implicit rates, when readily
determinable. Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
The
Company’s operating leases do not provide an implicit rate that can readily be determined. Therefore, the Company uses a
discount rate based on its incremental borrowing rate, which is determined using the average of borrowing rates explicitly stated
in the Company’s convertible debt.
The
Company’s weighted-average remaining lease term relating to its operating leases is 1.3 years, with a weighted-average discount
rate of 9.5%.
The
Company incurred lease expense for its operating leases of $21,508 for three months ended October 31, 2019.
The
following table presents information about the amount and timing of liabilities arising from the Company’s operating leases
as of October 31, 2019:
Maturity
of Operating Lease Liabilities
|
|
|
2019
|
|
$
|
64,801
|
|
2020
|
|
|
39,879
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
$
|
—
|
|
Total
undiscounted operating lease payments
|
|
$
|
104,680
|
|
Less:
Imputed interest
|
|
|
6,740
|
|
Present
value of operating lease liabilities
|
|
$
|
97,940
|
|
Note
6 – Inventory
Inventory
consists of the following components:
|
|
October
31,
|
|
July
31,
|
|
|
2019
|
|
2019
|
Raw
materials
|
|
$
|
74,444
|
|
|
$
|
77,782
|
|
Finished
goods
|
|
|
652,819
|
|
|
|
285,226
|
|
Total
Inventory
|
|
$
|
727,263
|
|
|
$
|
363,008
|
|
Note
7 – Property and Equipment
Property
and equipment, net consisted of the following:
|
|
October
31,
|
|
July
31,
|
|
|
2019
|
|
2019
|
Computers
and technological assets
|
|
$
|
163,168
|
|
|
$
|
163,168
|
|
Machinery
and equipment
|
|
|
500,576
|
|
|
|
386,929
|
|
Furniture
and fixtures
|
|
|
89,123
|
|
|
|
73,227
|
|
Leasehold
Improvements
|
|
|
16,596
|
|
|
|
16,596
|
|
|
|
|
769,463
|
|
|
|
639,920
|
|
Less
accumulated depreciation
|
|
|
(237,575
|
)
|
|
|
(139,927
|
)
|
|
|
$
|
531,888
|
|
|
$
|
499,993
|
|
Depreciation
expense related to property and equipment for the three months ended October 31, 2019 and October 31, 2018 was $48,847 and $25,664,
respectively.
Note
8 – Goodwill and Intangible Assets
Intangible
assets consist of the following at:
|
|
October 31,
|
|
July 31,
|
|
|
2019
|
|
2019
|
In-Process Research & Development
|
|
$
|
8,761,427
|
|
|
$
|
8,761,427
|
|
Non-compete agreements
|
|
|
1,566,700
|
|
|
|
1,210,000
|
|
Developed software/technology
|
|
|
172,500
|
|
|
|
131,000
|
|
Vendor agreements and other intangibles
|
|
|
775,674
|
|
|
|
51,274
|
|
|
|
|
11,276,301
|
|
|
|
10,153,701
|
|
Less accumulated amortization
|
|
|
(473,859
|
)
|
|
|
(319,432
|
)
|
|
|
$
|
10,802,442
|
|
|
$
|
9,834,269
|
|
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.
Amortization
expense amounted to $154,426 and $646 for the three months ended October 31, 2019 and October 31, 2018, respectively.
The remaining estimated amortization expense for the next five
years and thereafter is as follows:
Year Ending July 31,
|
|
Amount
|
2020
|
|
$
|
570,708
|
|
2021
|
|
|
616,744
|
|
2022
|
|
|
246,324
|
|
2023
|
|
|
94,511
|
|
2024
|
|
|
68,491
|
|
Thereafter
|
|
|
444,658
|
|
|
|
$
|
2,041,435
|
|
Changes
in the value of goodwill:
Balance
as of July 31, 2019
|
|
$
|
38,297,573
|
|
Acquisition
of MediSource and Pantheon
|
|
|
603,553
|
|
Balance
as of October 31, 2019
|
|
$
|
38,901,126
|
|
Note
9 – 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
January 24, 2019, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to
sell and sold its convertible note bearing interest at 10% per annum (the “Notes”) in the principal amount of $530,000.
The purchase price of the Notes was $505,000 and the remaining $25,000 of principal amount represents original issue discount.
Pursuant to the Securities Purchase Agreement, Generex also sold warrants to the investors to purchase 30,285 shares of common
stock with the fair value of the warrants as of the date of issuance in excess of the Notes resulting in full discount of the
Notes.
In
February 2019, Generex entered into Securities Purchase Agreements with two investors pursuant to which the Company agreed to
sell and sold each investor a $750,000 convertible note bearing interest at 10% per annum (the “Notes”). The total
purchase price of the Notes was $1,425,000 and the remaining $75,000 of principal amount represents original issue discount. 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 trading price of the common stock on the ten days prior to conversion. The embedded conversion feature of
these Notes was deemed to require bifurcation and liability classification, at fair value. Pursuant to the Securities Purchase
Agreements, Generex also sold warrants to the investors to purchase up to an aggregate 102,143 shares of common stock. The fair
value of the derivative liability and warrants as of the date of issuance was in excess of the Notes (Note 14) resulting in full
discount of the Notes. One of the notes went into default during the quarter. Pursuant to a settlement agreement, the Company
agreed to settle the debt by making a $900,000 payment and converting $350,000 of the remaining principal into common stock of
the Company. The Company recognized a loss on settlement of debt of $403,214.
In
April 2019, Generex entered into Securities Purchase Agreements with two 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 $1,060,000.
The purchase price of the Notes was $1,000,000 and the remaining $60,000 of principal amount represents original issue discount.
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 trading price of the common stock on the ten days prior to conversion. The embedded
conversion feature of these Notes was deemed to require bifurcation and liability classification, at fair value. Pursuant to the
Securities Purchase Agreements, Generex also sold warrants to the investors to purchase up to an aggregate 176,968 shares of common
stock. The fair value of the derivative liability and warrants as of the date of issuance was in excess of the Notes (Note 14)
resulting in full discount of the Notes. During the quarter, $110,000 of principal was converted into common stock of the Company,
leaving a remaining principal balance of $950,000 at October 31, 2019.
In
May 2019, the Company consummated a Stock Purchase Agreement entered into January 14, 2019 to which the Company agreed to sell
and sold $2,000,000 Promissory Note bearing interest at 7% per annum (the “Notes”) originally due and payable on August
1, 2019. The note remains active and interest has continued to accrue while new terms of the note are in process of being negotiated.
In
July 2019, Generex entered into Securities Purchase Agreements with two investors pursuant to which the Company agreed to sell
and sold convertible notes bearing interest at 9% per annum (the “Notes”) in the aggregate principal amount of $446,600.
The purchase price of the Notes was $400,000 and the remaining $46,600 of principal amount represents original issue discount.
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 80% of the lowest volume weighted average trading price of the common stock on the ten days prior to
conversion. The embedded conversion feature of these Notes was deemed to require bifurcation and liability classification, at
fair value. The fair value of the derivative liability as of the date of issuance was $206,548 and was recorded as a discount
of the Notes.
In
August 2019, the Company borrowed $1,000,000 from an investor, bearing 10% interest per annum, with an original issue discount
of $150,000. $1,150,000 is due in one year from the date of issuance.
In August and September
2019, the Company entered into Securities Purchase Agreements with three investors pursuant to which the Company agreed to sell
and sold convertible notes bearing interest between 9% and 10% per annum (the “Notes”) in the aggregate principal
amount of $2,222,500. The purchase price of the Notes was $1,976,745 and the remaining $245,755 of principal amount represents
original issue discount. 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: 80% of the lowest
trading price of the common stock on the ten or twenty days prior to conversion. The embedded conversion feature of these Notes
was deemed to require bifurcation and liability classification, at fair value. The fair value of the derivative liability as of
the date of issuance was $1,052,349 and was recorded as a discount of the Notes.
For
the quarter ending October 31, 2019, amortization of debt discount was $2,065,835 leaving a remaining debt discount balance as
of October 31, 2019 of $1,473,842.
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.
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 $3,413,000. 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 held a principal
plus of $615,000 as of the date of acquisition. As of October 31, 2019, the remaining principal balance was $349,656 with an unamortized
debt discount balance of $3,719. These notes have an accrued interest balance of $39,191 as of October 31, 2019.
Note
10 – 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 October 31, 2019:
following
table presents the activity for derivative liabilities measured at estimated fair value:
|
|
Derivative Liability - Convertible Notes
|
|
Derivative Liability - Warrants
|
|
Derivative Liability - Downside Protection
|
|
Total
|
Balance as of July 31, 2019
|
|
|
4,156,196
|
|
|
|
325,250
|
|
|
|
3,338,836
|
|
|
|
7,820,282
|
|
Additions during the period
|
|
|
1,021,996
|
|
|
|
30,353
|
|
|
|
—
|
|
|
|
1,052,349
|
|
Change in fair value
|
|
|
(1,131,157
|
)
|
|
|
(66,456
|
)
|
|
|
3,033,820
|
|
|
|
1,836,207
|
|
Change due to exercise / redemptions
|
|
|
(1,875,052
|
)
|
|
|
(36,432
|
)
|
|
|
—
|
|
|
|
(1,911,484
|
)
|
Balance as of October 31, 2019
|
|
$
|
2,171,983
|
|
|
$
|
252,715
|
|
|
$
|
6,372,656
|
|
|
|
$8, 797,354
|
|
Note
11 - 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.
During the three months
ended October 31, 2019, 296,793 shares of common stock payable were issued. As of October 31, 2019, 286,377 shares remain to be
issued resulting in common stock payable $215,793.
During the first quarter
of 2020, the Company issued 1,164,190 shares of common stock for the conversion of approximately $1,736,900 of debt.
In August 2019, the Company
issued 400,000 and 560,000 shares of common stock valued at $2.50 per share for the acquisition of MediSource and Pantheon, respectively.
On September 12, 2019, 20,375,900 outstanding shares of common
stock were cancelled by the Company held by Joe Moscato TTEE Friends of Generex Biotechnology Investment Trust U/A/D 4/2/2019,
a trust formed for the benefit the Company and any 80% controlled subsidiary of the Company by several shareholders contributing
in the aggregate 33,175,900 shares of the Company’s Common Stock and 8,293,975 shares of Antigen Express, Inc, d/b/a
NuGenerex Immuno-Oncology commons shares (the “Friends of Generex Trust”), similar to the Stock Control Agreement
previously entered into by the same shareholders on December 1, 2018 filed in an 8-K filed on December 3, 2019, incorporated herein
by reference.
Non-controlling
Interest
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 October 31, 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. In May 2019, the Company issued 4,000,000 shares of common stock contributed and provided by the Friends of Generex Trust
and a $2 million note payable for the acquisition of 592,683 shares of Series A Preferred Stock of Olaregen pursuant to a Stock
Purchase Agreement entered into January 14, 2019 subject to the approval of the Board of Directors of Olaregen and consummated
on May 10, 2019. On August 16, 2019, the Company entered into a Share Exchange Agreement to purchase an additional 900,000 shares
of common stock in Olaregen from other shareholders of Olaregen in exchange for 1,905,912 shares of Generex common stock contributed
and provided by the Friends of Generex Trust and 476,478 shares of Antigen common stock contributed and provided by the Friends
of Generex Trust. In September 2019, the Company converted all of the Series A Preferred Stock of Olaregen into common stock of
Olaregen.
On February 25, 2019, we issued a stock dividend
to our shareholders, whereby our shareholders received one (1) share of NGIO for every four (4) shares of our stock held on the
dividend date.
As of October 31, 2019, Olaregen had a total
of 6,236,390 shares of common stock and zero Series A voting preferred stock outstanding. As such, there are 1,461,075 of shares
that belong to non-controlling interest shareholders which represents a 23.43% 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
12 – 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 October
31, 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 consolidated balance sheets.
Note
13 - Stock-Based Compensation:
Stock
Option Plans
As
of October 31, 2019, the Company had two 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). At October 31, 2019, there were 2,823,450
and 231,149,875 the 2006 Plan and 2017 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 and 2017 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, 2019
|
|
|
7,988,675
|
|
|
$
|
0.84
|
|
|
|
7.21
|
|
|
$
|
15,961,391
|
|
Granted
|
|
|
1,003,000
|
|
|
$
|
2.09
|
|
|
|
4.92
|
|
|
|
—
|
|
Forfeited
or expired
|
|
|
(130,000
|
)
|
|
$
|
1.11
|
|
|
|
7.65
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
- October 31, 2019
|
|
|
8,861,675
|
|
|
$
|
0.98
|
|
|
|
6.71
|
|
|
$
|
5,859,392
|
|
The
intrinsic value is calculated as the difference between the market value and the exercise price of the shares on October 31, 2019.
The market values as of October 31, 2019 was $1.53 based on the closing bid price for October 31, 2019.
There
were 3,540,675 vested common stock options under the Plan as of October 31, 2019. The compensation expense was $787,458 for the
three months ended October 31, 2019. The Company had $4,256,191 of unrecognized compensation costs related to non-vested share-based
compensation arrangements granted under the Plan at October 31, 2019 to be recognized over an average of 2.67 years.
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:
|
|
October
31,
2019
|
Exercise
price
|
|
|
$2.01
– 2.09
|
|
Time
to expiration
|
|
|
5
years
|
|
Risk-free
interest rate
|
|
|
1.51%
- 1.59%
|
|
Estimated
volatility
|
|
|
153.4
|
%
|
Expected
dividend
|
|
|
—
|
|
Stock
price at valuation date
|
|
|
$2.01
– 2.09
|
|
During
2019, the Company established a Direct Stock Purchase Plan (“2019 Plan”) pursuant to which eligible participants may
acquire shares of common stock in lieu of certain cash obligations otherwise owed to participants during the 2019 calendar year.
The 2019 Plan will automatically terminate on December 31, 2019. There was a total of 1,200,000 shares of common stock reserved
under the plan of which no shares have been issues.
Note
14 - Warrants:
A
summary of the Company’s warrant activities is as follows:
|
|
Number
of Warrants
|
|
Weighted
Average Exercise Price per Share
|
|
Weighted
Average Remaining Life (Years)
|
|
Aggregate
Intrinsic Value
|
Outstanding
- July 31, 2019
|
|
|
15,399,681
|
|
|
$
|
2.53
|
|
|
|
0.40
|
|
|
$
|
4,500,000
|
|
Issued
|
|
|
62,857
|
|
|
|
3.50
|
|
|
|
5.01
|
|
|
|
—
|
|
Forfeited
|
|
|
(57,143
|
)
|
|
|
3.50
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
- October 31, 2019
|
|
|
15,405,395
|
|
|
$
|
2.52
|
|
|
|
0.18
|
|
|
$
|
—
|
|
During
the three months ended October 31, 2019, the Company issued 62,857 to investors of convertible notes and 57,143 warrants were
forfeited upon settlement of a note. All the warrants issued vested immediately upon issuance. Additionally, 84,000 warrants are
to be issued to AEXG in connection with an arbitrator’s award (Note 4).
Note
15 - 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.
|
|
Three Months Ended October 31,
|
|
|
2019
|
|
2018
|
Weighted average number of common shares outstanding - Basic
|
|
|
53,186,407
|
|
|
|
22,806,777
|
|
Potentially dilutive common stock equivalents
|
|
|
—
|
|
|
|
31,892,421
|
|
Weighted average number of common and equivalent shares outstanding - Diluted
|
|
|
53,186,407
|
|
|
|
54,699,198
|
|
The
following table provides weighted average number of common stock equivalents not included in diluted income per share, because
the effects are anti-dilutive, for the three months ended October 31, 2019 and 2018, respectively.
|
|
Three
Months Ended October 31,
|
|
|
2019
|
|
2018
|
Series
H Convertible Preferred Stock
|
|
|
—
|
|
|
|
25,200,000
|
|
Series
I Convertible Preferred Stock
|
|
|
—
|
|
|
|
6,636,000
|
|
Convertible
debt
|
|
|
3,744,548
|
|
|
|
—
|
|
Stock
options
|
|
|
8,871,675
|
|
|
|
2,747,850
|
|
Warrants
|
|
|
15,405,395
|
|
|
|
—
|
|
Total
|
|
|
28,021,618
|
|
|
|
34,583,850
|
|
Note
16 – Acquisitions:
MediSource
and Pantheon:
On
August 1, 2019, the Company, through its wholly owned subsidiary NDS, closed on Asset Purchase Agreements (the “APAs”)
for the purchase of substantially all the operating assets of MediSource Partners, LLC (“MediSource”) and Pantheon
Medical - Foot & Ankle, LLC (“Pantheon”).
MediSource
contracts with vendors (including Pantheon) for nationwide distribution of implants and devices for spine, hips, knees, foot,
ankle, hand, and wrist surgeries. Additional product lines include biologics (blood, bone, tissue, and stem cells), durable medical
equipment, and soft goods. MediSource also supplies kits to process bone marrow aspirates and platelet rich plasma biologics at
the time of surgery.
Pantheon
sells a physician friendly, “all-in-one,” integrated kit that includes plates, screws, and tools required for orthopedic
surgeons and podiatrists conducting foot and ankle surgeries. Over the next three years, Pantheon expects to develop and submit
several new product lines to the FDA, which will include cannulated surgical screws and surgical staples, as well as a proprietary
Hammertoe System.
The goal in acquiring these operating companies
is that they expect to provide multiple and significant revenue streams through delivery of patient-focused healthcare products
and services, thus generating value and ultimately creating goodwill upon acquisition.
Travis
H. Bird was the CEO and principal owner of both Pantheon and MediSource.
Under
the APAs:
|
•
|
Generex
will issue 400,000 shares of common stock in exchange for the Pantheon assets, and 560,000 shares of common stock in exchange
for the MediSource assets.
|
|
•
|
Generex
and NDS will pay up to $700,000 in cash to Pantheon as an earn out payment. No payment will be made unless the business conducted
by NDS using the former Pantheon assets has EBITDA in the twelve months following closing in excess of $500,000. If the Pantheon
business’s EBITDA meets or exceeds $1,000,000, the entire $700,000 will be paid. If the Pantheon business’s EBITDA
exceeds $500,000 but is less than $1,000,000, a pro rata portion of the $700,000 earn-out will be paid.
|
|
•
|
Generex
and NDS will pay up to $500,000 in cash to MediSource as an earn out payment. No payment will be made unless the business
conducted by NDS using the former MediSource assets has EBITDA in the twelve months following closing in excess of $130,000.
If the MediSource business’s EBITDA meets or exceeds $500,000, the entire $500,000 will be paid. If the MediSource business’s
EBITDA exceeds $130,000 but is less than $500,000, a pro rata portion of the $500,000 earn-out will be paid.
|
|
•
|
In
the event the EBITDA targets are met for one or both MediSource and Pantheon, Travis Bird will receive sales commissions equal
to 15% of net sales during the first year following closing, and 10% of net sales during the second year.
|
|
•
|
Both
MediSource and Pantheon agreed to waive the 1:1 stock dividend Generex announced it will issue if Generex is listed on NASDAQ.
|
|
•
|
Each
of Pantheon and MediSource will retain 50% of its cash on hand and 50% of its accounts receivable, with the remainder transferred
to NDS at closing.
|
|
•
|
Generex
and NDS will not assume any Pantheon or MediSource liabilities except for post-closing obligations under assumed contracts.
|
|
•
|
Pantheon
and MediSource will not transfer their Medicare and Medicaid numbers.
|
At
closing, Mr. Bird will enter into an 18-month consulting agreement with NDS. As compensation, Mr. Bird will receive Generex common
stock with a value of $250,000, as well as monthly payments equaling $97,222. The monthly payments shall be paid from any available
cash from the operations of Pantheon and MediSource. Any remaining balance of such monthly payments will consist of common stock.
The agreement specifies the shares are to be freely tradeable. In addition, Mr. Travis will agree to fully assign and exchange
any ownership rights in any new technology he develops with the Company, in exchange for a payment of $500,000 in value of common
stock for each completed item submitted to the FDA.
The Company accounted for the Acquisition
of MediSource and Pantheon as a business combination 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, we used our 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.
Fair
Value of the MediSource Acquisition
The
following table summarizes the allocation of the preliminary purchase price as of the MediSource acquisition:
|
|
Preliminary
Allocation as of
August 1,
2019
|
Cash
and cash equivalents
|
|
$
|
13,895
|
|
Other
current assets
|
|
|
11,864
|
|
Property
and equipment, net
|
|
|
8,992
|
|
Accounts
payable and accrued liabilities
|
|
|
(31,439
|
)
|
Net
Tangible Assets
|
|
$
|
3,312
|
|
Tradename
/ Trademarks
|
|
|
47,600
|
|
Business
Contracts
|
|
|
346,800
|
|
Non-Competes
|
|
|
124,600
|
|
Total
Fair Value of Assets Acquired
|
|
|
522,312
|
|
Consideration:
|
|
|
|
|
Fair
value of common stock
|
|
|
479,980
|
|
Contingent
consideration
|
|
|
409,790
|
|
Consideration
included in consulting agreement
|
|
|
104,168
|
|
Total
Purchase Price
|
|
|
993,938
|
|
Goodwill
|
|
$
|
471,626
|
|
Fair
Value of the Pantheon Acquisition
The
following table summarizes the allocation of the preliminary purchase price as of the Pantheon acquisition:
|
|
Preliminary
Allocation as of
August 1, 2019
|
Cash
and cash equivalents
|
|
$
|
35,410
|
|
Accounts
receivable
|
|
|
133,269
|
|
Prepaid
expenses
|
|
|
3,336
|
|
Inventory
|
|
|
266,071
|
|
Medical
Equipment, net
|
|
|
67,299
|
|
Accounts
payable
|
|
|
(53,242
|
)
|
Accrued
liabilities
|
|
|
(15,573
|
)
|
Net
Tangible Assets
|
|
$
|
436,570
|
|
Tradename
/ Trademarks
|
|
|
55,400
|
|
IP/Technology
|
|
|
41,500
|
|
Non-compete
agreement
|
|
|
232,100
|
|
Customer
Base
|
|
|
274,600
|
|
Total
assets acquired
|
|
$
|
1,040,170
|
|
Consideration:
|
|
|
|
|
Fair
value of common stock
|
|
|
671,972
|
|
Contingent
consideration
|
|
|
354,292
|
|
Consideration
included in consulting agreement
|
|
|
145,833
|
|
Goodwill
|
|
$
|
131,927
|
|
The
components of the acquired intangible assets were as follows:
|
|
Preliminary
Fair
Value
|
|
Average
Estimated Life
|
Tradename
/ Trademarks
|
|
$
|
103,000
|
|
|
|
15
|
|
IP/Technology
|
|
|
41,500
|
|
|
|
5
|
|
Business
Contracts
|
|
|
346,800
|
|
|
|
15
|
|
Customer
Base
|
|
|
274,600
|
|
|
|
10
|
|
Non-compete
agreement
|
|
|
356,700
|
|
|
|
3
|
|
|
|
$
|
1,112,600
|
|
|
|
|
|
Unaudited Supplemental Pro Forma Data
Unaudited pro forma results of operations for
the three months ended October 31, 2019 and 2018 as though the Company acquired MediSource and Pantheon on the first day of each
fiscal year are set forth below.
|
|
Three months Ended
October 31,
|
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
721,661
|
|
|
$
|
2,141,000
|
|
Cost of revenues
|
|
|
133,618
|
|
|
|
987,409
|
|
Gross profit
|
|
|
588,043
|
|
|
|
1,153,591
|
|
Operating expenses
|
|
|
5,136,754
|
|
|
|
2,629,854
|
|
Operating loss
|
|
|
(4,548,711
|
)
|
|
|
(1,476,262
|
)
|
Other income (expense)
|
|
|
(4,763,836
|
)
|
|
|
19,389,944
|
|
Net loss
|
|
$
|
(9,312,547
|
)
|
|
|
17,913,682
|
|
Comprehensive net loss
|
|
$
|
(9,312,547
|
)
|
|
$
|
17,913,682
|
|
Note
17 – 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 $(9,179,902) and $(11,006,793) for the three months ended October 31, 2019 and the year ended July 31, 2019, respectively.
Pre-tax (losses) arising from foreign operations (Canada) were $(10,963) and $(326,461) for the three months ended October 31,
2019 and the year ended July 31, 2019, respectively.
As
of October 31, 2019, the Company has NOL carryforwards in Generex Biotechnology Corporation of approximately $214 million ,
of which $196 million will expire in 2020 through 2038, and $17.7 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
$34.3 million, which expire in 2025 through 2040. Antigen Express, Inc. has NOL carryforwards of approximately $36.2 which will
expire in 2020 through 2038. Regentys Corporation has NOL carryforwards of approximately $6.1 million, of which $4.9 million will
expire in 2033 through 2038. Olaregen Therapeutics, Inc. has NOL carryforwards of $1.3 million which will not expire. Veneto has
NOL carryforwards of $8.7 million which will not expire. 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 October 31, 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 $70 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. During the period ended October 31, 2019, the Company acquired certain assets of MediSource
Partners, LLC and Pantheon Medical. The assets are included within Generex Biotechnology Corporation.
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 2016 to 2019 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 2011 to 2019 remain open to examination by the Canada Revenue Agency or other tax jurisdictions to which
the Company is subject.
Note
18 - 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 November 12, 2019 , the Company’s
note holder converted $80,000 of principal and $4,778 of interest into 115,344 shares of common stock.
On November 12, 2019 , the Company’s
note holder converted $50,000 of principal and $3,096 of interest into 128,561 shares of common stock.
On November 14, 2019 , the Company’s
note holder converted $50,000 of principal and $2,712 of interest into 80,110 shares of common stock.
On November 18, 2019 , the Company
entered into three Securities Purchase Agreements with investors pursuant to which the Company agreed to sell and sold three convertible
notes bearing interest at 10% per annum in the aggregate principal amount of $275,000.
On November 21, 2019 , the Company’s
note holder converted $80,000 of principal and $4,493 of interest into 134,865 shares of common stock.
On November 21, 2019 , the Company’s
note holder converted $100,000 of principal and $6,219 of interest into 169,543 shares of common stock.
On November 22, 2019, effective as of
November 15, 2019, the Company entered into a Stock Purchase Agreement for the purchase of 51% of the outstanding capital stock
of GH Care, Inc. DBA ALTuCELL, Inc.(“ALTuCELL”).
Under the SPA, in exchange for the ALTuCELL
Stock, Generex will issue to ALTuCELL 1,600,000 shares of Generex common stock with a down round provision and price floor of $1.25
per share. The Company will also pay $2.5 million in cash of which $112,000 has already been paid. In addition to stock and cash
at closing, Generex has agreed to pay up to an aggregate of $3,500,000 to ALTuCell upon ALTuCell’s attainment of certain
milestones.
On November 24, 2019 , the Company
amended the Stock Purchase Agreement with Olaregen. The Company was obligated to pay in full $11,600,000 to Olaregen by November
30, 2019, in connection with the purchase of Olaregen capital stock. Effective November 24, 2019, the deadline has been extended
to January 31, 2020.
On November 25, 2019 , the Company
amended the Stock Purchase Agreement with Regentys originally on January 7, 2019. Effective November 25, 2019, the remaining three
payments of $2,039,001, $2,000,000, and $3,000,000 are all payable on or before December 30, 2019.
On November 25, 2019 , the Company
entered an Equity Purchase Agreement with an investor to purchase up to $40,00,000 of the Company’s stock at 92% of the market
price for the period of five (5) consecutive trading days immediately subject to a put notice on such date on which the Purchase
Price is calculated in accordance with the terms and conditions of this Agreement and 1,228,501 shares of common stock (“Commitment
Shares”) will be issued to an investor upon signing.
On November 27, 2019 , the Company’s
note holder converted $100,000 of principal and $6,384 of interest into 202,635 shares of common stock.
On November 27, 2019 , the Company’s
note holder converted $125,000 of principal and $7,226 of interest into 251,859 shares of common stock.
On November 29, 2019 , the Company’s
note holder converted $50,000 of principal into 79,214 shares of common stock.
On December 5, 2019 , the Company
entered an Equity Purchase Agreement with an investor pursuant to which the Company will issue 100,000 shares of common stock to
the investor as a commitment fee and a convertible note in the principal amount of $2,200,000.
On December 5, 2019 , the Company’s
note holder converted $70,000 of principal and $4,621 of interest into 180,682 shares of common stock.
On December 5, 2019 , the Company’s
note holder converted $75,000 of principal and $4,500 of interest into 192,494 shares of common stock.
On December 10, 2019, the Company announced
revisions to previously announced stock dividends and approved by the Board of Directors on December 13, 2019 that the previously
approved 1:1 common stock dividend shall be restructured to provide for a 2 to 5 stock dividend to shareholders of the Company
and for shareholders to also receive an additional 2 to 5 stock dividend of Antigen Express, Inc, d/b/a NuGenerex Immuno-Oncology
commons shares; that the record date for the stock dividend be August 30, 2019; and the new pay date for this 2:5 dividend will
be January 3, 2020.
On December 12, 2019, the Company’s
note holder converted $75,000 of principal and $4,756 of interest into 181,007 shares of common stock.
On
December 12, 2019, the Company’s note holder converted $50,000 of principal and $ 3095.89
of interest into 128,561 shares of common stock.
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 three-month periods ended October 31, 2019
and 2018. We closed on the following acquisitions during the three months ended October 31, 2019:
|
•
|
On
August 1, 2019, the Company, through its wholly owned subsidiary NDS, closed on Asset Purchase Agreements (the “APAs”)
for the purchase of substantially all the operating assets of MediSource Partners, LLC (“MediSource”) and Pantheon
Medical - Foot & Ankle, LLC (“Pantheon”).
|
|
•
|
On
August 16, 2019, the Company entered into a Share Exchange Agreement to purchase an additional 900,000 shares in Olaregen
Therapeutix Inc. from Olaregen Therapeutix LLC representing increasing Generex’s ownership from approximately 62%
to 76%
|
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, 2019, and
the information contained in Part I, Item 1 - Financial Statements in this Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 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 October
31, 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:
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expectations concerning product candidates for our technologies;
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expectations concerning funding of obligations related to potential acquisitions and generally completing acquisitions;
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our
expectations concerning existing or potential development and license agreements for third-party collaborations, acquisitions
and joint ventures;
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our
expectations concerning product candidates for our technologies;
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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;
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our
expectations of when regulatory submissions may be filed or when regulatory approvals may be received; and
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our
expectations of when commercial sales of our products in development may commence and when actual revenue from the product
sales may be received.
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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:
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inherent uncertainties of product development based on our new and as yet not fully proven technologies;
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risks and uncertainties regarding the actual effect on humans of seemingly safe and efficacious formulations and treatments
when tested clinically;
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inherent uncertainties associated with clinical trials of product candidates;
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inherent uncertainties associated with the process of obtaining regulatory approval to market product candidates;
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inherent uncertainties associated with commercialization of products that have received regulatory approval;
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decline in our stock price; and
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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.
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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, 2019. 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
August 1, 2019, the Company, through its wholly owned subsidiary NDS, closed on Asset Purchase Agreements (the “APAs”)
for the purchase of substantially all the operating assets of MediSource Partners, LLC (“MediSource”) and Pantheon
Medical - Foot & Ankle, LLC (“Pantheon”).
We intend to focus resources on NuGenerex
Diagnostics, LLC’s (“NGDx”, as defined below) business, and on the businesses of Regentys, Olaragen and the
MSO 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.
Overview
of Business
Corporate
History
Generex
is based in Miramar, Florida, with offices in Dallas, Texas, Toronto, Canada and Wellesley, Massachusetts. The Company was originally
incorporated in the state of Delaware on September 4, 1997, for the purpose of acquiring Generex Pharmaceuticals Inc., a Canadian
(Province of Ontario) corporation formed in November 1995 to engage in pharmaceutical and biotechnological research and development
and other activities. The Company’s acquisition of Generex Pharmaceuticals Inc. was completed in October 1997 in a transaction
in which the holders of all outstanding shares of Generex Pharmaceuticals Inc. exchanged their shares for shares of Generex common
stock.
In
January 1998, Generex participated in a “reverse acquisition” with Green Mt. P.S., Inc, (“Green Mt.”),
an inactive Idaho corporation formed in 1983. As a result of this transaction, the shareholders of Generex (the former shareholders
of Generex Pharmaceuticals Inc.) acquired a majority (approximately 90%) of the outstanding capital stock of Green Mt., and Generex
became a wholly-owned subsidiary of Green Mt.; Green Mt. changed its corporate name to Generex Biotechnology Corporation ("Generex
Idaho"), and Generex changed its corporate name to GBC - Delaware, Inc. Because the reverse acquisition resulted in GBC -
Delaware, Inc. shareholders (formally Generex shareholders) becoming the majority holders of Generex Idaho, GBC Delaware, Inc.
was treated as the acquiring corporation in the transaction for accounting purposes. Thus, our, GBC - Delaware, Inc. (formally
Generex), historical financial statements, which essentially represented the historical financial statements of Generex Pharmaceuticals
Inc., were deemed to be the historical financial statements of Generex Idaho.
In
April 1999, we completed a reorganization in which GBC - Delaware, Inc. merged with Generex Idaho. In this transaction, all outstanding
shares of Generex Idaho were converted into shares of GBC - Delaware, Inc.; Generex Idaho ceased to exist as a separate entity,
and we, GBC - Delaware, Inc., changed our corporate name back to "Generex Biotechnology Corporation." This reorganization
did not result in any material change in our historical financial statements or current financial reporting.
Following
our reorganization in 1999, Generex Pharmaceuticals Inc., which was incorporated in Ontario, Canada, remained as our wholly-owned
subsidiary. All of our Canadian operations are performed by Generex Pharmaceuticals Inc.; Generex Pharmaceuticals Inc. is the
100% owner of 1097346 Ontario Inc., which was also incorporated in Ontario, Canada. In August 2003, we acquired Antigen Express,
Inc. (“Antigen”), a Delaware incorporated company. Antigen is engaged in the research and development of technologies
and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. Antigen also does business under
the name NuGenerex Immuno-Oncology. On February 28, 2019 Generex issued a dividend of Antigen to Generex shareholders in the amount
of 1 share of Antigen for every 4 shares of Generex common stock. Generex still maintains majority control of Antigen.
We
formed Generex (Bermuda), Inc., which is organized in Bermuda, in January 2001 in connection with a joint venture with Elan International
Services, Ltd., a wholly-owned subsidiary of Elan Corporation, plc, (“Elan”) to pursue the application of certain
of our and Elan's drug delivery technologies, including our platform technology for the buccal delivery of pharmaceutical products.
In December 2004, we and Elan agreed to terminate the joint venture. Under the termination agreement, we retained all of our intellectual
property rights and obtained full ownership of Generex (Bermuda), Inc.; Generex (Bermuda), Inc. does not currently conduct any
business activities. We have additional subsidiaries incorporated in the U.S. and Canada which are dormant and do not carry on
any business activities.
On
January 18, 2017, we acquired a majority of the equity interests in Hema Diagnostic Systems, LLC (“HDS”). In December
2018, we acquired the remaining interest in HDS. The company, now a wholly-owned subsidiary of Generex, has been renamed NuGenerex
Diagnostics, LLC (NGDx), and is managed by President Harold Haines, PhD.
On
October 3, 2018, our wholly owned subsidiary, NuGenerex Distribution Solutions, LLC (“NuGenerex”), entered into an
asset purchase agreement (the “Veneto Asset Purchase Agreement”) with Veneto Holdings, L.L.C. (“Veneto”),
pursuant to which NuGenerex purchased certain assets of Veneto and its subsidiaries (the “Assets”). The Veneto Asset
Purchase Agreement contains provisions regarding payment terms, confidentiality and indemnification, as well as other customary
provisions.
Effective
October 3, 2018, NuGenerex assigned the Veneto Asset Purchase Agreement to NuGenerex Distribution Solutions 2, LLC. The
sole member of NuGenerex Distribution Solutions 2, LLC is NuGenerex Management Services, Inc., a wholly-owned subsidiary of Generex
Biotechnology Corporation.
Also,
on October 3, 2018, we acquired certain assets from Veneto (the “First Closing Assets”), 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 Veneto assets (the “Second Closing Assets”), consisting primarily
of Veneto’s management services organization business and other assets. 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. On January 15, 2019, the parties entered into an amendment to the Asset Purchase Agreement
(the “Amendment”) restructuring payment of the New Note.
On
March 28, 2019, the Company entered into an amendment, a “Restructuring Agreement” with Veneto and the equity owners
of Veneto to restructure the payment of the New Note that provided, in lieu of any cash payments, the Company delivered on May
23, 2019 8,400,000 shares of our common stock; plus an aggregate 5,500,000 shares of the common stock of our subsidiary, Antigen.
The Veneto assets acquired by Generex included management services operations, systems, facilities, and other services.
On
January 7, 2019, we acquired a majority interest in Regentys Corporation (“Regentys”) for an aggregate of $15,000,000,
among which $400,000 was paid in cash and the remainder was paid by the issuance of a promissory note with a fair value of $14,342,414
for a total net purchase price of $14,742,414. The total fair value of the assets acquired totaled $907,883 and goodwill of $13,834,581.
Installments payable under the note were tied to specific business development objectives and dates. As of October 26, 2019, an
additional $850,000 was paid for a total of $1,250,000 against the note. 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,
among which $400,000 was paid in cash and the remainder was paid by the issuance of a promissory note with a fair value of $11,472,334
for a total net purchase price of $11,872,663. The total fair value of the assets acquired totaled $2,461,439 and goodwill of
$9,411,224. $1,291,500 principal was paid against the note as of July 31, 2019 and an additional $500,000 was paid subsequently
for a total aggregate of $1,791,500 of principal payments in addition to the $400,000 initial payment. Olaregen is launching an
FDA-510(k) cleared wound care product.
On
May 10, 2019, we acquired from a third party the outstanding Series A Preferred Stock in Olaregen in exchange for 4 million shares
of the Company’s common stock, plus the issuance of a $2 million promissory note increasing our interest in Olaregen to
approximately 62% of the Olaregen’s outstanding voting shares.
On
August 16, 2019, the Company entered into a Share Exchange Agreement to purchase an additional 900,000 shares of common stock
in Olaregen from other shareholders of Olaregen in exchange for 1,905,912 shares of Generex common stock and 476,478 shares of
Antigen common stock which increased our interest in Olaregen to approximately 77% of the Olaregen’s outstanding voting
shares. In September 2019, the Company converted all of the Series A Preferred Stock of Olaregen into common stock of Olaregen.
Historical
Business
Historically,
we have been a research and development company focused on the commercialization of Oral-lyn buccal insulin spray for diabetes.
Additionally, through our wholly-owned subsidiary Antigen Express, we have a deep intellectual property portfolio of immunotherapy
assets relating to the “Ii-Key” technology that activates the immune response for the treatment of cancer and infectious
diseases. We have completed a Phase IIb clinical trial of AE37 immunotherapeutic peptide vaccine with the Ii-Key technology in
over 300 women with breast cancer.
In
2017, we acquired HDS (now NuGenerex Diagnostics) and their diagnostic product portfolio of rapid point-of-care EXPRESS test kits
and cassettes for infectious disease testing.
We
believe that these legacy diagnostics, diabetes and cancer assets are may have significant value which is not being recognized
due to missteps in the clinical development process by previous management, resulting inability to raise capital necessary to
fund further development. We think the products and IP portfolio retain significant value. A recently signed co-development deal
with a major pharmaceutical company for AE37 in triple negative breast cancer, and a licensing deal in China for AE37 in prostate
cancer illustrate the potential for AE37 immunotherapeutic vaccine. Additionally, Oral-lyn has been reformulated to enter clinical
trials for Type II diabetes. The HDS EXPRESS diagnostic technology has been expanded with the new, patent-pending EXPRESS II technology
and a new product pipeline. We filled our first international commercial order for 40,000 units of its NGDx -Malaria PF/PV
Cassette Test Kit to Imres, BV, a Netherlands-based medical distribution company, and was recently granted a CE Mark
Certification under the European Medical Devices Directive (MDD) for its The Express II Syphilis Treponemal Assay, a
rapid point-of-care diagnostic assay for the detection of syphilis antibodies in primary and secondary syphilis. As part of the
reorganization plan, we placed our legacy assets into separate subsidiaries under the NuGenerex family of companies, including
NuGenerex Diagnostics, Nugenerex Immuno-Oncology (Antigen Express), and NuGenerex Therapeutics (Oral-Lyn and RapidMist buccal
delivery technology). Our strategy is to spin out NuGenerex Immuno-Oncology as a separately traded public company, to reignite
the Oral-Lyn development program with a reformulated buccal insulin spray, and to build out the diagnostics business, as detailed
in the following paragraphs, however there are no assurances that we will be able to accomplish our strategic objectives.
Treatment
of Legacy Assets
Generex
and its subsidiary companies have extensive patent portfolios, with intellectual property for composition of matter, formulation,
design, and use in a number of therapeutic areas, across multiple indications. As described, we plan to build our legacy assets
with the ultimate goal to spin-out such assets at the appropriate time, which have been incorporated into NuGenerex subsidiary
companies in an effort to unlock the potential unrealized value of the intellectual property and commercial opportunities for
these development companies in major markets for immuno-oncology, diabetes, and infectious disease testing:
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NuGenerex
Therapeutics: Oral-lyn (Buccal Insulin) and RapidMist Buccal delivery technology
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NuGenerex
Immuno-Oncology: Phase II AE37 + Keytruda in TNBC; Antigen Express (Ii-Key), Licensing, Partnerships, investor dividend paid
(1:4) for spin-out
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NuGenerex
Diagnostics: NGDx Express II rapid diagnostic tests for infectious disease
NuGenerex
Therapeutics
NuGenerex
Therapeutics houses the legacy diabetes assets, Oral-Lyn and RapidMist buccal delivery technology. We believe that our buccal
delivery technology is a platform technology that has application to many large molecule drugs and designed to provide 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 cannabinoid medicines. To that end we have entered into a licensing agreement with Scientus
Pharmaceuticals for the use of the RapidMist technology for the administration of cannabinoids.
Buccal
Delivery Technology and Products
Our
buccal delivery technology involves the preparation of proprietary formulations in which an active pharmaceutical agent is placed
in a solution with a combination of absorption enhancers and other excipients classified “generally recognized as safe”
("GRAS") by the U.S. Food and Drug Administration (“FDA”) when used in accordance with specified quantities
and other limitations. The resulting formulations are aerosolized with a pharmaceutical grade chemical propellant and are administered
to patients using our proprietary RapidMist™ brand metered dose inhaler. The device is a small, lightweight, hand-held,
easy-to-use aerosol applicator comprised of a container for the formulation, a metered dose valve, an actuator and dust cap. Using
the device, patients self-administer the formulations by spraying them into the mouth. The device contains multiple applications,
the number being dependent, among other things, on the concentration of the formulation. Absorption of the pharmaceutical agent
occurs in the buccal cavity, principally through the inner cheek walls. In clinical studies of our flagship oral insulin product
Generex Oral-lyn™, insulin absorption in the buccal cavity has been shown to be efficacious and safe.
Buccal
Insulin Product – Generex Oral-Lyn™
Insulin
is a hormone that is naturally secreted by the pancreas to regulate the level of glucose, a type of sugar, in the bloodstream.
The term “diabetes” refers to a group of disorders that are characterized by the inability of the body to properly
regulate blood glucose levels. When glucose is abundant, it is converted into fat and stored for use when food is not available.
When glucose is not available from food, these facts are broken down into free fatty acids that stimulate glucose production.
Insulin acts by stimulating the use of glucose as fuel and by inhibiting the production of glucose. In a healthy individual, a
balance is maintained between insulin secretion and glucose metabolism.
According
to the Centers for Disease Control (CDC), there are two major types of diabetes. Type 1 diabetes (juvenile onset diabetes or insulin
dependent diabetes) refers to the condition where the pancreas produces little or no insulin. Type 1 diabetes accounts for 5-10
percent of diabetes cases (CDC). It often occurs in children and young adults. Type 1 diabetics must take daily insulin injections,
typically three to five times per day, to regulate blood glucose levels. Generex Oral-lyn™ provides a needle-free means
of delivering insulin for these patients.
According
to the American Diabetes Association, in Type 2 diabetes (adult onset or non-insulin dependent diabetes mellitus), the body does
not produce enough insulin, or cannot properly use the insulin produced. Type 2 diabetes is the most common form of the disease
and accounts for 90-95 percent of diabetes cases, according to the American Diabetes Association. In addition to insulin therapy,
Type 2 diabetics may take oral drugs that stimulate the production of insulin by the pancreas or that help the body to more effectively
use insulin. Generex Oral-lyn™ provides a simple means of delivering needed insulin to this major cohort of individuals.
Studies
in diabetes have identified a condition closely related to and preceding diabetes, called impaired glucose tolerance (IGT). People
with IGT do not usually meet the criteria for the diagnosis of diabetes mellitus. They have normal fasting glucose levels but
two hours after a meal their blood glucose level is far above normal. With the increase use of glucose tolerance tests the number
of people diagnosed with this pre-diabetic condition is expanding exponentially. Per the 2017 Diabetes Atlas Update, published
by the International Diabetes Federation (IDF), approximately 40 million people in the United States and more than 425 million
people world-wide suffer from IGT. Generex Oral-lyn™ is an ideal solution to providing meal-time insulin to the millions
of IGT sufferers. This therapeutic area is currently being investigated.
There
is no known cure for diabetes. The IDF estimates that there are currently approximately 382 million diabetics worldwide per their
2017 Diabetes Atlas Update and is expected to affect over 592 million people by the year 2035. There are estimated to be over
37 million people suffering from diabetes in North America alone and diabetes is the second largest cause of death by disease
in North America.
A
substantial number of large molecule drugs (i.e., drugs composed of molecules with a high molecular weight and fairly complex
and large spatial orientation) have been approved for sale in the United States or are presently undergoing clinical trials as
part of the process to obtain such approval, including various proteins, peptides, monoclonal antibodies, hormones and vaccines.
Unlike small molecule drugs, which generally can be administered by various methods, large molecule drugs historically have been
administered predominately by injection. The principal reasons for this have been the vulnerability of large molecule drugs to
digestion and the relatively large size of the molecule itself, which makes absorption into the blood stream through the skin
inefficient or ineffective. The RapidMist technology provides a recognized and proven drug delivery system for the delivery of
large molecules directly into the blood stream with the attendant advantages.
Oral-lyn
History
In
May 2005, we received approval from the Ecuadorian Ministry of Public Health for the commercial marketing and sale of Generex
Oral-lyn™ for treatment of Type 1 and Type 2 diabetes. We have successfully completed the delivery and installation of a
turnkey Generex Oral-lyn™ production operation at the facilities of PharmaBrand in Quito, Ecuador. The first commercial
production run of Generex Oral-lyn™ in Ecuador was completed in May 2006. While Ecuador production capability may be sufficient
to meet the needs of South America, it is believed to be insufficient for worldwide production for future commercial sales and
clinical trials.
On
the basis of the test results in Ecuador and other pre-clinical data, we made an Investigational New Drug (“IND”)
submission to Health Canada (Canada's equivalent to the FDA) in July 1998, and received permission from the Canadian regulators
to proceed with clinical trials in September 1998. We filed an IND application with the FDA in October 1998, and received FDA
approval to proceed with human trials in November 1998.
We
began our clinical trial programs in Canada and the United States in January 1999. Between January 1999 and September 2000, we
conducted clinical trials of our insulin formulation involving approximately 200 subjects with Type 1 and Type 2 diabetes and
healthy volunteers. The study protocols in most trials involved administration of two different doses of our insulin formulation
following either a liquid Sustacal meal or a standard meal challenge. The objective of these studies was to evaluate our insulin
formulation's efficacy in controlling post-prandial (meal related) glucose levels. These trials demonstrated that our insulin
formulation controlled post-prandial hyperglycemia in a manner comparable to injected insulin. In April 2003, a Phase II-B clinical
trial protocol was approved in Canada. In September 2006, a Clinical Trial Application relating to our Generex Oral-lyn™
protocol for late-stage trials was approved by Health Canada. The FDA’s review period for the protocol lapsed without objection
in July 2007.
In
late April 2008, we initiated Phase III clinical trials in North America for Generex Oral-lyn™ with the first subject screening
in Texas. Other clinical sites participating in the study were located in the United States (Texas, Maryland, Minnesota and California),
Canada (Alberta), European Union (Romania, Poland and Bulgaria), Eastern Europe (Russia and Ukraine),) and Ecuador. Approximately
450 subjects were enrolled in the program at approximately 70 clinical sites around the world. The Phase III protocol called for
a six-month trial with a six-month follow-up with the primary objective to compare the efficacy of Generex Oral-lyn™ and
the RapidMist™ Diabetes Management System with that of standard regular injectable human insulin therapy as measured by
HbA1c, in patients with Type-1 diabetes mellitus. The final subjects completed the trial in August 2011. After appropriate validation,
the data from approximately 450 patients was tabulated, reviewed and analyzed. Those results from the Phase III trial along with
a comprehensive review and supplemental analyses of approximately 40 prior Oral-lyn clinical studies were compiled and submitted
to the FDA in late December 2011 in a comprehensive package including a composite metanalysis of all safety data. We do not currently
plan to expend significant resources on additional clinical trials of Oral-lyn™ until after such time that we secure additional
financing. However, we have undertaken a formulation enhancement project with the University Health Network at the University
of Toronto and the University of Guelph, Ontario to increase the amount of insulin reaching the blood stream. We believe that
the preliminary results from an animal study are encouraging,
In
the past, we engaged a global clinical research organization to provide many study related site services, including initiation,
communication with sites, project management and documentation; a global central lab service company to arrange for the logistics
of kits and blood samples shipment and testing; an Internet-based clinical electronic data management company to assist us with
global data entry, project management and data storage/processing of the Phase III clinical trial and regulatory processes. In
the past, we have contracted with third-party manufacturers to produce sufficient quantities of the RapidMist™ components,
the insulin, and the raw material excipients required for the production of clinical trial batches of Generex Oral-lyn™.
Future
Plans
We
have reformulated the original Oral-Lyn buccal insulin as a new patentable Oral-Lyn 2 that requires only 2 - 3 pre-prandial (before
meal) sprays for the treatment of Type II diabetes. The reformulated Oral-lyn 2 was made possible by new techniques in protein
chemistry and pharmaceutical formulation science, that with minimal changes in the production process and content of the components,
allow the development of a new and improved, concentrated insulin formulation for improved diabetes management.
NuGenerex
has engaged the University of Toronto’s Center for Molecular Design and Pre-formulations (CMDP) through the University Health
Network with the goal of enhancing the Oral-lyn™ 2 formulation to make it more attractive to patients and prospective commercialization
partners by increasing the bioavailability of insulin in the product and reducing the number of sprays required to achieve effective
prandial metabolic control for patients with diabetes. Under the supervision of NuGenerex consultant Dr. Lakshmi P. Kotra, B.Pharm.
(Hons), Ph.D., of CMDP, preliminary efforts succeeded in increasing the insulin concentration in the product by approximately
400 - 500% as confirmed by a variety of in vitro testing procedures, while preserving the solubility, stability,
biologic activity, and potency of the insulin in the formulation.
NuGenerex
subsequently entered into a Research Services Agreement with the University of Guelph pursuant to which Dr. Dana Allen, DVM, MSc.
and Dr. Ron Johnson, DVM, Ph.D. of the Ontario Veterinary College of the University of Guelph conducted a study of the relative
bioavailability of the enhanced formulation in dogs in the University’s Comparative Clinical Research Facility. The University
had previously conducted the studies of the original formulation of Generex Oral-lyn™ for proof of concept, safety, and
toxicity.
In
the new studies, the enhanced NuGenerex Oral-lyn™ 2 formulation was compared with the original formulation in a blinded,
parallel controlled study involving fasted, awake, healthy mature beagle dogs. Each dog received three sprays of either the enhanced
formulation or the original formulation. Each dog was observed with assessments of serum insulin and glucose measured over a two-hour
period. There were no adverse events observed in any of the animals.
In
the dogs given the enhanced Generex Oral-lyn™ formulation (5X), there was a greater than 20-fold increase in serum insulin
at 15 minutes (excluding one dog who had little response at any time point; (with dog included it was greater than 5-fold)) and
almost 500% greater absorption of insulin over the two-hour test period compared to dogs given the original formulation (1X).
There was a 33% decrease in serum glucose at 30 minutes in dogs treated with the enhanced Generex Oral-lyn™ formulation,
compared to a 12% increase in serum glucose in dogs treated with the original formulation.
The
results of the dog studies coupled with the positive findings from the in vitro work provide support and confidence
to move forward with the remaining clinical and regulatory work necessary to achieve FDA approval of the enhanced NuGenerex Oral-lyn™
formulation through a 505(b)2 NDA.
The
combined results provide evidence that the enhanced NuGenerex Oral-lyn™ 2 will be able to be used by people with either
type 1 or type 2 diabetes mellitus as a safe, simple, fast, flexible, and effective alternative to pre-prandial insulin injections
with dosing of only two to four sprays required before meals.
The
Oral-lyn Safety Database contains information on 1,496 subjects. Eight hundred sixty-nine (869) subjects were exposed to Oral-lyn,
while 627 served as Control subjects and were exposed to commercially available oral antihyperglycemics, injected insulin, or
Oral-lyn placebo. There were 695 subjects in pK/pD studies (368, Oral-lyn; 327, Control) and 801 subjects in efficacy trials (501,
Oral-lyn; 300, Control).
Two
hundred seventy-two (272) Oral-lyn subjects reported at least one adverse event (132 in pK/pD studies; 140 in efficacy studies)
while 278 Control subjects reported at least one adverse event (111 in pK/pD studies; 167 in efficacy studies). With respect to
adverse events by Maximum Severity there appeared to be no significant differences between Oral-lyn and the Control groups in
either the Efficacy or the pK studies.
In
summary, there appear to be no indications of any significant unexpected adverse events. The expected events of hypoesthesia oral,
throat irritation, dry throat, and cough were for the most part mild and could be consistent with the Oral-lyn therapy especially
during the learning phase of administration. There was an indication of overlap of some of these events with multiple event terms
in the constellation of upper respiratory tract infection that appeared to be balanced across therapy groups.
Our
strategy is to revitalize our diabetes program by advancing the reformulated buccal spray Oral-lyn 2 for the treatment of Type
II diabetes, and to integrate Oral-Lyn 2 therapy into our end-to-end solution for disease management through our MSO model.
Beyond
Oral-lyn 2 for Type II diabetes, NuGenerex Drug Delivery Solutions will advance the RapidMist buccal delivery technology with
additional small and large molecule drugs which will benefit from an alternative route of administration.
NuGenerex
Immuno-Oncology (NGIO, formerly Antigen Express)
NuGenerex
Immuno-Oncology is developing immunotherapeutic products and vaccines based on our proprietary, patented platform technology,
Ii-Key. The Ii-Key is a peptide derived from the major histocompatibility complex (MHC) Class II associated invariant chain (Ii)
that regulates the formation, trafficking, and antigen-presenting functions of MHC class II complexes, essential for the activation
of T cells in the immune response. T cells recognize antigenic epitopes when they are 'presented' to them by specific molecules,
termed (MHC) on the surface of infected or malignant cells. This interaction activates the T cells, stimulating a multicellular
cascade of actions that eliminates the diseased cell and protects against future disease recurrence.
When
the Ii-Key peptide is linked to an antigenic epitope, it can bind to MHC Class II molecules, displacing resident antigens from
the antigen binding groove, essentially 'hijacking' the MHC class II complex to present the Ii-Key epitope to selectively activate
T-Cell Th1 responses, thereby increasing the intensity and duration of the immune response.
NuGenerex
Immuno-Oncology has developed a number of Ii-Key Hybrid peptides for the immunotherapeutic targeting of tumor associated antigens
(TAAs) in cancer and for vaccines against infectious diseases.
Ii-Key
hybrid peptides can also be used to selectively activate Th2 responses and thereby induce tolerance to antigens involved in harmful
immune reactions, e.g. autoimmunity, allergy, and transplant rejection.
AE37
– Ii-Key/HER2/neu Hybrid Immunotherapeutic Vaccine
Our
most advanced immunotherapy vaccine is AE37, an Ii-Key-Hybrid molecule that contains the HER2/neu antigenic peptide
linked to the Ii-Key to enhance immune stimulation against HER2, which is expressed in numerous cancers, including breast, prostate,
and bladder cancers. We have completed a Phase I clinical trial of AE37 in breast cancer: A phase Ib safety and immunology study
of AE37 and GM-CSF in 16 breast cancer patients who had completed all first-line therapies and who were disease-free at the time
of enrollment to the study (Holmes et al. Results of the first phase I clinical trial of the novel Ii-Key hybrid preventive
HER-2/neu peptide (AE37) vaccine. J Clin Oncol 2008;26:3426-33). Furthermore, we completed a Phase IIb trial of AE37 in the
prevention of cancer recurrence in women who were at high risk of recurrence after undergoing successful primary standard of care
breast cancer therapies and were disease free at time of enrollment. Though the study enrolled 300 subjects, the results were
not statistically significant due to a complete lack of recurrence in the 160 women with HER2-3+ positive tumors who were treated
with Herceptin during primary therapy. Though the trial was not powered to evaluate the prevention of recurrence in subgroups,
the trial indicated efficacy in the subset of patients diagnosed with HER2 1+, 2+, and triple negative breast cancer.
Based
on the results from this trial, NuGenerex has entered into a collaborative agreement with Merck Sharpe & Dohme B.V. (Merck)
and the National Surgical Adjuvant Breast and Prostate Program (NSABP) to conduct a Phase II trial to evaluate the safety
and efficacy of AE37 in combination with the anti-PD-1 therapy, KEYTRUDA (pembrolizumab) in patients with metastatic triple-negative
breast cancer. The trial is scheduled to begin enrolling patients in the second quarter of 2019.
In addition
to the breast cancer program, NuGenerex has conducted a Phase I clinical trial in prostate cancer, enrolling thirty-two HER-2/neu+,
castrate-sensitive, and castrate-resistant prostate cancer patients to demonstrate safety and strong immunological response to
AE37. We are advancing AE37 for the treatment of prostate cancer through a licensing and research agreement with Shenzhen
BioScien Pharmaceuticals Co., Ltd. (“Shenzhen”), for which NuGenerex has received a $700,000 upfront payment,
with additional future milestone and royalty payments.
In exchange
for exclusive rights to AE37 for prostate cancer in China, Shenzhen is financing and conducting the Phase II trials in the European
Union and Phase III trials globally under International Commission on Harmonisation (“ICH”) guidelines, with NuGenerex
retaining the rights to all clinical data for regulatory submissions and commercialization in the rest of the world outside China.
Future
Plans
NuGenerex
Immuno-Oncology has been established to not only to advance the NuGenerex Immuno-Oncology core technology, but also to expand
our portfolio in the field of immunotherapy and personalized medicine through partnerships and acquisitions. As part of our strategy,
we are planning to spin-out NuGenerex Immuno-Oncology as a separate, publicly traded entity to unlock the true value of the Ii-Key
technology for our stockholders as it creates a pure play in immunotherapy, which will foster investment and collaboration.
As
an initial step in accomplishing the spin-out of NGIO, on February 25, 2019, we issued a stock dividend to our shareholders, whereby
our shareholders received 1 share of NGIO for every 4 shares of our stock held on the dividend date. The stock dividends will
enable our stockholders to directly participate in the potentially promising future of NGIO, while creating a large shareholder
base with the potential for substantial liquidity immediately upon spin-out to a national exchange, which will provide NGIO with
ready access to the capital markets to finance its on-going clinical and regulatory initiatives.
Additionally,
we are in discussions with multiple academic institutions and biotechnology development companies to acquire products and technologies
to augment the NGIO development pipeline and product portfolio.
We
plan to finalize our corporate acquisition strategy and to initiate the spin-out process for NGIO in the second quarter of 2020.
NuGenerex
Diagnostics (formerly Hema Diagnostic Systems LLC)
Our
wholly-owned subsidiary, NuGenerex Diagnostics (formerly Hema Diagnostic Systems LLC or HDS) is in the business of developing,
manufacturing, and distributing rapid point-of-care in-vitro medical diagnostics for infectious diseases. These are commonly referred
as rapid diagnostic tests (“RDTs”). We manufacture and sell RDTs based upon our own proprietary EXPRESS platforms
as well as standard “cassette” devices.
Since
its founding, NuGenerex Diagnostics has been developing and continues to develop an expanding line of RDTs for infectious disease
diagnosis. These include products for human immunodeficiency virus (HIV), tuberculosis, malaria, hepatitis B, hepatitis C, syphilis,
and others. These assays are all qualitative in nature and provide a simple positive or negative result directly at the clinical
site. They can be used for definitive diagnosis, triage or in combination with other assays depending on which disease is being
considered.
Each
device incorporates a test strip containing reagent lines (stripes) that have been impregnated with specific antigens or antibodies
that detect the target molecules specific to an infectious disease. The test strips are incorporated into our proprietary EXPRESS
platforms which are easy-to-use and user-friendly diagnostic devices. There are two EXPRESS platforms; the EXPRESS and the EXPRESS
II. The EXPRESS II is an upgraded version of the original EXPRESS and its use involves fewer operator steps, making it of higher
clinical utility value. The Express II platform is designed to be used in a broad range of clinical and laboratory medical settings
and for direct use by consumers in the home. It is simple to use, with fewer steps of operation than other rapid point-of-care
tests. A single drop of blood taken by a simple finger stick is added directly to the device and the assay is activated by placing
a pod of buffer solution onto the device. Results can be read in as early as 5 minutes, and no longer than 30 minutes. The accuracy
of the Express II Syphilis Treponemal Assay is equal to or better than standard laboratory assays for syphilis antibodies with
sensitivities and specificities of over 99%.
We
believe that 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 is designed to 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 EXPRESS and cassette diagnostic kits for infectious disease testing are designed for use in resource-poor
countries throughout the world, especially in sub-Saharan Africa, where the World Health Organization coordinates population screening
for infectious diseases. We recently filled our first international commercial order for 40,000 units of its NGDx -Malaria
PF/PV Cassette Test Kit to Imres, BV, a Netherlands-based medical distribution company.
NuGenerex
Diagnostics was recently granted a CE Mark Certification under the European Medical Devices Directive (MDD) for its The Express
II Syphilis Treponemal Assay, a rapid point-of-care diagnostic assay for the detection of syphilis antibodies in primary
and secondary syphilis. The assay is based upon NuGenerex Diagnostic’s innovative patent pending point-of-care diagnostic
platform, the Express II. The accuracy of the Express II Syphilis Treponemal Assay is equal to or better than standard laboratory
assays for syphilis antibodies with sensitivities and specificities of over 99%.
With
the receipt of the CE Mark Certification for its rapid point-of-care Express II Syphilis Treponemal Assay, we believe NuGenerex
Diagnostics is well situated to enter into this growing syphilis testing market and will now pursue marketing efforts in Europe
and, in parallel, begin plans for the filing of a 510k application with the United States FDA for marketing clearance in the United
States. To this end, NuGenerex Diagnostics is fully qualified as a diagnostic test developer and manufacturer under FDA Good Manufacturing
Procedures (GMP) and is certified by the International Standards Organization for the manufacture of medical devices under ISO
13485-2016 regulations.
NuGenerex
Diagnostics has just begun a new initiative which revolves around the development of quantitative rapid diagnostic assays. These
assays allow laboratory personnel and clinicians to assess the absolute amount of specific target molecules in blood or serum
samples as opposed to “yes” or “no” results of qualitative RDTs. The first assay to be developed is a
multiplex biomarker test for the diagnosis of sepsis and the potential differentiation of infectious sepsis from systemic immune
response syndrome (SIRS).
We
maintain an FDA registered facility in Miramar, Florida and are 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 allows 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. 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 non-governmental organizations (“NGO”)
funding for the purchase of diagnostic products.
We
maintain current U.S. Certificates of Exportability that are issued by two FDA divisions-CBER and CDRH. CBER (Center for Biologicals
Evaluation and Research) is the FDA regulatory division that oversees infectious disease diagnostic devices, including our HIV,
Hepatitis B and Hepatitis C EXPRESS and EXPRESS II kits. The other division, Center for Devices and Radiological Health (CDRH),
is responsible for the oversight of other HDS devices which include Tuberculosis, Syphilis, and the remaining product line. Our
HDS facility maintains FDA Establishment Registration status and is in accord with GMP (Good Manufacturing Practice) as confirmed
by the FDA.
We
do not currently have FDA clearance to sell our products in the United States. We intend to submit selected devices to the FDA
under a Pre-Market Approval Application (PMA) or through the 510K process. The 510K would require the appropriate regulatory administrative
submissions as well as a limited scientific review by the FDA to determine completeness (acceptance and filing reviews); in-depth
scientific, regulatory, and Quality System review by appropriate FDA personnel (substantive review); review and recommendation
by the appropriate advisory committee (panel review); and final deliberations, documentation, and notification of the FDA decision.
The PMA process is more extensive, requiring clinical trials to support the application. We expect to apply to the FDA for clearance
of our first RDT (Express II Syphilis Treponemal Assay) for FDA 510K approval in early 2020. We anticipate the FDA process will
be completed within 9 months after submission. During this timeline, we will be preparing documentation for additional rapid tests
to undergo either the FDA PMA or 510k process.
Generex
plans to use the NuGenerex Diagnostics subsidiary to build a multi-faceted diagnostics business focused on personalized medicine.
To that end, we are exploring opportunities in multiplex assays for point-of-care infectious disease testing, pharmacogenomic
testing for medication management, and biomarker analysis for personalized cancer treatment, including immunotherapy.
The
“New” Generex & The NuGenerex Family of Subsidiary Companies
Through
reorganization and acquisition, we are building the family of NuGenerex subsidiary companies to provide end-to-end solutions for
physicians and patients. To that end, our subsidiary NuGenerex Distribution Solutions (NDS) has established a network of physicians,
ancillary service providers, and patients through a Management Services Organization (MSO). As the MSO network currently consists
of orthopedic surgeons and podiatrists, we have acquired and/or have agreements to acquire a number of revenue-generating companies
that manufacture, market and distribute surgical and wound healing products. The acquisitions include Olaregen Therapeutix, a
regenerative medicine company that has recently launched Excellagen wound conforming gel, which is FDA-cleared for the management
of 17 wound healing indications, and Regentys, a clinical-stage development company with regenerative medicine technology for
the treatment of inflammatory bowel diseases; Pantheon Medical, a manufacturer of patented, FDA-cleared foot & ankle kits
with surgical plates, screws, and tools; and MediSource Partners, a licensed distributor of surgical supplies, orthopedic implants,
and biologics, including human placental derived tissue products for regenerative medicine applications. Additionally, NDS will
be launching a new software as a service (SaaS) business called DME-IQ that enables orthopedic surgeons to manage in-house programs
for orthopedic durable medical equipment, including inventory controls, insurance adjudication, and patient billing. Together,
under the banner of these subsidiary companies offer a range of products and services to meet the needs of our proprietary distribution
channels. Cross selling of products and services will enhance the revenue opportunities for the entire family of NuGenerex subsidiaries.
Our
corporate mission is to provide end-to-end solutions for physicians and patients through geographic expansion of our MSO model,
diversification of management services offerings, the establishment of an HMO in partnership with Dr. Kiran Patel, and the proposed
acquisition of an Accountable Care Organization for complex care.
The
NuGenerex family of subsidiary companies offer a broad range of products and services to meet the needs of physicians and patients,
including:
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NuGenerex
Distribution Solutions: MSO, Ancillary Services, DME-IQ, and Surgical Products.
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NuGenerex
Regenerative Medicine: Olaregen Therapeutix, Regentys.
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NuGenerex
Surgical Products: Pantheon Medical – Foot & Ankle, LLC and MediSource Partners, LLC.
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NuGenerex
Health: MSO/HMO with Dr. Kiran Patel: Ancillary health management services for chronic conditions – 65,000
+ Patient population with Diabetes; Ophthalmology, Podiatry, Chronic Care Management (CCM).
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Services
and Products
NuGenerex
Distribution Solutions
Generex
Biotechnology established NuGenerex Distribution Solutions (NDS) in 2018 as the foundational piece in the transformation of the
Company into an integrated healthcare holding company that provides end-to-end solutions for physicians and patients. Part of
the NDS model includes a physician-owned MSO which is positioned to procure our new products and services as made available. NDS
will also continue to provide inventory selection and management, as well as management services for legal and regulatory compliance,
accounting, HR, IT and customer support services through the MSO networks.
We
serve as the General Partner of the MSO which is 99% owned by over 50 entities. The entities included orthopedic and podiatric
surgery centers with over 100 Physicians in 5 states and this MSO structure creates the foundation of our future alternative distribution
channel with an open sales channel for products and services. The company plans to expand its geographic footprint nationally
where appropriate.
NuGenerex
Distribution Solutions Corporate Mission NDS benefits the medical community by providing cost effective ancillary services that
ultimately deliver better outcomes and enhance the doctor-patient relationship. NDS will make available numerous best of class
products and services using a patient centric approach that enables ancillary service providers, physicians, and patients to better
coordinate healthcare services from diagnosis through treatment and follow-up.
NDS
Expansion
The
NuGenerex MSO network has operated in five states and is configuring a roll out which will be compliant and take costs out of
healthcare through better outcomes. Those organizations which invest in our new MSO model will be aligned solely with our GNBT
shareholders and will receive discount codes to procure our products such as Excellagen.
DME-IQ
NuGenerex
Distribution Solutions is planning a launch DME-IQ, a novel software as a service (SaaS) solution for physicians to manage in-office
distribution of durable medical equipment (DME). DME-IQ supports the development and management of compliant and profitable in-office
DME programs. DME-IQ focuses on several key areas which include negotiating on behalf of the physicians with key vendors to decrease
the COGS (Cost of Goods Sold), increasing insurance collections by providing oversight of the coding during the billing process,
providing the necessary personnel to manage the appeals processes, and ensuring compliance with state and federal regulations.
DME-IQ
will automate and provide the orthopedic practices with a proprietary, tablet-based software package that immediately verifies
patient benefits and eligibility. This unique system manages DME inventory, collects patient copays and deductibles, and links
patient information with the DME products and necessary patient forms all in one easy to use platform.
The
DME Market
The US
market for DME is large and growing, a result of several factors including the rising prevalence of chronic diseases requiring
long-term care, the rapidly growing geriatric population, and the trend toward home healthcare services. Chronic disorders such
as diabetes, diabetic foot & pressure ulcers, chronic pain, and cancer that require long-term patient care and postoperative
recovery are driving demand for DME. According to a 2018 market report by Grand View Research, Inc., the US DME market is expected
to reach $70.8 billion by 2025, growing at a 6.0% CAGR during the forecast period.
DME-IQ
tracks and maintains DME inventory to ensure an adequate supply and product mix for orthopedic patient populations, and the system
facilitates insurance claim submissions and adjudication to help achieve optimal reimbursements. With the DME-IQ system, the practice
gains control of their DME program from an operations and financial perspective, while patients gain access to a wider variety
of DME products that are custom fitted for their needs.
The
explosion of high deductible insurance plans has resulted in a dramatic increase of patient out-of-pocket payments for care, and
the subsequent requirement that physicians spend more time as collection agents rather than doctors. DME-IQ provides practice
workflow solutions for DME with custom, tablet-based software that removes the administrative burden from the practice, facilitating
patient eligibility review, collection of patient co-pay and deductibles, centralized insurance adjudication, DME product procurement,
and other support services that allow physician practices to increase revenue and service quality. The launch of DME-IQ advances
the mission of NDS to provide physicians with end-to-end solutions for patient centric care.”
NuGenerex
Regenerative Medicine
Olaregen
Therapeutix, Inc.
Our
majority-owned subsidiary, Olaregen Therapeutix, Inc. is a regenerative medicine company focused on the development, manufacturing
and commercialization of products that fill unmet needs in the current wound care market. We aim to provide advanced healing solutions
that substantially improve medical outcomes while lowering the overall cost of care. Olaregen’s first product, Excellagen®
(wound conforming matrix) is a topically applied product for dermal wounds and other indications. Excellagen is a FDA 510(k) cleared
device for of a broad array of dermal wounds, including partial and full thickness wounds, pressure ulcers, venous ulcers, diabetic
ulcers, chronic vascular ulcers, tunneled/undermined wounds, surgical wounds (donor sites/ grafts, post-Mohs surgery, post-laser
surgery, podiatric, wound dehiscence), trauma wounds (abrasions, lacerations, second-degree burns and skin tears) and draining
wounds, enabling Olaregen to market Excellagen in multiple vertical markets.
The
Wound Care Market
Total
Global Wound Care Industry is expected to reach $22.01 billion by 2022, according to Markets and Markets; Bioactive Wound Care
Market (i.e. skin substitute) is valued at $7.8 billion; In the U.S. There are 6.5 million patients in the U.S. with chronic wounds
(NIH estimate).
Olaregen
Highlights
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Received
FDA 510(k) clearance on October 3, 2013, for 17 indications;
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Obtained
Intellectual properties and global rights of Excellagen® except China, Russia and CIS.
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Received
Patent on October 10, 2017;
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Has
a unique Healthcare Common Procedure Coding System (HCPCS) Code - Q4149
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Clinical
data show significant tissue growth and positive wound closure (PDGF)
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Ease
of use – No grafting
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Low
cost provider with High profit margins;
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Low
execution risk (seasoned management team with product launch experience);
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No
development risk (over $20 million invested and completed);
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No
regulatory risk (FDA cleared).
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Excellagen
is an advanced, wound care management platform:
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Formulated
fibrillar Type I bovine collagen (2.6%)
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Viscosity
optimized for dripless wound coverage
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Flowable
with no staples or sutures required
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Pre-filled,
ready to use syringes
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One
syringe covers up to 5.0 cm2 wound
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Refrigerated
storage only with no thawing or mixing
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Treatment
at only one-week intervals
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Activates
human platelets
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Triggers
the release of Platelet-Derived Growth Factor (PDGF)
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Accelerates
granulation tissue growth in “non-healing wounds”
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Additionally, Excellagen can
serve as an Enabling Delivery Platform for pluripotent stem cells, antimicrobial agents, small molecule drugs, DNA-Based Biologics,
conditioned cell media and peptides. Olaregen's initial focus will be in advanced wound care including diabetic foot ulcers (DFU),
venous leg ulcers and pressure ulcers. Future products focusing on innovative therapies in bone and joint regeneration comprise
the current pipeline.
Excellagen®
History
Olaregen
Therapeutix Inc. acquired the intellectual properties and global rights of Excellagen® except in China, Russia and CIS, from
Taxus Cardium, Inc. (OTC: CRXM), and its wholly owned subsidiaries Activation Therapeutics, Inc. and Gene Biotherapeutics, Inc.
On
August 2018, Olaregen acquired the IP for a total consideration is $4,200,000 and is broken down as follows: 1) $650,000 upfront
payment, 2) $200,000 sales credit for collagen solution, and 3) $3,350,000 payable at 10% of net sales, which is defined as total
sales less allowances, including hub fees, sales concessions, co-promote fees, cost of goods sold and other charges.
Regentys
Corporation
Our
majority-owned subsidiary, Regentys Corporation (formerly Asana Medical, Inc.) is a regenerative medicine company developing a
tissue engineered therapy for the treatment of Ulcerative Colitis.
Overview
In
January 2019, we acquired a majority interest in Regentys Corporation, a Florida corporation, a development-stage regenerative
medicine company. Since its formation in May 2013 as Asana Medical Inc., Regentys has been developing a first-in-class tissue
engineered therapies for the treatment of Ulcerative Colitis (UC) and other inflammatory bowel diseases.
Ulcerative
Colitis
According
to an article that was published in The Lancet on December 23, 2018 named worldwide incidence and prevalence of inflammatory
bowel disease in the 21st century: a systematic review of population-based studies. (2018 Dec 23;390(10114):2769-2778),
Ulcerative Colitis affects an estimated 3.2 million patients in Europe, the United States and Japan. It is a chronic, inflammatory
disease that causes sores or ulcers in the lining of the large intestine (the colon). Immunological in nature, UC is thought to
be facilitated by a variety of hereditary, genetic and environmental factors and it is increasingly being diagnosed in more urbanized
areas. Symptoms, including urgency, bleeding, and diarrhea, that substantially affect quality of life.
Regentys™
Extracellular Matrix Hydrogel (“ECMH”)
Regentys’
initial product, ECMH™ Rectal Solution, is a first-in-class, non-pharmacologic, non-surgical treatment option for millions
of patients suffering from mild to moderate Ulcerative Colitis. Its product candidate is a powder that is reconstituted
with saline and delivered as a liquid via enema. As ECMH reaches body temperature, it gels and coats the mucosal lining of the
GI tract.
The
core technology is derived from ECM, a safe and effective FDA-approved base now extensively used for surgical applications
and wound treatment. ECMH acts as a bio-scaffold, separating the damaged tissue from waste flow, covering ulcerations to limit
the inflammatory response, and facilitating a healing environment using endogenous (the body’s own) stem cells.
Pre-Clinical
Results
Published
pre-clinical results in the Journal of Crohn’s and Colitis highlight the promise of Regentys technology.
Animal data show the ECMH therapy can both alleviate clinical symptoms and facilitate healing in UC patients. Previous pre-clinical
ECM animal data for approved products has been shown to have a high correlation with human data.
Competition
Currently
four biologics are FDA-approved, including top-selling antibody medicines Humira® (adalimumab), Simponi® (golimumab),
Remicade® (infliximab) and Entyvio® (vedolizumab), all of which act to suppress the pro-inflammatory protein, TNF-a (Tumor
Necrosis Factor Alpha), a leading cause of the proliferation of ulcerative colis and other forms of IDB. However, even with these
options, more than half of all UC patients do not achieve long-term remission. Moreover, 20-30% of non-responsive patients will
undergo colon removal surgery in an attempt to remediate the disease.
Regentys
Advantages
We
expect our product to offer a true alternative to patients non-responsive to first line therapies such as 5-ASA. Unresponsive
patients will then need to choose among therapies that alter the body’s immune system or pose long term health risks or
perhaps both. Regentys’ technology is expected to enable targeted tissue healing but pose none of the health risks of more
expensive market-leading biologics that generally suppress the immune system. We expect to provide our therapy at a cost less
than other therapies.
Market
In
2023, when we expect to receive approval, the projected drug costs for UC alone are expected to exceed $7.5B globally according
to a 2017 report by Allied Market Research; including other inflammatory bowel disease indications, the global market is expected
to be double the UC market. Based upon the nature of IBD, and the characteristics of Regentys’ technology, management believes
variations of Regentys’ core technology will also be effective in treating IBD diseases such as Crohn’s, rectal mucositis,
proctitis and anal fissures.
Intellectual
Property
Regentys
in-licensed patents and co-developed its technology platform with the University of Pittsburgh. It now holds patent rights in
US and foreign jurisdictions, and has other global filings pending; as well, it has patent applications pending for similar indications
predicated on its existing technology in other major global markets.
Regulatory
Path
The FDA has
affirmed our approach to file a 510(k) de novo application on its ECM hydrogel. We have developed a protocol
and has engaged a clinical research organization to manage the conduct of its first-in-human clinical trials expected to start
in Q2/Q3 2020 in Australia. Additionally, we have engaged consultants to assist in managing the trials and regulatory approval
process in Australia, the US and Europe, jurisdictions in which we initially expect to undertake clinical trials and, among other
markets, where it will first seek governmental approval to promote and sell medical devices.
Product
Development
Since
2013, we have maintained a research and development agreement with the University of Pittsburgh supplemented with personnel from
the affiliated McGowan Institute of Regenerative Medicine. In February 2018, Regentys entered into a development agreement with
(and has received a co-investment by) Cook Biotech, Inc., a global leader in ECM manufacturing technology (CookBio). Product batches
now on hand are expected to be sufficient for additional development and testing. A larger clinical batch with finalized specifications
will be generated in the coming months for use in clinical trials. There are alternate providers of development services who can
assist with product development activities. Notwithstanding these options, management believes that because of the nature of ongoing
development activities, and the reliance upon certain bench and manufacturing processes and ECM product expertise and technology,
any interruption in the development relationship with CookBio would subject the Company to substantial expenditures of time and
cost to duplicate the product.
Manufacturing
Regentys
has an exclusive manufacturing agreement with CookBio for the production of biomaterial and use of its proprietary technology
conditioned upon the completion of final product development work. Management has negotiated an agreement with a third-party manufacturer
for product components and kitting. We believe that there are alternate sources of these manufacturing and supply services. However,
because of the nature of regulation in the medical device industry, and the reliance upon the collection, reporting and management
of medical device manufacturing data, a change of manufacturer would substantially impact the time and cost required for clinical
product production and regulatory compliance.
Operations
Currently,
Regentys employs four full-time contract employee and several part-time consultants. We supplement our business operations by
engaging external legal (intellectual property, corporate and health care), accounting and tax professionals. We also have contracted
with information services, regulatory and clinical trial companies who make available professionals to manage the information
services, regulatory, clinical, and compliance aspects of the business. Upon payment of the interim note, Regentys will formally
add two contract employees, additional administrative staff and a third-party provider to assist with employee payroll and benefits
as well as undertake clinical trial activities suing external support.
NuGenerex
Surgical Products
MediSource
Partners & Pantheon Medical – Foot & Ankle
Pantheon
Medical is a manufacturer of orthopedic foot & ankle surgery kits that offer physician friendly “all-in-one,”
integrated surgical kits that include plates, screws, and tools required for orthopedic surgeons and podiatrists conducting foot
and ankle surgeries.
MediSource
Partners is a 10-year old private company that is an FDA registered distributor of surgical, medical, and biologic supplies, with
over 25 vendor contracts for nationwide distribution of implants and devices for spine, hips, knees, foot, ankle, hand, and wrist
surgeries. Additional product lines include biologics (blood, bone, tissue, stem cells), durable medical equipment, and soft goods.
We maintain partnerships and contracts with hospital systems for ordering, billing and inventory management.
The
acquisitions of Pantheon and MediSource were finalized on August 1, 2019, immediately subsequent to the end of our 2019 fiscal
year. MediSource Partners has contracts with over 25 vendors (including Pantheon Medical) for distribution of:
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Biologics
(blood, bone, tissue, and stem cells)
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Durable
medical equipment
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Kits
to process bone marrow aspirates and platelet rich plasma biologics
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Historical
Background
MediSource
Partners was founded in 2009 and designed to be unique amongst its competitors by operating as a service-focused, “one stop
shop” for the healthcare professionals it serves. With over 25,000 products in its catalogue, including thirteen (13) lines
dedicated to spine, MediSource prides itself on its ability to service everything from small private practices across several
disciplines, to entire hospital systems. The large and broad-based inventory allows our client physicians to “customize”
their operating environment by selecting and implementing the hardware, biologics, soft goods and ancillary tools they feel most
confident in and comfortable with. In addition, the “one stop shop” model reduces the burden placed on support staff
tasked with managing multiple reps from multiple vendors and shortens the distribution chain to reduce costs and potential redundancies.
The success of this model is demonstrated in MediSource’s ability to offer this client-focused, low-impact service at a
pricing matrix often below even standard GPO pricing, thus increasing client profitability and productivity.
Pantheon
Medical was founded in 2014 to build a manufacturing company with proprietary product lines that offer convenience and cost effectiveness
to physicians. Pantheon is contracted with MediSource Partners for nationwide distribution of its proprietary “All-in-One”
Foot & Ankle Surgery Kit.
NuGenerex
Health, LLC
In
addition to our efforts in orthopedic medicine, we are currently in the process of setting up NuGenerex Health MSO to provide
ancillary health services in partnership with Arizona Endocrinology Center and Paradise Valley Family Medicine, two major physician
practices that care for a population of ~65,000 patients, approximately 25,000 of whom are insulin dependent diabetics with chronic
care needs. With an initial focus on the management of complex diabetes patients, NuGenerex Health will offer ophthalmology, podiatry,
chronic care management (CCM) services to provide patients with integrated, concierge care to improve outcomes and reduce costs.
NuGenerex Health will employ ophthalmologists, podiatrists, and medical staff to provide ancillary health services for chronic
care diabetes patients in support of the endocrinology and family medicine practices. By bringing the specialty ancillary care
directly to the patients who regularly visit the clinic, NuGenerex Health provides an integrated, collaborative care model to
not only enhance patient wellbeing, but also to comply with CMS guidelines for diabetes and chronic care management that can lead
to 5-star ratings and increased reimbursements.
Ophthalmology
Regular
eye exams for persons diagnosed with diabetes mellitus are important for detecting potentially treatable vision loss. Monitoring,
surveillance, and evaluation of visual health are widely recognized as prerequisites for effective, accessible, and high-quality
individual and population-based health services.
Medicare
Part B (Medical Insurance) covers preventive and diagnostic eye exams as part of a comprehensive diabetes care plan, with
reimbursements averaging $215 per patient for standard eye exam with accompanying tests for glaucoma and macular degeneration.
Podiatry
According
to an article that was published in Therapeutics Advances Endocrinology & Metabolism, Financial burden of diabetic
foot ulcers to world: a progressive topic to discuss always(2018 Jan; 9(1): 29–31.), as diabetic foot ulcers (DFUs)
are the leading cause of non-traumatic lower extremity amputation costing an estimated $13 billion annually, CMS promotes preventive
and diagnostic foot exams by a podiatrist, with reimbursement rates averaging $175 for a new patient evaluation, and $150 for
follow up. Under the CMS guidelines, patients are eligible for diabetic foot exams every six months.
Chronic
Care Management (CCM)
According
to the CDC an estimated 117 million adults have one or more chronic health conditions, and 2/3 of Medicare patients have 2 or
more chronic conditions. The Centers for Medicare & Medicaid Services (CMS) made benefit payments of $583 billion in 2018,
with chronic care patients accounting for 99% of expenditures. Recognizing chronic care management (CCM) as a critical component
of health care, CMS has established reimbursement codes to promote adoption in the marketplace, including significant improvements
in 2017 that increased payment amounts and introduced new billing codes. NuGenerex Health is designed to provide comprehensive
ancillary services to fill the current gaps in care that lead to significant morbidity and astronomical costs of diabetes.
Once
the model is established for the diabetes population in Arizona, NuGenerex Health plans to expand to other states.
NuGenerex
Health HMO
Generex
is in the process of building the final link in our corporate mission to provide physicians, hospitals, and all healthcare providers
with an end-to-end solution for patient centric care from rapid diagnosis through delivery of personalized therapies, streamlining
care processes, minimizing expenses, and delivering transparency for payers.
Generex
intends to establish NuGenerex Health a multi-specialty Management Services Organization (MSO) that will serve as in-network providers
for a health maintenance organization (HMO) that provides healthcare services and disease management solutions for patients living
with chronic medical conditions. NuGenerex Health will serve patients with Chronic Special Needs Plans (C-SNP) and Dual-Eligible
Special Needs Plans under Medicare Advantage and Medicare Part B and Part D. In doing this, Generex intends to partner with an
experienced HMO developer. Following the roadmap established by this partner in building some of the most successful HMO companies
in recent history, NuGenerex plans to generate significant membership growth by developing patient centric engagement programs
and building on our strong provider relationships. The HMO infrastructure will be managed by Beacon Health Solutions, which has
provided back-end services for HMOs since 2009.
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 October 31, 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 three months ended October 31, 2019 and 2018, Antigen expensed $37,076 and $0, respectively, to NSABP for clinical trials
for additional research and development relating to Antigen’s peptide immune therapeutic vaccines and related technologies.
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 three months October 31, 2019 and 2018, NGDx expended $138,674 and $141,067 on research and development relating to its rapid
diagnostic tests.
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, 2019 filed with the SEC on November
12, 2019, 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.
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.
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 October 31, 2019 and July 31, 2019, 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 October 31, 2019 compared to three months ended October 31, 2018
We had a net loss for the three months ended
October 31, 2019 of $9,312,547 and a net gain of $17,785,747 in the corresponding three months of the prior fiscal year. The net
loss for the three months ended October 31, 2019 was primarily caused by general and administrative expenses of $4,787,039 and
other expenses consisting of changes in fair value of derivative liabilities of approximately $1,836,000, and interest expense
of approximately $2,516,000. The net gain for the three months of the prior fiscal year was caused primarily by the change in fair
value of contingent purchase consideration of $19,545,098 which did not exist during the first quarter of 2020. One of the reasons
for the increase in net loss for the three months ended October 31, 2019 is due to additional expenses incurred from entities acquired
during fiscal year 2019.
The $2,811,148 increase in general and administrative
expenses in the quarter ended October 31, 2019 versus the comparative previous fiscal quarter is due to compensation expense of
approximately $1,613,000 not including compensation incurred from newly acquired entities and approximately $1,375,000 of expenses
incurred from Regentys, Olaregen and MediSource Pantheon all of which had not yet been acquired in the previous fiscal year.
Our
interest expense in the three months ended October 31, 2019 was $2,638,642 compared to the previous year’s fiscal three
months of $165,716 which is primarily due to the amortization of debt discount relating to the convertible 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.
As
of December 16, 2019, the Company’s cash position is not sufficient for twelve months of operations. Anticipated
revenues associated with MediSource and Pantheon acquisitions 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 $3 million during the three months ended
October 31, 2019 (including proceeds from issuance of convertible notes), our cash balances have been low throughout fiscal 2019.
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 during the three months ending October 31, 2019.
Convertible
Note Transactions
Financing
– August 8, 2019
On
August 8, 2019, borrowed $1,000,000 from an investor with a $150,000 original issue discount. The note accrues at 9% per annum
and has a maturity date of August 7, 2020 .
Financing
– August 14, 2019
On
August 14, 2019, we entered into a convertible note and securities purchase agreement with an investor in the principal amount
of $1,100,000. The note accrues at 10% per annum and has a maturity date of August 14, 2020 and is convertible into
common voting shares at a variable rate determined in the instrument.
Financing
– August 29, 2019
On
August 29, 2019, we entered into a convertible note and securities purchase agreement with an investor in the principal amount
of $250,000. The note accrues at 9% per annum and has a maturity date of August 28, 2020 and is convertible into common
voting shares at a variable rate determined in the instrument.
Financing
– September 13, 2019
On
September 13, 2019, we entered into a convertible note and securities purchase agreement with an investor in the principal amount
of $872,000. The note accrues at 9.5% per annum and has a maturity date of September 12, 2020 and is convertible into
common voting shares at a variable rate determined in the instrument.
Cash
Flows for the Three Months ended October 31, 2019
For
the fiscal quarter ended October 31, 2019, we used $1.8 million in cash to fund our operating activities. The use for operating
activities included a net loss of $9.2 million. Changes to working capital included an increase of $2.5 million related to accounts
payable and accrued expenses.
The
use of cash was offset by non-cash expenses of $0.2 million related to depreciation and amortization, $0.8 million related to
stock compensation, $0.4 loss on settlement of debt, $2.2 million of amortization of debt discount and $3.0 million change
in fair value of downside protection partially offset by a gain in fair value of derivative liabilities - convertible notes of
$1.5 million.
In
the three months ended October 31, 2019, we had net cash provided by investing activities of $0.05 million primarily relating
to cash received in the acquisition of MediSource Pantheon.
We
had cash provided by financing activities in the three months ended October 31, 2019 of $2 million, most of which pertained to
proceeds from investors of $3 million partially offset by payments on notes payable of $0.9 million.
Our
net working capital deficiency October 31, 2019 increased to $32.1 million from $28.0 million at October 31, 2019, which was
attributed primarily to an increase in accounts payable and accrued expenses as well as increase in 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:
•
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Payment
of $15,750,000 by delivery of Generex common stock, initially valued at $2.50 per share.
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•
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If,
on the first to occur of (i) the ninetieth (90th) 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.
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•
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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.
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•
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All
Generex shares issued pursuant to the Amendment will be delivered pro rata to the six
equity owners of Veneto as distributions from Veneto.
|
As
of the date hereof, we had delivered the shares of Generex Common Stock to the transfer agent for distribution to the Veneto equity
owners.
On
March 28, 2019, we entered into an amendment Restructuring Agreement with Veneto with respect to the payment terms of the January
15, 2019 promissory note. The parties agreed to restructure the terms as follows:
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In
lieu of any payments under the agreement or the note, we will deliver shares of its common
stock and the common stock of its subsidiary, Antigen;
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•
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All
shares of our common stock delivered pursuant to the foregoing sentence will be outstanding
shares held by existing shareholders;
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•
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8.4
million of our shares have been placed in escrow as of May 6, 2019, and delivered to
the transfer agent on May 9, 2019 for transfer;
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5.5
million of Antigen’s common stock as the original agreement was pre dividend and
the restructuring was ex-dividend, and the company honored the intent of the prior agreements;
and
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Limited
“downside protection” to ensure the value of our common stock to be delivered.
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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:
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$800,000
on or before January 15, 2019. The Company has paid this installment.
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•
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$800,000
on or before January 31, 2019. As of the date this quarterly report was filed, the Company
has paid $796,500 of this installment and remaining balance of $3,500 is payable on or
before January 31, 2020 per extension in amended agreement.
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•
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$3,000,000
on or before February 28, 2019. 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 January 31, 2020 per extension in amended agreement.
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•
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$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 January 31, 2020 per extension in amended agreement.
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•
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$6,000,000
on or before January 31, 2020.
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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
November 24, 2019, the Company and Olaregen amended the Stock Purchase Agreement and Promissory Note to extend the due date of
the remaining balance of the note on or before January 31, 2020. 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:
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$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 $1,012,450 and the remaining balance
is payable on or before December 30, 2019.
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•
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$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 December 30, 2019 per extension in amended
agreement.
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•
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$3,000,000
to initiate a first-in-human pilot study on or before December 30, 2019.
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•
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$5,000,000
to initiate a human pivotal study on or before February 1, 2020.
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•
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$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
November 25, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of
the remaining balance of the note on or before December 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:
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the
timing and amount of expenses incurred to complete our clinical trials;
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the
costs and timing of the regulatory process as we seek approval of our products in development;
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the
advancement of our products in development;
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our
ability to generate new relationships with industry partners throughout the world that
will provide us with regulatory assistance and long-term commercialization opportunities;
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the
timing, receipt and amount of sales, if any, from Generex Oral-lyn™ in India, Lebanon,
Algeria and Ecuador;
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the
cost of manufacturing (paid to third parties) of our licensed products and the cost of
marketing and sales activities of those products;
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the
costs of prosecuting, maintaining, and enforcing patent claims, if any claims are made;
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our
ability to maintain existing collaborative relationships and establish new relationships
as we advance our products in development;
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our
ability to obtain the necessary financing to fund our operations and effect our strategic
development plan; and
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the
receptivity of the financial market to biopharmaceutical companies.
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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
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 August 1, 2020. The Company is evaluating the effect that ASU 2017-04 will
have on its 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% effective January
1, 2018 and the establishment of a territorial-style system for taxing foreign-source income of domestic multinational corporations.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Act (“SAB118”),
which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment. The
Company remeasured its deferred tax assets and liabilities as of July 31, 2018, applying the reduced corporate income tax rate
and recorded a provisional decrease to the deferred tax assets of $31,876,520, with a corresponding adjustment to the valuation
allowance. In the fourth quarter of fiscal year ended July 31, 2019, we completed our analysis to determine the effect of the
Tax Act and there were no material adjustments as of July 31, 2019.
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 consolidated
financial statements.