United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q 

 

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: January 31, 2020

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: ________________ to _______________

 

Commission File No. 0-25169

 

Generex Biotechnology Corporation

  (Exact name of registrant as specified in its charter)

 

Delaware 98-0178636
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)

 

10102 USA Today Way, Miramar, Florida 33025

(Address of principal executive office)

 

Registrant's telephone number: (416) 364-2551

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ YES  ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☒ YES  ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”,  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
  Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ YES   ☒ NO

 

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   GNBT   OTCQB

 

As of March 17, 2020, the registrant had 78,222,313 shares of common stock, $0.001 par value per share, outstanding.

 

  1  

 

 

GENEREX BIOTECHNOLOGY CORPORATION

 

INDEX

 

PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited)  
Consolidated Balance Sheets – January 31, 2020 (unaudited) and July 31, 2019 3
Consolidated Statements of Operations and Comprehensive Loss - For the three and six-month periods ended January 31, 2020 and 2019 (unaudited) 4
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) - January 31, 2020 (unaudited) 5
Consolidated Statements of Cash Flows - For the six-month periods ended January 31, 2020 and 2019 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 51
Item 4. Controls and Procedures 51
PART II: OTHER INFORMATION  
Item 1. Legal Proceedings 52
Item 1A. Risk Factors 53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 3. Defaults Upon Senior Securities 54
[Item 4. Removed and Reserved.] 54
Item 5. Other Information 54
Item 6. Exhibits 54
Signatures 55

 

  2  

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
         
    January 31, 2020  

July 31,

2019

ASSETS
Current assets                
Cash and cash equivalents   $ 269,069     $ 298,485  
Accounts receivable, net     239,919       36,311  
Inventory, net     861,094       363,008  
Other current assets     504,100       275,731  
Total current assets     1,874,182       973,535  
                 
Property and equipment     483,121       499,993  
Goodwill     38,901,126       38,297,573  
Intangible assets, net     10,647,507       9,834,269  
Operating lease right-of-use assets - net     165,570       —    
Other assets, net     31,621       30,621  
TOTAL ASSETS   $ 52,103,127     $ 49,635,991  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)                
Current Liabilities                
Accounts payable and accrued expenses   $ 24,117,503     $ 19,055,822  
Notes payable, net of debt issuance cost and discount     11,816,170       8,368,379  
Loans from related parties     29,700       19,700  
Operating lease liabilities     90,999       —    
Deferred tax liability     1,502,122       1,502,122  
Total Current Liabilities     37,556,494       28,946,023  
                 
Derivative liability     10,361,668       7,820,283  
Common stock payable     86,239       1,123,188  
Operating lease liabilities - net of current portion     73,361       —    
Total Liabilities     48,079,762       37,889,494  
                 
Redeemable non-controlling interest (Note 11)     4,073,898       4,073,898  
                 
Stockholders’ equity (defiency) (Note 10)                
Common stock, $0.001 par value; authorized 750,000,000 shares; 69,129,001 and 78,608,419 issued and outstanding at January 31, 2020 and  July 31, 2019, respectively     69,127       78,608  
Subscription receivable (Note 12)     (767,690 )     —    
Additional paid-in capital     420,206,242       408,550,211  
Accumulated deficit     (434,763,323 )     (418,727,875 )
Accumulated other comprehensive income     775,191       797,216  
Non-controlling interest     14,429,920       16,974,439  
Total stockholders’ equity (deficiency)     (50,533 )     7,672,599  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)   $ 52,103,127     $ 49,635,991  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

  3  

 

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
     
    Three Months  Ended   Six Months  Ended
    January 31,   January 31,
    2020   2019   2020   2019
Revenue, net   $ 857,427     $ 3,442,265     $ 1,579,088     $ 5,161,413  
Cost of Goods Sold     165,659       2,011,679       299,277       2,882,300  
Gross Profit     691,768       1,430,586       1,279,811       2,279,113  
                                 
Operating expenses                                
Research and development     599,837       810,938       938,571       991,005  
Bad debt expense     3,165       —         14,146       —    
General and administrative     4,647,065       6,498,664       9,434,104       8,771,305  
Total operating expenses     5,250,067       7,309,602       10,386,821       9,762,310  
                                 
Operating Loss     (4,558,299 )     (5,879,016 )     (9,107,010 )     (7,483,197 )
                                 
Other Income (Expense):                                
Interest expense     (1,431,052 )     (2,097,220 )     (3,947,165 )     (2,262,936 )
Interest income     635       —         1,087       768  
Changes in fair value of contingent purchase consideration     —         (4,397,507 )     —         15,147,591  
Change in fair value of derivative liability     (1,406,569 )     —         (3,559,218 )     142,725  
Change in fair value of common stock payable     115,054       —         115,054       —    
Impairment of long lived assets     —         (99,519 )     —         (99,519 )
Other income, net     201       (51,322 )     (8,552 )     (47,436 )
Net (Loss) Income     (7,280,030 )     (12,524,584 )     (16,592,577 )     5,397,996  
                                 
Net loss attributable to noncontrolling interests     (370,527 )     (272,147 )     (557,129 )     (360,403 )
                                 
Net Income (Loss) Available to Common Stockholders   $ (6,909,503 )   $ (12,252,437 )   $ (16,035,448 )   $ 5,758,399  
                                 
Net Income per Common Share                                
Basic   $ (0.11 )   $ (0.19 )   $ (0.24 )   $ 0.12  
Diluted   $ (0.11 )   $ (0.19 )   $ (0.24 )   $ 0.10  
                                 
Shares Used to Compute Income per Share                                
Basic     65,603,002       64,462,007       67,765,862       48,195,762  
Diluted     65,603,002       64,462,007       67,765,862       56,592,846  
                                 
Comprehensive (loss) income:                                
Net Income   $ (6,909,503 )   $ (12,252,437 )   $ (16,035,448 )   $ 5,758,399  
Change in foreign currency translation adjustments     (21,731 )     —         (22,025 )     2,024  
Comprehensive Income Available to Common Stockholders   $ (6,931,234 )   $ (12,252,437 )   $ (16,057,473 )   $ 5,760,423  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  4  

 

   

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 
                                Accumulated                
                    Common   Additional       Other           Redeemable   Total
    Preferred Stock   Common Stock   Stock   Paid-in   Accumulated   Comprehensive       Non-controlling   Non-controlling   Stockholders’
    Shares   Amount   Shares   Amount   Payable   Capital   Deficit   Income   Sub Total   Interest   Interest   Equity
Balance at October 31, 2018     79,590     $ 5       39,797,869     $ 39,798     $ 251,617     $ 370,391,425     $ (391,512,465 )   $ 800,048     $ (20,029,573 )   $ (5,573,501 )   $ —       $ (25,603,074 )
Investment in subsidiary by noncontrolling interest     —         —         —         —         —         —         —         —         —         42,652       —         42,652  
Conversion of preferred series H     (63,000 )     (3 )     28,828,953       28,829       —         (28,829 )     —         —         (3)       —         —         (3)  
Conversion of preferred series I     (16,590 )     (1 )     7,583,560       7,584       —         (7,584 )     —         —         (1)       —         —         (1)  
Elimination of non-controlling interest     —         —         —         —         —         (6,951,015 )     —         —         (6,951,015 )     —         —         (6,951,015 )
Issuance of common stock payable     —         —         100,225       99       (50,323 )     50,224       —         —         —         —         —         —    
Issuance of stock options     —         —         —         —         —         821,651       —         —         821,651       —         —         821,651  
Extinguishment of debt     —         —         46,033       46       —         14,056,067       —         —         14,056,113       —         —         14,056,113  
Issuance of warrants     —         —         —         —         —         9,032,435       —         —         9,032,435       —         —         9,032,435  
Acquisition of NCI of Veneto     —         —         —         —         —         —         —         —         —         51,090       —         51,090  
Acquisition of NCI of Regentys     —         —         —         —         —         —         —         —         —         9,870,762       —         9,870,762  
Acquisition of NCI of Olaregen     —         —         —         —         —         —         —         —         —         11,999,557       —         11,999,557  
Acquisition of NCI of HDS     —         —         —         —         —         —         —         —         —         5,565,285       —         5,565,285  
Redeemable non-controlling interest     —         —         —         —         —         —         —         —         —         —         4,073,898       4,073,898  
Currency translation adjustment     —         —         —         —         —         —         —         398       398       —                 398  
Net Income (Loss)     —         —         —         —         —         —         (12,115,604 )     —         (12,115,604 )     (272,147 )     —         (12,387,751 )
Balance at January 31, 2019     —       $       76,356,640     $ 76,356     $ 201,294     $ 387,364,374     $ (403,628,069 )   $ 800,446     $ (15,185,599 )   $ 21,683,698     $ 4,073,898     $ 10,571,997  
                                                                                                 
Balance at July 31, 2018     79,590     $ 4       31,402,169     $ 31,402     $ 2,168,951     $ 368,379,293     $ (409,386,468 )   $ 798,422     $ (38,008,396 )   $ (5,576,272 )   $ —       $ (43,584,668 )
Investment in subsidiary by noncontrolling interest     —         —         —         —         —         —         —         —         —         133,679       —         133,679  
Conversion of preferred series H     (63,000 )     (3 )     28,828,953       28,829       —         (28,829 )     —         —         (3)       —         —         (3)  
Conversion of preferred series I     (16,590 )     (1 )     7,583,560       7,584       —         (7,584 )     —         —         (1)       —         —         (1)  
Elimination of non-controlling interest     —         —         —         —         —         (6,951,015 )     —         —         (6,951,015 )     —         —         (6,951,015 )
Issuance of common stock payable     —         —         8,495,924       8,495       (1,967,657 )     1,959,162       —         —         —         —         —         —    
Issuance of stock options     —         —         —         —         —         924,845       —         —         924,845       —         —         924,845  
Extinguishment of debt     —         —         46,033       46       —         14,056,067       —         —         14,056,113       —         —         14,056,113  
Issuance of warrants     —         —         —         —         —         9,032,435       —         —         9,032,435       —         —         9,032,435  
Acquisition of NCI of Veneto     —         —         —         —         —         —         —         —         —         51,090       —         51,090  
Acquisition of NCI of Regentys     —         —         —         —         —         —         —         —         —         9,870,762       —         9,870,762  
Acquisition of NCI of Olaregen     —         —         —         —         —         —         —         —         —         11,999,557       —         11,999,557  
Acquisition of NCI of HDS     —         —         —         —         —         —         —         —         —         5,565,285       —         5,565,285  
Redeemable non-controlling interest     —         —         —         —         —         —         —         —         —         —         4,073,898       4,073,898  
Currency translation adjustment     —         —         —         —         —         —         —         2,024       2,024       —                 2,024  
Net Income (Loss)     —         —         —         —         —         —         5,758,399       —         5,758,399       (360,403 )     —         5,397,996  
Balance at January 31, 2019     —       $ —         76,356,640     $ 76,356     $ 201,294     $ 387,364,374     $ (403,628,069 )   $ 800,446     $ (15,185,599 )   $ 21,683,698     $ 4,073,898     $ 10,571,997  
                                                                                                 
                                                               Accumulated                                   
                                               Additional                 Other                         Total           
       Preferred Stock         Common Stock        Subscription        Paid-in         Accumulated         Comprehensive                 Non-controlling         Stockholders’            
       Shares         Amount         Shares         Amount         Receivable         Capital         Deficit         Income         Sub Total         Interest         Equity           
Balance at October 31, 2019     —       $ —         61,225,895     $ 61,226     $ —       $ 417,064,612     $ (427,853,820 )   $ 796,922     $ (9,931,060 )   $ 14,800,447     $ 4,869,387          
Stock compensation expense     —         —         —         —         —         449,239       —         —         449,239       —         449,239          
Shares issued for deferred offering     —         —         1,719,901       1,720       (767,690)         765,970       —         —         767,690       —         —            
Shares issued for services     —         —         560,000       560       —         243,040       —         —         243,600       —         243,600          
Issuance of common stock payable     —         —         32,611       33       —         14,468       —         —         14,501       —         14,501          
Conversion of debt to equity     —         —         3,376,682       3,374       —         1,164,546       —         —         1,167,920       —         1,167,920          
Issuance of common stock for acquisitions     —         —         —         —         —         —         —         —         —         —         —            
Reduction of derivative liabilities     —         —         —         —         —         364,591       —         —         364,591       —         364,591          
Purchase of shares in subsidiary     —         —         1,905,912       1,906       —         (1,906 )     —         —         —         —         —            
Shares issued upon issuance of debt     —         —         308,000       308       —         141,682       —         —         141,990       —         141,990          
Currency translation adjustment     —         —         —         —         —         —         —         (21,731 )     (21,731 )     —         (21,731 )        
Net Income (Loss)     —         —         —         —         —         —         (6,909,503 )     —         (6,909,503 )     (370,527 )     (7,280,030 )        
Balance at January 31, 2020     —       $ —         69,129,001     $ 69,127     $ (767,690)       $ 420,206,242     $ (434,763,323 )   $ 775,191     $ (14,480,453) )   $ 14,429,920     $ (50,533)          
                                                                                                 
Balance at July 31, 2019     —       $ —         78,608,419     $ 78,608     $ —       $ 408,550,211     $ (418,727,875 )   $ 797,216     $ (9,301,840 )   $ 16,974,439     $ 7,672,599          
Stock compensation expense     —         —         —         —         —         1,236,697       —         —         1,236,697       —         1,236,697          
Shares issued for deferred offering     —         —         1,719,901       1,720       (767,690)         765,970       —         —         767,690       —         —            
Shares issued for services     —         —         560,000       560       —         243,040       —         —         243,600       —         243,600          
Issuance of common stock payable     —         —         436,121       436       —         935,959       —         —         936,395       —         936,395          
Conversion of debt to equity     —         —         5,006,548       5,005       —         2,899,753       —         —         2,904,758       —         2,904,758          
Issuance of common stock for acquisitions     —         —         960,000       960       —         1,150,992       —         —         1,151,952       —         1,151,952          
Reduction of derivative liabilities     —         —         —         —         —         2,276,078       —         —         2,276,078       —         2,276,078          
Cancellation of shares     —         —         (20,375,900 )     (20,376 )     —         20,376       —         —         —         —         —            
Purchase of shares in subsidiary     —         —         1,905,912       1,906       —         1,985,484       —         —         1,987,390       (1,987,390 )     —            
Shares issued as debt issuance cost     —         —         308,000       308       —         141,682       —         —         141,990       —         141,990          
Currency translation adjustment     —         —         —         —         —         —         —         (22,025 )     (22,025 )     —         (22,025 )        
Redeemable non-controlling interest     —         —         —         —         —         —         —         —         —         —         —            
Net Income (Loss)     —         —         —         —         —         —         (16,035,448 )     —         (16,035,448 )     (557,129 )     (16,592,577 )        
Balance at January 31, 2020     —       $ —         69,129,001     $ 69,127     $ (767,690)       $ 420,206,242     $ (434,763,323 )   $ 775,191     $ (14,480,453 )   $ 14,429,920     $ (50,533)          
                                                                                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

  

 

  5  

 

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    Six Months Ended January 31,
    2020   2019
CASH FLOWS FROM OPERATING ACTIVITIES                
Net (Loss) Income   $ (16,592,577 )   $ 5,397,996  
Adjustments to reconcile net (loss) income to net cash used in operating activities:                
Depreciation and amortization     407,141       378,200  
Amortization of operating lease right-of-use assets     45,128       —    
Stock compensation expense     1,236,697       924,845  
Shares issued for services     243,600       —    
Changes in fair value of contingent purchase consideration     —         (15,147,591 )
Amortization of debt discount     2,955,576       —    
Change in fair value of derivative liabilities - convertible notes     (1,406,799 )     (177,844 )
Change in fair value of derivative liabilities - convertible warrants     51,823       35,119  
Change in fair value of derivative liabilities - downside protection     5,000,966       —    
Change in fair value of common stock payable     (115,054 )     —    
Impairment of long-lived assets     —         99,519  
Bad debt expense     10,981       —    
Changes in operating assets and liabilities, net of effect of acquisitions:                
Accounts receivable     (81,320 )     686,889  
Inventory     (232,015 )     385,987  
Accounts payable and accrued expenses     4,136,266       3,296,630  
Accrued interest on notes receivable     —         (18,288 )
Operating lease liabilities     (44,338 )     —    
Other current assets     (216,352 )     2,936  
Other assets     2,183       (10,997 )
Other current liabilities     —         4,620  
Other liabilities     —         171,562  
Net cash used in operating activities     (4,598,094 )     (3,970,417 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     (4,616 )     (26,671 )
Purchase of intangible assets     —         (26,488 )
Cash received in acquisition of a business, net of cash paid     49,305       1,722,814  
Net cash provided by investing activities     44,689       1,669,655  
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Loan proceeds from (repayments to) related party     10,000       (3,305 )
Payment of notes payable     (935,731 )     (28,640 )
Proceeds from note payable     5,361,975       3,524,460  
Proceeds from issuance of common stock     109,770       —    
Investment in subsidiary by noncontrolling interest     —         133,679  
Net cash provided by financing activities     4,546,014       3,626,194  
                 
Effects of currency rate exchange on cash     (22,025 )     2,024  
                 
Net(decrease) increase in cash and cash equivalents     (29,416 )     1,327,456  
                 
Cash and cash equivalents, beginning of period     298,485       1,046,365  
                 
Cash and cash equivalents, end of period   $ 269,069     $ 2,373,821  
                 
Supplemental Disclosure of Cash Flow Information                
Cash paid for interest   $ 25,000     $ —    
Cash paid for taxes   $ —       $ —    
                 
Supplemental Disclosure of Non-Cash Investing and Financing Activities                
Reduction of derivative liabilities   $ 2,276,078     $ —    
Discount on Derivative liability upon issuance of debt   $ 1,574,685     $ 165,833  
Issuance of common stock for conversion of debt   $ 2,904,695     $ —    
Set up of ROU   $ 210,698     $ —    
Issuance of shares--common stock payable   $ 921,895     $ —    
Subscription receivable   $ 765,970     $ —    
Shares issued as debt issuance cost   $ 141,990     $ —    
Conversion of series H 9% convertible preferred stock to common stock   $ —       $ 25,200  
Conversion of series I 9% convertible preferred stock to common stock   $ —       $ 6,631  
Note payable issued for acquisition of a business   $ —       $ 35,000,000  
Acquisition of Veneto assets & liabilities - First Closing   $ —         (13,947,462 )
Acquisition of Veneto assets & liabilities - Second Closing   $ —         (19,948,909 )
Acquisition of Regentys assets & liabilities   $ —         (337,538 )
Acquisition of Olaregen assets & liabilities   $ —         212,355  
Extinguishment of HDS debt   $ —         (14,056,109 )
Note payable issued for acquisition of a business   $ —         35,000,000  
Market value of convertible notes   $ —         2,110,000  
Derivative liability - convertible notes   $ —         2,530,983  
Derivative liability - convertible warrants   $ —         157,552  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

  7  

 

  

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, NuGenerex Immuno-Oncology (“NGIO”), formerly Antigen Express, Inc., or “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”).

 

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.

 

  8  

 

 

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 $435 million and a working capital deficiency of approximately $35.6 million at January 31, 2020. 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 filing of this document. 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 and six months ended January 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2020. The balance sheet at January 31, 2020 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. 

 

  9  

 

 

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. Revenue from product sales of Pantheon medical surgical kits used in surgical procedures is recorded all revenue is recognized at a point in time, generally when title of the product and control is transferred to the client which occurs upon the completion of surgical procedure when the product utilized and the medical facility provides a final list of products consumed. 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).

  10  

 

    Three Months ended   Three Months ended
Revenue Source   January 31, 2020
Product sales   $ 848,805     $ 1,562,276  
Management services     8,622       16,878  
Total Revenue   $ 857,427     $ 1,579,154  

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. 

 

  11  

 

 

Note 3 - 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 NGIO 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 NGIO 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. As of January 31, 2020, 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. Three Brothers has moved for summary judgment seeking to confirm the arbitrator’s original decision with respect to the monetary award of $210,000, attorney’s fees, cost and interest while also requesting that the court  remand the award to the arbitrator to determine the value of 84,000 warrants to potentially be a value in excess of $3,000,000.  Generex has crossed moved for summary judgment to affirm the award with regard to the warrants to the extent it can be interpreted as awarding little or no value for the Warrants. All motions are fully submitted and pending before the court.

 

  12  

 

 

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 $682,000On 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 fact that the assets that were liened were never transferred by Veneto to NuGenerex, 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, which was later filed against the Company. 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 matter is set for a final hearing to commence on August 25, 2020. The Company has served its initial discovery in this matter. At this early stage, it is premature to express an opinion about possible outcome. As of January 31, 2020, the Company has accrued for the full $2,752,235 balance.

 

On December 2, 2019 the Company was named as a respondent in an arbitration brought by KSKZ Management, LLC before the American Arbitration Association in Texas.  The Claimant alleges that the Company breached a consulting agreement that purportedly obligated the Company to pay claimant a monthly consulting fee for three years.  Kevin Kuykendall is the manager and a member of Claimant. Claimant is seeking approximately $3,450,000 in unpaid consulting fees allegedly due.  The Company is vigorously defending itself and has filed counter-claims against Claimant.

 

On February 18, 2020 the Company was named as a defendant in an action brought by Discover Growth Fund, LLC in the United States District Court for the District of Delaware. The plaintiff alleges that the Company breached a Purchase Agreement and Promissory Note and seeks $2,475,000 in damages. The plaintiff also filed a confession of judgment in support of its claim.  The Company is evaluating the claim and has had a preliminary settlement discussion with the plaintiff and it is too early to determine that the liability is probable or estimable.

 

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.

 

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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.

 

Acquisitions

 

ALTuCELL

 

On November 22, 2019, the Company entered into a Stock Purchase Agreement (“SPA”) 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 2,240,000 shares of Generex common stock with an attributed value of $4 million to be issued at the market price of the day at closing, but no less than $0.89 per share. The Company will also pay $2.5 million in cash of which $212,000 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 January 27, 2020, Generex and ALTuCELL executed an Amendment Agreement to the SPA (the “Amendment”). Under the Amendment, closing will occur within 30 days of the full execution of the Amendment, subject to the conditions to closing under the SPA. The parties agreed that Generex will pay the $2.5 million closing payment from certain specifically identified sources. If ALTuCELL chooses to cancel the transaction as a result of delays due to forces beyond the control of Generex, including government regulatory delays or extended reviews by regulators that delay approvals of corporate actions, or by natural disasters or other unforeseen events beyond the control of Generex, ALTuCELL, agrees to return all payments made by Generex. As of January 31, 2020, Generex has advanced $212,000 to ALTuCELL. As of the date of this filing, the acquisition did not close, however, both companies are negotiating the terms of the extension.

 

Olaregen

 

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. The Company is negotiating the terms of a new extension and there has been no demand for payment at this time.

 

Regentys

 

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. The Company is negotiating the terms of a new extension and there has been no demand for payment at this time.

 

Note 4 – Leases

 

The Company has various operating lease agreements with terms up to 3 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 August 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.

 

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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 1.64 years, with a weighted-average discount rate of 9.5%.

 

The Company incurred lease expense for its operating leases of $52,112 for six months ended January 31, 2020.

 

The following table presents information about the amount and timing of liabilities arising from the Company’s operating leases as of January 31, 2020:

 

Maturity of operating lease liabilities for the remainder of the current fiscal year and the following fiscal years:    
2020   $ 60,125  
2021   $ 75,675  
2022   $ 38,139  
2023   $ 9,681  
2024   $ —    
Thereafter   $ —    
Total undiscounted operating lease payments   $ 183,620  
Less: Imputed interest   $ 17,260  
Present value of operating lease liabilities   $ 166,360  

 

Note 5 – Inventory

 

Inventory consists of the following components:

 

    January 31,   July 31,
    2020   2019
Raw materials   $ 227,971     $ 77,782  
Finished goods     633,123       285,226  
Total Inventory   $ 861,094     $ 363,008  

 

Note 6 – Property and Equipment

 

Property and equipment, net consisted of the following:

 

    January 31,   July 31,
    2020   2019
Computers and technological assets   $ 163,168     $ 163,168  
Machinery and equipment     460,477       386,929  
Furniture and fixtures     80,586       73,227  
Leasehold Improvements     16,596       16,596  
      720,827       639,920  
Less accumulated depreciation     (237,706 )     (139,927 )
    $ 483,121     $ 499,993  

 

Depreciation expense related to property and equipment for the six months ended January 31, 2020 and January 31, 2019 was $97,779 and $54,426, respectively.

 

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Note 7 – Goodwill and Intangible Assets 

Intangible assets consist of the following at:

  Estimated January 31,   July 31,
  Useful Lives 2020   2019
In-Process Research & Development   $ 8,761,427     $ 8,761,427  
Non-compete agreements 3 years   1,566,700       1,210,000  
Developed software/technology 5 years   172,500       131,000  
Vendor agreements and other intangibles     775,674       51,274  
      11,276,301       10,153,701  
Less accumulated amortization     (628,794 )     (319,432 )
    $ 10,647,507     $ 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 $309,362 and $323,774 for the six months ended January 31, 2020 and January 31, 2019, respectively.

The estimated amortization expense remainder of the current fiscal year and for the next five years and thereafter is as follows:

 

Year Ending July 31,   Amount
For the period February 1, 2020 to July 31, 2020   $ 308,119  
2021     616,744  
2022     346,794  
2023     94,510  
2024     75,018  
Thereafter     445,166  
 Total   $ 1,886,351  

 

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 January 31, 2020   $ 38,901,126  

 

Note 8 – Notes Payable 

 

On October 26, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company sold its Note Due October 26, 2019 (“Note”) in the principal amount of $682,000The 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 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 42,399 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.

 

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In February 2019, Generex entered into Securities Purchase Agreements with two investors pursuant to which the Company 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 143,000 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 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 247,755 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 resulting in full discount of the Notes.

In May 2019, the Company consummated a Stock Purchase Agreement entered into January 14, 2019 to which the Company 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 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.

On February 19, 2020, a lender made a formal demand for repayment of a note payable due on August 29, 2020 and has threatened litigation if payment is not tendered. The demand for payment in the amount of $1,292,621 in cash includes original principal in the amount of $872,500 and approximately $360,442 in penalties.

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 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.

On February 19, 2020, a lender made a formal demand for repayment of a note payable due on August 29, 2020 and has threatened litigation if payment is not tendered. The demand for payment in the amount of $1,292,621 in cash includes original principal in the amount of $872,500 and approximately $360,442 in penalties.

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During the second quarter of fiscal 2020, the Company entered into Securities Purchase Agreements with four investors pursuant to which the Company sold convertible notes bearing interest between 4% and 10% per annum (the “Notes”) in the aggregate principal amount of $495,000. The purchase price of the Notes was $550,000 and the remaining $55,000 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. 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 $410,828 and was recorded as a discount of the Notes.

In December 2019, the Company entered into Securities Purchase Agreements with an investor pursuant to which the Company sold a convertible note bearing interest of 12% per annum in the principal amount of $2,200,000. The purchase price of the note was $2,000,000 and the remaining $200,000 of principal amount represents original issue discount. Subject to certain ownership limitations, the note will be convertible at the option of the holder at any time into shares of the Company’s common stock at an effective conversion price of 95% of the lowest stock five trading days prior to conversion less. During the quarter, the Company defaulted on the note for not filing the S-1 within a required period. Thereafter the interest increased to 22% per annum and the conversion price decreased to 85% of the lowest stock five trading days prior to conversion. This embedded conversion feature 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 $111,508 and was recorded as a discount of the note. The investor has subsequently filed suit and the Company is evaluating the claim and has had a preliminary settlement discussion with the plaintiff. 

    Amount
Balance of notes payable at July 31, 2019   $ 8,368,379  
Issuances of debt     5,361,975  
Debt discount     (1,139,178 )
Amortization of debt discount     2,955,576  
Conversions     (2,794,851 )
Payments     (935,731 )
Balance of notes payable at January 31, 2020   $ 11,816,170  

On December 28, 2017, the Company through its wholly owned subsidiary NuGenerex Distribution Solutions, LLC (“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 January 31, 2020, the remaining principal balance was $353,375 with an unamortized debt discount balance of $3,719. These notes have an accrued interest balance of $53,442 as of January 31, 2020.

 

Note 9 – 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 liabilities. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion options and warrants and shares to be issued were recorded as derivative liabilities on the issuance date and revalued at each reporting period.

 

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Based on the various convertible notes described in Note 9, the fair value of applicable derivative liabilities on notes, warrants and change in fair value of derivative liability are as follows as of January 31, 2020:

 

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     1,544,331       30,353       —         1,574,684  
Change in fair value     (1,493,570 )     51,823       5,000,966       3,669,787  
Change due to conversion / exercise / redemptions     (2,556,082 )     (36,435 )     —         (2,703,085 )
Balance as of January 31, 2020   $ 1,650,875     $ 370,991     $ 8,339,802     $ 10,361,668  

Note 10 - 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.

 

On February 24, 2020, Generex issued a 1.4:1 stock split (the “Stock Split”) and paid a stock dividend (“Stock Dividend”) consisting of two shares of NGIO for every five shares of Generex, or 40%. Some stockholders and option holders waived their rights to participate in the 1.4:1 stock split and the 40% Stock Dividend. Proportional adjustments for the stock split was 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.

 

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  NGIO 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.

 

On November 25, 2019 , the Company entered an Equity Purchase Agreement with an investor to purchase up to $40,000,000 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 the agreement (subject to certain limitations) from time to time over a 36-month period. The Company also issued 1,719,901 common stock of Commitment Shares upon execution of the agreement as consideration for the investor’s commitment to purchase additional shares of our common stock pursuant to the agreement. (Note 12)

 

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During the second quarter of 2020, the Company issued 560,000 shares of common stock to a vendor for services valued at $0.44 per share, or $243,600 and 308,000 shares of common stock to investors as debt issuance cost in conjunction with the issuance of notes payable which were valued at priced per share between $0.42 and $0.51, or total of $141,990.

 

During the six months ended January 31, 2020, 436,120 shares of common stock payable were issued. As of January 31, 2020, 281,810 shares remain to be issued resulting in common stock payable $86,239.

During the six months ended January 31, 2020, the Company issued 5,006,548 shares of common stock for the conversion of $2,904,695 of debt.

Non-controlling Interest

 

Regentys

 

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 January 31, 2020, 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. 

 

Olaregen

 

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 and 476,478 shares of NGIO common stock. In September 2019, the Company converted all of the Series A Preferred Stock of Olaregen into common stock of Olaregen.

 

As of January 31, 2020, 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 February 14, 2020, Olaregen exchanged all of its outstanding shares for 5,950,000 shares of Generex common stock and 2,765,000 shares of NGIO in. After this transaction, Generex owns 100% of the outstanding shares of Olaregen.

 

Veneto

 

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. 

 

NuGenerex Immuno-Oncology, Inc.

 

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.

 

Note 11 – 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 January 31, 2020. 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 12 – Subscription Receivable

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 the agreement (subject to limitations) from time to time over a 36-month period. The Company issued 1,719,901 shares of common stock (“Commitment Shares”) to the investor upon execution of the agreement as consideration for the investor’s commitment to purchase additional shares of our common stock pursuant to the agreement. The investor will be required to return half of such shares to the Company if the Company determines, in its discretion, to terminate the agreement within 6 months of a registration statement including this agreement as being declared effective pursuant to a registration rights agreement with the investor which the Company filed with the SEC the registration on February 2, 2018. As of the date this quarterly report was filed, the registration statement has not been declared effective. There shares were valued at $0.45 per share, or $767,690 and have been recorded as a subscription receivable until such time that funding has occurred, or pursuant to the completion of other conditions of the agreement.

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Note 13 - Stock-Based Compensation:

 

Stock Option Plans

 

The Company has 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 January 31, 2020, there were 2,818,830 and 230,892,975 shares available under 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     8,116,495     $ 0.84       7.21     $ 15,961,391  
Granted     1,404,200     $ 2.09       4.67       —    
Forfeited or expired     (397,500 )   $ 0.79       7.07       —    
Exercised     —         —         —         —    
Outstanding - January 31, 2020     9,123,195     $ 1.05       6.39     $ 139,216  

The intrinsic value is calculated as the difference between the market value and the exercise price of the shares on January 31, 2020. The market values as of January 31, 2020 was $0.22 based on the closing bid price for January 31, 2020.

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There were 4,573,762 vested common stock options under the Plan as of January 31, 2020. The compensation expense was $1,234,715 for the six months ended January 31, 2020. The Company had $3,785,311 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan at January 31, 2020 to be recognized over an average of 2.49 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:

    January 31, 2020
Exercise price     $1.44 – 1.49  
Time to expiration     5 years  
Risk-free interest rate     1.51% - 1.59 %
Estimated volatility     153.4 %
Expected dividend     —    
Stock price at valuation date     $1.44 – 1.49  

 

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 automatically terminated on December 31, 2019. There was a total of 1,680,000 shares of common stock reserved under the plan of which no shares have been issued.

 

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     21,559,553     $ 1.81       0.40     $ 4,500,000  
Issued     88,000       2.50       4.54       —    
Forfeited     (80,000 )     2.50       —         —    
Expired     (21,000,000 )     1.79       0.01       —    
Outstanding - January 31, 2020     567,553     $ 2.50       2.70     $ —    

  

During the six months ended January 31, 2020, the Company issued 88,000 warrants to investors of convertible notes and 21,000,000 warrants expired due to the passage of time, and 80,000 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 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.

 

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    Three Months Ended January 31,   Six Months Ended January 31,
    2020   2019   2020   2019
Weighted average number of common shares outstanding - Basic     65,603,002       64,462,007       67,765,862       48,195,762  
Potentially dilutive common stock equivalents     —         —         —         8,397,084  
Weighted average number of common and equivalent shares outstanding - Diluted     65,603,002       64,462,007       67,765,862       56,592,846  

The following table provides weighted average number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive, as of January 31, 2020 and 2019, respectively.

    Six Months Ended January 31,
    2020   2019
Convertible debt     34,374,900       2,822,013  
Stock options     9,123,195       7,122,415  
Warrants     567,553       168,798  
Total     44,065,648       10,113,226  

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 issued 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 1.4:1 stock split 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.

 

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At closing, Mr. Bird entered 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  

 

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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 six months ended January 31, 2020 and 2019 as though the Company acquired MediSource and Pantheon on the first day of each fiscal year are set forth below.

 

    Three months Ended   Six months Ended
  January 31,   January 31,
    2020   2019   2020   2019
Revenues   $ 857,427     $ 3,968,796     $ 1,579,088     $ 6,109,796  
Cost of revenues     165,659       2,217,142       299,277       3,204,551  
Gross profit     691,768       1,751,654       1,279,811       2,905,245  
Operating expenses     4,707,483       7,590,467       9,844,237       10,220,321  
Operating loss     5,399,251       9,342,121       8,564,426       (7,315,077 )
Other income (expense)     (3,363,518 )     (6,507,715 )     (8,127,354 )     12,882,229  
Net loss   $ (8,762,769 )     (15,849,836 )   $ (16,691,780 )     5,566,152  
Comprehensive net loss   $ (6,667,662 )   $ (12,515,686 )   $ (15,980,209 )   $ 5,397,996  

  

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 $(16,671,769) and $(11,006,793) for the six months ended January 31, 2020 and the year ended July 31, 2019, respectively. Pre-tax (losses) arising from foreign operations (Canada) were $(20,011) and $(326,461) for the six months ended January 31, 2020 and the year ended July 31, 2019, respectively.

 

As of January 31, 2020, the Company has NOL carryforwards in Generex Biotechnology Corporation of approximately $220 million, of which $196 million will expire in 2020 through 2038, and $23.9 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 $34.4 million, which expire in 2025 through 2040. NGIO has NOL carryforwards of approximately $36.2 which will expire in 2020 through 2038. Regentys Corporation has NOL carryforwards of approximately $6.3 million, of which $5.0 million will expire in 2033 through 2038. Olaregen Therapeutics, Inc. has NOL carryforwards of $1.7 million which will not expire. Veneto has NOL carryforwards of $9.2 million which will not expire. Some of these loss carryforwards are subject to limitation due to the acquisition of Regentys, Olaregen and NGIO 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.

 

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As of January 31, 2020, 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 equal 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 January 31, 2020, 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.

Between February 3rd and the date of this filing, debt holders converted $1,267,294 of principal and $92,780 of accrued interest into 4,801,652 shares of common stock. 

On February 10, 2020, the Company entered into a Securities Purchase Agreement with an investor pursuant to which we sold a convertible note bearing interest at 12% per year in the principal amount of $305,000. The purchase price of the note was $270,000 and the remaining $35,000 of principal amount represents $30,000 of original issue discount and $5,000 of closing costs. Subject to certain ownership limitations, the note will be convertible at the option of the holder at any time into shares of our common stock at an effective conversion price equal 80% of the lowest closing price as of the day of the notice. Additionally, the Company issued 35,000 shares of common stock to the investor upon execution of the note.

 

On February 14, 2020, Olaregen exchanged all of its outstanding shares for 5,950,000 shares of Generex common stock and 2,765,000 shares of NGIO in. After this transaction, Generex owns 100% of the outstanding shares of Olaregen.

 

On February 18, 2020 the Company was named as a defendant in an action brought by Discover Growth Fund, LLC in the United States District Court for the District of Delaware. The plaintiff alleges that the Company breached a Purchase Agreement and Promissory Note and seeks $2,475,000 in damages, which is balance of the note. The plaintiff also filed a confession of judgment in support of its claim.  The Company is evaluating the claim and has had a preliminary settlement discussion with plaintiff. 

On February 18, 2020, the Company filed a Registration Statement on Form S-1, filed with United States Securities and Exchange Commission.  The prospectus relates to the offer and sale of up to 26,806,714 shares of common stock of the Company by the selling stockholders

On February 24, 2020, Generex issued a 1.4:1 stock split and paid a stock dividend consisting of two shares of NGIO for every five shares of Generex. Proportional adjustments for the stock split was made to the Company’s outstanding stock options, and warrants including all share and per-share data, for all amounts and periods presented in the condensed interim consolidated financial statements.

 

On February 28, 2020, Generex Biotechnology Corporation (“Generex”) entered into a Collaboration Agreement with Beijing Zhonghua Investment Fund Management Co., LTD and Sinotek-Advocates International Industry Development (Shenzhen) Co., Ltd. (an affiliate of China Technology Exchange), to develop a COVID-19 vaccine using the Ii-Key Peptide vaccine technology of Generex’s majority owned subsidiary, NGIO.

 

On February 28, 2020, the Company entered into a series of Securities Purchase Agreements with three investors pursuant to which we agreed to sell and sold convertible notes bearing interest at 9.5% per year in the aggregate principal amount of $281,600. The purchase price of the notes in the aggregate was $256,000 and the remaining $25,600 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 our common stock at an effective conversion price equal 80% of the lowest closing price for the ten trading days prior to the day of the notice.

 

On March 12, 2020, the Company’s subsidiary of which the Company owns 91%, NGIO filed a Registration Statement on Form 10 to register its common stock pursuant to Section 12(g) of the Exchange Act with United States Securities and Exchange Commission.

 

On March 18, 2020, Generex received a letter from counsel for Efrat Investments LLC, the holder of two of the Company’s Convertible Promissory Notes (“Notes”), in the aggregate principal amount of $446,600, claiming damages for failure to receive, upon conversion of the Notes, additional shares of Generex common stock attributable to Generex’s February, 2020 stock dividend.  The letter cites several bases for liability, and also claims that Generex has violated securities laws by failing to disclose Generex’s conduct  relating to Efrat in certain SEC filings.  The letter demands payment of $627,497 in damages and/or delivery of 250,813 shares of Generex Common Stock.  Generex intends to vigorously defend this claim.  Generex does not agree with Efrat’s interpretation of the terms of the Notes leading to this claim.  Generex strongly denies any claim of securities law violations by not disclosing these circumstances, for various reasons including that Generex did not and does not believe it engaged in any conduct requiring disclosure.

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 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 six-month periods ended January 31, 2020 and 2019. We closed on the following acquisitions during the six months ended January 31, 2020:

 

  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 six months ended January 31, 2020.

 

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 January 31, 2020 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:

 

the risks associated with international operations; (including pandemics and public health problems, such as the outbreak of novel coronavirus (COVID-19);
our expectations concerning product candidates for our technologies;
our expectations concerning funding of obligations related to potential acquisitions and generally completing acquisitions;
our expectations concerning existing or potential development and license agreements for third-party collaborations, acquisitions and joint ventures;
our expectations concerning product candidates for our technologies;
our expectations regarding the cost of raw materials and labor, consumer preferences, the effect of government regulations on the Company’s business, the Company’s ability to compete in its industry, as well as future economic and other conditions both generally and in the Company’s specific geographic markets;
our expectations of when regulatory submissions may be filed or when regulatory approvals may be received; and
our expectations of when commercial sales of our products in development may commence and when actual revenue from the product sales may be received.

         

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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: 

 

the inherent uncertainties of product development based on our new and as yet not fully proven technologies;
the risks and uncertainties regarding the actual effect on humans of seemingly safe and efficacious formulations and treatments when tested clinically;
the inherent uncertainties associated with clinical trials of product candidates;
the inherent uncertainties associated with the process of obtaining regulatory approval to market product candidates;
the inherent uncertainties associated with commercialization of products that have received regulatory approval;
the decline in our stock price; and
our current lack of financing for operations and our ability to obtain the necessary financing to fund our operations and effect our strategic development plan.

  

Additional factors that could affect future results of our historical business are set forth in Part I, Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended July 31, 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, Olaregen 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 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.

 

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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 NuGenerex Immuno-Oncology, Inc. (formerly Antigen Express, Inc.) (“NGIO”), 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. On February 28, 2019 Generex issued a dividend of NGIO 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 NGIO.

 

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.

 

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 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 11,760,000 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 January 31, 2020, an additional $150,000 was paid for a total of $1,162,000 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. $1,754,800 principal was paid against the note as of January 31, 2020 and an additional $13,770 was paid subsequently for a total aggregate of $1,768,570 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 NGIO 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.

 

On February 14, 2020, Olaregen exchanged all of its outstanding shares for 5,950,000 shares of Generex common stock and 2,765,000 shares of NGIO in. After this transaction, Generex owns 100% of the outstanding shares 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 subsidiary NGIO, 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 Assaya 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, NGIO, and NuGenerex Therapeutics (Oral-Lyn and RapidMist buccal delivery technology). Our strategy is to spin out NGIO 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.

 

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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:

 

NuGenerex Therapeutics: Oral-lyn (Buccal Insulin) and RapidMist Buccal delivery technology
NuGenerex Immuno-Oncology: Phase II AE37 + Keytruda in TNBC; Antigen Express (Ii-Key), Licensing, Partnerships, investor dividend paid (1:4) for spin-out
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.

 

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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.

 

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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.

 

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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)

NGIO 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.

 

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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.

 

NGION 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 began enrolling patients in the first quarter of 2020.

 

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

NGIO has been established to not only to advance the NGIO 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 NGIO 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.

 

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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.

 

On February 28, 2020, the Company signed a contract from the China Technology Exchange, Beijing Zhonghua Investment Fund Management Co., LTD., and Sinotek-Advocates International Industry Development (Shenzhen) Co., LTD. to develop a COVID-19 vaccine using the Ii-Key peptide vaccine platform of Nugenerex immune-Oncology (NGIO). The terms of the contract include an upfront payment of $1 million to initiate the project work in the United States, a $5 million licensing fee for the Ii-Key technology, payment by the Chinese consortium for all costs and expenses related to the development of a COVID-19 vaccine, and a substantial royalty on each dose of vaccine produced.

 

Under the terms of the agreement, Generex will generate a series of Ii-Key peptides linked with nCOV-2019 coronavirus epitopes, as predicted by proprietary computer algorithms and deliver them to our partners in China for testing against blood samples from patients who have recovered from COVID-19. This screening program should yield data indicating which Ii-Key-nCOV epitopes are recognized by the human immune system, and therefore are potential peptide vaccine candidates. Once the most reactive peptides are identified, the group plans to manufacture multi-valent Ii-Key peptide vaccines for evaluation in human clinical trials in China. When the optimal vaccine formulation is determined, Generex intends to initiate the requisite clinical trials of the Ii-Key-nCOV peptide vaccine for approval in the United States.

 

We finalized our corporate acquisition strategy in the second quarter of 2020 and have initiated the spin-out process for NGIO in the third 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 Assaya 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%.

 

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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.  

 

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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:

 

NuGenerex Distribution Solutions: MSO, Ancillary Services, DME-IQ, and Surgical Products.
NuGenerex Regenerative Medicine: Olaregen Therapeutix, Regentys.
NuGenerex Surgical Products: Pantheon Medical – Foot & Ankle, LLC and MediSource Partners, LLC.
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).

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.

 

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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.” 

 

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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:

  Received FDA 510(k) clearance on October 3, 2013, for 17 indications

  Obtained Intellectual properties and global rights of Excellagen® except China, Russia and CIS

  Received Patent on October 10, 2017

  Has a unique Healthcare Common Procedure Coding System (HCPCS) Code - Q4149

  Clinical data show significant tissue growth and positive wound closure (PDGF)

  Ease of use – No grafting

  Low cost provider with High profit margins

  Low execution risk (seasoned management team with product launch experience)

  No development risk (over $20 million invested and completed)

  No regulatory risk (FDA cleared)

 

Excellagen is an advanced, wound care management platform:

 

  Formulated fibrillar Type I bovine collagen (2.6%)

  High molecular weight

  Viscosity optimized for dripless wound coverage

  Flowable with no staples or sutures required

  Pre-filled, ready to use syringes

  One syringe covers up to 5.0 cm2 wound

  Refrigerated storage only with no thawing or mixing

  Treatment at only one-week intervals

  Activates human platelets

  Triggers the release of Platelet-Derived Growth Factor (PDGF)

  Accelerates granulation tissue growth in “non-healing wounds”

 

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.

 

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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.

 

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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.

 

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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:

 

  Implants and devices

  Biologics (blood, bone, tissue, and stem cells)

  Durable medical equipment

  Soft Goods

  Kits to process bone marrow aspirates and platelet rich plasma biologics

 

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.

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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 January 31, 2020 and 2019 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 six months ended January 31, 2020 and 2019, NGIO expensed $142,200 and $0, respectively, to NSABP for clinical trials for additional research and development relating to NGIO’s peptide immune therapeutic vaccines and related technologies. One NGIO 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 NGIO 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 six months January 31, 2020 and 2019, NGDx incurred $250,221 and $141,067 on research and development relating to its rapid diagnostic tests, respectively.

 

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. 

 

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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. As a result, certain derivative warrant liabilities (namely those with a price protection feature) are separately valued 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 January 31, 2020 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.

 

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Results of Operations

 

Three months ended January 31, 2020 compared to three months ended January 31, 2019

 

During the three months ended January 31, 2020 and 2019, we had net revenues of $857,427 and $3,442,265, respectively. The decrease in revenue is due to the reduction of operations of Veneto which resulted in approximately $9,000 of revenue during the three months ended January 31, 2020. The decrease was partially offset by revenues from Pantheon and Olaregen of approximately $805,000 and $44,000, respectively.

 

We had a net loss for the three months ended January 31, 2020 and 2019 of $7,280,030 and $12,524,584, respectively. The decrease in net loss for the three months ended January 31, 2020 was caused primarily by the change in fair value of contingent purchase consideration of approximately $4,397,000 in the prior fiscal period and $0 in the current period. Also, there were operating losses of approximately $4,558,000 and $5,879,000 in the three months ended January 31, 2020 and 2019, respectively.

 

The $1,852,000 decrease in general and administrative expenses in the quarter ended January 31, 2020 versus the comparative previous fiscal quarter is due to the decrease in operations of Veneto which decreased approximately $3,274,000 which was partially offset by $632,000 of expenses incurred from newly acquired entities. Additionally, there was additional compensation expense of $585,000 in the second quarter of 2020.

 

Our interest expense in the three months ended January 31, 2020 was $1,431,052 compared to the previous year’s fiscal three months of $2,097,220 which was primarily due to the amortization of debt discount relating to the convertible promissory notes.

  

Six months ended January 31, 2020 compared to six months ended January 31, 2019

 

During the six months ended January 31, 2020 and 2019, we had net revenues of $1,579,088 and $5,161,413, respectively. The decrease in revenue is due to the reduction of operations of Veneto which resulted in approximately $17,000 of revenue during the three months ended January 31, 2020. The decrease was partially offset by revenues from Pantheon and Olaregen of approximately $1,254,000 and $309,000, respectively.

 

We had a net loss for the six months ended January 31, 2020 of $16,592,577 and a net gain of $5,397,996 in the corresponding six months of the prior fiscal year. The net loss for the six months ended January 31, 2020 was primarily caused by general and administrative expenses of approximately $9,434,000 and other expenses consisting of changes in fair value of derivative liabilities of approximately $3,670,000, and interest expense of approximately $3,947,000. The net gain for the six months of the prior fiscal year was caused primarily by the change in fair value of contingent purchase consideration of approximately $15,148,000 which did not exist during the fiscal year 2020.

 

The $662,212 increase in general and administrative expenses in the six months ended January 31, 2020 versus the comparative previous six month period is due to additional compensation expense of $585,000 in the second quarter of 2020.

 

Our interest expense in the six months ended January 31, 2020 was approximately $3,947,000 compared to the previous year’s fiscal three months of approximately $2,262,000 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 March 13, 2020, 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 $4.5 million during the six months ended January 31, 2020 (including proceeds from issuance of convertible notes), our cash balances have been low throughout fiscal 2019.

 

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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

 

The following is a summary of the financing activities that we have completed during the six months ended January 31, 2020.

 

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 $1,100,000The 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 $250,000The 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 $872,000The 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.

 

Financing – November 18, 2019

 

On November 18, 2019, we entered into a convertible note and securities purchase agreement with three investors in the principal amount of $275,000The note accrues at 10% per annum and has a maturity date of November 18, 2020 and is convertible into common voting shares at a variable rate determined in the instrument.

 

Financing – December 5, 2019

 

On December 5, 2019, we entered into a convertible note and securities purchase agreement with an investor in the principal amount of $2,200,000The note is in default and accrues at 22 % per annum and has a maturity date of June 5, 2021 and is convertible into common voting shares at a variable rate determined in the instrument.

 

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Financing – January 14, 2020

 

On January 14, 2020, we entered into a convertible note and securities purchase agreement with an investor in the principal amount of $275,000The note accrues at 4% per annum and has a maturity date of January 14, 2021 and is convertible into common voting shares at a variable rate determined in the instrument. 

 

Cash flows for the six months ended January 31, 2020

 

For the six months ended January 31, 2020, we used $4.6 million in cash to fund our operating activities. The use for operating activities included a net loss of $16.7 million. Changes to working capital included an increase of $4.0 million related to accounts payable and accrued expenses.

 

The use of cash was offset by non-cash expenses of $0.4 million related to depreciation and amortization, $1.2 million related to stock compensation, $2.9 million of amortization of debt discount and $5.0 million change in fair value of downside protection partially offset by a gain in fair value of derivative liabilities - convertible notes of $1.4 million.

 

In the six months ended January 31, 2020, 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 six months ended January 31, 2020 of $4.5 million, most of which was from proceeds from investors of $5.5 million partially offset by payments on notes payable of $0.9 million.

 

Our net working capital deficiency on January 31, 2020 increased to $35.7 million from $28.0 million at January 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:

 

  Payment of $15,750,000 by delivery of Generex common stock, initially valued at $2.50 per share.

  If, on the first to occur of (i) the ninetieth (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.

  The remainder of the principal and interest under the note shall be payable on April 15, 2019; provided that on that maturity date, Veneto shall have the option of (i) payment of principal and interest in cash and (ii) payment of principal and interest by Generex’s delivery of Generex Shares valued at $2.50 per share.

  All Generex shares issued pursuant to the Amendment will be delivered pro rata to the six equity owners of Veneto as distributions from Veneto.

 

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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:

 

  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;

  All shares of our common stock delivered pursuant to the foregoing sentence will be outstanding shares held by existing shareholders;

  8.4 million were transferred on May 9, 2019;

  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

  Limited “downside protection” to ensure the value of our common stock to be delivered.

 

Olaregen and Regentys Acquisitions

 

Olaregen

 

As of January 7, 2019, the Company completed a definitive Stock Purchase Agreement and related documents relating to the Company’s purchase of 3,282,632 newly issued shares of the Olaregen common stock representing 51% percent of the issued and outstanding capital stock of Olaregen for an aggregate $12,000,000.

 

In addition to $400,000 paid to Olaregen upon signing of the LOI, the purchase price for the Olaregen shares will consist of the following cash payments:

 

  $800,000 on or before January 15, 2019. The Company has paid this installment.

  $800,000 on or before January 31, 2019. As of the date this quarterly report was filed, the Company has paid $796,500 of this installment and remaining balance of $3,500 is payable on or before January 31, 2020 per extension in amended agreement.

  $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.

  $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.

  $6,000,000 on or before January 31, 2020.

 

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.

 

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Based on the Note, in the event any incremental payment is not paid when due, Olaregen has the option to increase the per share purchase price for all remaining purchased shares to $4.00 per share. Based on $1,400,000 of remitted payments and a Promissory Note balance of $10,400,000 prior to the first extension agreement on March 14, 2019, Olaregen elected the option to proportionally increase the per share purchase price to $4.00 for the remaining 2,899,658 of the total 3,282,632 shares to be acquired. This will result in an additional $998,633 which has been accrued for the Company to remit to Olaregen pursuant to the acquisition. This additional amount will be penalty amounts will be paid out proportionately with future payments. For example, the $361,500 balance of the second tranche, at the original purchase price of $3.65 per share, would have paid for 99,041 Olaregen shares. The Company will now be required to pay 99,041 x $4.00 = 396,164 to complete the second tranche.

 

Generex has a limited anti-dilution right under the Purchase Agreement, to ensure that Generex will retain 51% ownership in Olaregen for a period of time.

 

Regentys

 

On January 7, 2019 the Company completed a definitive Stock Purchase Agreement and related documents relating to the Company’s purchase of 12,048,161 newly issued shares of the Regentys common stock representing 51% percent of the issued and outstanding capital stock of Regentys (“Regentys Shares”) for an aggregate of $15,000,000.

   

In addition to $400,000 paid to Regentys upon signing of the LOI, the purchase price for the Regentys shares consist of the following cash payments, with the proceeds intended to be used for specific purposes, as noted:

 

  $3,450,000 to initiate pre-clinical activities on or before January 15, 2018. As of the date this quarterly report was filed, the Company has paid $1,012,450 and the remaining balance is payable on or before December 30, 2019.

  $2,000,000 to initiate patient recruitment activities on or before May 1, 2019. As of the date this quarterly report was filed, the Company has not yet paid this installment and the full balance of $2,000,000 is payable on or before December 30, 2019 per extension in amended agreement.

  $3,000,000 to initiate a first-in-human pilot study on or before December 30, 2019.

  $5,000,000 to initiate a human pivotal study on or before February 1, 2020.

  $1,150,000 to submit a 510(k) de novo submission to the FDA on or about February 1, 2021.

 

The Company issued its promissory note in the amount of $14,600,000 (the “Note’) representing its obligation to pay the above amounts. The Note is secured by a pledge of the Regentys pursuant to a Pledge and Security Agreement.  

 

On 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:

 

  the timing and amount of expenses incurred to complete our clinical trials;

  the costs and timing of the regulatory process as we seek approval of our products in development;

  the advancement of our products in development;

  our ability to generate new relationships with industry partners throughout the world that will provide us with regulatory assistance and long-term commercialization opportunities;

  the timing, receipt and amount of sales, if any, from Generex Oral-lyn™ in India, Lebanon, Algeria and Ecuador;

  the cost of manufacturing (paid to third parties) of our licensed products and the cost of marketing and sales activities of those products;

  the costs of prosecuting, maintaining, and enforcing patent claims, if any claims are made;

  our ability to maintain existing collaborative relationships and establish new relationships as we advance our products in development;

  our ability to obtain the necessary financing to fund our operations and effect our strategic development plan; and

  the receptivity of the financial market to biopharmaceutical companies.

  

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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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Generex is a smaller reporting company and not required to provide Quantitative and Qualitative Disclosures about Market Risk pursuant to Regulation S-K 305 (e).

 

Item 4. Controls and Procedures

 

As of January 31, 2020, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) and concluded that, subject to the inherent limitations, our disclosure controls and procedures were not effective due to the existence of several significant deficiencies culminating in material weaknesses in our internal control over financial reporting because of inadequate segregation of duties over authorization, review and recording of transactions, as well as the financial reporting of such transactions.

 

We have been working and are currently working to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. We believe we have taken appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, however we cannot be certain that our remediation efforts will ensure that our management designs, implements and maintains adequate controls over our financial processes and reporting in the future or that the changes made will be sufficient to address and eliminate the material weaknesses previously identified. Our inability to remedy any additional deficiencies or material weaknesses that may be identified in the future could, among other things, have a material adverse effect on our business, results of operations and financial condition, as well as impair our ability to meet our quarterly, annual and other reporting requirements under the Securities Exchange Act of 1934 in a timely manner, and require us to incur additional costs or to divert management resources.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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 NGIOsubsequent 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 NGIOor 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.

 

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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 January 31, 2020, 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 $682,000On 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 January 31, 2020 , the Company has accrued for the full $2,752,235 balance.

 

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On September 9, 2019 Generex and its subsidiary NuGenerex Distribution Solutions, LLC, and NuGenerex Distributions Solutions 2, LLC (jointly “NDS”) filed a litigation against Veneto, and the constituent entities, for fraud, breach of contract, and a motion for a temporary restraining order restraining the shares contemplated in the Asset Purchase Agreement (“APA”) (supra) for hiding their involvement in a massive healthcare fraud scheme, which is currently being prosecuted civilly by the federal government, and failing to transfer assets specified in the APA. The litigation is pending the Court of Chancery in the State of Delaware. Our motion for a temporary restraining order on transfer of shares we issued in connection with the acquisition of Veneto assets was denied by the Court of Chancery. Generex intends to continue to pursue claims against Veneto and its principals in a separate action. In a related action, our transfer agent has been sued for failure to process a transfer of the shares issued pursuant to the APA. This suit was brought in the United States District Court for the Eastern District of New York. Generex is not named in the suit, but our transfer agent has notified us of our obligation to indemnify them pursuant to our agreement with the transfer agent.

 

On December 2, 2019 the Company was named as a respondent in an arbitration brought by KSKZ Management, LLC before the American Arbitration Association in Texas.  The Claimant alleges that the Company breached a consulting agreement that purportedly obligated the Company to pay claimant a monthly consulting fee for three years.  Kevin Kuykendall is the manager and a member of Claimant. Claimant is seeking approximately $3,450,000 in unpaid consulting fees allegedly due.  The Company is vigorously defending itself and has filed counter-claims against Claimant.

 

On February 18, 2020 the Company was named as a defendant in an action brought by Discover Growth Fund, LLC in the United States District Court for the District of Delaware. The plaintiff alleges that the Company breached a Purchase Agreement and Promissory Note and seeks $2,475,000 in damages. The plaintiff also filed a confession of judgment in support of its claim.  The Company is evaluating the claim and has had a preliminary settlement discussion with plaintiff. 

 

Item 1A. Risk Factors.

 

Generex is a smaller reporting company defined by Rule 12b-2 of the Exchange Act and not required to provide Risk Factors.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On August 8, 2019, we entered into a convertible note and securities purchase agreement with an investor in the principal amount of $1,150,000. The note accrues at 9% per annum and has a maturity date of August 7, 2020 and is convertible into common voting shares at a variable rate determined in the instrument.

 

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.

 

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.

 

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.

 

On November 18, 2019, the Company entered into a Securities Purchase Agreement with three investors pursuant to which the Company agreed to sell and sold a convertible note bearing interest at 10% per annum in the principal amount of $275,000. Subject to certain ownership limitations, the note will be convertible at the option of the holder at any time into shares of our common stock at a conversion price equal to 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 twenty days prior to (and including) the date a notice of conversion is received.

 

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On November 25, 2019, the Company entered an Equity Purchase Agreement with an investor to purchase up to $40,000,000 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 in which 1,719,901 shares of common stock (“Commitment Shares”) upon signing were issued to an investor.

 

On December 5, 2019, we converted $70,000 of principal and $4,621 of interest into 252,954 shares of common stock.

 

On December 5, 2019, we converted $75,000 of principal and $4,500 of interest into 269,491 shares of common stock.

 

On December 9, 2019, we closed under a securities purchase agreement with an investor pursuant to which we sold a convertible note bearing interest at 12% per year in the principal amount of $2,200,000. The purchase price of the note was $2,000,000 and the remaining $200,000 of principal amount represents original issue discount and issued 140,000 shares of common stock for the commitment. Subject to certain ownership limitations, the note will be convertible at the option of the holder at any time into shares of our common stock at a conversion price equal to 95% of the Market Price, the mathematical average of the 5 lowest individual daily volume weighted average prices of the common stock less $0.05/share.

 

On December 13, 2019, we issued 32,610 shares of common stock pursuant to a satisfaction and release agreement.

 

On December 12, 2019, we converted $70,000 of principal and $4,756 of interest into 253,410 shares of common stock.

 

On December 12, 2019, we converted $50,000 of principal and $3,096 of interest into 179,253 shares of common stock.

 

On December 17, 2019, we converted $75,000 of principal and $4,47 of interest into 270,327 shares of common stock.

 

On December 18, 2019, we converted $50,000 of principal and $4,556 of interest into 179,985 shares of common stock.

 

On December 30, 2019, we converted $75,000 of principal and $5,014 of interest into 320,055 shares of common stock.

 

On December 31, 2019, we entered into a business development service agreement and issued 560,000 shares of common stock for services.

 

On January 6, 2020, we converted $50,000 of principal and $4,819 of interest into 204,207 shares of common stock.

 

On January 14, 2020, we closed under a securities purchase agreement with an investor pursuant to which we sold a convertible note bearing interest at 4% per year in the principal amount of $275,000. The purchase price of the note was $262,500 and the remaining $12,500 of principal amount represents original issue discount and issued 105,000 shares of common stock for the commitment. Subject to certain ownership limitations, the note will be convertible at the option of the holder at any time into shares of our common stock at a conversion price equal to 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 twenty days prior to (and including) the date a notice of conversion is received.

 

On February 3, 2020, we converted $74,572 of principal into 253,400 shares of common stock.

 

On February 9, 2020, we converted $100,464 of principal into 364,000 shares of common stock. 

 

On February 13, 2020, we converted $330,881 of principal and $54,849 of interest into 1,400,000 shares of common stock.

 

On February 13, 2020, we converted $67,057 of principal and $13,793 of interest into 242,909 shares of common stock.

 

On February 19, 2020, we converted $168,300 of principal and $6,797 of interest into 634,936 shares of common stock.

 

On March 4, 2020, we converted $250,000 of principal and $11,022 of interest into 865,000 shares of common stock.

 

On March 6, 2020, we converted $189,814 of principal and $4,636 of interest into 1,000,000 shares of common stock.

 

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Issuer Purchases of Equity Securities

 

Neither Generex nor any affiliated purchaser (as defined in Section 240.10 b-18(a)(3) of the Exchange Act) purchased any of its equity securities during the fiscal quarter ended January 31, 2020. 20,375,900 shares of common stock were contributed back to the Company by one shareholder without consideration.

 

Item 3. Defaults Upon Senior Securities.

 

Reference is made to Item 1 - Legal Proceedings, above for a description of claims relating to the Note held by Alpha Capital Anstalt.

 

Item 5. Other Information.

 

None 

 

Item 6. Exhibits.

 

Exhibits are incorporated herein by reference or are filed with this quarterly report as set forth in the Exhibit Index beginning on page 56 hereof.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  GENEREX BIOTECHNOLOGY CORPORATION
  (Registrant)
     
Date: March 13, 2020 By: /s/ Joseph Moscato
    Joseph Moscato
    President and Chief Executive Officer
     
Date: March 13, 2020 By: /s/ Mark Corrao
    Mark Corrao
    Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number Description of Exhibit (1)
1 Amendment dated as of April 7, 2010 to Placement Agent Agreement Placement Agency Agreement, dated June 8, 2009, by and between Generex Biotechnology Corporation and Midtown Partners & Co., LLC and amendments dated August 5, August 18, and September 11, 2009 (incorporated by reference to Exhibit 1.2 to Generex Biotechnology Corporation’s Current Report on Form 8-K filed on April 8, 2010)
2 Agreement and Plan of Merger among Generex Biotechnology Corporation, NuGenerex Immuno-Oncology, Inc. (formerly Antigen Express, Inc.) and AGEXP Acquisition Inc. (incorporated by reference to Exhibit 2.1 to Generex Biotechnology Corporation’s Current Report on Form 8-K filed on August 15, 2003)
3(i)(a) Restated Certificate of Incorporation of Generex Biotechnology Corporation (incorporated by reference to Exhibit 4.1 to Generex Biotechnology Corporation’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 filed on October 26, 2009)
3(i)(b) Certificate of Designation of Preferences, Rights and Limitations of Series A 9% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Generex Biotechnology Corporation’s Current Report on Form 8-K filed on July 11, 2011).
3(i)(c) Certificate of Designation of Preferences, Rights and Limitations of Series B 9% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Generex Biotechnology Corporation’s Current Report on form 8-K filed on February 1, 2012)
3(i)(d) Certificate of Designation of Preferences, Rights and Limitations of Series C 9% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Generex Biotechnology Corporation’s Current Report on Form 8-K filed on August 8, 2012).
3(i)(e) Certificate of Designation of Preferences, Rights and Limitations of Series D 9% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Generex Biotechnology Corporation’s Current Report on form 8-K filed on December 11, 2012)
3(i)(f) Certificate of Amendment to Restated Certificate of Incorporation of Generex Biotechnology Corporation (incorporated by reference to Exhibit 3(i)(f) to Generex Biotechnology Corporation’s Current Report on Registration Statement on Form S-1 (File No. 333-187656) filed on April 1, 2013)
3(i)(g)