Notes
to the Unaudited Condensed Interim Consolidated Financial Statements
Note
1 – Organization of Business and Going Concern:
Generex
Biotechnology Corporation (“Generex” or the “Company”), was formed in the State of Delaware on September
4, 1997 and its year-end is July 31. It is engaged primarily in the research and development of drug delivery systems and the
use of the Company’s proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal)
cavity using a hand-held aerosol applicator; and through the Company’s wholly-owned subsidiary, Antigen Express, Inc. (“Antigen”),
has undertaken work on immunomedicines incorporating proprietary vaccine formulations.
On
January 18, 2017, the Company closed an Acquisition Agreement pursuant to which the Company acquired a 51% interest in Hema Diagnostic
Systems, LLC (“HDS”), a Florida limited liability company established in December 2000 to market and distribute rapid
test devices including infectious diseases. Since 2002, HDS has been developing an expanding line of rapid diagnostic tests (RDTs)
including such diseases as Human Immunodeficiency Virus (HIV) – 1/2, tuberculosis, malaria, hepatitis, syphilis, typhoid
and dengue as well as other infectious diseases. Subsequently, on December 1, 2018, the Company exercised its call option and
closed the acquisition of remaining 49% interest in HDS to become a wholly owned subsidiary of the Company.
On
October 3, 2018, the Company entered into an Asset Purchase Agreement with Veneto Holdings, L.L.C. (“Veneto”) to purchase
certain assets of Veneto and its subsidiaries. The Agreement bifurcated the closing. On October 3, 2018 (the
“First Closing”), the Company purchased substantially all the operating assets of Veneto including (a)system of dispensing
pharmacies, (b) one central adjudicating pharmacy, (c) a wholesale pharmaceutical purchasing company, and (d) an in-network laboratory
in exchange for a secured promissory note in the principal amount of $15,000,000. On November 1, 2018 the Company consummated
the acquisition of the Second Closing Assets, consisting primarily of Veneto’s management services organization business
and two additional ancillary services. The aggregate price for the First Closing Assets and the Second Closing Assets was $30,000,000.
The Company issued a promissory note in the principal amount of $35,000,000 (the “
New Note
”) consisting of
the $30,000,000 purchase price and a $5,000,000 original issue discount, as the sole consideration payable on the Second Closing
Date. On January 15, 2019, the Company entered into an Amendment Agreement (the “
Amendment
”) with Veneto and
the equity owners of Veneto entered into restructuring payment of the Note. At the time of filing the Amendment is still negotiating
terms and as such, has not been finalized.
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 regenereative medicine company that is preparing to lauch its proprietary, patented, wound conforming gel matrix, Excellagen,
an FDA 510K Cleared wound healing product. The terms of the Regentys acquisition included on upfront payment of $400,000, plus
$14,600,000 to be paid according to a milestone-based schedule. The terms of the Olaregen acquisition included on upfront payment
of $400,000, plus $11,600,000 to be paid according to a milestone-based schedule.
Going
Concern
The
accompanying unaudited condensed interim consolidated financial statements have been prepared in conformity with US GAAP, which
contemplate continuation of the Company as a going concern. The Company has experienced negative cash flows from operations since
inception and has an accumulated deficit of approximately $403 million and a working capital deficiency of approximately $54 million
at January 31, 2019. The Company has funded its activities to date almost exclusively from debt and equity financings.
The
Company will continue to require substantial funds to implement its new investment acquisition plans. Management’s
plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common
stock, preferred stock offerings, and issuances of debt and convertible debt instruments. Management is also actively pursuing
financial and strategic alternatives, including strategic investments and divestitures, industry collaboration activities and
strategic partners.
It
is management’s opinion that these conditions raise substantial doubt about the Company’s ability to continue as a
going concern for a period of twelve months from the balance sheet date. There are no assurances that such additional funding
will be achieved and that the Company will succeed in its future operations. The unaudited condensed interim consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts
of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s inability
to obtain required funding in the near future or its inability to obtain funding on favorable terms will have a material adverse
effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional
capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially
and adversely affected, and the Company may have to cease operations.
Note
2 – Summary of Significant Accounting Policies:
Revenue
Recognition
—Revenue is recognized when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred
or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability
is reasonably assured.
Revenue
from the provision of 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
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 (ii)). Shipment to or pick up by the patient is the first time that all criteria
for revenue recognition have been met.
Revenue
from the provision of 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.
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.
Cost
of Goods Sold
—Costs and directly related expenses to sell the Company’s products and services are recorded as
cost of goods sold when the related revenue is recognized. The Company records shipping and handling costs related to delivery
of products to customers within cost of goods sold.
Inventories
—Inventories,
which consist of finished goods, are stated at the lower of cost, determined principally under the first-in, first-out method,
or net realizable value. Inventories include the cost of pharmaceuticals, reagents, and consumables. Obsolete or excess inventories
are reflected at their estimated realizable values. Net realizable value is the estimated sales revenue for a normal period of
activity less expected selling costs. Allowances for excess and obsolete inventory are recognized for excess amounts, obsolescence
and declines in net realizable value below cost. Estimation and judgment are required in determining the value of the allowance
for excess and obsolete inventory at each statement of financial position date. Management specifically analyzes estimates of
future demand for products when determining allowances for excess and obsolete inventory. Changes in these estimates could result
in revisions to the valuation of inventory in future periods.
Property
and Equipment
—Property, equipment and improvements to leased premises are depreciated using the straight-line method
over the estimated useful lives of the assets, or when applicable, the term of the lease, whichever is shorter. Major renewals
or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Property and equipment
are depreciated using the straight-line method over the estimated useful lives of the assets, which are generally as follows:
Leasehold improvements
|
The shorter
of the expected useful life of the improvement or the lease term
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Computers and technological assets
|
3-5 years
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Machinery and equipment
|
5 years
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Furniture and fixtures
|
7 years
|
Assets
acquired through finance lease arrangements or long-term rental arrangements that transfer substantially all the risks and rewards
associated with ownership of the asset to the Company (as lessee) are capitalized.
Reclassifications
to Prior Period Financial Statements and Adjustments
Certain
reclassifications have been made in the Company’s financial statements of the prior year to conform to the current year
presentation. These reclassifications have no impact on previously reported net income.
Adoption
of New Accounting Standards
We
have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof
that have effective dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements
that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have
a material impact on the Company’s reported financial position or operations in the near term. The applicability of any
standard is subject to the formal review of our financial management and certain standards are under consideration.
•
|
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ASU
2014-09, “Revenue from Contracts with Customers (Topic 606)”
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•
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ASU
2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net).”
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•
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ASU
2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.”
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•
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ASU
2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because
of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF (Emerging Issue
Task Force) Meeting.”
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•
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ASU
2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.”
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•
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ASU
2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.”
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•
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ASU
2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840) and
Leases (Topic 842). Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and
Rescission of Prior SEC Staff Announcements and Observer Comments.”
|
The
standards provide companies with a single model for use in accounting for revenue arising from contracts with customers that supersedes
current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize
revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and
rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements
retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The
guidance was adopted as of August 1, 2018. The Company performed a cumulative adjustment and found that the adoption did not have
a material effect on the Company’s consolidated financial statements and related disclosures.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments—Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
(“ASU 2016-01”). This standard affects the accounting for equity instruments,
financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. In
February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10)
– Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to clarify certain
narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU No. 2016-01, “Financial
Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This
includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its
measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election
that would apply to that security and all identical or similar investments of the same issued. The update is effective for fiscal
years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. The guidance
was adopted as of August 1, 2018 and did not have a material effect on the Company’s consolidated financial statements and
related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing
diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The
standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2)
settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds
from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions
received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable
cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2017 on a retrospective basis. The guidance was adopted as of August 1, 2018 and did not have a material
effect on the Company’s consolidated financial statements and related disclosures.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires that a
statement of cash flows should include the total of cash, cash equivalents, and amounts generally described as restricted cash
or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The update is effective
for fiscal years beginning after December 15, 2017. The guidance was adopted as of August 1, 2018 and did not have a material
effect on the Company’s consolidated financial statements and related disclosures.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
These amendments clarify the definition of a business. The amendments affect all companies and other reporting organizations that
must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including
acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance was adopted as
of August 1, 2018 and did not have a material effect on the Company’s consolidated financial statements and related disclosures.
In
May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation” (Topic 718): Scope of Modification Accounting.
The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require
an entity to apply modification accounting under Topic 718 Compensation-Stock Compensation. An entity should account for the effects
of a modification unless all the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative
measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such
an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification
does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required
to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same
as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the
modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the original award is modified. The ASU is effective for all entities for annual periods, including interim periods within
those annual periods, beginning after December 15, 2017. The guidance was adopted as of August 1, 2018 and did not have a material
effect on the Company’s consolidated financial statements and related disclosures.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). In January 2018, the FASB
issued ASU 2018-01, which provides additional implementation guidance on the previously issued ASU 2016-02. Under the new guidance,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted
basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified
asset for the lease term. The Company is required to adopt ASU 2016-02 for fiscal years, and for interim periods within those
fiscal years, beginning after December 15, 2018. The Company does not plan to elect early adoption for this pronouncement.
In
January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(Topic 350), which eliminates
Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting
unit. The Company will adopt the standard effective October 1, 2020. The Company is evaluating the effect that ASU 2017-04 will
have on its 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 is evaluating the effect
that ASU 2017-11 will have on its consolidated financial statements.
In
February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which was issued to address the income
tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing
due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment
of the TCJA on December 22, 2017 that changed the Company’s federal income tax rate from 35% to 21%. The ASU changed
current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income
to retained earnings. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15,
2018. Early adoption is permitted, including adoption in an interim period. Adoption of this ASU is to be applied either in the
period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized.
The Company is currently evaluating the impact, if any, ASU 2018-02 will have on its financial position, results of
operations, and its consolidated financial statement disclosures. The Company’s evaluation process includes, but is not
limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for
these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a
result of the guidance. The Company is evaluating the effect that ASU 2018-02 will have on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement”, which adds disclosure requirements to Topic 820 for the range and weighted average
of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for interim and annual
reporting periods beginning after December 15, 2019. The Company is evaluating the effect that ASU 2018-13 will have on its consolidated
financial statements.
Note
3 - Loans from Related Parties
HDS
received substantially all of its funding from a shareholder, who owned 98.9% of HDS prior to the acquisition of HDS by the Company.
The loan is unsecured, matures on December 31, 2019 and accrued interest at 0.75% per annum through January 19, 2017, and bears
no interest thereafter. Upon acquisition of HDS by the Company (see Note 8), the outstanding principal balance was $13,239,837
and total accrued interest of $191,869. This loan is subject to a call option (Note 8) which, if exercised, the principal and
accrued interest through January 18, 2017 would be eliminated.
Pursuant
to the January 18, 2017 Acquisition, Mr. Berkman agreed, under certain conditions to transfer the remaining 49% of the HDS equity
to the Company for a consideration of $1.00. On December 1, 2018, the Company and Mr. Berkman entered into an Agreement, Assignment
and Release, pursuant to which Mr. Berkman transferred the remaining HDS equity interests to the Company, waiving and releasing
any conditions to such transfer. HDS is now a wholly owned subsidiary of the Company. In addition to the assignment of the HDS
interests, Mr. Berkman released these loans in exchange for shares of the Company’s common stock valued at the aggregate
of such amount using the closing price for the common stock on November 30, 2018. The closing price was $18.99, resulting in 32,881
shares issuable to Mr. Berkman. This transaction resulted in $624,404 plus the remaining 49% of the Company’s shares of
the HDS debt being removed from Company debt and added to the Company’s stockholders’ equity.
Note
4 - Commitments and Contingencies:
Pending
Litigation
The
Company is a defendant in one legal proceeding relating to alleged breach of contract and claims against certain of the Company’s
original buccal delivery patents. The Company is also a defendant in two legal proceedings brought by a former executive officer
and her affiliate. These legal proceedings have been reported in the Company’s prior periodic reports. No activity has occurred
in these cases in several years, and the Company now considers them dormant.
In
December 2011, a vendor of the Company commenced an action against the Company and its subsidiary, Generex Pharmaceuticals, Inc.,
in the Ontario Superior Court of Justice claiming damages for unpaid invoices including interest in the amount of $429,000, in
addition to costs and further interest. The Company responded to this statement of claim and also asserted a counterclaim
in the proceeding for $200,000 arising from the vendor’s breach of contract and detinue, together with interest and costs.
On November 16, 2012, the parties agreed to settle this action and the Company has agreed to pay the plaintiff $125,000, following
the spinout of its subsidiary Antigen, from the proceeds of any public or private financing related to Antigen subsequent to such
spinout. Each party agreed to execute mutual releases to the claim and counterclaim to be held in trust by each party’s
counsel until payment of the settlement amount. Following payment to the plaintiff, the parties agree that a Consent Dismissal
Order without costs will be filed with the court. If the Company fails to make the payment following completion of any post-spinout
financing related to Antigen or any other subsidiaries, the Plaintiffs may take out a judgment in the amount of the claim plus
interest of 3% per annum and costs fixed at $25,000. This has been accrued in the unaudited condensed interim consolidated financial
statements.
On
August 22, 2017, Generex received a letter from counsel for Three Brothers Trading LLC, d/b/a Alternative Execution Group (“AEXG”),
claiming breach of a Memorandum of Understanding (“MOU”) between Generex and AEXG. The MOU related to AEXG referring
potential financing candidate to Generex. The letter from AEXG counsel claimed that Generex’s acceptance of $3,000,000
in financing from Pharma Trials, LLC, in March 2017, violated the provisions of the MOU prohibiting Generex from seeking other
financing, with certain exceptions, for a period of 60 days after execution of the MOU. AEXG has demanded at least $210,000 in
cash and 84,000 warrants for Generex stock convertible at $2.50 per share, for attorney’s fees and costs. On December
2, 2018, an arbitrator awarded Three Brothers Trading LLC, d/b/a Alternative Execution Group (“AEXG”) an aggregate
of $315,695 in damages, costs and fees as well as warrants exercisable for 84,000 shares of Generex Common Stock at an exercise
price of $2.50 per share. The awards were made pursuant to claims under a Memorandum of Understanding (“MOU”) between
Generex and AEXG related to AEXG referring potential financing candidate to Generex. AEXG filed a petition to confirm the
arbitrator’s award in the United States District Court for the Southern District of New York. The petition includes a demand
of $3,300,360 as the value of the Warrants. The arbitrator did not award the specific amount of $3.3 million, but only liquidated
damages in the amount of $220,000 and the value of 84,000 warrants “as of today” (the date of the award) plus attorney’s
fees, certain costs, prejudgment and post-judgment interest (which continues to run on a daily basis) and arbitration fees. 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 are pending before the Court for
a decision.
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, 2018,
Generex received a letter from the purchaser’s counsel stating that the Note was in default because Generex’s common
stock was not listed on NASDAQ within 90 days after the issuance of the Note. The letter demanded repayment in full. On February
12, 2019, the Purchaser filed a Motion for Summary Judgment in lieu of complaint in the Supreme Court of New York, demanding
the aggregate principal amount, default interest and costs. Counsel for Generex and Alpha have engaged in settlement discussions
which are likely to result in an agreement by Generex to pay an amount more than the existing note payable balance of $600,000
but less than the full amount demanded over a period of four months.
In
connection with 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.
There
are rental agreements in effect at Hema Diagnostics Systems, Grainland Pharmacy Inc. and Empire State Pharmacy Inc. and paid out
in the following periods: $45,271 in fiscal year 2019, $82,469 in fiscal year 2020 and $9,306 in fiscal year 2021.
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.
Note
5 - Net Income Per Share (“EPS”):
Basic
net income or loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted
net income per share is calculated by dividing income available to common shareholders by the weighted average number of common
shares outstanding for the period and, when dilutive, potential shares from stock options and warrants to purchase common stock,
using the treasury stock method. Common stock equivalents are included in the diluted income per share calculation only when option
exercise prices are lower than the average market price of the common shares for the period presented.
The
weighted average number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive,
was 17,850 for the three and six months ended January 31, 2019.
|
|
Three
Months Ended
January
31,
|
|
Three
Months Ended
January
31,
|
|
|
2019
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2018
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Weighted
average number of common shares outstanding - Basic
|
|
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49,967,615
|
|
|
|
22,430,121
|
|
Potentially
dilutive common stock equivalents
|
|
|
5,127,472
|
|
|
|
32,085,329
|
|
Weighted
average number of common and equivalent shares outstanding-Diluted
|
|
|
55,095,087
|
|
|
|
54,515,450
|
|
|
|
Six
Months Ended
January
31,
|
|
Six
Months Ended
January
31,
|
|
|
2019
|
|
2018
|
Weighted
average number of common shares outstanding - Basic
|
|
|
36,387,185
|
|
|
|
22,430,121
|
|
Potentially
dilutive common stock equivalents
|
|
|
5,127,472
|
|
|
|
32,085,329
|
|
Weighted
average number of common and equivalent shares outstanding-Diluted
|
|
|
41,514,657
|
|
|
|
54,515,450
|
|
Note
6 - Stockholders’ Deficiency:
Common
Stock
On
October 3, 2018, the Company declared a stock dividend on our outstanding Common Stock for stockholders of record date to be determined
(the “Record Date”). As a result, all stockholders on the Record Date received twenty new shares of Common Stock for
each share of Common Stock owned by them as of that date. Proportional adjustments for the reverse stock split were made to the
Company’s outstanding stock options, and warrants including all share and per-share data, for all amounts and periods presented
in the consolidated financial statements.
On
January 18, 2017, the Company issued 1,117,431 shares of common stock for the acquisition of 51% of HDS and is obligated to issue
4,830,000 shares of common stock upon the conclusion of the Company’s reverse stock split. On October 26, 2018, 4,830,000
shares were issued.
During
January 2017, the Company issued 168,000 shares of common stock for the conversion of 120 shares of Series F convertible preferred
stock, plus 88,935 shares for the related make-whole payments issued to convert the accumulated dividend payable.
During
January 2017, the Company issued 210,000 shares of common stock for the conversion of 150 shares of Series G convertible preferred
stock, plus 98,448 shares for the related make-whole payments issued to convert the accumulated dividend payable.
During
February 2017, the Company issued 489,993 shares of common stock for the conversion of 350 shares of Series G convertible preferred
stock, plus 222,726 shares for the related make-whole payments issued to convert the accumulated dividend payable.
On
February 9, 2017, the Company offered all current warrant holders an option to exercise immediately all outstanding common stock
purchase warrants on a cashless basis at a reduced exercise price of $0.35 per share from $0.71 per share. The Company agreed
to issue a total of 2,179,989 shares of common stock in connection with the exercise of 6,607,629 warrants in connection with
the following outstanding warrants:
|
|
Warrants
Exercised
|
|
Shares
Agreed to be Issued
|
Series
C 9% Convertible Preferred Stock
|
|
|
210,000
|
|
|
|
69,279
|
|
Series
D 9% Convertible Preferred Stock
|
|
|
349,629
|
|
|
|
115,332
|
|
Series
E 9% Convertible Preferred Stock
|
|
|
2,513,007
|
|
|
|
829,101
|
|
Series
F 9% Convertible Preferred Stock
|
|
|
2,904,993
|
|
|
|
958,419
|
|
Series
G 9% Convertible Preferred Stock
|
|
|
630,000
|
|
|
|
207,858
|
|
|
|
|
6,607,629
|
|
|
|
2,179,989
|
|
During
the six months ended January 31, 2019, 1,238,517 common stock payable was issued. As at January 31, 2019, 349,545 shares remain
to be issued resulting in common stock payable $201,294.
Series
H and Series I Convertible Preferred Stock
The
Company has authorized 109,000 shares of designated non-voting Series H Convertible Preferred Stock with a stated value of $1000
per share and authorized 6,000 shares of designated non-voting Series I Convertible Preferred Stock with a stated value of $47.61
per share pursuant to the Purchase Agreement dated March 27, 2017. The Series H Preferred Stock was scheduled to be sold in four
tranches to the Purchaser. Under the Securities Purchase Agreement, in the event the Purchaser failed to purchase 100% of the
shares of Preferred Stock at any given Closing, the Company can decline to sell any further securities to the Purchaser (the “Purchase
Agreement”).
The
Series H and Series I Convertible Preferred Stock are convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price of $.12 per share. An aggregate of 966,000,000 shares of the Company’s common
stock would be issuable upon conversion of both the Series H and Series I Preferred Stock if all shares of such preferred stock
contemplated by the securities purchase agreement are issued.
Neither
Series H nor Series I Convertible Preferred Stock have special dividend rights. If the Company pays dividends on its common stock,
the holders of the preferred stock will receive dividends in the amount they would have received had they converted the preferred
stock to common stock.
At
closing of the first tranche on March 28, 2017, the Company issued 63,000 shares of Series H Preferred Stock for a purchase price
of $3,000,000. The proceeds of this sale were paid directly on the Company’s behalf to Emmaus as an additional deposit under
the Company’s Emmaus LOI. The full amount of such proceeds was repaid to the Company in July 2017 upon termination of the
Emmaus LOI. On December 1, 2018, after payment of the dividend, B-H Sanford, LLC, converted all shares of its holding of the Company’
Series H Convertible Preferred Stock owned by it into 25,200,000 shares of common stock.
Prior
to payment of Generex’s 20 for 1 common stock dividend, on November 30, 2018, Joseph Moscato, the Company’s President
and Chief Executive Officer, and Lawrence Salvo, a member of the Company’s Board of Directors, converted all shares
of the Company’ Series I Convertible Preferred Stock owned by them. Mr. Moscato received 3,276,000 shares of
the Company’s Common Stock upon conversion. Mr. Salvo received 3,354,645 shares of the Company’s Common
Stock upon conversion.
Noncontrolling
Interest
Mr.
Berkman agreed, under certain conditions to transfer the remaining 49% of the HDS equity to the Company for a consideration of
$1.00. On December 1, 2018, the Company and Mr. Berkman entered into an Agreement, Assignment and Release, pursuant to which Mr.
Berkman transferred the remaining HDS equity interests to the Company, waiving and releasing any conditions to such transfer.
As of December 1, 2018, HDS is a wholly owned subsidiary of the Company. During the six months ended in January 31, 2019, there
was a net loss attributable to the non-controlling interest (49%) in HDS of $122,692 and contributions made of $174,371. As of
January 31, 2019, and July 31, 2018, the non-controlling interest in HDS was $0 and $5,576,272, respectively.
On
November 28, 2018, the Company and Regentys closed on an agreement to acquire 51% of the outstanding capital stock of Regentys
for a total consideration of fifteen million dollars ($15,000,000). In connection with the acquisition, the Company was issued
12,048,161 shares of Regentys common stock. As of January 31, 2019, Regentys had authorized 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, the Company
has 9,368,309 of non-controlling shares for a 43.74% non-controlling interest in Regentys.
On
November 27, 2018, the Company and Olaregen closed on an agreement to acquire 51% of the outstanding capital stock of Olaregen
for a total consideration of twelve million dollars ($12,000,000). In connection with the acquisition, the Company was issued
3,282,632 shares of common stock. As of January 31, 2019, Olaregen had authorized a total of 5,648,819 shares of common stock
and 592,683 Series A voting preferred stock for a total of 6.241,502 total voting shares outstanding. As such, the Company has
2,958,870 of non-controlling shares for a 47.41% non-controlling interest in Olaregen.
On
November 1, 2018, the Company completed its second closing of Veneto Holdings, L.L.C. (“Veneto”) which granted the
Company with a 99% non-controlling interest in Rapport Services, LLC (“Rapport”).
Note
7- Stock-Based Compensation
:
Stock
Option Plans
As
of January 31, 2019, the Company had two stockholder-approved stock incentive plans under which shares and options exercisable
for shares of common stock have been or may be granted to employees, directors, consultants and advisors. A total of 2,835,000
shares of common stock are reserved for issuance under the 2006 Stock Plan as amended (the 2006 Plan) and 5,040,000,000 shares
of common stock reserved for issuance under the 2017 Stock Option Plan (the 2017 Plan). At January 31, 2019, there were 2,817,150
and 5,033,799,375 shares of common stock reserved for future awards under the 2006 Plan and 2017 Plan, respectively. The Company
issues new shares of common stock from the shares reserved under the respective Plans upon conversion or exercise of options and
issuance of restricted shares.
The
2006 and 2017 Plans (the Plans) are administered by the Board of Directors (the Board). The Board is authorized to select from
among eligible employees, directors, advisors and consultants those individuals to whom options are to be granted and to determine
the number of shares to be subject to, and the terms and conditions of the options. The Board is also authorized to prescribe,
amend and rescind terms relating to options granted under the Plans. Generally, the interpretation and construction of any provision
of the Plans or any options granted hereunder is within the discretion of the Board.
The
Plans provide that options may or may not be Incentive Stock Options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive ISOs, while employees and non-employee directors, advisors
and consultants are eligible to receive options which are not ISOs, i.e. “Non-Qualified Options.” The options granted
by the Board in connection with its adoption of the Plans were Non-Qualified Options. In addition, the 2006 Plan also provides
for restricted stock grants.
The
fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model or the value of
the services provided, whichever is more readily determinable. The Black-Scholes option pricing model takes into account, as of
the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest rate for the term of the option.
The
following is a summary of the common stock options granted, forfeited or expired and exercised under the Plan:
|
|
Options
|
|
Weighted
Average Exercise Price per Share
|
Outstanding
- July 31, 2018
|
|
|
232,218
|
|
|
$
|
1.46
|
|
Granted
|
|
|
6,220,625
|
|
|
|
0.47
|
|
Forfeited
or expired
|
|
|
(214,371
|
)
|
|
|
(0.05
|
)
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding - January
31, 2019
|
|
|
6,238,472
|
|
|
$
|
0.56
|
|
The
6,221,475 outstanding options at January 31, 2019 had a weighted average remaining contractual term of 9.68 years.
There
were 942,695 vested common stock options under the Plan for the period ended January 31, 2019. As of January 31, 2019, the Company
had $212,121 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.
The
Company granted 6,220,625 options during the six months ended January 31, 2019 and none during the year ended July 31, 2018.
The
Company estimated the fair value of each stock option on the grant date using a Black-Scholes option-pricing model. Black-Scholes
option-pricing models requires the Company to make predictive assumptions regarding future stock price volatility, recipient exercise
behavior, and dividend yield. The Company estimated the future stock price volatility using the historical volatility over the
expected term of the option. The following assumptions were used in the Black-Scholes option-pricing model:
|
|
|
January
31,
2019
|
|
Exercise price
|
|
$
|
0.64
- 1.08
|
|
Time to expiration
|
|
|
10
years
|
|
Risk-free interest
rate
|
|
|
2.56%
- 3.14%
|
|
Estimated volatility
|
|
|
135.2%
- 143.1%
|
|
Dividend
|
|
|
—
|
|
Stock price at valuation
date
|
|
$
|
0.64
- 1.08
|
|
The
following table summarizes information on stock options outstanding at January 31, 2019:
|
|
|
|
|
Options
Outstanding and Options Exercisable
|
|
Range
of Exercise Price
|
|
|
|
Number
Outstanding at January 31, 2019
|
|
|
|
Weighted
Average Exercise Price
|
|
|
|
Weighted
Average Remaining Life (Years)
|
|
|
|
Aggregate
Intrinsic Value
|
|
$
|
0.11
|
|
|
|
2,730,000
|
|
|
$
|
0.11
|
|
|
|
9.93
|
|
|
$
|
5,525,000
|
|
|
0.64
|
|
|
|
1,328,125
|
|
|
|
0.64
|
|
|
|
9.68
|
|
|
|
1,978,906
|
|
|
0.78
|
|
|
|
1.712.500
|
|
|
|
0.78
|
|
|
|
9.87
|
|
|
|
2,311,875
|
|
|
0.92
|
|
|
|
200,000
|
|
|
|
0.92
|
|
|
|
9.92
|
|
|
|
242,000
|
|
|
1.08
|
|
|
|
250,000
|
|
|
|
1.08
|
|
|
|
9.93
|
|
|
|
262,500
|
|
$
|
30.48
|
|
|
|
17,850
|
|
|
$
|
30.48
|
|
|
|
1.10
|
|
|
|
—
|
|
|
|
|
|
|
6,238,475
|
|
|
|
5.95
|
|
|
|
9.74
|
|
|
$
|
10,320,281
|
|
The
intrinsic value is calculated as the difference between the market value and the exercise price of the shares on January 31, 2019.
The market values as of January 31, 2019 was $2.13 based on the closing bid price for January 31, 2019
Note
8 – Acquisitions:
Hema
Diagnostics Systems, LLC:
On
January 18, 2017, the Company acquired a 51% interest in Hema Diagnostic Systems, LLC (“HDS”), pursuant to the Acquisition
Agreement. At closing, the Company acquired 4,950 of HDS’s 10,000 previously outstanding limited liability company units
in exchange for 1,117,011 shares of Generex common stock valued at $253,721, plus 420 shares of Generex common stock issued to
HDS in exchange for 300 new limited liability company units. The Acquisition Agreement also provides the Company with a call option
to acquire the remaining 49% of HDS and a retirement of HDS shareholder loans in the amount of $13,431,706 (including interest)
(the “Call Option”) for the aggregate purchase price of $1.
Following
the closing and the completion of Company’s reverse stock split, the Company was required to issue a further 4,830,000 shares
of common stock and issue a warrant to a former shareholder of HDS to acquire 15,000,000 additional shares of Generex common stock
for $2.50 per share. The issue of this warrant is contingent upon the Company obtaining approval from its shareholders for an
increase in its authorized share capital. The total consideration was valued at $1,350,916 on the date of the acquisition. As
of January 31, 2019, all warrants relating to this acquisition have been issued. On November 30, 2018, the call option was exercised,
and the Company acquired the remaining 49% of HDS.
On
December 1, 2018, the Company issued to Stephen L. Berkman a Warrant exercisable for 15,000,000 shares of common stock. The Warrant
is exercisable until December 1, 2019 at an exercise price of $2.50 per share. The Warrant contains a provision prohibiting the
exercise of the Warrant to the extent that, after exercise, Mr. Berkman would own more than 9.99% of the Company’s common
stock. The Warrant was issued pursuant to the January 18, 2017 Acquisition Agreement among the Company, Hema Diagnostic Systems,
LLC (“HDS”), Stephen L. Berkman and the other equity owners of HDS. Despite the warrants being issued after the effective
date of the 20 for 1 stock dividend, per an agreement with warrant holder, such warrants were not subject to the stock dividend
and no adjustment was made to the exercise price.
Fair
Value of the HDS Assets
The
intangibles assets acquired include In–Process Research & Development (“IPR&D”). The Fair Value of the
IPR&D intangible asset using an Asset Cost Accumulation methodology as of January 18, 2017 (the “Valuation Date”)
was determined to be $2,911,377.
The
net purchase price of HDS was determined to be as follows:
|
|
Stock
Price at Closing
|
|
Shares
|
|
Fair
Value
|
Purchase
price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock at closing
|
|
$
|
.23
|
|
|
|
1,117,011
|
|
|
$
|
253,721
|
|
Common
Stock after closing
|
|
$
|
.23
|
|
|
|
420
|
|
|
|
95
|
|
Common
Stock post reverse stock split
|
|
$
|
.23
|
|
|
|
4,830,000
|
|
|
|
1,097,100
|
|
Total
purchase price
|
|
|
|
|
|
|
5,947,431
|
|
|
$
|
1,350,916
|
|
As
of January 18, 2017, the issue of the warrant to acquire 15,000,000 additional common shares of Generex was contingent upon shareholder
approval of an increase in the Company’s authorized capital stock. No warrant has been issued by the Company until such
time that an increase in authorized capital has been approved. At the time of closing, Management was not of the opinion that
it is more likely than not that the warrant will be issued and the Call Option will be exercised, accordingly no values have been
attributed to the warrant and Call Option at closing. During 2017, management made a redetermination and estimated that it was
more likely than not that the shareholder approval to increase authorized share capital would be obtained and the Call Option
will be exercised.
On
November 30, 2018, the warrant was issued by the Company and the Company exercised the Call Option and acquired the remaining
49% non-controlling interest in HDS. Accordingly, the fair values of the warrants and call option was updated through the issuance
and exercise date and the change in the change in the fair value of the contingent purchase consideration of $(4,397,507) and
$15,147591 was recorded and included in the in the consolidated statements of operations and comprehensive income for the three-
and six-months ending January 31, 2019. Due to the issuance of the warrants and exercise of the call option, the Company will
no longer report a value for the call option and due to the Company’s sequencing policy further described below, the Company
determine there are sufficient authorized shares related the possible exercise of these warrants and no further warrant liability
or derivative liability is required.
Fair
Value Assumptions Used in Accounting for Warrants
The
Company used the Black-Scholes option-pricing model to calculate the fair value of the warrants as of January 31, 2019. The Black-Scholes
option-pricing model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest
rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. The key inputs
used in the fair value calculations were as follows:
|
|
January
31,
2019
|
|
July
31,
2018
|
Exercise
price
|
|
|
2.50
|
|
|
|
2.50
|
|
Time
to expiration
|
|
|
3.18
years
|
|
|
|
3.47
years
|
|
Risk-free
interest rate
|
|
|
3.01
|
%
|
|
|
2.77
|
%
|
Estimated
volatility
|
|
|
138.61
|
%
|
|
|
143.97
|
%
|
Dividend
|
|
|
—
|
|
|
|
—
|
|
Stock
price at valuation date
|
|
$
|
0.9
|
|
|
$
|
0.1
|
|
Fair
Value Assumptions Used in Accounting for Call Option
The
Company used the Monte Carlo model to calculate the fair value of the call option as of six months ended January 31, 2019 and
year ended July 31, 2018. The valuations are based on assumptions as of the valuation date with regard to the value of the asset
acquired net of impairment, the risk-free interest rate, the estimated volatility of the stock price in the future, the time to
expiration and the stock price at the date of valuation.
The
following assumptions were used in estimating the value of the Call Option:
|
|
December
1,
2019
|
|
July
31,
2018
|
Risk-free
interest rate
|
|
|
2.52
|
%
|
|
|
2.44
|
%
|
Estimated
volatility
|
|
|
164.43
|
%
|
|
|
129.95
|
%
|
Remaining
Term
|
|
|
1.13
years
|
|
|
|
1.47
years
|
|
Stock
price at valuation date
|
|
$
|
0.9043
|
|
|
$
|
0.0976
|
|
Grainland
and Empire Pharmacies:
On
December 28, 2017, the Company through its wholly owned subsidiary NuGenerex, completed the acquisition of the assets and 100%
of the membership interests of two pre-operational pharmacies, Empire State Pharmacy Holdings, LLC and Grainland Pharmacy Holdings,
LLC, pursuant to the bills of sale for a consideration of $320,000 Promissory Note due and payable in full on June 28, 2018 bearing
an annual interest rate of 3%. The note was extended by six months and set to mature with the same terms on December 28, 2018.
We
finalized our allocation of the purchase price as of January 31, 2019. The final allocation of the purchase price as of January
31, 2019, is as follows:
|
|
Preliminary
Allocation as of December 28,
2017
|
|
Allocation
Adjustments
|
|
Final
Allocation
|
Intangible
assets
|
|
$
|
276,380
|
|
|
$
|
(88,311
|
)
|
|
$
|
188,069
|
|
Property
and equipment
|
|
|
19,879
|
|
|
|
(7,652
|
)
|
|
|
12,226
|
|
Leasehold
Improvements
|
|
|
5,981
|
|
|
|
(2,872
|
)
|
|
|
3,109
|
|
Computer
software acquired
|
|
|
17,761
|
|
|
|
(1,165
|
)
|
|
|
16,596
|
|
Total
assets acquired
|
|
|
320,000
|
|
|
|
(100,000
|
)
|
|
|
220,000
|
|
Consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Payable
|
|
|
320,000
|
|
|
|
|
|
|
|
320,000
|
|
Goodwill
|
|
$
|
—
|
|
|
|
|
|
|
$
|
100,000
|
|
The
intangible assets represent the licenses obtained to operate a pharmacy in the respective state of each of the acquired pharmacies.
Intangible assets are generally amortized on a straight-line basis over the useful lives of the assets. The Company is currently
not amortizing the pharmacy license until the pharmacies becomes commercially viable and operations begin in the acquired pharmacies.
At the time, when the intangible assets are placed in service, the Company will determine a useful life.
Since
acquisition, the Grainland Pharmacy Holdings, LLC recently ceased to operate and the value of its assets and associated goodwill
of $100,000 will be fully impaired.
Goodwill
and Intangible Assets
The
change in the carrying amount of goodwill and other intangible assets for the year ended July 31, 2018 and six-month period ended
January 31, 2019, is as follows:
|
|
Total
|
|
Goodwill
|
|
Other
Intangibles, net
|
Balance
as of July 31, 2018
|
|
$
|
3,187,757
|
|
|
$
|
—
|
|
|
$
|
3,187,757
|
|
|
|
|
8,946,073
|
|
|
|
8,883,982
|
|
|
|
62,091
|
|
Balance
as of January 31, 2019
|
|
$
|
12,133,830
|
|
|
$
|
8,883,982
|
|
|
$
|
3,249,848
|
|
Intangible
assets are generally amortized on a straight-line basis over the useful lives of the assets. The Company is currently not amortizing
the in-process research and development until it becomes commercially viable and placed in service. At the time when the intangible
assets are placed in service the Company will determine a useful life.
Goodwill
for HDS was valued at $14.3 million as of the date of acquisition. It was later determined that the value of goodwill was
$13.4 million due to the change in estimates of in-process research and development.
Goodwill
represents the excess of the purchase price over the fair market value of net assets acquired. Goodwill for HDS was $14.3 million
as of the date of the acquisition. When the acquisition transaction closed in January 2017, HDS was a development-stage entity
and its liabilities exceeded the aggregate value of its assets. Utilizing discounted cash flow (DCF) valuation methodology, Generex
determined that HDS has forecasted losses throughout the reasonably foreseeable future with a nominal terminal value. In addition,
there was a high degree of uncertainty as to the future cash flows of HDS. Therefore, the Company concluded that the implied goodwill
arising out of the acquisition was zero and should be properly characterized as fully impaired as of January 31, 2019.
Veneto:
On
October 3, 2018, we entered into an Asset Purchase Agreement (the “Agreement”) with Veneto Holdings, L.L.C. (“Veneto”)
to purchase certain assets of Veneto.
Effective
as at October 3, 2018, NuGenerex Distribution Solutions, LLC assigned the Veneto Asset Purchase Agreement to NuGenerex Distribution
Solutions 2, LLC. The sole member of that LLC is NuGenerex Management Services, Inc., a wholly-owned subsidiary of Generex
Biotechnology Corporation.
The
aggregate purchase price for the Assets, is $35,000,000 including the Promissory Note. At the Second Closing, the Company
will pay the principal of the Promissory Note plus interest to Veneto, (i) $9,000,000 will be paid by the Company into a trust
or other fiduciary account acceptable to Veneto to be used exclusively for satisfaction of certain contingent liabilities of Veneto
and subsidiaries of Veneto not being acquired by the Company, (ii) $3,000,000 will be paid by the Company into an escrow account
to secure potential obligations of Veneto in respect of the Second Closing date working capital and under the indemnification
provisions of the Agreement and (iii) the balance will be payable directly to Veneto in cash.
The
Company has also entered into a temporary fee-for-service arrangement with Veneto and one of its subsidiaries for Veneto to provide
management, personnel, operational, administrative and other services with respect to the First Closing Assets pending the Second
Closing. At the Second Closing, all of Veneto personnel providing these services are expected to become employees or consultants
of the Company, and Veneto will no longer provide the services.
As
the First Closing, the Promissory Note issued to Veneto in the original principal amount of $15,000,000 with interest at an annual
rate of 5.0% and guaranteed by Generex and Joseph Moscato, and secured by a first priority security interest in the Company’s
assets other than the First Closing Assets was subsequently cancelled upon the issuance of the a new promissory note on the Second
Closing in the principal amount of $35,000,000 with an annual of 12.0% and guaranteed by Generex and Joseph Moscato. There was
$62,500 of accrued interest on the $15,000,000 note and an additional $1,050,000 of accrued interest on the new $35,000,000 promissory
note for a total of $1,112,500 of accrued interest for the six months ended January 31, 2019.
On
November 1, 2018 we consummated the acquisition of the Second Closing Assets, consisting primarily of Veneto’s management
services organization business and two additional ancillary services. The aggregate price for the First Closing Assets and the
Second Closing Assets was $30,000,000. The Company issued a promissory note in the principal amount of $35,000,000 (the “
New
Note
”) consisting of the $30,000,000 purchase price and a $5,000,000 original issue discount, as the sole consideration
payable on the Second Closing Date. In addition, we agreed to assume approximately $3.8 million in outstanding institutional debt
of Veneto subsidiaries, but will have use of Veneto cash which would otherwise have been applied to paying down the debt.
On
January 15, 2019, the Company entered into an Amendment Agreement (the “
Amendment
”) with Veneto and the equity
owners of Veneto entered into restructuring payment of the Note which was not yet closed as of January 31, 2019. The Company and
the owners of Veneto are in further negotiations that is anticipated to result in a further amendment that may reduce the purchase
price and payment terms.
The
terms of the Amendment were as follows:
•
|
|
Payment
of $15,750,000 by delivery of Generex common stock, initially valued at $2.50 per share.
|
•
|
|
If,
on the first to occur of (i) the ninetieth (90
th
) day after closing under
the Amendment and (ii) the effective date of a registration statement filed with the
SEC including the Generex shares pursuant to the Amendment, the average volume weighted
average price (“VWAP”) of Generex common stock for the preceding five (5)
trading days is less than $2.50 share, Generex will deliver additional Generex Shares
such that the aggregate number of shares delivered under this Agreement equals $15,750,000
÷ such average VWAP.
|
•
|
|
The
remainder of the principal and interest under the Note shall be payable on April 15,
2019; provided that on that maturity date, Veneto shall have the option of (i) payment
of principal and interest in cash and (ii) payment of principal and interest by Generex’s
delivery of Generex Shares valued at $2.50 per share.
|
•
|
|
All
Generex shares issued pursuant to the Amendment will be delivered pro rata to the six
equity owners of Veneto as distributions from Veneto.
|
Fair
Value of the Veneto Acquisition
|
|
“First
Closing” completed on
October
3, 2018
|
|
“Second
Closing” completed on
November
1, 2018
|
|
Total
|
Cash
and cash equivalents
|
|
$
|
2,410,150
|
|
|
$
|
—
|
|
|
$
|
2,410,150
|
|
Accounts
receivable, net
|
|
|
1,935,078
|
|
|
|
—
|
|
|
|
1,935,078
|
|
Inventory,
net
|
|
|
1,068,856
|
|
|
|
—
|
|
|
|
1,068,856
|
|
Prepaid
expenses
|
|
|
95,803
|
|
|
|
—
|
|
|
|
95,803
|
|
Property
and equipment, net
|
|
|
652,590
|
|
|
|
—
|
|
|
|
652,590
|
|
Other
receivables
|
|
|
1,014,316
|
|
|
|
—
|
|
|
|
1,014,316
|
|
Notes
receivable - LT
|
|
|
1,387,763
|
|
|
|
—
|
|
|
|
1,387,763
|
|
Other
assets, net
|
|
|
61,348
|
|
|
|
—
|
|
|
|
61,348
|
|
Intangible
assets, net
|
|
|
—
|
|
|
|
7,110,000
|
|
|
|
7,110,000
|
|
Total
assets acquired
|
|
|
8,625,905
|
|
|
|
7,110,000
|
|
|
|
15,735,905
|
|
Total
current liabilities
|
|
|
2,509,887
|
|
|
|
—
|
|
|
|
2,509,887
|
|
Notes
payable
|
|
|
—
|
|
|
|
3,403,948
|
|
|
|
3,403,948
|
|
Total
liabilities assumed
|
|
|
2,509,887
|
|
|
|
3,403,948
|
|
|
|
5,913,835
|
|
Net
identifiable assets acquired
|
|
|
6,116,018
|
|
|
|
3,706,052
|
|
|
|
9,822,070
|
|
Goodwill
|
|
|
8,883,982
|
|
|
|
16,293,948
|
|
|
|
25,177,930
|
|
Total
consideration transferred
|
|
$
|
15,000,000
|
|
|
$
|
20,000,000
|
|
|
$
|
35,000,000
|
|
The
following table summarizes the allocation of the preliminary purchase price as of the Veneto acquisition as of the First Closing
and the Second Closing:
The
significant intangible assets identified in the purchase price allocation discussed above include developed software and technology,
referral base (recurring revenue from the MSO investments and their use of Company owned pharmacies) and non-compete agreements
with continued employment of key employees. Tradenames and trademarks were not valued as tradenames and trademarks will not be
maintained going forward. To value the developed software and technology, the Company utilized the relief from royalty method,
a form of the income approach to value the developed software and technology which assumes a limited technology life and market
share adjusted by assumed obsolescence with a terminal value. The referral base was valued using a multi-period excess earnings
method, a form of the income approach. The Company utilized the with and without method, a form of the income approach to value
non-compete agreements with Generex.
The
preliminary amounts assigned to the identifiable intangible assets, the estimated useful lives, and the estimated amortization
expense related to these identifiable intangible assets are as follows:
|
|
Preliminary
Fair
Value
|
|
Average
Estimated
Life
|
|
Amortization
for Year Ended
July 31, 2018
|
Developed
Software/Technology
|
|
$
|
780,000
|
|
|
|
5
|
|
|
$
|
156,000
|
|
Referral
Base
|
|
|
3,920,000
|
|
|
|
15
|
|
|
|
261,333
|
|
Non-compete
agreements
|
|
|
2,410,000
|
|
|
|
3
|
|
|
|
803,333
|
|
|
|
$
|
7,110,000
|
|
|
|
|
|
|
$
|
1,220,667
|
|
Intangible
assets are generally amortized on a straight-line basis over the useful lives of the assets.
Goodwill
represents the excess of the purchase price over the fair market value of net assets acquired. Goodwill for Veneto Acquisition
was $8.9 million as of the date of the First Closing and $16.3 million as of the date of the Second Closing.
Regentys:
On
November 28, 2018, Generex Biotechnology Corporation (the “Company”) and Regentys Corporation. (“Regentys”)
closed the acquisition of 51% of the outstanding capital stock of Regentys for a total consideration of fifteen million dollars
($15,000,000). On January 7, 2019 the Company completed a definitive Stock Purchase Agreement and related documents effecting
the transactions contemplated by the LOI.
Consideration
for Proposed Acquisition
Pursuant
to a Stock Purchase Agreement between the Company and Regentys (the “Purchase Agreement”) the Company purchased 12,048,161
newly issued shares of the Regentys common stock representing 51% percent of the issued and outstanding capital stock of Regentys
(“Regentys Shares”).
In
addition to $400,000 paid to Regentys upon signing of the LOI, the purchase price for the Regentys Shares will consist of the
following cash payments, with the proceeds intended to be used for specific purposes, as noted:
•
|
|
$3,450,000
to initiate pre-clinical activities on or before January 15, 2018.
|
•
|
|
$2,000,000
to initiate patient recruitment activities on or before May 1, 2019.
|
•
|
|
$3,000,000
to initiate a first-in-human pilot study on or before September 1, 2019.
|
•
|
|
$5,000,000
to initiate a human pivotal study on or before February 1, 2020.
|
•
|
|
$1,150,000
to submit a 510(k) de novo submission to the FDA on or about February 1, 2021.
|
The
Company issued its Promissory Note in the amount of $14,600,000 (the “Note’) representing its obligation to pay the
above amounts. The Note is secured by a pledge of the Regentys pursuant to a Pledge and Security Agreement. In the event that
Generex does not make any of the first three payments listed above, at Regentys’ option either:
•
|
|
Generex
will forfeit all of the Regentys shares issued with no refund of amounts paid; or
|
•
|
|
Generex
will issue shares of its common stock to Regentys equivalent to 110% of the value of
the missing payment, which shares will be registered for resale.
|
In
the event Generex does not make either or both of the fourth and fifth payments, its share ownership of Regentys will be proportionately
reduced.
On
March 14, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the first tranche of Guaranteed Payments amounting to $2,800,000 on or before April 1, 2019.
The
Company accounted for the Acquisition of Regentys 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.
The
fair values assigned to Regentys’ tangible and identifiable intangible assets acquired, and liabilities assumed are based
on management’s estimates and assumptions. The estimated fair values of these assets acquired, and liabilities assumed are
considered preliminary and are based on the information that was available as of the date of the acquisition. The preliminary
estimated fair values of assets acquired, and liabilities assumed, and identifiable intangible assets may be subject to change
as additional information is received. Thus, the provisional measurements of fair value are subject to change. We expect to finalize
the valuation as soon as practicable, but not later than one year from the closing date.
Olaregen:
On
November 27, 2018, Generex Biotechnology Corporation (the “Company”) and Olaregen Therapeutix Inc. (“Olaregen”)
entered into a binding letter of intent (“LOI”) contemplating the Company’s acquisition of 51% of the outstanding
capital stock of Olaregen for a total consideration of twelve million dollars ($12,000,000). As of January 7, 2019, the Company
completed a definitive Stock Purchase Agreement (“Purchase Agreement”) and related documents effecting the transactions
contemplated by the LOI.
Consideration
for Proposed Acquisition
The
Company will purchase 3,282,632 newly issued shares of the Olaregen common stock representing 51% percent of the issued and outstanding
capital stock of Olaregen (“Olaregen Shares”).
In
addition to $400,000 paid to Olaregen upon signing of the LOI, the purchase price for the Olaregen Shares will consist of the
following cash payments:
•
|
|
$800,000
on or before January 15, 2019.
|
•
|
|
$800,000
on or before January 31, 2019.
|
•
|
|
$3,000,000
on or before February 28, 2019.
|
•
|
|
$1,000,000.
On or before May 31, 2019.
|
•
|
|
$6,000,000.00
on or before September 30, 2019.
|
Generex
issued its Promissory Note in the amount of $11,600,000 (the “Note’) representing its obligation to pay the above
amounts. The Note is secured by a pledge of the Oleregen Shares pursuant to a Pledge and Security Agreement. In the event that
Generex fails to pay the installment due on September 30, 2019, Generex will forfeit the shares allocated to that installment
(1,600,000 Olargeren Shares) and Olaregen will be entitled to “claw back” fifty percent (50%) of any and all shares
paid for by the prior payments.
On
March 14, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the first tranche of Guaranteed Payments amounting to $2,800,000 on or before April 1, 2019.
In
the event Generex does not make any other payments, its share ownership of Olaregen will be proportionately reduced.
Generex
has a limited anti-dilution right under the Purchase Agreement, to ensure that Generex will retain 51% ownership in Olaregen for
a period of time.
The
Company accounted for the Acquisition of Regentys 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.
The
fair values assigned to Regentys’ tangible and identifiable intangible assets acquired, and liabilities assumed are based
on management’s estimates and assumptions. The estimated fair values of these assets acquired, and liabilities assumed are
considered preliminary and are based on the information that was available as of the date of the acquisition. The preliminary
estimated fair values of assets acquired, and liabilities assumed, and identifiable intangible assets may be subject to change
as additional information is received. Thus, the provisional measurements of fair value are subject to change. We expect to finalize
the valuation as soon as practicable, but not later than one year from the closing date.
Unaudited
Supplemental Pro Forma Data
Unaudited
pro forma results of operations for the six months ended January 31, 2018 and 2017 as though the Company acquired HDS, Veneto,
Olaregen, Grainland, Empire and Regentys (the “Acquired Companies”) on the first day of each fiscal year are set forth
below.
|
|
Six
months Ended
January
31, 2019
|
|
|
2018
|
|
2017
|
Revenues
|
|
$
|
5,839,903
|
|
|
$
|
19,407,319
|
|
Cost
of revenues
|
|
|
2,810,874
|
|
|
|
7,622,676
|
|
Gross
profit
|
|
|
3,029,029
|
|
|
|
11,784,643
|
|
Operating
expenses
|
|
|
6,406,594
|
|
|
|
13,592,954
|
|
Operating
loss
|
|
|
(3,377,565
|
)
|
|
|
(1,808,311
|
)
|
Other
income (expense)
|
|
|
(202,760
|
)
|
|
|
(123,688
|
)
|
Net
loss
|
|
$
|
(3,580,325
|
)
|
|
|
(1,931,999
|
)
|
Comprehensive
net loss
|
|
$
|
(3,580,325
|
)
|
|
$
|
(1,931,999
|
)
|
Note
9– Notes Payable
On
October 26, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to
sell and sold its Note Due October 26, 2019 (“Note”) in the principal amount of $682,000
.
The purchase
price of the Note was $550,000 from which Generex was required to pay the $15,000 fee of the investor’s counsel. The remaining
$122,000 of principal amount represents original issue discount. The Note does not bear any stated interest in addition to the
original issue discount. The effective interest is 27.5%.
On
November 25, 2018, Generex entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed
to sell and sold its Note Due November 26, 2019 (“Note”) in the principal amount of $1,060,000. The purchase price
of the Note was $1,000,000. The remaining $60,000 of principal amount represents original issue discount. The Note does not bear
any stated interest in addition to the original issue discount.
On
January 24, 2019, Generex entered into Securities Purchase Agreements with 3 investors pursuant to which the Company agreed to
sell and sold convertible notes bearing interest at 10% per annum (the “Notes”) in the aggregate principal amount
of $2,110,000
.
The purchase price of the Notes was $2,010,000 and the remaining $100,000 of principal amount represents
original issue discount. Pursuant to the Securities Purchase Agreements, the Generex also sold warrants to the Investors to purchase
up to an aggregate 120,570 shares of common stock.
Subject
to certain ownership limitations, the Notes will be convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price determined as follows: the lesser of
•
|
|
A
price determined as of the date of closing; and
|
•
|
|
70%
of the lowest volume weighted average trading price of the common stock on the ten days
prior to conversion.
|
On
November 27, 2018, Generex and Olaregen Therapeutix Inc. (“Olaregen”) entered into a binding letter of intent (“LOI”)
contemplating the Company’s acquisition of 51% of the outstanding capital stock of Olaregen for a total consideration of
twelve million dollars ($12,000,000) in accordance with the terms and conditions of the LOI. As of January 7, 2019, the Company
completed a definitive Stock Purchase Agreement and related documents effecting the transactions contemplated by the LOI. After
paying $400,000 at signing, Generex issued a promissory note as it relates to the acquisition. The note is due in multiple installments
with the final payment due September 30, 2019.
On
November 28, 2018, Generex Biotechnology Corporation (the “Company”) and Regentys Corporation. (“Regentys”)
entered into a binding letter of intent (“LOI”) contemplating the Company’s acquisition of 51% of the outstanding
capital stock of Regentys for a total consideration of fifteen million dollars ($15,000,000) in accordance with the terms and
conditions of the LOI (the "Proposed Acquisition").
On
March 14, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the second payment and the third payment of Guaranteed Payments amounting to $600,000 on or before April
1, 2019.
Note
10 - 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.
Generex
Biotechnology Corporation (“Generex”) will issue to holders of Generex common stock a dividend of shares of its wholly
owned subsidiary Antigen Express, Inc., d/b/a NuGenerex Immuno-Oncology. Generex shareholders will receive a dividend of one share
of Antigen Express, Inc. for every four shares of Generex common stock. The Record Date for the dividend was January 30, 2019,
the Payment Date is February 25, 2019.
On
February 8, 2019, Generex Biotechnology Corporation (the “Company”) closed under a Securities Purchase Agreement with
an investor pursuant to which the Company agreed to sell and sold a convertible note bearing interest at 10% per annum (the “Note”)
in the principal amount of $750,000. The purchase price of the Note was $712,500 and the remaining $37,500 of principal amount
represents original issue discount. Pursuant to the Securities Purchase Agreements, the Company also sold to the Investor warrants
to purchase up to an aggregate 45,000 shares of common stock.
On
February 15, 2019, Generex Biotechnology Corporation (the “Company”) entered into, and on February 22, 2019, Generex
closed under a Securities Purchase Agreement with an investor pursuant to which the Company agreed to sell and sold a convertible
note bearing interest at 10% per annum (the “Note”) in the principal amount of $750,000
.
The purchase
price of the Note was $712,500 and the remaining $37,500 of principal amount represents original issue discount. Pursuant to the
Securities Purchase Agreements, the Company also sold to the Investor warrants to purchase up to an aggregate 57,143 shares of
common stock.
On
March 14, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the second payment and the third payment of Guaranteed Payments amounting to $600,000 on or before April
1, 2019.
On
March 14, 2019, the Company and Regentys amended the Stock Purchase Agreement and Promissory Note to extend the due date of the
remaining balance of the first tranche of Guaranteed Payments amounting to $2,800,000 on or before April 1, 2019.