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: April 30, 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 June 17, 2020, the registrant had 79,936,996 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 as of April 30, 2020 (unaudited) and July 31, 2019 3
Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended April 30, 2020 and 2019 (unaudited) 4
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) for the three and nine month ended April 30, 2020 and 2019 (unaudited) 5
Consolidated Statements of Cash Flows - For the nine months ended April 30, 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 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk 66
Item 4. Controls and Procedures 66
PART II: OTHER INFORMATION  
Item 1. Legal Proceedings 67
Item 1A. Risk Factors 69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 69
Item 3. Defaults Upon Senior Securities 72
[Item 4. Removed and Reserved.]
Item 5. Other Information 72
Item 6. Exhibits 72
Signatures 73

 

  2  

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
         
      April 30, 2020       July 31, 2019  
ASSETS                
Current assets                
Cash and cash equivalents   $ 416,643     $ 298,485  
Accounts receivable, net     142,000       36,311  
Inventory, net     910,984       363,008  
Other current assets     623,844       275,731  
Total current assets     2,093,471       973,535  
                 
Property and equipment     244,822       499,993  
Goodwill     38,901,126       38,297,573  
Intangible assets     10,494,574       9,834,269  
Operating lease right-of-use assets - net     138,711       —    
Other assets, net     22,421       30,621  
TOTAL ASSETS   $ 51,895,125     $ 49,635,991  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Accounts payable and accrued expenses   $ 21,537,332     $ 14,684,060  
Notes payable, current     11,565,791       8,368,379  
Payable to foundation for services     1,315,817       1,315,817  
Interest payable to foundation     3,682,812       3,055,945  
Loans from related parties     29,700       19,700  
Operating lease liabilities - current     79,704       —    
Deferred tax liability     1,502,122       1,502,122  
Total current liabilities     39,713,278       28,946,023  
                 
Notes payable - noncurrent     499,473       —    
Derivative liability     10,320,061       7,820,283  
Common stock payable     186,972       1,123,188  
Operating lease liabilities - net of current portion     60,309       —    
Total liabilities     50,780,093       37,889,494  
                 
Redeemable non-controlling interest (Note 11)     4,073,898       4,073,898  
                 
Stockholders’ equity (deficiency) (Note 10)                
Common stock, $0.001 par value; authorized 750,000,000 shares;79,936,996 and 78,608,419 issued and outstanding at April 30, 2020 and July 31, 2019, respectively     79,937       78,608  
Subscription receivable     (767,690 )     —    
Additional paid-in capital     427,623,151       408,550,211  
Accumulated deficit     (440,389,785 )     (418,727,875 )
Accumulated other comprehensive income     792,233       797,216  
                 
Non-controlling interest     9,703,288       16,974,439  
                 
Total stockholders’ equity (deficiency)     (2,958,866 )     7,672,599  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)   $ 51,895,125     $ 49,635,991  
Going Concern (Note 1)                
Subsequent Events (Note 18)                
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

  3  

 

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
         
    Three Months Ended April 30,   Nine Months Ended April 30,
    2020   2019   2020   2019
Revenue, net   $ 498,676     $ 1,092,926     $ 2,077,764     $ 6,254,339  
Cost of goods sold     116,292       1,264,964       415,569       4,147,264  
Gross profit (loss)     382,384       (172,038 )     1,662,195       2,107,075  
                                 
Operating expenses                                
Research and development     332,029       472,010       1,270,600       1,463,015  
Bad debt expense     —         —         14,146       —    
General and administrative     3,624,709       8,656,877       13,058,813       17,428,182  
Total operating expenses     3,956,738       9,128,887       14,343,559       18,891,197  
                                 
Operating loss     (3,574,354 )     (9,300,925 )     (12,681,364 )     (16,784,122 )
                                 
Other income (expense):                                
Interest expense     (1,506,103 )     (2,328,703 )     (5,453,268 )     (4,591,639 )
Interest income     5       2,855       1,092       3,623  
Changes in fair value of contingent purchase consideration     (119,630 )     —         (119,630 )     15,147,591  
Change in fair value of derivative liability     (466,217 )     417,330       (4,112,208 )     560,055  
Change in fair value of common stock payable     (96,183 )     —         18,871       —    
Impairment of long lived assets     —         —         —         (99,519 )
Other income, net     1,665       56,135       (6,887 )     8,699  
                                 
Net loss     (5,760,817 )     (11,153,308 )     (22,353,394 )     (5,755,312 )
                                 
Net loss attributable to noncontrolling interests     (134,355 )     (839,419 )     (691,484 )     (1,199,822 )
Net loss available to common stockholders     (5,626,462 )     (10,313,889 )     (21,661,910 )   $ (4,555,490 )
                                 
Net loss per common share                                
Basic   $ (0.07 )   $ (0.12 )   $ (0.31 )   $ (0.06 )
Diluted   $ (0.07 )   $ (0.12 )   $ (0.31 )   $ (0.06 )
                                 
Shares used to compute loss per share                                
Basic     76,976,925       84,507,030       70,702,570       74,445,373  
Diluted     76,976,925       84,507,030       70,702,570       74,445,373  
                                 
Comprehensive loss                                
Net loss   $ (5,626,462 )   $ (10,313,889 )   $ (21,661,910 )   $ (4,555,490 )
Change in foreign currency translation adjustments     17,042       7,318       (4,983 )     9,342  
Comprehensive loss available to common stockholders   $ (5,609,420 )   $ (10,306,571 )   $ (21,666,893 )   $ (4,546,148 )
                                 
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 (DEFICIENCY)
                 
                                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 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  
Investment in subsidiary by noncontrolling interest     —         —         —         —         —         —         —         —         —         44,022       —         44,022  
Issuance of stock options     —         —         —         —         —         605,471       —         —         605,471       —         —         605,471  
Extinguishment of debt     —         —         —         —         —         13,929,129       —         —         13,929,129       —         —         13,929,129  
Antigen dividend     —         —         —         —         —         (1,070,456 )     —         —         (1,070,456 )     1,070,456       —         —    
Reclassification of equity to liability     —         —         —         —         (201,294 )     —         —         —         (201,294 )     —         —         (201,294 )
Currency translation adjustment     —         —         —         —         —         —         —         7,318       7,318       —                 7,318  
Net Income (Loss)     —         —         —         —         —         —         (10,313,889 )     —         (10,313,889 )     (839,419 )     —         (11,153,308 )
Balance at April 30, 2019     —         —         76,356,640     $ 76,356     $ —       $ 400,828,518     $ (413,941,958 )   $ 807,764     $ (12,229,320 )   $ 21,958,757     $ 4,073,898     $ 13,803,335  
                                                                                                 
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     —         —         —         —         —         —         —         —         —         228,789       —         228,789  
Conversion of preferred series H     (63,000 )     (3 )     28,828,953       28,829       —         (28,826 )     —         —         —         —         —         —    
Conversion of preferred series I     (16,590 )     (1 )     7,583,560       7,584       —         (7,583 )     —         —         —         —         —         —    
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     —         —         —         —         —         1,530,312       —         —         1,530,312       —         —         1,530,312  
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  
Antigen dividend     —         —         —         —         —         (1,070,456 )     —         —         (1,070,456 )     1,070,456       —         —    
Conversion of debt to equity - Veneto     —         —         —         —         —         13,929,129       —         —         13,929,129       —         —         13,929,129  
Acquisition of NCI of Regentys     —         —         —         —         —         —         —         —         —         9,870,762       —         9,870,762  
Acquisition of NCI of Olaregen     —         —         —         —         —         —         —         —         —         11,999,559       —         11,999,559  
Acquisition of NCI of HDS     —         —         —         —         —         —         —         —         —         5,565,285       —         5,565,285  
Reclassification of equity to liability     —         —         —         —         (201,294 )     —         —         —         (201,294 )     —         —         (201,294 )
Redeemable non-controlling interest     —         —         —         —         —         —         —         —         —         —         4,073,898       4,073,898  
Currency translation adjustment     —         —         —         —         —         —         —         9,342       9,342       —                 9,342  
Net Income (Loss)     —         —         —         —         —         —         (4,555,490 )     —         (4,555,490 )     (1,199,822 )     —         (5,755,312 )
Balance at April 30, 2019     —         —         76,356,640     $ 76,356     $ —       $ 400,828,518     $ (413,941,958 )   $ 807,764     $ (12,229,320 )   $ 21,958,757     $ 4,073,898     $ 13,803,335  
                                                                                                 
                                                               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 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 )        
Stock compensation expense     —         —         —         —         —         393,414       —         —         393,414       —         393,414          
Shares issued for services     —         —         109,803       110       —         49,890       —         —         50,000       —         50,000          
Conversion of debt to equity     —         —         4,713,192       4,715       —         1,580,437       —         —         1,585,152       —         1,585,152          
Reduction of derivative liabilities     —         —         —         —         —         765,424       —         —         765,424       —         765,424          
Purchase of shares in subsidiary     —         —         5,950,000       5,950       —         4,586,327       —         —         4,592,277       (4,592,277 )     —            
Shares issued as debt issuance cost     —         —         35,000       35       —         9,205       —         —         9,240       —         9,240          
Settlement of subsidiary's debt with stock     —         —         —         —         —         32,212       —         —         32,212       —         32,212          
Currency translation adjustment     —         —         —         —         —         —         —         17,042       17,042       —         17,042          
Net Income (Loss)     —         —         —         —         —         —         (5,626,462 )     —         (5,626,462 )     (134,355 )     (5,760,817 )        
Balance at April 30, 2020     —         —         79,936,996     $ 79,937     $ (767,690 )   $ 427,623,151     $ (440,389,785 )   $ 792,233     $ (12,662,155 )   $ 9,703,288     $ (2,958,866 )        
                                                                                                 
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     —         —         —         —         —         1,630,111       —         —         1,630,111       —         1,630,111          
Shares issued for services     —         —         669,803       670       —         292,930       —         —         293,600       —         293,600          
Shares issued for deferred offering     —         —         1,719,901       1,720       (767,690 )     765,970       —         —         —         —         —            
Issuance of common stock payable     —         —         436,121       436       —         935,959       —         —         936,395       —         936,395          
Conversion of debt to equity     —         —         9,719,740       9,720       —         4,480,190       —         —         4,489,910       —         4,489,910          
Issuance of common stock for acquisitions     —         —         960,000       960       —         1,150,992       —         —         1,151,952       —         1,151,952          
Reduction of derivative liabilities     —         —         —         —         —         3,041,502       —         —         3,041,502       —         3,041,502          
Cancellation of shares     —         —         (20,375,900 )     (20,376 )     —         20,376       —         —         —         —         —            
Purchase of shares in subsidiary     —         —         7,855,912       7,856       —         6,571,811       —         —         6,579,667       (6,579,667 )     —            
Shares issued as debt issuance cost     —         —         343,000       343       —         150,887       —         —         151,230       —         151,230          
Currency translation adjustment     —         —         —         —         —         —         —         (4,983 )     (4,983 )     —         (4,983 )        
Settlement of subsidiary's liability with stock     —         —         —         —         —         32,212       —         —         32,212       —         32,212          
Net Income (Loss)     —         —         —         —         —         —         (21,661,910 )     —         (21,661,910 )     (691,484 )     (22,353,394 )        
Balance at April 30, 2020     —         —         79,936,996     $ 79,937     $ (767,690 )   $ 427,623,151     $ (440,389,785 )   $ 792,233     $ (12,662,155 )   $ 9,703,288     $ (2,958,866 )        
                                                                                                 
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
 
    Nine Months Ended April 30,
    2020   2019
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (22,353,394 )   $ (5,755,312 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     609,007       550,285  
Amortization of operating lease right-of-use assets     71,987       —    
Stock compensation expense     1,630,111       1,530,312  
Shares issued for services     293,600       —    
Changes in fair value of contingent purchase consideration     —         (15,147,591 )
Loss on disposal of fixed assets     189,366       —    
Increase in notes payable due to default     94,214       —    
Amortization of debt discount     3,795,606       1,128,613  
Non-cash interest expense from issuance on debt (derivative)     —         959,974  
Change in fair value of derivative liabilities - convertible notes     (642,221 )     (1,034,180 )
Change in fair value of derivative liabilities - convertible warrants     (9,913 )     (95,986 )
Change in fair value of derivative liabilities - downside protection     4,764,341       570,112  
Change in fair value of common stock payable     (18,871 )     —    
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     16,599       735,317  
Inventory     (281,905 )     1,239,411  
Accounts payable and accrued expenses     6,061,988       6,583,739  
Interest payable to foundation     626,867       524,303  
Accrued interest on notes receivable     —         (38,401 )
Operating lease liabilities     (70,685 )     —    
Other current assets     (286,096 )     106,160  
Other assets     11,383       (21,597 )
Other current liabilities     —         4,702  
Other liabilities     —         2,233  
Net cash used in operating activities     (5,487,035 )     (8,058,387 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     (4,616 )     (285,670 )
Purchase of intangible assets     —         (26,487 )
Disposal of property and equipment     —         252,012  
Disposal of intangible assets     —         62,091  
Cash received in acquisition of a business, net of cash paid     49,305       2,280,425  
Net cash provided by investing activities     44,689       2,282,371  
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Loan proceeds from related party     10,000       (3,305 )
Payment of notes payable     (935,731 )     (27,248 )
Proceeds from note payable     6,381,448       5,929,910  
Proceeds from issuance of common stock     109,770     —    
Investment in subsidiary by noncontrolling interest     —         228,789  
Net cash provided by financing activities     5,565,487       6,128,146  
                 
Effects of currency translation on cash and cash equivalents     (4,983 )     9,342  
                 
Net increase in cash and cash equivalents     118,158       361,472  
                 
Cash and cash equivalents, beginning of period     298,485       1,046,365  
Cash and cash equivalents, end of period   $ 416,643     $ 1,407,837  
                 
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   $ 3,041,502     $ —    
Discount on Derivative liability upon issuance of debt   $ 1,834,607     $ —    
Issuance of common stock for conversion of debt   $ 4,489,910     $ —    
Set up of ROU   $ 210,698     $ —    
Issuance of shares--common stock payable   $ 936,395     $ —    
Subscription receivable   $ 765,970     $ —    
Shares issued as debt issuance cost   $ 151,230     $ —    
Issuance of debt for payment of prepaid expense   $ 50,000     $ —    
Settlement of subsidiary’s liability with stock   $ 32,212     $ —    
Conversion of HDS debt and issuance of call option   $ —       $ 14,056,113  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

  

  6  

 

 

  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”, “Company”, "we", "us" or "our"), 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 subsidiary, NuGenerex Immuno-Oncology (“NGIO”), formerly Antigen Express, Inc., or “Antigen”), has undertaken work on immunomedicines incorporating proprietary vaccine formulations. GNBT distributed a total of approximately 34 million shares of NGIO in two dividends to GNBT shareholders on February 19, 2019 and February 24, 2020.  Additional NGIO shares were used as consideration in various acquisitions by GNBT. After all of these transactions GNBT still owns over 90% of the outstanding shares of NGIO requiring GNBT to continue to consolidate NGIO.  On March 12, 2020, NGIO filed a Form 10 registration statement.  This form 10 became effective on May 11, 2020 at which time NGIO became a reporting entity controlled by GNBT.  As a result of these transactions, GNBT shall recognize the non-controlling interest in NGIO in its financial statements. 

 

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%. In the third quarter of 2020 the Company acquired the remaining interest in Olaregen in exchange for its shares of common stock and became a wholly owned subsidiary of the Company.

 

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”).

 

  7  

 

 

MediSource contracts with vendors (including Pantheon) for nationwide distribution of implants and devices for spine, hips, knees, foot, ankle, hand, and wrist surgeries. Additional product lines include biologics (blood, bone, tissue, and stem cells), durable medical equipment, and soft goods. MediSource also supplies kits to process bone marrow aspirates and platelet rich plasma biologics at the time of surgery.

 

Pantheon sells a physician friendly, “all-in-one,” integrated kit that includes plates, screws, and tools required for orthopedic surgeons and podiatrists conducting foot and ankle surgeries. Over the next three years, Pantheon expects to develop and submit several new product lines to the FDA, which will include cannulated surgical screws and surgical staples, as well as a proprietary Hammertoe System.

 

Going Concern

 

The accompanying unaudited condensed interim consolidated financial statements have been prepared in conformity with generally accepted in the United States of America (“U.S. 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 $440.4 million and a working capital deficiency of approximately $37.6 million at April 30, 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.

 

The recent, widespread outbreak of a novel infectious disease called Coronavirus Disease 2019, or COVID-19, has created a dynamic and uncertain situation in the national economy. Regarding the Company, sales of Olaregen's Excellagen, Pantheon’s foot & ankle surgical kits, and the line of MediSource catalogue products have been significantly impacted by the COVID-19 pandemic. Surgeries and outpatient procedures were delayed and rescheduled, severely limiting sales of wound care and surgical products. Going forward, as the VA and other hospital systems re-open, the re-scheduled surgeries and procedures are expected to start up and create a backlog of cases, which should accelerate product sales to pre-COVID levels in due course. 

 

Because of the COVID-19 pandemic Generex and its subsidiaries are currently pursuing the development of a SARS-CoV-2 vaccine using the company's patented Ii-Key peptide vaccine technology. To this end, the Company applied for funding to BARDA in the U.S., Health Canada, and the Malaysian Ministry of Health as well as with CEPI, the international public/private consortium focused on the development of vaccines for the global market. To date, Generex has identified viral epitopes through computer vaccinology algorithms, and manufactured those peptide sequences with the Ii-Key moiety for testing in immunological screening program using convalescent blood samples from patients who have recovered from COVID-19. The immunological blood screening program is scheduled to begin shortly. Manufacturing partners have been identified for clinical and commercial supply. Completion of the ii-Key-SARS-CoV-2 peptide vaccine program is dependent on obtaining funding from government and/or private sources.

 

The Company continues to closely monitor the latest information to make timely, informed business decisions and public disclosures regarding the potential impact of pandemic on its operations and financial condition. The scope of pandemic is unprecedented and its long-term impact on the Company’s operations and financial condition cannot be reasonably estimated at this time.

 

There is always uncertainty and risk associated with the development of any vaccine, medical treatment or therapy, but the continued development depends upon the completing the trials under various collaboration agreements and associated potential commercialization of the product, FDA approval and/or licensing agreements. Any collaborator with whom we may enter into such collaboration agreements may not support fully our research and commercial interests since our program may compete for time, attention and resources with such collaborator's internal programs. Therefore, these collaborators may not commit sufficient resources to our program to move it forward effectively, or that the program will advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. During the pandemic COVID-19, it is anticipated that delays will occur, but the full impact of any slow down due to COVID-19 has not been determined.

 

  8  

 

 

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 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 nine months ended April 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2020. The balance sheet at April 30, 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. 

 

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.

  9  

 

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 considering 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 April 30,   Nine months ended April 30,
Revenue Source   2020   2019   2020   2019
Product sales   $ 497,386     $ 37,300     $ 2,059,662     $ 37,300  
Management services     1,290       80,471       18,168       283,319  
Pharmacy sales     —         1,020,616       —         5,615,153  
Laboratory sales     —         (45,461 )     —         318,567  
Total Revenue   $ 498,676     $ 1,092,926     $ 2,077,830     $ 6,254,339  

 

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.

 

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.

 

  11  

 

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the TCJA on December 22, 2017 that changed the Company’s federal income tax rate from 35% to 21% effective January 1, 2018 and the establishment of a territorial-style system for taxing foreign-source income of domestic multinational corporations. In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Act (“SAB118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment. The Company remeasured its deferred tax assets and liabilities as of July 31, 2018, applying the reduced corporate income tax rate and recorded a provisional decrease to the deferred tax assets of $31,876,520, with a corresponding adjustment to the valuation allowance. In the fourth quarter of fiscal year ended July 31, 2019, we completed our analysis to determine the effect of the Tax Act and there were no material adjustments as of July 31, 2019.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”, which adds disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect that ASU 2018-13 will have on consolidated financial statements.

 

Note 3 - 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. AEXG filed a demand for arbitration and on September 25, 2018 an arbitration hearing was held with an arbitrator from the American Arbitration Association’s International Centre for Dispute Resolution. On December 3, 2018, an arbitrator awarded 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. 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 $3.5 million, but only liquidated damages in the amount of $210,000 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. Generex has responded that the value of the warrants on the date of the award is $0 or some figure far less than the value calculated by AEXG. 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. AEXG filed a petition to confirm that part of the arbitrator’s award that awarded AEXG $210,000 in liquidated damages plus post award prejudgment interest. On April 24, 2020, legal fees in the amount of $93,304 plus costs of $12,393. The Court remanded part of the arbitrator’s award for a determination as to the economic value of 84,000 warrants with an exercise price of $2.50 per share. As of April 30, 2020, $285,613 has been accrued in relation to this matter.

 

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On June 28, 2018, the Company was named in respect of a claim by Burrard Pharmaceutical Enterprises Ltd. and Moa’yeri Kayhan for unspecified damages and other remedies issued by the Supreme Court of British Columbia. The claim is made in connection with one advanced against Burrard and Kayhan by Middle East Pharmaceutical Factory L.L.C., a foreign corporation, for fraudulent or negligent misrepresentation. Middle East alleges that it was misled by Burrard and Kayhan into believing that Burrard had rights to distribute Generex product in the Middle East. Burrard and Kayhan allege that they did have rights in that regard, which the Company denies. The matter remains at the pleadings stage and the Company is investigating the facts.

 

On October 26, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to sell and sold its Note due October 26, 2019 (“Note”) in the principal amount of $682,000. On January 25, 2019, Generex received a letter from the purchaser’s counsel stating that the Note was in default because Generex’s common stock was not listed on NASDAQ within 90 days after the issuance of the Note. The letter demanded repayment in full. On February 12, 2019, the Purchaser filed a Motion for Summary Judgment in lieu of complaint in the Supreme Court of New York, demanding the aggregate principal amount, default interest and costs. Purchaser’s motion for summary judgment was denied, and that that denial was upheld in the Appellate Division, Second Department. The Company is vigorously defending this matter. 

 

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 April 30, 2020, the Company has accrued for the full $2,752,235 balance.

 

On September 10, 2019, Generex and its subsidiaries, NuGenerex Distribution Solutions, LLC, and NuGenerex Distributions Solutions 2, LLC (jointly “NDS”) filed an arbitrary action against Veneto Holdings, LLC and certain affiliated entities holding shares of our common stock issued in connection with our acquisition of Veneto’s assets, alleging, among other things, that Veneto never transferred the ownership rights in at least one pharmacy to NDS. This pharmacy was a necessary element in the operation of other assets transferred by Veneto. The ownership rights in this pharmacy was a substantial portion of the consideration for shares issued to Veneto and its affiliates, and, as a result, Generex contends the shares issued to Veneto and its affiliates were never fully paid for. The arbitrator subsequently dismissed certain holders of the Company’s shares from the arbitration. The arbitration against Veneto is currently pending before the American Arbitration Association in Delaware. 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.

 

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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 counterclaims 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. On May 4, 2020, the District Court entered judgment against the Company for the balance of the note already accrued of $2,200,000. The Court will next consider the amount of attorneys fees that Discover is entitled to. Discover has communicated that they are entitled to $91,455 in attorneys fees and the Company has opposed this request.

 

On May 6, 2020, the Company was named as a defendant in an action brought by Iliad Research and Trading LP (“Iliad”) in Salt Lake City, Utah. The plaintiff alleges that the Company breached a Securities Purchase Agreement and Convertible Promissory Note. The action seeks, among other things, a temporary restraining order preventing the Company from issuing new shares and an order compelling the Company to arbitrate the dispute with Iliad. On Friday, May 29, 2020, the Third District Court entered a ruling that Generex may not issue, transfer or otherwise dispose of any shares of stock without receiving court approval from the judge in the Utah Third District Court. The Company continues to contest the matter.

 

With respect to all litigation, as additional information concerning the estimates used by the Company becomes known, the Company reassesses its position both with respect to accrued liabilities and other potential exposures.

 

Commitments

 

Intellectual Property

 

In connection with the Company’s acquisition of Olaregen, intellectual property was acquired that had a valuation of $650,000 prior to being acquired and revalued. This initial $650,000 valuation represented the initial payment remitted by Olaregen in accordance with the $4 million signed commitment agreement entered into with Activation Therapeutics, Inc. The remaining $3.35 million balance is to be paid in quarterly installments equal to 10% of quarterly net sales generated by Activation Therapeutics assuming the Exellagen average selling price per unit exceeds $800. In the event that the average selling price per unit is less than $800 per unit, cost of goods sold shall be excluded from the computation of net sales.

 

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 April 30, 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 was 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.

 

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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.

 

Agreements

 

On November 20, 2018, the Company entered into a clinical trial agreement with NSABP Foundation, Inc. (“NSABP”) under which NSABP will conduct clinical research using the Company’s AE37 peptide immunotherapeutic vaccine in combination with pembrolizumab (Ketruda®) for the treatment of metastatic triple negative breast cancer. The Company has agreed to pay NSABP an amount not to exceed $2,118,461 based on NAABP achieving various milestones.

 

The Company recognized $340,000 as research and development related to the clinical trial agreement with NSABP as of April 30, 2020.

 

On February 28, 2020, the Company 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) (the “Chinese Parties”), to develop a COVID-19 vaccine using the Ii-Key Peptide vaccine technology of NGIO.

 

Under the Agreement, Generex will make the Ii-Key Peptide vaccine technology available to the Chinese Parties. The Chinese parties will provide facilities and personnel for the development of the COVID-19 vaccine under Generex/NGIO technical guidance. The development will include synthesis, analysis and human trials through Phase III, if warranted, in China. The Chinese parties will have exclusive rights to use and commercialize the COVID-19 technology and products in China.

The Chinese Parties have agreed to set-aside $1,000,000 for Generex/NGIO expenses during development and human clinical trials.

If development and testing are successful, the parties will enter into further collaboration and technology transfer agreements. In this event, the Chinese Parties have the following maximum commitment to NGIO:

  A technology transfer fee of $5 million.

 

  A 20% royalty.

 

  Its accumulated cost for development of the technology.

 

The Agreement provides Generex will receive a $2,000,000 breakup fee if China develops a cure for COVID-19. If Generex ceases its participation, Generex would be required to repay all amounts paid by the Chinese Parties on behalf of Generex.

 

On March 3, 2020, the Company entered into a Master Services Agreement and Statement of Work Agreement with EpiVax, Inc. (“EpiVax”). The Agreement provides for EpiVax to use its proprietary epitope prediction software in the identification, development, and transfer of a potential vaccine for COVID-19 based upon Nugenerex Immuno-Oncology’s (“NGIO”) Ii-Key vaccine technology. NGIO is a majority owned subsidiary of Generex. Generex/NGIO will own the intellectual property generated by EpiVax’s work. The total fee for services is $325,000 of which $150,000 has been paid as of April 30, 2020.

 

Payable to Foundation

On February 1, 2007, the Company entered into a clinical study agreement with the Henry J. Jackson Foundation (the “Foundation” for the clinical research and development of AE37 for the treatment of breast cancer). The Company agreed to pay the foundation total compensation of $2,700,000 payable at various intervals over the term of the agreement.

 

On September 9, 2013, the Company entered into a forbearance agreement (the “Forbearance Agreement”) with the Foundation and under which the Company n acknowledged that they were in arrears on its payment and interest obligations to the Foundation in the amount of $1,315,817. Pursuant to the Forbearance Agreement, the Company and the Foundation agreed that in exchange for deferring the overdue payments the Company would among other matters, pay the foundation (i) the final $200,000 upon completion of the study and acceptance of all study documents, (ii) a royalty of 5% of net third party sales and (iii) the original forbearance amount will continue to bear interest at 1.5% per month, compounded. The Foundation may terminate the Forbearance Agreement by providing the Company written notice should the Company, among other matters, fail to make payments due under the Forbearance Agreement. The foundation has not provided the study documents to the Company.

 

As of April 30, 2020, and July 31, 2019, the Company’s payable to the foundation for services was $1,315,817. Interest payable to the Foundation was $3,682,812 and $3,055,945 as of April 30, 2020 and July 31, 2019, respectively. Interest accrued related to the payable to the foundation was $218,360 and $182,629, respectively for the three months ended April 30, 2020 and 2019; and $626,867 and $524,303, respectively, for the nine months ended April 30, 2020 and 2019. 

 

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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.

 

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

 

The Company incurred lease expense for its operating leases of $82,715 for nine months ended April 30, 2020.

 

The following table presents information about the amount and timing of liabilities arising from the Company’s operating leases as of April 30, 2020:

 

Maturity of operating lease liabilities for the remainder of the current fiscal year and the following fiscal years:    
For the period May 1, 2020 to July 31, 2020   $ 30,109  
2021     75,675  
2022     38,139  
2023     9,682  
2024     —    
Thereafter   $ —    
Total undiscounted operating lease payments     153,605  
Less: Imputed interest     13,592  
Present value of operating lease liabilities   $ 140,013  

 

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Note 5 – Inventory

 

Inventory consists of the following components:

 

    April 30,   July 31,
    2020   2019
Raw materials   $ 278,310     $ 77,782  
Finished goods     632,674       285,226  
Total Inventory   $ 910,984     $ 363,008  

 

Note 6 – Property and Equipment

 

Property and equipment, net consisted of the following:

 

    April 30,   July 31,
    2020   2019
Computers and technological assets   $ 53,314     $ 163,168  
Machinery and equipment     329,976       386,929  
Furniture and fixtures     18,725       73,227  
Leasehold Improvements     16,596       16,596  
      418,611       639,920  
Less accumulated depreciation     (173,789 )     (139,927 )
    $ 244,822     $ 499,993  

 

Depreciation expense related to property and equipment for the nine months ended April 30, 2020 and 2019 was $146,712 and $150,744, respectively.

 

Note 7 – Goodwill and Intangible Assets 

Intangible assets consist of the following at:

    Estimated   April 30,   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         (781,727 )     (319,432 )
        $ 10,494,574     $ 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. As of April 30, 2020, the in-process research and development (“IPR&D”) of $8,761,427 in the aggregate was a combination of $2,911,377 obtained through the acquisition of HDS; $3,391,050 obtained through the acquisition of Regentys; and $2,459,000 through the acquisition of Olaregen. None of the research and development underlying the IPR&D has been not been abandoned, nor was it determined to be impaired by management as a result of COVID-19. The Company was recently awarded a Blanket Purchase Agreement (BPA) contract from the National Strategic Acquisition Center (SAC). The VA’s National Contract and National BPA programs are used by VA medical centers, related facilities, specific State Veterans Homes, and other Federal facilities to procure select products based on clinical evidence, patient outcomes, and economic cost to the VA hospitals. The SAC awarded Olaregen’s Excellagen will expedite the purchasing of Excellagen at over 165 VA medical centers across the U.S. and Puerto Rico. This approval process is critical to the Company’s ability to determine whether IPR&D associated with Olaregen no longer has an indefinite life subject to amortization, except until the VA resumes its surgical procedures, the Company determined Olaregen’s IPR&D life to remain indefinite as of April 30, 2020.

Amortization expense amounted to $462,295 and $399,541 for the nine months ended April 30, 2020 and 2019, respectively.

  17  

 

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 May 1, 2020 to July 31, 2020   $ 154,565  
2021     616,744  
2022     347,399  
2023     94,510  
2024     75,018  
Thereafter     444,911  
 Total   $ 1,733,147  

 

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 April 30, 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 rate is 27.5% per annum.

 

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.

 

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.

 

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In May 2019, the Company consummated a Stock Purchase Agreement entered into January 14, 2019 to which the Company sold $2,000,000 of promissory notes bearing interest at 7% per annum (the “Notes”) originally due and payable on August 1, 2019. The notes 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.

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.

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. 

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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.

On February 10, 2020, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company 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 to 80% of the lowest closing price as of the date of the notice. Additionally, the Company issued 35,000 shares of common stock to the investor upon execution of the note.

On February 19, 2020, a lender made a formal demand for repayment of a note payable due on August 29, 2020 because they claim Company failed to comply with all terms of the note. On April 8, 2020, the Company signed a forbearance agreement with the lender to remove the major default penalty, but increase the annual interest rate to 22%. The balance of the note was amended to $956,535 in cash which includes principal in the amount of $772,500 and approximately $184,035 of accrued interest and penalties.

As of April 30, 2020, there were three notes in default with an aggregate principal balance of 3,748,744.  The notes are accruing at default rates of interest between 22% and 24% per annum.

 

On February 28, 2020, the Company entered into a series of Securities Purchase Agreements with three investors pursuant to which the Company 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 $250,000 and the remaining $31,600 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 April 9, 2020, the Company issued a note to a lender for $50,000 due in year with an interest rate of 10% per annum. The funds were paid directly to one of the Company’s vendors.

In April, 2020, Regentys, Olaregen, NDS 2 and MediSource (collectively “the Subsidiaries”) were granted loans (the “PPP Loans”) in the aggregate amount of $499,473, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further required the Subsidiaries to consider its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Subsidiaries having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria.

 

The PPP Loans, which were in the form of a notes with dates ranging between April 17 and April 24, 2020 and mature between two and five years and bear interest at a rate of 1.00% per annum, payable in monthly payments commencing six months after loan disbursements. The notes may be prepaid by the Subsidiaries at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs and any payments of certain covered interest, lease and utility payments. The Company intends to use the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. No assurance can be provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

 

    Amount
Balance of notes payable at July 31, 2019   $ 8,368,379  
Issuances of debt     5,492,242  
Issuance of PPP loans     499,473  
Increase in debt due to default     92,619  
Debt discount     (971,563 )
Amortization of debt discount     3,795,605  
Conversions     (4,275,760 )
Payments     (935,731 )
Balance of notes payable at April 30, 2020   $ 12,065,264  

 

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On December 28, 2017, the Company through its then 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 April 30, 2020, the remaining principal balance was $353,375 with an unamortized debt discount balance of $16,824. These notes have an accrued interest balance of $67,383 as of April 30, 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.

 

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 April 30, 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     1,804,254       30,353       —         1,834,607  
Change in fair value     (1,045,434 )     (9,913 )     4,764,341       3,708,994  
Change due to conversion / exercise / redemptions     (3,007,387 )     (36,435 )     —         (3,043,822 )
Balance as of April 30, 2020   $ 1,907,629     $ 309,255     $ 8,103,177     $ 10,320,061  

 

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Note 10 - Stockholders’ Equity

 

Stock Split and Dividend

 

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.

 

Common Stock

 

Shares issued for services

 

In January and February of 2020, the Company issued 669,803 shares of common stock to vendors for services valued between $0.44 and $0.46 per share, or $293,600.

 

Shares issued for deferred offering

 

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)

 

Issuance of common stock payable

 

During the nine months ended April 30, 2020 and 2019, 436,121 and 8,495,924 shares of common stock payable were issued, respectively. As of April 30, 2020 and 2019, 410,928 and 400,928 shares remain to be issued resulting in common stock payable $186,972 and 201,294, respectively.

Conversion of debt to equity

 

During the nine months ended April 30, 2020, the Company issued 9,719,740 shares of common stock for the conversion of $4,489,910 of debt.

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Issuance of common stock for acquisitions

 

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.

Cancellation of shares

 

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.

 

Purchase of shares in subsidiary

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.

 

On February 14, 2020, the remaining shareholders of Olaregen exchanged all of its outstanding shares for 5,950,000 shares of Generex common stock and 2,765,000 shares of NGIO. In total, during the nine months ended April 30, 2020, the Company issued 7,855,912 shares of stock for the purchase of the outstanding shares in Olaregen,

 

Shares issued as debt issuance cost

During the nine months ended April 30, 2020, the Company issued 343,000 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 $0.26 and $0.51, or total of $151,230.

 

Settlement of subsidiary's liability with stock

 

On February 14, 2020, the former stockholders of Olaregen settled a $32,212 payroll related liability using previously issued Generex common stock it had received from its share exchange.

 

Series H and Series I Convertible Preferred Stock 

 

The Company has authorized 109,000 shares of designated non-voting Series H Convertible Preferred Stock with a stated value of $1,000 per share and authorized 6,000 shares of designated non-voting Series I Convertible Preferred Stock with a stated value of $47.61 per share pursuant to the Purchase Agreement dated March 27, 2017. The Series H Preferred Stock was scheduled to be sold in four tranches to the Purchaser. The Series H and Series I Convertible Preferred Stock were convertible at the option of the holder.  At closing of the first tranche on March 28, 2017, the Company issued 63,000 shares of Series H Preferred Stock for a purchase price of $3,000,000.   On December 1, 2018, after payment of the dividend, B-H Sanford, LLC, converted all of its holding of the Company’ Series H Convertible Preferred Stock owned by it into 28,828,953 shares of common stock.  On November 30, 2018, Joseph Moscato, the Company’s President and Chief Executive Officer, and Lawrence Salvo, a member of the Company’s Board of Directors, converted all shares of the Company’ Series I Convertible Preferred Stock owned by them receiving the aggregate 7,595,350 shares. 

 

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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 from Olaregen shareholders. 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. The provided shares by the Friends of Generex Trust were already issued and outstanding and did not result in any expense of the Company. Since these shares were transferred, to the shareholders of Olaregen, by an existing shareholder to settle an obligation of the Company, the value of the shares provided by the Friends of the Generex Trust to settle the debt was reflected in the financial statements as an addition to contributed (paid-in) capital.

 

After completion Share Exchange Agreement on August 16, 2019, the Company owned 51% of Olaregen.

 

On February 14, 2020, the remaining stockholders of Olaregen exchanged all of its outstanding shares for 5,950,000 shares of Generex common stock and 2,765,000 shares of NGIO. After this transaction and as of April 30, 2020, 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.

 

On March 10, 2020, the Company increased the number of authorized shares from 400,000,000 to 760,000,000, which consists of 750,000,000 shares of common stock, par value $0.001 per share and 10,000,000 shares of preferred stock, par value $0.001 per share.  The preferred stock may be issued in one of more series and may have preferences as to dividends and to liquidation of the Company.

As of April 30, 2020, 400,000,000 shares of NGIO are issued and outstanding of which 38,357,038 shares belong to non-controlling interest shareholders which represents a 9.59% non-controlling interest.

 

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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 $40,000,000 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 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.

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 April 30, 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.

  25  

 

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     $ 1.49       4.42       —    
Forfeited or expired     (642,500 )   $ 0.79       5.78       —    
Exercised     —         —         —         —    
Outstanding – April 30, 2020     8,878,195     $ 0.93       6.20     $ 439,979  

The intrinsic value is calculated as the difference between the market value and the exercise price of the shares on April 30, 2020. The market value was $0.46 based on the closing bid price for April 30, 2020.

There were 5,432,887 vested common stock options under the Plan as of April 30, 2020. The compensation expense was $1,630,111 for the nine months ended April 30, 2020. The Company had $3,593,298 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan at April 30, 2020 to be recognized over an average of 2.52 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:

    April 30, 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.

 

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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       2.29       —    
Forfeited     (80,000 )     2.50       —         —    
Expired     (21,000,000 )     1.79       0.01       —    
Outstanding – April 30, 2020     567,553     $ 2.50       2.45     $ —    

  

During the nine months ended April 30, 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.

 

    Three Months Ended April 30,   Nine Months Ended April 30,
    2020   2019   2020   2019
Weighted average number of common shares outstanding - Basic     76,976,925       84,507,030       70,702,570       74,445,373  
Potentially dilutive common stock equivalents     —         —         —         —    
Weighted average number of common and equivalent shares outstanding - Diluted     76,976,925       84,507,030       70,702,570       74,445,373  

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 April 30, 2020 and 2019, respectively.

    Nine Months Ended April 30,
    2020   2019
Convertible debt     12,923,232       8,339,288  
Stock options     9,123,195       6,228,095  
Warrants     567,553       559,553  
Total     22,613,980        15,126,936  

 

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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.

 

  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          

 

The components of the purchase consideration as of April 30, 2020 and 2019 is as follows:

 

Balance Sheet Components   As of April 30, 2019   As of April 30, 2020
Warrants to be issued     —         —    
Call Option     —         —    
Pantheon     —         473,949  
MediSource     —         409,763  
Total Balance of Contingent Consideration     —         883,712  

 

The components in the change in fair value of the purchase consideration for the nine months ending April 30, 2020 and 2019 is as follows:

 

    Nine months ending April 30, 2019   Nine months ending April 30, 2020
Warrants to be issued     15,930,072       —    
Call Option     (782,481 )     —    
Pantheon     —         64,159  
MediSource     —         55,471  
Change in fair value of purchase consideration     15,147,591       119,630  

 

Unaudited Supplemental Pro Forma Data

 

Unaudited pro forma results of operations for the three and nine months ended April 30, 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   Nine Months Ended
    April 30,   April 30,
    2020   2019   2020   2019
Revenues   $ 498,676     $ 1,515,036     $ 2,077,764     $ 7,624,831  
Cost of revenues     116,292       1,366,268       415,569       4,570,820  
Gross profit     382,384       148,767       1,662,195       3,054,012  
Operating expenses     3,956,738       9,387,355       14,343,559       19,607,676  
Operating loss     (3,574,354 )     9,238,587       (12,681,364 )     (16,553,664 )
Other income (expense)     (2,186,463 )     (1,853,364 )     (9,672,030 )     11,028,865  
Net loss   $ (5,760,817 )   $ 7,385,223     $ (22,353,394 )   $ (5,524,800 )
Comprehensive net loss   $ (5,609,420 )   $ (9,944,144 )   $ (21,666,893 )   $ (4,546,148 )

 

  

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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 $(22,329,887) and $(11,006,793) for the nine months ended April 30, 2020 and the year ended July 31, 2019, respectively. Pre-tax (losses) arising from foreign operations (Canada) were $(23,507) and $(326,461) for the nine months ended April 30, 2020 and the year ended July 31, 2019, respectively.

 

As of April 30, 2020, the Company has NOL carryforwards in Generex Biotechnology Corporation of approximately $227.5 million, of which $196.2 million will expire in 2020 through 2038, and $31.3 million will not expire. 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 and $1.3 million will not expire. Olaregen Therapeutics, Inc. has NOL carryforwards of $4.0 million which will not expire. Veneto has NOL carryforwards of $9.8 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.

 

As of April 30, 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 $72 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 April 30, 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.

 

On March 27, 2020, the CARES Act was enacted and signed into law in the U.S. in response to the COVID-19 pandemic. One of the provisions of this law is the temporary suspension of the 80% limitation on the utilization of net operating losses generated in taxable years beginning after December 31, 2017 and before January 1, 2021. Additionally, the CARES Act allows The Company to carryback net operating losses generated in taxable years beginning after December 31, 2017 and before January 1, 2021 to the five previous periods if the company has taxable income in the carryback years. Neither of these modifications are expected to apply to the Company due to the sustained history of losses.

   

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Note 18 - Subsequent Events: 

 

The Company has evaluated subsequent events occurring after the balance sheet date through the date the unaudited condensed interim consolidated financial statements were issued.

On May 4, 2020, the Company issued a promissory note to a Lender with a purchase price of $100,000 that matures in one year and has a stated interest rate of 10% per annum. Additionally, the Company will issue 20,000 shares of restricted common stock and 20,000 stock options with an exercise price of $0.43 which was due upon execution of the note.

 

On May 26, 2020, the Company entered into a legal services agreement providing for a portion of legal fees payable in $50,000 cash and 120,000 shares of common stock of which $92,120 was accrued as of April 30, 2020.

 

On June 2, 2020, the Company entered into a Laboratory Services Agreement and Statement of Work Agreement (together, the “Agreement”) with Cellular Technology Limited (“CTL”). The Agreement calls for CTL to provide certain laboratory testing and analysis. These services provided by CTL to Generex are part of the development of a potential vaccine for COVID-19 based upon NGIO Ii-Key vaccine technology. NGIO is a majority owned subsidiary of Generex. Generex/NGIO will own the intellectual property generated by CTL’s work.

 

Pursuant to the Agreement, Generex will pay to CTL a fee for work plan completion of $939,478.

 

On June 15, 2020, filed Form S-1 offering 1,000,000 shares of its Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) and warrants (“Warrants”) to purchase up to an aggregate of 100,000 shares of the Company’s common stock, par value $0.001 (“Common Stock”). For every ten shares of Series A Preferred Stock purchased, we will issue to such purchaser one Warrant to purchase one share of Common Stock. The Warrants will have an initial per share exercise price of $15.00.  The warrants will be exercisable immediately and will expire two years from the date of issuance.  Dividends on the Series A Preferred Stock offered hereby are cumulative from the first day of the calendar month in which they are issued and will be payable on the fifteenth day of each calendar month, when, as and if declared by our board of directors. Dividends will be payable out of amounts legally available therefor at a rate equal to 13% per annum per $33.00 of stated liquidation preference per share, or $33.00 per share of Series A Preferred Stock per year.  As of the time of this filing, this Form S-1 is not effective pending review by the SEC.

 

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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 three and nine-month periods ended April 30, 2020 and 2019. We closed on the following acquisitions during the nine months ended April 30, 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%

 

  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.

 

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 nine months ended April 30, 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 April 30, 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. 

 

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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.

 

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.

 

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On October 3, 2018, our wholly owned subsidiary, NuGenerex Distribution Solutions, LLC (“NuGenerex”), entered into an asset purchase agreement (the “Veneto Asset Purchase Agreement”) with Veneto Holdings, L.L.C. (“Veneto”), pursuant to which NuGenerex purchased certain assets of Veneto and its subsidiaries (the “Assets”). The Veneto Asset Purchase Agreement contains provisions regarding payment terms, confidentiality and indemnification, as well as other customary provisions. 

 

Effective October 3, 2018, NuGenerex assigned the Veneto Asset Purchase Agreement to NuGenerex Distribution Solutions 2, LLC.  The sole member of NuGenerex Distribution Solutions 2, LLC is NuGenerex Management Services, Inc., a wholly-owned subsidiary of Generex Biotechnology Corporation.

 

Also, on October 3, 2018, we acquired certain assets from Veneto (the “First Closing Assets”), primarily consisting of the operating assets of (a) system dispensing pharmacies, (b) a central adjudicating pharmacy, (c) a wholesale pharmaceutical purchasing company, and (d) an in-network laboratory. 

 

On November 1, 2018, we consummated the acquisition of Veneto assets (the “Second Closing Assets”), consisting primarily of Veneto’s management services organization business and other assets. The aggregate price for the First Closing Assets and the Second Closing Assets was $30,000,000. We issued a promissory note in the principal amount of $35,000,000 (the “New Note”) consisting of the $30,000,000 purchase price and a $5,000,000 original issue discount, as the sole consideration payable on the Second Closing Date. On January 15, 2019, the parties entered into an amendment to the Asset Purchase Agreement (the “Amendment”) restructuring payment of the New Note.

 

 On March 28, 2019, the Company entered into an amendment, a “Restructuring Agreement” with Veneto and the equity owners of Veneto to restructure the payment of the New Note that provided, in lieu of any cash payments, the Company delivered on May 23, 2019 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 April 30, 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 April 30, 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 1, 2019, NDS purchased the assets of Pantheon Medical - Foot & Ankle, LLC (“Pantheon”) and MediSource Partners, LLC (“MediSource”) in exchange for 960,000 shares of the Company’s common stock, performance based cash considerations. The assets purchased from MediSource were placed in a newly formed entity named Nugenerex Surgical Holdings, LLC (“Nugenerex Surgical”); and the assets purchased from Pantheon were placed in a newly formed entity named Pantheon F&A LLC (“Pantheon Medical”). Even after the reallocation of assets, Nugenerex Surgical and Pantheon Medical can be referred to as MediSource and Pantheon, respectively.

 

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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. 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.

 

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.

 

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NuGenerex Therapeutics

NuGenerex Therapeutics houses the legacy diabetes assets, Oral-Lyn and RapidMist buccal delivery technology. We believe that our buccal delivery technology is a platform technology that has application to many large molecule drugs and designed to provide a convenient, non-invasive, accurate and cost-effective way to administer such drugs. We have identified several large molecule drugs as possible candidates for development, including cannabinoid medicines. To that end we have entered into a licensing agreement with Scientus Pharmaceuticals for the use of the RapidMist technology for the administration of cannabinoids.

 

Buccal Delivery Technology and Products 

Our buccal delivery technology involves the preparation of proprietary formulations in which an active pharmaceutical agent is placed in a solution with a combination of absorption enhancers and other excipients classified “generally recognized as safe” ("GRAS") by the U.S. Food and Drug Administration (“FDA”) when used in accordance with specified quantities and other limitations. The resulting formulations are aerosolized with a pharmaceutical grade chemical propellant and are administered to patients using our proprietary RapidMist™ brand metered dose inhaler. The device is a small, lightweight, hand-held, easy-to-use aerosol applicator comprised of a container for the formulation, a metered dose valve, an actuator and dust cap. Using the device, patients self-administer the formulations by spraying them into the mouth. The device contains multiple applications, the number being dependent, among other things, on the concentration of the formulation. Absorption of the pharmaceutical agent occurs in the buccal cavity, principally through the inner cheek walls. In clinical studies of our flagship oral insulin product Generex Oral-lyn™, insulin absorption in the buccal cavity has been shown to be efficacious and safe. 

 

Buccal Insulin Product – Generex Oral-Lyn™ 

Insulin is a hormone that is naturally secreted by the pancreas to regulate the level of glucose, a type of sugar, in the bloodstream. The term “diabetes” refers to a group of disorders that are characterized by the inability of the body to properly regulate blood glucose levels. When glucose is abundant, it is converted into fat and stored for use when food is not available. When glucose is not available from food, these facts are broken down into free fatty acids that stimulate glucose production. Insulin acts by stimulating the use of glucose as fuel and by inhibiting the production of glucose. In a healthy individual, a balance is maintained between insulin secretion and glucose metabolism.

 

According to the Centers for Disease Control (CDC), there are two major types of diabetes. Type 1 diabetes (juvenile onset diabetes or insulin dependent diabetes) refers to the condition where the pancreas produces little or no insulin. Type 1 diabetes accounts for 5-10 percent of diabetes cases (CDC). It often occurs in children and young adults. Type 1 diabetics must take daily insulin injections, typically three to five times per day, to regulate blood glucose levels. Generex Oral-lyn™ provides a needle-free means of delivering insulin for these patients.

 

According to the American Diabetes Association, in Type 2 diabetes (adult onset or non-insulin dependent diabetes mellitus), the body does not produce enough insulin, or cannot properly use the insulin produced. Type 2 diabetes is the most common form of the disease and accounts for 90-95 percent of diabetes cases, according to the American Diabetes Association. In addition to insulin therapy, Type 2 diabetics may take oral drugs that stimulate the production of insulin by the pancreas or that help the body to use insulin more effectively. 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.

 

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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.

 

NGIO 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