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Eckert Seamans Cherin &
Mellott, TEL: 215 851 8400
LLC
FAX: 215 851 8383
Two Liberty Place
50 South 16th Street, 22nd
Floor
Philadelphia, PA 19102
Gary M. Miller
215.851.8472
gmiller@eckertseamans.com
April 30, 2020
Securities and Exchange Commission
Division of Corporation Finance
Office of Life Sciences
Mary Mast
Dan Gordon
100 S Street, NE
Washington, DC 20549-0213
VIA EDGAR
Re: Generex Biotechnology Corp. (the Company )
Form 10-K for the Fiscal Year Ended July 31, 2019
Filed November 12, 2019
File No. 000-25169
Ms. Nast and Mr. Gordon:
The Company is in receipt of your correspondence dated March 25, 2020, posing
comments and requesting information
regarding the Form 10-K referenced above.
Please find the issuer s respective responses below, restating the Staff s
comments in bold, and the Company s response in
plain text. In some cases, the Staff s comments were in multiple parts, and
we have responded to individual parts
separately.
Form 10-K for the Fiscal Year Ended July 31, 2019
Management's Discussion and Analysis
Financial Condition, Liquidity and Resources Sources of
Liquidity, page 70
1. You state that your July 31, 2019 cash position was not sufficient for
12 months of operations and that
anticipated revenues associated with the Veneto acquisition are
expected to dramatically alter the cash
flow landscape. Given the litigation with Veneto and the uncertainty
relating to the assets acquired, tell us
the basis for the company's assertions.
Response: On July 31, 2019, the end of the fiscal year, the Company continued
to believe that it could reorganize and
rehabilitate the Veneto business so that it would provide positive cash flow.
Although the acquisition included pharmacy
assets and operations which ceased and reported during the measurement period
as part of the amended purchase and
debt restructuring, the MSO operation and anticipated cashflows are expected to
be realized and increase within Generex
and benefit from subsequent acquisitions and services integrated in the MSO
model.
Management's Discussion and Analysis Results of Operations, page 70
2. For each significant key research and development project, provide the
following to be included in future
filings:
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the costs incurred during each period presented, reconciled to
your research and
development on your Statements of Operations
Response:
Please see the following table of research and development costs summarized by
quarter and annually:
3 Months 3 Months
3 Months 3 Months 12 Months
Ending Ending
Ending Ending Ending
RECONCILIATION of
RESEARCH AND
DEVELOPMENT COSTS 10/31/2018 1/31/2019
4/30/2019 7/31/2019 7/31/2019
NGIO (Antigen) $ 39,000 $ 342,000 $
$ 30 $ 381,030
Regentys 306,800
331,711 131,486 769,997
NGDx (HDS) 141,067 162,138
140,299 154,351 597,855
TOTAL $ 180,067 $ 810,938 $
472,010 $ 285,867 $ 1,748,882
The Company undertakes to provide additional information in its future filings,
beginning with its quarterly report on
Form 10-Q for the quarter ending April 30, 2020 that will summarize and reflect
the information below.
NGIO
the nature of efforts and steps necessary to complete the
project,
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.
NGIO is also sponsoring the NSABP FB-14 clinical trial protocol. Merck
is contributing pembrolizumab
(Keytruda) for use in combination with AE37 for the treatment of triple
negative breast cancer.
Based on the results from this trial, NGIO has entered into a
collaborative agreement with Merck Sharpe &
Dohme B.V. (Merck) and the National Surgical Adjuvant Breast and
Prostate Program (NSABP) to conduct a
Phase II trial to evaluate the safety and efficacy of AE37 in
combination with the anti-PD-1 therapy,
KEYTRUDA (pembrolizumab) in patients with metastatic triple-negative
breast cancer. The trial began
enrolling patients in September during 2019.
In addition to the breast cancer program, NGIO has conducted a Phase I
clinical trial in prostate cancer,
enrolling thirty-two HER-2/neu+, castrate-sensitive, and
castrate-resistant prostate cancer patients to
demonstrate safety and strong immunological response to AE37. We are
advancing AE37 for the treatment of
prostate cancer through a licensing and research agreement with
Shenzhen BioScien Pharmaceuticals Co., Ltd.
reasons for significant increases or decreases in research
and development from period to
period,
The primary increase incurred by NGIO during the year ending July 31,
2019 was related the initial payment of
$340,000 to NSABP Foundation Inc. ( NSABP ) for the Clinical Trial
Agreement for the start-up activities of
the Phase II Study, paid during the quarter ending January 31, 2020.
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expected future increases or decreases in research and development,
As the clinical trial continues, NGIO will be obligated to pay NSABP, pursuant
to the Clinical Trial
Agreement, additional amounts during each completed phase in the increments and
at the times set forth in the
agreement in four primary phases: Start-Up Activities, Accrual and Treatment
Period, Follow-up Period and
Primary Endpoint.
In addition, Generex and through NGIO have been working to develop a peptide
vaccine against the new
coronavirus SARS-CoV-2 using the company s proprietary and patented Ii-Key
immune system activation
technology. We have built our technology to assist third party groups and
government agencies in their
evaluation of potential vaccines against this pandemic SARS-CoV-2 virus.
The patented NuGenerex Immuno-Oncology (Formerly Antigen Express) Ii-Key
technology uses synthetic
peptides that mimic essential protein regions from a virus that are chemically
linked to the 4-amino acid Ii-Key
to ensure robust immune system activation. In particular, the Ii-Key ensures
potent activation of CD4+ T cells,
which in turn facilitates antibody production to ward off infection. This
Ii-Key modification can be applied to
any protein fragment of any pathogen to increase the potency of immune
stimulation.
Generex is working with our partners at EpiVax who have identified such protein
fragments or epitopes to
generate Ii-Key-SARS 2 peptide vaccines in collaboration with our peptide
manufacturing partners. The
peptides and Ii-Key are made from naturally occurring amino acids, ensuring an
excellent safety profile for Ii-
Key peptide vaccines.
the risks and uncertainties associated with completing development,
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.
the extent and nature of additional resources that need to be
obtained if current liquidity
is not expected to be sufficient to complete the project, and
With respect to the NSABP FB-14 clinical trial, Merck is not contributing
financial support; NGIO is funding
the conduct of the trial through NSABP and a collaboration and licensing
agreement with Shenzhen Bioscien
Pharmaceuticals Co. Ltd. ( Shenzhen ) for the rights to China. This trial
is expected to continue without further
funding by Generex. All the funding for trial is being contributed by Shenzhen.
All Clinical Data shall be
jointly owned by NGIO and Merck.
In exchange for exclusive rights to AE37 for prostate cancer in China, Shenzen
is financing and conducting the
Phase II trials in the European Union and Phase III trials globally under
International Commission on
Harmonisation ( ICH ) guidelines, with NGIO retaining the rights to all
clinical data for regulatory
submissions and commercialization in the rest of the world outside China. This
trial continue for the duration of
the Phase II combination trial of AE37 plus pembrolizumab in patients with
triple negative breast cancer.
NGIO has also sign a Pharmacovigilance Agreement among Merck, NSABP and NGIO to
ensure the clinical
monitoring of the trial.
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The funding for the development of a vaccine of SARS-CoV-2 virus is in
advanced discussions and currently
expected that the development costs will be borne by the U.S. and
foreign government agencies and without
additional external funding, Generex will not pursue these projects.
your estimate of the date of completion of any future
milestone such as completion of a
development phase, date of filing an NDA with a regulatory
agency, or approval from a
regulatory agency.
Except for the development of a vaccine of SARS-CoV-2 virus, the other
trials being conducted with NSABP
and Merck with Shenzhen are multi-year studies. The FDA approved our
Ii-Key peptide vaccine, AE37 (Ii-
Key-HER2/neu) for Phase 1 and Phase II clinical trials without requiring
additional animal studies.
With respect to the SARS-CoV-2 vaccine, our plan to make a targeted
vaccine that produces a complete
immune response that neutralizes the virus. We will work with the FDA to
approve an IND for the Ii-Key-
SARS-COV-2 vaccine candidate to quickly enter clinical trials with a
rapid assessment of safety and
immunogenicity with the first trial starting as early as July 2020.
Based on the results of this initial safety and
immunogenicity study, we propose a pivotal healthcare worker clinical
trial in the fall of 2020 as well as trials
in special populations to continue assessing the safety and efficacy
data required for licensure. Manufacturing
is major advantage for the Ii-Key-SARS-CoV-2 vaccine, because is a
synthetic peptide that can be readily
scaled. Generex and our commercial manufacturing partners will be
positioned to begin delivery of up to 100
million doses (100 Kg) of vaccine starting in the fall of 2020.
Regentys
the nature of efforts and steps necessary to complete the
project,
Regentys is developing ECMH Rectal Solution, an extracellular matrix
( ECM ) hydrogel, to facilitate tissue
healing in patients with inflammatory bowel diseases. Initially, the
company is targeting patients with
Ulcerative Colitis and thereafter, it plans to modify its products and
delivery system to address patients with
Crohn s Disease, Rectal Mucositis and other similar indications.
The company s product is categorized by the US Food and Drug
Administration ( FDA ) as a medical device.
This requires approval by the FDA prior to marketing or sale in the
United States and by other governmental
regulatory authorities in different foreign jurisdictions. Most
simplistically, the process to obtain approval for
similar products in the US is as follows: undertake preclinical and
animal studies; assess and validate study
results; draft regulatory filings to prepare for clinical trials; make
manufacturing batches of the product;
validate the effectiveness of the manufacturing process; scale up
manufacturing for clinical trial batches, file
clinical trial documentation, solicit patients, undertake a first-in-man
(FIM) pilot study, adjust the product/study
and protocol if required, and undertake additional pivotal studies,
gather and present data and submit final
regulatory applications with all the required product, manufacturing and
clinical data. Thereafter, once all
elements are met, permission to market and sell is granted by the
regulatory authority. For FDA medical device
applications that are 510(k) de novo, there is a great likelihood of
approval.
In 2016 and 2017, Regentys completed promising pre-clinical and animal
studies under a research and
development agreement with the University of Pittsburgh. In 2018,
Regentys engaged HPA, a Boston, MA-
based consulting firm, to provide the company with guidance in its US
FDA filing activities. In 2018, Regentys
received guidance from the FDA regarding its need to file a 510(k) de
novo application to position its product
for clinical evaluation, commercialization and market approval the US.
The clinical program Regentys is
undertaking is being designed to meet FDA standards which are recognized
by major industrialized countries
globally with statutory regulatory clinical trial and filing adjustments
to be made to account for the distinctions
imposed by each country. The company expects to conduct a 20-person
study and a 50-person study prior to
filing its application with the US FDA.
In 2018, Regentys entered into a development agreement with Cook
Biotech, Inc. ( CookBio ) a recognized
global leader in the development and manufacture of extracellular matrix
products. CookBio is helping
Regentys to facilitate a final production version of the ECMH product,
and upon completion, CookBio has
agreed to manufacture the product in North America. As well, CookBio is
collecting relevant product data and
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building the product and manufacturing data portfolio required for submission
to the FDA and other
governmental entities. In 2018, the Company also entered into an agreement with
Natureplex, a finished goods
maker is the second largest enema manufacturer behind Fleet. The Natureplex
diluent and bottles along with
the Cook Bio ECM biomaterial is expected to comprise the final product kit.
During 2019, Regentys development activities focused on scaling-up batch
sizes of the product and evaluating
key indicators to demonstrate conformity with the original formulae plus
certain enhancements. The company
achieved an almost identical version of the original formula in a scaled-up
production run, but it seeks to
improve on two commercial specifications. To facilitate this process, Regentys
engaged Dr. Steven Badylak,
DVD, MD and the McGowan Institute at the University of Pittsburgh to help with
this work. Should
improvements not meet all the desired commercialization parameters, Regentys
has an established back-up
version of its formula that will meet all indicators without the commercial
enhancements.
reasons for significant increases or decreases in research and
development from period to
period,
In 2019, Regentys contracted with Brandwood CKC, a Sydney, Australia-based
global regulatory firm to assist
the company with all necessary regulatory filings to conduct clinical trials
and gain product approvals in
jurisdictions outside of the US. The company intends to undertake a clinical
trial in Australia within months of
the completion of the final product. Brandwood representatives will help
Regentys establish the process for the
pilot clinical trial in Australia. Currently, the United States, Canada, Europe
and Israel are proposed pivotal
trial venues.
In 2019, Regentys finalized its clinical protocol and developed an advanced
version of the Investigators
Brochure. Dr. Thomas Borody, MD, a Sydney, Australia based physician with the
Center for Digestive
Diseases and recognized expert in GI matters, has agreed to be our principal
investigator in Australia. Along
with Brandwood, Dr. Borody s team will undertake a coordinated effort to
manage human clinical trials and
regulatory activities in Australia.
expected future increases or decreases in research and
development,
Our pre-2020 business plan forecasted the initiation of our first-in-human
pilot clinical trial in Australia to
generate data that will be used to focus later human trials and support
regulatory filings. In the future, over the
next several years, the development, clinical and regulatory activities and to
secure approval to market and sell
the initial product candidate for ulcerative colitis in the US, with
approximately $7 million allocated to
development activities and $8 million for clinical trial and regulatory
approvals. In addition, about $15 million
is also likely to be needed to develop the asset to treat Crohn s Disease and
each other indication.
the risks and uncertainties associated with completing development,
As will all trials, there is always uncertainty and risk associated with the
development of any medical treatment
or therapy, but the continued development of the trials financing and the lack
of such financing is central risk to
the development of a final product formulation, the conduct of human clinical
trials and the receipt of
regulatory approval for marketing its ECMH Rectal Solution.
As a condition of its licensing agreement with the University of Pittsburgh,
Regentys has specific milestones to
meet in its development program in 2020 or its exclusive license can be
terminated. Funding is required to
retain this license. Should this license be lost, Regentys would have options
to develop its co-developed
technology with Pittsburgh, but the company would likely have to repeat
research to use a new form of
hydrogel process to make its product without infringing the University of
Pittsburgh s patent. This would be a
substantial additional cost to Regentys and create a competitive advantage to
any new holder in due course of
such rights. In addition, Regentys has additional patents in process that could
serve as the basis of additional
regenerative medicine products in the urogenital space, but additional research
and development is required.
Any delay in funding could substantial delay these projects in time and
increase costs.
the extent and nature of additional resources that need to be
obtained if current liquidity
is not expected to be sufficient to complete the project, and
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In addition to the funding requirements noted above, additional funding
is expected by Generex by the end of
Q3 2020 to meet Regentys present stage of development of the product,
and the milestones required to
successfully meet all regulatory, clinical, and manufacturing
requirements to acquire regulatory approval to
market and sell products.
In addition to financial capital, Regentys will require additional human
resources to get its product approved
and to market. More specifically, the company expects that commercial
success will more readily occur with a
proven strategic partner with established global and or regional sales
and distribution channels. Management
has made identifying and engaging an entity (or multiple entities) with
a global sales and distribution footprint
to facilitate its product introduction and market expected Q4 2022.
Should this strategic partnering not occur,
Regentys would be required to raise substantial additional monies to
develop the company s resources to enable
it to undertake the marketing and sale of the developed assets.
your estimate of the date of completion of any future
milestone such as completion of a
development phase, date of filing an NDA with a regulatory
agency, or approval from a
regulatory agency.
We anticipate the earliest we may expect development to be finalized is
Q4 2020 and first-in-human trials to
begin in Q1 2021. Accordingly, we may expect to commence sales in the US
no earlier than in Q1 2023
contingent on FDA acceptance of our proposed clinical and regulatory
strategy and our ability to execute this
strategy. Product commercialization with a CE mark in the EU and
Australia is anticipated simultaneously, or
soon thereafter, contingent upon applicable approvals to market by
jurisdiction and a partnering arrangement
with an established European life sciences partner that has not yet been
identified.
Prior to licensing products from the University of Pittsburgh,
management conducted extensive due diligence
on the then market trends, competitive landscape, government regulatory
and compliance matters for ECM
regenerative products. Management continues this monitoring activity. To
date, no similar technologies to
ECMH addressing Ulcerative Colitis and Crohn s Disease have
surfaced. In fact, the market is in greater
need to fill the void between current first-line therapies, like 5-ASA,
steroids, and biologics, such as Humira ,
and other monoclonal antibody technologies principally because ECM has
shown the ability to facilitate tissue
healing as opposed to simply suppressing inflammation as many other
competitive products do.
The market continues to be dominated by pharmaceutical therapies for IBD
treatment. While recent regulatory
trends, including the FDA s effort to reform the 510(k) process, tend
to raise the regulatory bar and add
additional costs, therapies that show promise in treating chronic
diseases such as UC and Crohn s Disease,
especially those therapies providing a regenerative approach to treating
the disease will be viewed favorably.
Stem cell-based therapies continue to be developed, however, we are not
aware of any clinical trial applications
for IBD.
We are closely monitoring the use of emerging technologies to enhance
the healing aspects of ECM products
like ours and look to support our existing product with variations that
might enhance the benefits of our
products. The likelihood is that any adjustment to our initial product
candidate with any such advance will only
occur in the second generation of the product candidate.
NGDx (formerly HDS)
NuGenerex Diagnostics is the development of the HDS EXPRESS diagnostic
technology which has been
expanded with the new, patent-pending EXPRESS II technology that will
create a new product pipeline.
NuGenerex Diagnostics was recently granted a CE Mark Certification under
the European Medical Devices
Directive (MDD) for its The Express II Syphilis Treponemal Assay, a
rapid point-of-care diagnostic assay for
the detection of syphilis antibodies in primary and secondary syphilis.
The assay is based upon NuGenerex
Diagnostic s innovative patent pending point-of-care diagnostic
platform, the Express II. The accuracy of the
Express II Syphilis Treponemal Assay is equal to or better than standard
laboratory assays for syphilis
antibodies with sensitivities and specificities of over 99%.
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We maintain current U.S. Certificates of Exportability that are issued by two
FDA divisions-CBER and CDRH.
CBER (Center for Biologicals Evaluation and Research) is the FDA regulatory
division that oversees infectious
disease diagnostic devices, including our HIV, Hepatitis B and Hepatitis C
EXPRESS ( EXPRESS I ) and
EXPRESS II kits. The other division, Center for Devices and Radiological Health
(CDRH), is responsible for
the oversight of other HDS devices which include Tuberculosis, Syphilis, and
the remaining product line. Our
HDS facility maintains FDA Establishment Registration status and is in accord
with GMP (Good
Manufacturing Practice) as confirmed by the FDA.
As a result, 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.
In addition, our HIV rapid test has been issued by the United States Agency for
International Development
(USAID). Currently, we have two malaria rapid tests approved under World Health
Organization (WHO)
guidelines. This process allows expedited approval of rapid tests, reducing the
current 24 -30-month process
down to approximately 6-9 months. WHO approval is necessary for our products to
be used in those countries
which rely upon the expertise of the WHO, as well as for non-governmental
organizations ( NGO ) funding for
the purchase of diagnostic products.
the nature of efforts and steps necessary to complete the project,
We do not currently have FDA clearance to sell our products in the United
States. We intend to submit selected
devices to the FDA under a Pre-Market Approval Application (PMA) or through the
510K process. The 510K
would require the appropriate regulatory administrative submissions as well as
a limited scientific review by
the FDA to determine completeness (acceptance and filing reviews); in-depth
scientific, regulatory, and Quality
System review by appropriate FDA personnel (substantive review); review and
recommendation by the
appropriate advisory committee (panel review); and final deliberations,
documentation, and notification of the
FDA decision. The PMA process is more extensive, requiring clinical trials to
support the application. We
expect to apply to the FDA for clearance of our first RDT (Express II Syphilis
Treponemal Assay) for FDA
510K approval in early 2020. We anticipate the FDA process will be completed
within 9 months after
submission. During this timeline, we will be preparing documentation for
additional rapid tests to undergo
either the FDA PMA or 510k process.
reasons for significant increases or decreases in research and
development from period to
period,
Increases in our research and development costs for each period incurred the
prior year under NGDx (HDS)
was related to the development costs associated with EXPRESS I and EXPRESS II
kits.
expected future increases or decreases in research and development,
Additional costs and increases are expected as NGDx pursues FDA 510K approval,
plus the development of
additional rapid tests beyond the existing targeted infectious diseases noted
above. NGDx expects to build a
multi-faceted diagnostics business focused on personalized medicine. To that
end, NDGx is exploring
opportunities in multiplex assays for point-of-care infectious disease testing,
pharmacogenomic testing for
medication management, and biomarker analysis for personalized cancer
treatment, including immunotherapy.
The technology developed by NDGx has the potential application for many
infectious diseases which will be
pursued including COVID-19.
the risks and uncertainties associated with completing development,
As discussed above with other products, there is always uncertainty and risk
associated with the development
of any medical treatment or therapy, the outcome of trials, receipt of needed
FDA approvals or our ability to
fund and complete the necessary research and development. During the pandemic
COVID-19, it is anticipated
that delays will occur, but the full impact has not been determined.
the extent and nature of additional resources that need to be
obtained if current liquidity
is not expected to be sufficient to complete the project, and
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It is estimated that $750,000 is needed to complete clinical trials
needed for the FDA 510K approval process
and to develop additional Express II products for other infectious
diseases.
your estimate of the date of completion of any future
milestone such as completion of a
development phase, date of filing an NDA with a regulatory
agency, or approval from a
regulatory agency.
The primary next major milestone is the FDA 510K approval which take
about 18 months. This includes
approximately 6 months to complete and submit the approval, plus an
additional 12 months for additional
clinical testing, manufacture validation to achieve final approval
Olaregen
Since acquisition, Olaregen has had no research and development costs
due to the lack of additional funding
necessary to conduct further R&D related to products in development.
the nature of efforts and steps necessary to complete the
project,
Although, Olaregen has not conducted any further research and
development, since acquisition, Excellagen
became commercially viable. Excellagen possesses a FDA 510K clearance
wound healing product for the
treatment of 17 types of wounds including partial and full thickness
wounds, pressure ulcers, venous ulcers,
diabetic ulcers, chronic vascular ulcers, tunneled/undermined wounds,
surgical wounds (donor sites/grafts,
post-Mohs surgery, post-laser surgery, podiatric, wound dehiscence),
trauma wounds (abrasions, lacerations,
second-degree burns, and skin tears) and draining wounds became
commercially viable and requires limited
research and development. Olaregen s product known as Cord Products
requires funding to complete additional
needed research and development to remain commercially viable and
competitive in order to generate future
sales. Exassome requires funding to initiate research and development
costs to combine Exassome and
Excellagen for the development of Excellasome to begin the initial
trials.
reasons for significant increases or decreases in research and
development from period to
period,
Due to lack of funding additional research and development related to
Olaregen and its products was not
conducted.
expected future increases or decreases in research and
development,
Additional research and development is expected for Excellagen to
enhance the product to allow the product to
be used in VA Hospitals that require treatments as room temperature.
Upon funding and indications from the
marketplace, Olaregen s would consider further research and
development on its Cord Products to enhance and
create unique qualities in order to remain commercially viable and
competitive combined with other marketplace
indicators. Substantial research and development costs are expected for
several years to develop Excellasome
as a commercially viable product beginning with its initial Phase I
trial.
the risks and uncertainties associated with completing
development,
The product Excellagen is complete with active sales. Without
additional funding to create a viable room
temperature product for VA Hospitals, its full potential would not
realized. Excellagen has received the FDA
510K approval with 17 indications, but any additional indications and
treatments will require additional funding
to fully exploit Excellegen s potential including combining Excellagen
with Exassome to create the viable
product Excellasome . Without additional funding, Olaregen would not be
able to maintain its Cord Products as
a commercially viable product needed to remain competitive and generate
future sales. As discussed above with
other products, there is always uncertainty and risk associated with the
development of any medical treatment or
therapy, the outcome of trials, receipt of needed FDA approvals or the
ability to complete research with
collaborators. During the pandemic COVID-19, it is anticipated that
delays will occur, but the full impact has not
been determined.
Page 9 of 33
the extent and nature of additional resources that need to
be obtained if current liquidity
is not expected to be sufficient to complete the project, and
No additional resources are currently needed for Excellagen is
complete the project as has FDA 510K approval
with active sales. Limited funding is required to develop the project
further to create a viable room temperature
product noted above. Excellasome requires substantial funding and
will not continue without such funding or
license and collaboration agreement to conduct the needed research and
development with internal funding.
your estimate of the date of completion of any future
milestone such as completion of a
development phase, date of filing an NDA with a regulatory
agency, or approval from a
regulatory agency.
Excellagen became a viable commercial product after acquisition with
active sales. A collaboration and
funding to conduct a Phase I Trial of Excellasome The would be the
first of many research and development
milestones to be completed over the next several years prior to any FDA
approval. Currently, we are not aware
of any clinical trial applications.
Consolidated Statements of Operations and Comprehensive (Loss) Income, page 82
3. The changes in fair value of contingent purchase consideration was
$18,587,782 and $39,027,901 and $0
in the years ended July 31, 2019 and 2018 and three months ended
October 31, 2019, respectively.
[Individual Questions under #3 are repeated and responded to below].
Introductory Response: The two components contained in the amounts reported for
"Contingent Consideration" relates
to the acquisition of NGDx (formerly HDS) (See Table 1). At the time of the
initial acquisition the Call Option and
Warrants (to be issued) were valued and revalued at the end of each quarter
through the final exercise date of the option
and issuance date of the warrant (See Table 2). Once the call option was
exercised and 100% of NGDx was acquired, there
was no longer any contingent consideration as of July 31, 2019, nor any
contingent consideration related to this
acquisition on a going forward basis.
TABLE 1:
FV at the As
As As As
time of As of July of October
of January of July of October
BALANCE SHEET COMPONENTS issuance 31, 2018 31, 2018
31, 2019 31, 2019 31, 2019
Warrants To Be Issued (66,060,026) (24,962,507)
(4,005,240) (9,032,486)
Call Option 4,237,829 2,168,211 756,041
1,385,780
Total Balance of Contingent
Consideration (61,822,197) (22,794,296)
(3,249,198) (7,646,705)
TABLE 2:
3
Months
3 Months 6
Months Ending
For the year Ending
Ending Change in For the year October
Components in the Change in FV of ending July October 31, January
31, FV at Time ending July 31,
Purchase Consideration: 31, 2018 2018
2019 of Issuance 31, 2019 2019
Warrants To Be Issued (41,097,519) (20,957,267)
(15,930,021) (3,440,191) (19,370,212)
Call Option 2,069,618 1,412,170
782,431 782,431
Change in FV of Purchase Consideration (39,027,901) (19,545,098)
(15,147,591) (3,440,191) (18,587,782)
Question: Please tell us the amount of contingent consideration at each
balance sheet date and the
components thereof. Also tell us your consideration of separately
presenting the contingent consideration
on the face of the balance sheet.
Page 10 of 33
Response: As of July 31, 2018, the individual components of the contingent
consideration were included on the Balance
Sheet on separate lines as an asset on the line "Call Option (Note 13), and
as a liability on the line "Warrants to be issued
(Note 13)." Since both elements has been issued and/or exercised by July 31,
2019, they no longer were reflected on the
balance sheets, but the details of each were fully disclosed in Note 13 as
indicated on the Balance Sheet.
Question: Clarify to us why there was no change in the fair value in
the three months ended October 31,
2019 either to the contingent consideration outstanding at July 31,
2019 or the additional contingent
consideration recorded in connection with the MediSource and Pantheon
acquisitions as disclosed on page
22 of your October 31, 2019 10-Q.
Response: Per 805-30-25-5, the contingent consideration was valued as of the
date of acquisition. The contingent
consideration did not change materially between the date of acquisition on Aug.
1, 2019 and October 31, 2019. The
contingency payments based upon future earnings beginning in August 1, 2020
cannot be determined. In a future reporting
period, as the payout gets closer and the expectation and realization of the
payment more likely than not, then the
Company will revalue the fair value of contingency consideration in a future
filing. Currently, the anticipated change in
fair value is estimated to increase by approximately five 5% percent per
quarter.
Consolidated Statements of Changes in Stockholders' Equity, page 83
4. You state on pages 95 and 109 that in May 2019 you issued 4 million
shares of common stock in
exchange for 592,682 shares of Series A preferred stock of Olaregen.
You also state on page 104 that in
connection with the Amendment Agreement for the Veneto acquisition you
delivered 8,400,000 shares
on May 23, 2019.
Question or Request: Please tell us where the issuance of shares is
presented in the Statements of
Changes in Stockholders' Equity.
Response: The amounts are only reflected in the increase of Additional Paid-In
Capital. Common Stock did not increase.
as the shares had already been issued and held solely for the benefit of the
Company by a trust held by Joe Moscato TTEE
Friends of Generex Biotechnology Investment Trust U/A/D 4/2/2019, a trust
formed for the benefit of Generex and any
80% controlled subsidiary of the Company ("Generex Trust"). Several major
shareholders, Joseph Moscato, Lawrence
Salvo, BH-Sanford, LLC and Stephen Berkman entered into a stock control
agreement and together contributed
33,175,900 shares in the aggregate into the Generex Trust. Without their
contribution, it would have been difficult for
Generex to attract additional capital without significant dilution. Since the
shares were already outstanding and only
transferred from the Generex Trust to new owners, Common Stock was not
affected.
In SAB topic 5T provides guidance on the accounting for an expense settled by a
shareholder transferring shares to settle a
litigation. The guidance states: the value of the shares transferred should
be reflected as and expense in the company s
financial statements with a corresponding cred to contributed (paid-in) capital
. We believe the recording of the shares
transferred by the Friends of Generex Trust to settle the amended purchase
agreement with Veneto is analogous because
the amended purchase agreement was settled by a shareholder transferring shares
to settle an obligation of the Company.
You issued 1,953,257 common stock for the issuance of common stock for
conversion of debt and
recorded $18,404,731 of additional paid-in-capital.
Question or Request: Please provide us an analysis of the
transactions, including how the amount
recorded to additional paid-in capital was determined in light of your
stock price at the time of the
transactions.
Response: The transactions were valued at the time of conversion, except the
shares issued for the conversion of the
Veneto debt. The Friends of Generex Trust transferred the shares of the Company
and share of its wholly owned
subsidiary NuGenerex Immuno-Oncology, Inc. to settle the Vento debt. See Table
below:
TABLE: Comment 4 b - Reconciliation of "Issuance of common stock for conversion
of debt"
Price
Issue Number
per
Name Date Shares
C/S APIC Share Total
Common Stock
Page 11 of 33
Extinguishment of Debt (Related Party) 12/03/18 32,881 $
33 $ 624,377 $ 18.99 $ 624,410
Conversion of debt (Note) 07/08/19 205,897
206 292,374 $ 1.42 292,580
Conversion of debt (Note) 07/16/19 1,121,343
1,121 3,149,851 $ 2.81 3,150,972
Conversion of debt (Note) 07/19/19 565,000
565 853,941 $ 1.51 854,506
Conversion of debt (Note) 07/19/19 28,136
28 52,485 $ 1.87 52,513
Conversion of debt (Veneto) ** 04/30/19 **
** 13,431,703 ** 13,431,703
Total 1,953,257 $
1,953 $18,404,731 $18,406,684
** Contributed from the "Generex Trust"
Question or Request: Also, please reconcile the transactions to the
disclosure presented on page 83 and
elsewhere in the filing, as applicable.
Response: See discussion of tracing in table below.
Tracing of Statement of Changes in Stockholder's Equity
Line Item
Column Amount Note
Non
Note
1 Investment in subsidiary by noncontrolling interest
controlling 227,245
6
Interest
The total of $227,245 was not specifically reported in Note 6, but
separately reported as the increase in non
controlling interest related to additional contributions of NGDx was
$133,679, the remaining amount of $93,567 was
related to change in contributions less distributions of Class B Membership
Interests in Rapport.
Preferred Stock Note
2 Conversion of preferred series H
(63,000)
Shares 6
Common Stock
25,200,000
Shares
Additional
(25,197)
Paid in Capital
Reported under Series H and Series I Convertible Preferred Stock reported
the conversion of Series H including the
decrease of ($63,000) in Series H Preferred Shares and increase in Common
Stock Shares of 25,200,000. The net
change in par value in the amount of $25,197 between the decrease in
Preferred Shares in the amount of $3.00 and
the increase in par value of Common Stock Shares of $25,200 was not
separately reported in Note 6, but evident on
the Statement of Changes in Stockholder's Equity.
Preferred Stock Note
3 Conversion of preferred series I
(16,590)
Shares 6
Common Stock
6,639,045
Shares
Additional
(6,638)
Paid in Capital
Reported under Series H and Series I Convertible Preferred Stock reported
the sale of all the shares of Series I Preferred
Shares, the issuance of 3,276,000 Commons Shares to Mr. Moscato and
3,354,645 Common Shares to Mr. Salvo for a
total of 6,639,045 common shares as reported. The net change in par value in
the amount of $6,638 between the
decrease in Preferred Shares in the amount of $1.00 and the increase in par
value of Common Stock Shares of $6,639
was not separately reported in Note 6, but evident on the Statement of
Changes in Stockholder's Equity.
Note
Additional 6/
4 Exercise of call option to acquire noncontrolling interest
(6,951,015)
Paid in Capital Note
13
Non
controlling 5,565,285
Interest
In Note 13, the remaining fair value of the call option and the warrant
payable remaining at the time of exercise of the
call option and issuance of the warrant was charged against additional paid
in capital as an elimination of non
controlling interest for a loss of $6,951,015. In Note 6, Non controlling
Interest the net change of $5,565,285 was
Page 12 of 33
stated in the note, but the separate components the activity is, reconciling
to the balance on the Consolidated
Statement of Changes in Stockholder Equity . . .
Note
Common Stock 6/
5 Issuance of common stock payable
6,068,517
Shares Note
13
Common Stock
(1,967,657)
Payable
Additional
1,961,589
Paid in Capital
In Note 6, Common Stock the Company reported the issuance of 1,238,517
shares of common stock payable, and it
was reported that on January 18, 2017 pursuant to the NGDx acquisition, the
Company was obligated to issue
4,830,000 shares in a prior period issued during the year ended July 31, 2019
as noted and reported in Note 13,
related to the acquisition of NGDx, the Company reported 4,830,000 of common
stock. The combined total to the two
components equals 6,068,517 and the Common Stock at Par Value of $6,068, but
not separately reported on the
Statement of Changes in Stockholder's Equity. The amount of embedded value
Common Stock Payable of ($1,967,657)
and Additional Paid in Capital of $1,961,589 were not separately presented
in the aggregate in Note 6.
Additional Note
6 Issuance of stock options
3,006,203
Paid in Capital 16
The amount of $3,006,023 was not specifically mentioned, except in Note 16,
Stock Option Plans Noted a total of
compensation expense of $3,000,974 for the year ended July 31, 2019. The
remaining difference of $5,229 related to
options issued by Regentys as part of stock compensation.
Note
Common Stock 9/
7 Issuance of common stock for conversion of debt
1,953,257
Payable Note
13
Additional
18,404,731
Paid in Capital
These amounts were not specifically referenced in the Notes to the Financial
Statements, but the result of
accumulated conversions of debt issued for acquisitions and various converted
notes payable.
Note
Additional 9/
8 Conversion of debt to equity
15,176,629
Paid in Capital Note
13
These amounts were not specifically referenced in the Notes to the Financial
Statements, but the result of
accumulated conversions of debt issued for acquisitions and various converted
notes payable was reported:
Note 9 The note issued on May 25,
1,060,000
2018 was converted in May 2019
Note 9 Pursuant to the Regentys
187,500
acquisition, $187,500 was converted
Reported in the Unaudited Condensed
Interim Consolidated Statement of
Changes in Stockholder s Equity for
13,929,129
the period ending April 30, 2019 as
April 30, 2019 Conversion of Debt to
Equity Veneto
15,176,629Total
Additional Note
9 Antigen dividend
(1,070,456)
Paid in Capital 6
Non
controlling 1,070,456
Interest
The amount of $1,070,456 was referenced as fair value of the shares issued
for the stock dividend of NGIO shares on
February 25, 2019.
Page 13 of 33
10 Issuance of warrants
Additional 5,592,244Note
Paid in Capital 13
This amount was not specifically referenced in the Notes to the Financial
Statements, but the amount represents the
accumulated value of warrants issued in the Acquisition of NGIO and
subsequent changes in FV related to these
warrants
Non
Note
11 Acquisition of NCI of Regentys
controlling 9,873,553
Interest
13
Fair Value of the Regentys Acquisition This amount was not
specifically referenced in the Notes to the Financial
Statements, but the fair value table, the initial fair value of the Non
Controlling Interest with respect to the Regentys
Acquisition of $9,870,762 was disclosed less an additional allocation
adjustment of $2,791 which was not properly
footed on the table that reflected the adjusted total of 9,873,553, but
this amount as reported on the Statement of
Changes in Stockholder's Equity is correct.
Non
Note
12 Acquisition of NCI of Olaregen
controlling 11,999,559
Interest
13
Fair Value of the Olaregen Acquisition this amount was specifically
mentioned as the value of the Non Controlling
interest in the fair value table.
Additional Note
13 Acquisition of Olaregen Series A Preferred Stock
2,520,000
Paid in Capital 6
Non
controlling (4,520,000)
Interest
Non Controlling Interest Although the acquisition of the additional
Series A Preferred Stock in Olaregen was
disclosed, the value of the shares held in trust and issued was not
mentioned or the change in the non controlling
interest.
Common Stock
14 Reclassification of equity to liability
(201,294)None
Payable
This amount is not referenced in the Notes to the Financial Statements.
Additional
15 Extinguishment of derivative liability associated with convertible notes
1,570,174None
Paid in Capital
This amount is not referenced in the Notes to the Financial Statements.
Other
16 Currency translation adjustment
Comprehensive (1,206)None
Income
This amount is not referenced in the Notes to the Financial Statements,
except as part of the Statement of Operations
and Comprehensive (Loss) Income.
Revenue Recognition, page 86
5. You disclose several different types of revenue streams such as
product sales, pharmacy prescriptions,
laboratory services, and management services. Please revise to
provide the following or tell us why
additional disclosure is not required:
disaggregated revenue recognized pursuant to ASC
606-10-50-5 and ASC 606-10-55- 89 through
55-91, including disclosure relating to geographical
regions if applicable.
Response: Revenue in fiscal 2019 resulting from the acquisition of Veneto
Holdings, LLC on October 3, 2018 was
approximately $6.1 million or 98% of the approximately $6.2 million in revenue
recognized by the Company. The
Company s other subsidiaries are clinical stage development companies with
insignificant revenues in fiscal 2019. In
accordance with the guidance in 606-10-50-1, the Company considered the nature,
amount, timing and uncertainty of
revenue and cash flows to determine the necessity of disclosure guidance
contained in Topic 606. As explained in the
Basis for Conclusion of ASU 2014-09, the FASB does not intend the disclosures
described in the guidance to be a
checklist of minimum requirements. The Company believes that further
disaggregation of its revenue would not provide
investors with meaningful information regarding the nature, timing, amount and
uncertainty of revenue and cash flows.
The Veneto pharmacy services business accounted for $6.1 million or 98% of the
Company s revenue. The Company s
Page 14 of 33
other subsidiaries are clinical stage development companies with insignificant
revenues in fiscal 2019. (Olaregen -
$68,000 and NGDx- $37,000). As disclosed in Note 1 to the consolidated
financial statements, in March 2019 the
Company changed its business model to no longer utilize existing pharmacies.
Since that strategic shift the Veneto
subsidiary has generated minimal revenue.
significant judgments and changes in judgments
pursuant to ASC 606-10-50-17,
including how variable consideration was determined for
each significant revenue stream,
Response: The majority of the Company s revenues in fiscal 2019 derived from
pharmacy sales. This revenue is
recognized when the prescription is dispensed. Judgement is not required to
determine when this performance obligation
is met by the Company. Also, there is no variable consideration associated with
Pharmacy services. Finally, the nature of
Pharmacy Service revenue does not result in significant contract assets or
liabilities as payment is received and the time
the prescription in delivered to the patient. Further, we believe that
discussion of price and volume would not be a
meaningful disclosure in MD&A as almost the entire change in revenue resulted
from the Veneto acquisition.
contract balances pursuant to ASC 606-10-50-6 through
606-10-50-11, and
Response: Finally, the nature of Pharmacy Service revenue does not result in
significant contract assets or liabilities as
payment is received and the time the prescription in delivered to the patient.
additional disclosure in Management's Discussion and
Analysis quantifying each significant
factor that resulted in significant changes in revenue and
the extent to which the change
relates to price vs. volume. Refer to item 303(a)(3) of
Regulation S-K.
Response: In the MD&A, page 70, we disclosed The increase in revenue was
generated from Veneto which was
acquired during fiscal year 2019. We believe the disclosure in Management
s discussion and analysis is compliant with
the requirements of S-K 303(a)(iii) because the increase in revenue is due
solely to the introduction of new products or
services related to the Veneto acquisition. None of these increases and/or
decreases in revenue were a result of volume of
sales and not price. Therefore, a discussion of the extent to which such
increases are attributable to increases in prices or
increases in volume would not be material.
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies Research and
Development Costs, page 88
6. You state on page 11 that you have entered into agreements with Merck
and NSABP to conduct a Phase
II trial to evaluate the safety and efficacy of AE37 in combination
with KEYTRUDA. You also state that
you are advancing AE37 for the treatment of prostate cancer through a
licensing and research agreement
with Shenzhen.
For these agreements and any other agreements entered into subsequent
to July 31, 2019, tell us the date
of the agreements, the nature and significant terms of those
agreements, including the rights and
obligations of each party and any commitments and contingencies with
respect to the agreements.
Response:
(i) Clinical Trial Collaboration and Supply Agreement. Merck
Sharp & Dohme B.V., Antigen Express,
Inc. June 28, 2017
The following disclosure was provided in the Company s 8-K filed
August 1, 2017:
In June, 2017, the Company s wholly owned subsidiary, Antigen
Express, Inc. ( Antigen ) entered into a
Clinical Trial Collaboration and Supply Agreement (the
Collaboration Agreement ) with Merck Sharpe &
Dohme B.V. ( Merck ). The Collaboration Agreement provides for
Phase I clinical trial to evaluate the
pharmacokinetics, pharmacodynamics and preliminary
efficacy of administering Merck s
Keytruda (pembrolizumab) in combination with Antigen s AE37
cancer vaccine in patients with triple
negative breast cancer.
Page 15 of 33
The Collaboration Agreement provides for Antigen to sponsor the study
and to make the regulatory filings for
approval of the trial. Merck will supply Antigen with Keytruda for
the trial. Antigen will provide its AE37
cancer vaccine and will generally be responsible for the costs of the
trial.
A copy of this Agreement was filed as an Exhibit to the 8-K.
We did not believe the details of the agreement were required to be reiterated
in the 10-K pursuant to S-K item 101.
However, going forward we will include the detail stating that Antigen (now
NuGenerex Immuno-Oncology) is
responsible for the conduct and costs of the trials.
In Management s Discussion and Analysis, page 40, subheading NuGenerex
Immuno-Oncology (formerly Antigen
Express) Research& Development Expenditures in the 10-K, the Company disclosed
that the trial will require additional
funding estimated at roughly $1.5 million over the next three years. The
Company believes this is sufficient information
for the MD&A.
This Agreement was filed as a material agreement to an 8-K. Since the Company
has previously filed an 8-K on this,
we do not believe that it is necessary to amend the 10-K to file this exhibit.
(ii) Clinical Trial Agreement, Phase II Study, NSABP and Antigen
Express, November 20, 2018.
NSABP is the clinical research organization contracted to conduct the trials
under the Merck Agreement. Antigen express
is to pays for the trials, with a cap of $2,118,461.
The following disclosure was provided in the Company s 8-K filed 11.26.18:
On November 20, 2018, the Company s wholly owned subsidiary, Antigen
Express, Inc. ( Antigen ) entered into
a Clinical Trial Agreement with NSABP Foundation, Inc. ( NSABP ).
Pursuant to the Clinical Trial Agreement,
NSABP will conduct a Phase II Study to evaluate efficacy of
administering Merck Sharpe & Dhome s ( Merck )
Keytruda (pembrolizumab) in combination with Antigen s AE37 cancer
vaccine for the treatment of metastatic
triple negative breast cancer. While Merck is not a party to the
Clinical Trail Agreement, Merck is expected to
provide Keytruda for the study pursuant to the Clinical Trial
Collaboration and Supply Agreement between
Antigen and Merck.
An initial payment from Generex in the amount of $340,000 is due by
December 20, 2018. If the study runs
the full anticipated term, Generex will be responsible for an
aggregate $2,118,461.
The initial payment of $340,000 was paid by Generex. The future payments
required under the NSABP agreement will
be funded through the proceeds received from the Shenzhen licensing agreement
discussed below. We did not believe the
details of the agreement were required to be reiterated in the 10-K pursuant to
S-K item 101. However, going forward we
will include the detail stating that Antigen (now NuGenerex Immuno-Oncology) is
responsible for the conduct and costs
of the trials. As noted above, the aggregate cost of the trial in the next
three years is disclosed in the MD&A pursuant to
Item 303 of S-K.
This agreement should be filed as an Exhibit to the 10-K as it was filed as a
material agreement to an 8-K. Since the
Company has previously filed an 8-K on this, we do not believe that it is
necessary to amend the 10-K to file this
exhibit.
(iii)License and Research Agreement between Antigen Express, Inc. and
Shenzhen Bioscien Pharmaceuticals
Co., Ltd. November 29, 2017.
The following was disclosed in our 8-K filed 12.11.17:
The Company s wholly owned subsidiary, Antigen Express, Inc. (
Antigen ), entered into a License and
Research Agreement (the License Agreement ) with Shenzhen
BioScien Pharmaceuticals Co., Ltd.,
( Shenzhen ) dated November 29, 2017. Under the License Agreement,
Antigen granted Shenzhen an exclusive
license (the License ) to use Antigen s patents, know-how, data
and other intellectual property relating to
Antigen s AE37 peptide to develop and sell products for the
prevention and treatment of prostate cancer in
China (including Taiwan, Hong Kong and Macau).
Page 16 of 33
In exchange for the License, Shenzhen has agreed, inter alia, to the
following financial consideration:
a $700,000 non-refundable initial payment;
milestone payments of $1,000,000 each upon completion of
Phase II and Phase III studies;
a milestone payment of $2,000,000 upon regulatory
approval of a product covered by the License; and
a 10% royalty on net sales, provided the patents are in
force and there are no approved generic
equivalents.
Shenzhen, generally, will be responsible for conducting clinical
trials, securing Chinese regulatory approvals, and
marketing in China for all products developed under the Agreement.
Because Generex has limited obligations going forward under this Agreement, we
believe the following to excerpts from
the 10-K are sufficient disclosure for purposes of item 101 and 303.
Risk Factors Page 43:
Additionally, we have out-licensed AE37 for the immunotherapeutic
treatment of prostate cancer to Shenzhen
Bioscien ( Shenzhen ), a Chinese biopharmaceutical company that
has agreed to fund the development of AE37
for prostate cancer through a clinical development program conducted
under ICH guidelines that would allow
global registration of the AE37 product in the prostate cancer
indication. The development deal includes upfront
and milestone payments to Generex, together with a double-digit
royalty on sales of AE37 in China in exchange
for the rights to AE37 for prostate cancer treatment in China, with
the ex-China global rights remaining with us.
Though Shenzhen has made an upfront payment of $700,000 to us, there
is no guarantee that they will continue
to fulfill their contractual obligations to advance the clinical
development of AE37 for prostate cancer. Further,
there is no guarantee that AE37 will prove to be safe and
efficacious for the treatment of prostate cancer, or that
the product will be approved by regulatory authorities.
Page 11:
In addition to the breast cancer program, NuGenerex has conducted a
Phase I clinical trial in prostate cancer,
enrolling thirty-two HER-2/neu+, castrate-sensitive, and
castrate-resistant prostate cancer patients to
demonstrate safety and strong immunological response to AE37. We are
advancing AE37 for the treatment of
prostate cancer through a licensing and research agreement with
Shenzhen BioScien Pharmaceuticals Co., Ltd.,
for which NuGenerex has received a $700,000 upfront payment, with
additional future milestone and royalty
payments.
This agreement was filed as a material agreement to an 8-K. Since the Company
has previously filed an 8-K on this, we
do not believe that it is necessary to amend the 10-K to file this exhibit.
(iv) Collaborative Agreement among Generex Biotechnology
Corporation and Beijing Zhonghua
Investment Fund Management Co LTD and Sinotek-Advocates
International Industry Development
(Shenzhen) Co., LTD for li-Key Peptide For The 2019
Coronavirus Disease Application
The following is disclosed in the Company s 8-K filed March 2, 2020:
On February 28, 2020, Generex Biotechnology Corporation ( Generex
) entered into a Collaboration Agreement
(the 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 Generex s
majority owned subsidiary, NuGenerex Immuno-Oncology, Inc. ( 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
Page 17 of 33
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 will pay, for the
benefit of NGIO, the following:
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.
The parties activities under the Agreement, including the clinical trials,
are subject to approval under China Technology
Import Contract Management Regulations as well as the Chinese version of the
FDA.
This Agreement is included as an Exhibit 10.90 (by reference to the 8-K
exhibit) to Generex s 10-Q for the quarter ended
January 31, 2020. We will include a description in our next 10-K if the
agreement is still material at that time.
Tell us your consideration of providing additional disclosure in the
filing in accordance with ASC 450, 730,
and 808;
Response: On June 28, 2017, the Company s wholly owned subsidiary NuGenerex
Immuno- Oncology (Formerly known
as Antigen Express, Inc.) entered into a Clinical Trial Collaboration and
Supply Agreement (the Agreement ) with
Merck Sharp & Dohme B.V. ( Merck ). The Collaboration Agreement provides
for Phase I clinical trial to evaluate the
pharmacokinetics, pharmacodynamics and preliminary efficacy of administering
Merck s Keytruda (pembrolizumab) in
combination with Antigen s AE37 cancer vaccine in patients with triple
negative breast cancer. When preparing its July
31, 2019 financial statements, The Company analyzed the Agreement against
Accounting Standards Codification ( ASC )
Topics 450 Contingencies ( ASC 450 ), 730 Research and Development ( ASC
730 ) and ASC 808 Collaborative
Arrangements ( ASC 808 ).
The Company determined that the Agreement is a collaborative arrangement as
defined in ASC 808 because (a) both the
Company and Merck are active participants in the activity and both are subject
to the risks and rewards related to the
outcome of the clinical trial contemplated by the Agreement. The Company began
enrolling patients in the trial in
September 2019. As of November 12, 2019, the date the Company s financial
statements were issued, the company had
not enrolled a significant number of patients or incurred material costs
related to this collaborative agreement. Further
there have not been any transactions between Merck and the Company related to
the Agreement.
There is only one possible contingency subject to the Guidance in ASC 450. The
contingent loss could occur if Merck
terminated the Agreement pursuant to certain sections of the Agreement, then
the company could be liable to Merck for
the cost of manufacture of the Merck compound produced for the trial. As of the
date the financial statements were issued,
Merck had not terminated the agreement therefore accrual of any liability under
this agreement is not warranted. The
Company believes that disclosure of this potential claim is unnecessary because
until Merck terminates the Agreement
there is not an indication that a loss is reasonably possible.
The Company will account for any costs it incurs pursuant to the Agreement as
Research and Development and will
record a charge against income or loss from operations in the period incurred,
in accordance with the guidance contained
in ASC 730.
The Company will continue monitor the need for additional disclosures under ASC
450, and ASC 808 in its financial
statements.
Page 18 of 33
Tell us your consideration of providing additional disclosure in the
filing in accordance with items 101,
303, and 601 of Regulation S-K; and any other applicable guidance.
Response: The Company believes the disclosure of the Agreements on page 11
meets the requirements of Regulation S-K
item 101. Since expenditures pursuant to this agreement are not material,
discussion of these Agreements Under S-K item
303 Management s Discussion and Analysis is not necessary. Each Agreement is
analyzed below for S-K 101, 303 and
601 considerations:
(i) Clinical Trial Collaboration and Supply Agreement. Merck Sharp
& Dohme B.V., Antigen Express,
Inc. June 28, 2017
The following disclosure was provided in the Company s 8-K filed August 1,
2017:
In June, 2017, the Company s wholly owned subsidiary, Antigen
Express, Inc. ( Antigen ) entered into a
Clinical Trial Collaboration and Supply Agreement (the Collaboration
Agreement ) with Merck Sharpe &
Dohme B.V. ( Merck ). The Collaboration Agreement provides for
Phase I clinical trial to evaluate the
pharmacokinetics, pharmacodynamics and preliminary efficacy
of administering Merck s
Keytruda (pembrolizumab) in combination with Antigen s AE37 cancer
vaccine in patients with triple negative
breast cancer.
The Collaboration Agreement provides for Antigen to sponsor the study
and to make the regulatory filings for
approval of the trial. Merck will supply Antigen with Keytruda for
the trial. Antigen will provide its AE37
cancer vaccine and will generally be responsible for the costs of the
trial.
A copy of this Agreement was filed as an Exhibit to the 8-K.
We did not believe the details of the agreement were required to be reiterated
in the 10-K pursuant to S-K item 101.
However, going forward we will include the detail stating that Antigen (now
NuGenerex Immuno-Oncology) is
responsible for the conduct and costs of the trials.
In Management s Discussion and Analysis, page 40, subheading NuGenerex
Immuno-Oncology (formerly Antigen
Express) Research& Development Expenditures in the 10-K, the Company disclosed
that the trial will require additional
funding estimated at roughly $1.5 million over the next three years. The
Company believes this is sufficient information
for the MD&A.
This Agreement was filed as a material agreement to an 8-K. Since the Company
has previously filed an 8-K on this, we
do not believe that it is necessary to amend the 10-K to file this exhibit..
(ii) Clinical Trial Agreement, Phase II Study, NSABP and Antigen
Express, November 20, 2018.
NSABP is the clinical research organization contracted to conduct the trials
under the Merck Agreement. NGIO (formerly
Antigen) express agreed to pay for the trials an amount not to exceed
$2,118,461. Including: Start-up Activities in the
amount of $340,000 (an upfront non-refundable payment expensed at the time
paid), Accrual and Treatment Period in the
amount of $1,458,461 (in the future additional liabilities to be recorded when
incurred pursuant to the agreement to be
amortized over the estimated life of the study) , Follow-Up Period in the
amount of $240,000 and the Primary Endpoint in
the amount of $80,000. The initial $340,000 was paid by Generex. The remaining
payments are expected to be funded
through the collaboration and licensing agreement with Shenzhen Bioscien
Pharmaceuticals Co., Ltd. noted below.
The following disclosure was provided in the Company s 8-K filed 11.26.18:
On November 20, 2018, the Company s wholly owned subsidiary, Antigen
Express, Inc. ( Antigen ) entered into
a Clinical Trial Agreement with NSABP Foundation, Inc. ( NSABP ).
Pursuant to the Clinical Trial Agreement,
NSABP will conduct a Phase II Study to evaluate efficacy of
administering Merck Sharpe & Dhome s ( Merck )
Keytruda (pembrolizumab) in combination with Antigen s AE37 cancer
vaccine for the treatment of metastatic
triple negative breast cancer. While Merck is not a party to the
Clinical Trail Agreement, Merck is expected to
provide Keytruda for the study pursuant to the Clinical Trial
Collaboration and Supply Agreement between
Antigen and Merck.
Page 19 of 33
An initial payment from Generex in the amount of $340,000 is due by
December 20, 2018. If the study runs the
full anticipated term, Generex will be responsible for an aggregate
$2,118,461.
We did not believe the details of the agreement were required to be reiterated
in the 10-K pursuant to S-K item 101.
However, going forward we will include the detail stating that Antigen (now
NuGenerex Immuno-Oncology) is
responsible for the conduct and costs of the trials. As noted above, the
aggregate cost of the trial in the next three years is
disclosed in the MD&A pursuant to Item 303 of S-K.
This agreement was filed as a material agreement to an 8-K. Since the Company
has previously filed an 8-K on this, we do
not believe that it is necessary to amend the 10-K to file this exhibit.
(iii) License and Research Agreement between Antigen Express, Inc.
and Shenzhen Bioscien
Pharmaceuticals Co., Ltd. November 29, 2017.
The following was disclosed in our 8-K filed 12.11.17:
The Company s wholly owned subsidiary, Antigen Express, Inc. (
Antigen ), entered into a License and
Research Agreement (the License Agreement ) with Shenzhen
BioScien Pharmaceuticals Co., Ltd.,
( Shenzhen ) dated November 29, 2017. Under the License Agreement,
Antigen granted Shenzhen an exclusive
license (the License ) to use Antigen s patents, know-how, data
and other intellectual property relating to
Antigen s AE37 peptide to develop and sell products for the
prevention and treatment of prostate cancer in China
(including Taiwan, Hong Kong and Macau).
In exchange for the License, Shenzhen has agreed, inter alia, to the following
financial consideration:
a $700,000 non-refundable initial payment;
milestone payments of $1,000,000 each upon completion of
Phase II and Phase III studies;
a milestone payment of $2,000,000 upon regulatory approval
of a product covered by the License; and
a 10% royalty on net sales, provided the patents are in
force and there are no approved generic
equivalents.
Shenzhen, generally, will be responsible for conducting clinical
trials, securing Chinese regulatory approvals, and
marketing in China for all products developed under the Agreement.
Because Generex has limited obligations going forward under this Agreement, we
believe the following to excerpts from
the 10-K are sufficient disclosure for purposes of item 101 and 303.
Risk Factors Page 43:
Additionally, we have out-licensed AE37 for the immunotherapeutic
treatment of prostate cancer to Shenzhen
Bioscien ( Shenzhen ), a Chinese biopharmaceutical company that
has agreed to fund the development of AE37
for prostate cancer through a clinical development program conducted
under ICH guidelines that would allow
global registration of the AE37 product in the prostate cancer
indication. The development deal includes upfront
and milestone payments to Generex, together with a double-digit
royalty on sales of AE37 in China in exchange
for the rights to AE37 for prostate cancer treatment in China, with
the ex-China global rights remaining with us.
Though Shenzhen has made an upfront payment of $700,000 to us, there
is no guarantee that they will continue
to fulfill their contractual obligations to advance the clinical
development of AE37 for prostate cancer. Further,
there is no guarantee that AE37 will prove to be safe and efficacious
for the treatment of prostate cancer, or that
the product will be approved by regulatory authorities.
Page 20 of 33
Page 11:
In addition to the breast cancer program, NuGenerex has conducted a
Phase I clinical trial in prostate cancer,
enrolling thirty-two HER-2/neu+, castrate-sensitive, and
castrate-resistant prostate cancer patients to demonstrate
safety and strong immunological response to AE37. We are advancing
AE37 for the treatment of prostate cancer
through a licensing and research agreement with Shenzhen BioScien
Pharmaceuticals Co., Ltd., for which
NuGenerex has received a $700,000 upfront payment, with additional
future milestone and royalty payments.
In addition, the Company appropriately recorded the upfront licensing fee as
Licensing Revenue in its year ended July 31,
2018 financial statements. Since the most significant income statement item
included in the Company s July 31, 2018 and
2019 financial statements relate to the changes in fair value of contingent
consideration ($39 million and $19 million for
the years ended July 31, 2018 and 2019, respectively), the Company believes
that discussion of this item in its
Management Discussion and Analysis required by Regulation S-K Item 303 will not
impact a reasonable investors
decisions regarding the Company.
This agreement should be filed as an Exhibit to the 10-K as it was filed as a
material agreement to an 8-K. Since the
Company has previously filed an 8-K on this, we do not believe that it is
necessary to amend the 10-K to file this exhibit.
Collaborative Agreement among Generex Biotechnology Corporation and Beijing
Zhonghua Investment Fund
Management Co LTD and Sinotek-Advocates International Industry Development
(Shenzhen) Co., LTD for li-Key
Peptide For The 2019 Coronavirus Disease Application
The following is disclosed in the Company s 8-K filed March 2, 2020:
On February 28, 2020, Generex Biotechnology Corporation ( Generex
) entered into a Collaboration Agreement
(the 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 Generex s
majority owned subsidiary, NuGenerex Immuno-Oncology, Inc. ( 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 will pay, for the
benefit of NGIO, the following:
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.
The parties activities under the Agreement, including the clinical trials,
are subject to approval under China Technology
Import Contract Management Regulations as well as the Chinese version of the
FDA.
This Agreement is included as an Exhibit 10.90 (by reference to the 8-K
exhibit) to Generex s 10-Q for the quarter ended
January 31, 2020. We will include a description in our next 10-K if the
agreement is still material at that time.
Page 21 of 33
Tell us your consideration of providing additional disclosure in the filing in
accordance with ASC 450, 730, and 808;
Response: On June 28, 2017, the Company s wholly owned subsidiary NuGenerex
Immuno- Oncology (Formerly known
as Antigen Express, Inc.) entered into a Clinical Trial Collaboration and
Supply Agreement (the Agreement ) with
Merck Sharp &Dohme B.V. ( Merck ). The Collaboration Agreement provides for
Phase I clinical trial to evaluate the
pharmacokinetics, pharmacodynamics and preliminary efficacy of administering
Merck s Keytruda (pembrolizumab) in
combination with Antigen s AE37 cancer vaccine in patients with triple
negative breast cancer. When preparing its July
31, 2019 financial statements, The Company analyzed the Agreement against
Accounting Standards Codification ( ASC )
Topics 450 Contingencies ( ASC 450 ), 730 Research and Development ( ASC
730 ) and ASC 808 Collaborative
Arrangements ( ASC 808 ).
The Company determined that the Agreement is a collaborative arrangement as
defined in ASC 808 because (a) both the
Company and Merck are active participants in the activity and both are subject
to the risks and rewards related to the
outcome of the clinical trial contemplated by the Agreement. The Company was
scheduled to begin enrolling patients in
the trial in September 2019. As of November 12, 2019, the date the Company s
financial statements were issued, the
company had not enrolled a significant number of patients or incurred material
costs related to this collaborative
agreement. Further there have not been any transactions between Merck and the
Company related to the Agreement.
There is only one possible contingency subject to the Guidance in ASC 450. The
contingent loss could occur if Merck
terminated the Agreement pursuant to certain sections of the Agreement, then
the company could be liable to Merck for
the cost of manufacture of the Merck compound produced for the trial. As of the
date the financial statements were issued,
Merck had not terminated the agreement therefore accrual of any liability under
this agreement is not warranted. The
Company believes that disclosure of this potential claim is unnecessary because
until Merck terminates the Agreement
there is not an indication that a loss is reasonably possible.
The Company will account for any costs it incurs pursuant to the Agreement as
Research and Development and will
record a charge against income or loss from operations in the period incurred,
in accordance with the guidance contained
in ASC 730.
The company will continue monitor the need for additional disclosures under ASC
450, and ASC 808in its financial
statements.
7. With respect to your historical business discussed on page 42 and
elsewhere in your filing, clarify the
dates in which you completed significant research and development
milestones.
Response: NuGenerex Immuno-Oncology R&D milestones:
June 28, 2017 - Signed Agreement with Merck
November 28, 2018 - Signed NSABP agreement for FB-14
protocol - AE37 + Keytruda in TNBC
June 24, 2019 - 1st patient enrolled in FB-14 Protocol"
Tell us your consideration of providing additional disclosure in the filing.
For example, tell us when you completed
the Phase IIb clinical trial of AE37 immunotherapeutic peptide vaccine with the
Ii-Key technology in over 300
women with breast cancer.
Response: The final study closeout for the Phase IIb trial was 11/15/19 - see
attached. We obtained the database from
Henry Jackson Foundation at that time. The study results were previously
published by the principal investigator Elizabeth
Mittendorf, MD (Attachment)
Note 12- Goodwill and Intangible Assets, page 100
8. With respect to your acquisition of Veneto on
October 3, 2018 we note the following:
You state on page 66 that you are currently in litigation
with Veneto regarding the assets
and business transferred, many of the contractual arrangements
you assumed have been
Page 22 of 33
terminated, and you have had to rebuild the business
relationships and the structure of the
contractual relationships you took over from Veneto. You also
state on page 45 that the
MSO was built through relationships between physicians and the
previous Veneto
administration.
You state on page 69 that the arbitration action alleges that
Veneto never transferred the
ownership rights in at least one pharmacy to NDS and that
pharmacy was a necessary
element in the operation of other assets transferred by Veneto.
You state on page 94 that certain assets were never transferred
due to regulatory
impositions and that NuGenerex is not responsible for repayment
of a loan on assets not
transferred.
You state on page 85 that in March 2019 you changed your
business model to no longer
utilize their existing pharmacies which resulted in you breaking
your existing lease
agreements with your pharmacies. In this respect we note your
disclosure on page 95 which
states that $292,681 of disposals pertain to Veneto and was
mostly the result of your shift in
business operations during March 2019.
You disclose on page 105 that you revalued the assets during
the measurement period in
accordance with ASC 805-10-25-14 and reduced goodwill
accordingly. However, your
disclosure, as noted above, appears to imply that the assets
recorded may need further
consideration, including potentially an impairment for events
occurring after the acquisition
date such as the change in your business model.
Please provide us your analysis regarding the valuation of the assets
recorded in connection with the
Veneto acquisition, including goodwill. Your analysis should at a
minimum include the following:
the nature of each significant asset acquired in the
acquisition
Response:
A. Assets of (a) seven dispensing pharmacies, (b) a wholesale
pharmacy purchasing company, and
(c) an in-network laboratory. These assets included:
Tangible property, furniture, fixtures and equipment,
Cash on hand
Accounts and notes receivable
Inventory (including office supplies)
Tenant improvements
Goodwill, software
Intellectual property
Prepaid items
Contracts
Personal property leases
Books and records (including all customer lists and
all patient lists to the extent
transferable under applicable Law, but excluding any
patient medical records and
files to the extent required to be retained by the
Seller and any communications
which are subject to attorney-client privilege)
Seller policies and procedures relating to its
business
Telephone and email addresses
All permits and certificates of need to the extent
transferable to the Buyer
B. Equity and management interest in management services
organization (MSO) business.
C. Two additional ancillary service companies 1) the HDDL
Laboratory in Prescott Arizona, and
the DMEiq business which a scalable SAAS for Physician Practices.
the status of ownership and rights for each
significant asset at the time of the
acquisition and at your balance sheet date,
Page 23 of 33
Significant
Significant Estimated
Assets at the
Assets per Value as
time of
Amended of July 31,
Acquisition
Agreement 2019
Cash and cash equivalents $ 2,410,150
$ 2,410,150 $ *
Accounts receivable, net 1,935,078
1,490,638 33,556*
Inventory, net 1,068,856
1,068,856 1,095*
Prepaid expenses 95,804
95,803 *
Property and equipment, net 652,590
652,590 147,903*
Other receivables 1,014,316
1,014,316 *
Notes receivable - LT 1,387,763
1,387,763 *
Other assets, net 25,745
25,745 *
Intangible assets, net 7,145,603
846,603 621,350*
Goodwill 25,177,930
15,051,769 15,051,769*
* These working capital assets increase and decreased due to normal operations
from the date of acquisition through July
31, 2019. The amounts are likely new amounts as reflected by operations and the
original receivables, trade payables
collected and/or paid.
Response: At the time of acquisition and at the balance sheet date, the Company
owned all of the assets referenced above
other than the licenses to operate the pharmacies and any pharmaceutical
inventory required to be owned by a
pharmaceutical licensee. The Company had an agreement with the sellers to
transfer the pharmacy licenses, and prior to
such transfer, for the sellers to operate the pharmacies under contractual
terms with the Company. However, once the
Company realized it would be impossible to have the pharmacy licenses
transferred due to the seller s legal and regulatory
problems, the Company renegotiated the purchase price and payment terms as
reflected in the amended purchase price
allocation and the pharmacy assets mainly working capital assets had already
been consumed in operations. The Company
still owns and controls the MSO model and operations which is expected to
continue.
The table above reflects the significant assets at the time of original
acquisitions, followed by the value of the significant
assets at the time the purchase agreement was amended, and lastly the remaining
value of the assets held as of July 31,
2019. During the normal course of the operations, the current assets acquired
from the pharmacies (cash, accounts
receivable, prepaids, inventory and other elements of working capital) were
either consumed in operations when collected,
paid or written off. As pharmacy operations ceased, any associated fixed assets
and other assets (furniture & fixtures,
equipment and leasehold improvements) were written off. A single note
receivable still currently owned and possessed by
Generex was impaired due to non-collectability and expensed currently.
how each asset was affected by your change in business
model,
Response: The current assets as discussed above were either consumed in
operations when collected, paid or written off
as each pharmacy was closed and any associated fixed asset. The primary assets
that were affected by the change in the
business model were non-compete agreements and goodwill. These assets were
revalued during the measurement period
to reflect the new business model that retains the MSO operations without the
pharmacy assets and operations reflected in
the reduced purchase price and the allocation to goodwill. As of the July 31,
2019, the reduced value of the goodwill was
tested again for any impairment and no further reduction in the fair value
during the measurement period and/or
impairment was required.
how each asset was affected by any terminated contractual
arrangements,
Response: The primary significant assets which were affected by terminated
contractual arrangement were various
leasehold improvements associated with leases held by the pharmacy operations.
These assets were written off upon
closing of these pharmacies during the normal course of operations. The other
significant asset that were affected by the
terminated contractual arrangements was the value allocated to the non-compete
agreement associated with the sellers.
Page 24 of 33
the extent to which you have had to rebuild business
relationships, including the network of
physician partners in the MSO acquired from Veneto, and
Response: The operations of the MSO was limited as a result, but the MSO is
still in place and the future utilization of the
MSO still provide future income and considered the cornerstone of the
acquisition. Although the assets and operations
from Veneto Group pharmacies have ceased, the operations planned in the future
will utilize third-party pharmacies to
fulfill prescription orders without the need to have company owned pharmacies
and achieve the same business model
without the full capital requirements of creating or acquiring additional
pharmacies.
the effect of the ongoing litigation with Veneto
Response: After the acquisition, nearly all the tangible assets acquired from
Veneto were consumed through operations
and little or no tangible assets remain related to the Veneto Acquisition. The
intangible assets acquired as discussed above
were revalued during the measurement period pursuant to an amended purchase
agreement that reduced the total
consideration paid resulting in a change in the purchase price allocation
computation and the fair value of the assets
acquired. Except for the cost of litigation, the Company believes that is
unlikely that any further losses due to the outcome
of the litigation and could only recover costs, or shares to be returned to
treasury. The Company does not believe that the
litigation will affect its ability to utilize and operate the MSO, but any
change in the MSO could cause additional losses
due to a further impairment of the remaining Goodwill which would be reported
in a future filing if such action is taken,
but the Company has no plans to abandon the MSO business plan.
Note 13 - Acquisitions Veneto, page 104
9. You appear to consolidate the assets acquired of Veneto. You state on
page 45 the MSO acquired from
Veneto is named Rapport Services, LLC ( Rapport ), which is a
physician- owned limited liability
company (or LLC) requiring an at-risk equity investment from
physicians or physician groups that wish to
participate in the network. The Rapport physician investors own 99% of
Rapport, and Generex (through
your wholly-owned subsidiary NuGenerex Distribution Solutions 2) owns
1% and serves as the managing
director of the LLC.
Please provide us with your analysis as to why consolidation is
consistent with ASC 810.
Response: Under the scope of ASC 810-10 Consolidation, Variable Interest
Entities the Company reviewed the MSO's
operating agreement (Rapport) and concluded that because its sole
decision-making authority over MSO determined that it
has a variable interest in Rapport and that Rapport is a VIE. The Company has
both the power to direct the activities of
Rapport that most significantly impacts Rapport s economic performance with
the obligation to absorb benefits from or
losses of the Rapport that could potentially be significant. The Company
consolidates Rapport as a VIE as it is considered
to be the primary beneficiary. While the individual MSOs have more diverse
ownership, their ownership does not have the
ability to direct the activities of the entity, nor does their ownership have
the ability to determine the timing or amount of
distributions. As a result, the non-controlling interest represents the
physician ownership. The Company consolidates
entities in which it or its wholly owned subsidiary is the general partner or
managing member and the limited partners or
members, respectively, do not have substantive participating rights to overcome
the Company s control.
If Veneto is not considered a variable interest entity, please provide
your assessment of consolidation
under the entities controlled by contract in ASC 810-10-25-60.
Response: Except for Rapport, the MSO (VIE) discussed above, the remaining
operations known as Veneto was acquired
pursuant to an "asset purchase agreement" and such assets and operations were
deemed to be a business which the
Company obtained a controlling financial interest through one or more of its
wholly owned subsidiaries.
Regentys and Olaregen, page 106
10. Please provide us the following with respect to the $2,459,000 of
in-process research and development
recorded in the Olaregen acquisition and $3,391,050 acquired in the
Regentys acquisition:
Page 25 of 33
the specific nature and fair value of each significant
in-process research and development
project acquired.
Response:
For Regentys, the primary value was attributed to Extracellular Matrix Hydrogel
( ECMH ), a proprietary, patented UC
treatment that protects damaged tissue from waste flow and promotes tissue
regeneration and healing rather than
suppressing the immune system as other treatments currently do. ECMH is a
first-in-class, non-pharmacologic, non-
surgical treatment option for patients suffering from Ulcerative Colitis.
Regentys. Regentys was to initiate the clinical
studies necessary to obtain that approval of the FDA 510K in the future
including any associated intellectual property,
licensed patents and in-process research& development costs.
For Olargen, the primary value was attributed to Excellagen , a flowable
dermal matrix that is a 510K FDA cleared
medical device for utilization for a variety of wound types that has recently
been awarded a U.S. patent with a 17 year
right of exclusivity. Excellagen is a highly-purified Type 1 collagen-based,
flowable gel formulation approved for 17
types of wounds, including partial and full thickness wounds, pressure ulcers,
venous ulcers, diabetic ulcers, chronic
vascular ulcers, tunneled/undermined wounds, surgical wounds (donor
sites/grafts, post-Mohs surgery, post-laser surgery,
podiatric, wound dehiscence), trauma wounds (abrasions, lacerations, second-
degree burns, and skin tears) and draining
wounds, and limited value attributed to Cord Products and Exassome, and
associated intellectual property, licensed patents
and in-process research& development costs. Limited value was attributed to two
additional product lines:
the completeness, complexity and uniqueness of the projects
at the acquisition date.
Response:
For Regentys:
Completeness- 85% of the product development, 80% of
preclinical work, 10% of Clinical
Prep.
Complexity- While there are challenges in scaling up any
product from the science lab to
commercial production, the product is not complex with the
base product having been
commercialized for 20 yrs. All other facets of clinical,
production and commercialization are
not considered highly complex
Uniqueness- The company in-licensed certain patented
hydrogel technology and co-
developed technology with the University of Pittsburgh. As
previously discussed, the ECM
component of ECMH has been around for quite some time.
Formulating ECM into a
hydrogel is a patented process. The application to treat
Ulcerative Colitis is also novel and
unique for which several patents have been filed and several
jurisdictions have issued claims.
For Olaregen: At the time of acquisition, Excellagen was FDA 510K cleared, but
was not yet deemed to be commercially
viable. On March 20, 2020 Excellagen , was Awarded by the Strategic
Acquisition Centers (SAC) a Biologic Blanket
Purchase Agreement (BPA) Contract and IDIQ (Indefinite Delivery & Indefinite
Quantity) contract from the National VA
Approval through the SAC committee. The BPA contract facilitates the sales and
distribution of Excellagen across the VA
system s 165 hospitals and over 1000 clinics. As a result, the acquisition,
Excellagen became commercially viable and had
a single initial sale made to the Veterans Administration Hospitals (VA), In
some VA hospitals, additional research and
testing is required to permit its use in room temperature applications in
VA hospitals that do not have refrigeration for
storage of medical products. The Cord Products which can be sold in the
marketplace requires additional research and
development to remain commercially viable and competitive in order to generate
future sales. Exassome can also be sold
in the marketplace, but further research and development costs are expected to
combine Exassome and Excellagen for the
development of Excellasome which had not begun its initial trials and still
requires funding.
the nature, timing and estimated costs of the efforts
necessary to complete the projects, and the
anticipated completion dates.
Response: For Regentys: The Company expects to finalize product development in
the next 4 months, produce a clinical
batch of product, conduct a 20-person pilot study in early 2021 which will take
through the end of 2021. During this time
frame the Company expects to incur approximately $7M of expenses. An additional
$8M will be required to complete a
Page 26 of 33
pivotal human clinical study and prepare regulatory submissions for approval to
commercialize the product. If successful,
Regentys product would be commercialized by 2023.
For Olaregen: Excellagen requires no future research and development and is
now currently active in product sales. The
Cord Products requires additional funding to remain viable in the competitive
market to be initiated in 2020 provided there
is ongoing interest within the marketplace. Excellasome requires a Phase I
trial pending funding to be provided by
Generex and/or through a collaboration agreement with an industry partner
anticipated to begin during 2020, but the
completion and commercialization of Excellasome is not expected to be
completed or become commercially viable for
several years.
the risks and uncertainties associated with completing
development on schedule, and consequences
if it is not completed timely.
Response: For both Olaregen and Regentys the biggest risk is receipt of funds
to continue development. Continued delays
will result in loss of our exclusive license which would significantly impair
the value of the company.
what appraisal method was used to value the projects.
Response: For Regentys: The Intellectual Property/Licensed Patents/In-Process
R&D Assets were valued using Cost
Accumulation Methods. The Non Competes were valued as a group using a with
or without method which compares
the value of the Company with the agreement in place thereby assuming
no competition from the seller and without
the agreement in place thereby assuming the seller competes with the
Company.
For Olaregen, we valued Intellectual Property/Patents/In Process Research &
Development intangible assets using the
Relief from Royalty Method (assuming obsolescence and assuming a terminal
value) . Utilizing the fair value defined in
Statement of Financial Accounting Standard No. 820 10 35 37 Fair Value
Measurements and Disclosures.
the significant appraisal assumptions, such as: the
period in which material net cash inflows
from significant projects are expected to commence;
For Regentys: The significant assumptions included:
The developer s profit was measured as the profit margin for Drugs
(Biotechnology) Drugs (Pharmaceutical)
Healthcare Products development/manufacturing firms determined to be
16.68% based on earnings as a percent
of revenue.
The entrepreneurial incentive was measured as the return on capital
for venture capital firms using the average of
First stage/prototype at 50%. These measures were sourced from
Pellegrino Associates and NYU with original
data sources from Morningstar, Capital IQ, and Bloomberg as well as QED
Research and Harvard Business
School Publishing.
No un booked direct costs were provided to the historical costs.
Inflation rates in the 1% to 3% range.
A 5-year life for the product research and development with
obsolescence rates of 10% to 20% annually.
For Olaregen, we used the Income approach to estimate a value of the Company
s intangible assets based on management
approved projections of future cash flows using 5 year financials projections
and multiple methods (including Relief from
Royalty Methods; Multi Period Excess Earnings Methods; With/Without Methods;
and Residual Cash Flow Methods)
assuming a risk adjusted weighted discount rates; management projections; and
industry based long term growth rates.
The projections utilized in our valuation included adjustments including
revenue/expense growth rates; capital
expenditures; working capital; and taxes. The financial projections utilized in
the valuation of the IP & Non Compete
intangible assets are based the following assumptions:
Olaregen projected sales of $ 3,288,000 in 12 trailing months ( TTM
) to $37,845,000 in the TTM through 2021
with managements growth rates after 2019.
Page 27 of 33
Projecting those revenues with management growth rates of 283.67% for
2020 and increasing long term to
200.00% in 2021 to 28.57% in 2024 resulting in $ 113,535,000 in sales.
Industry growth rates of 10.580% are
used following 2024.
Costs of goods sold are expected at the Company projected rate in
2019 of 80.170% to 5.784% by the end of
2023.
Operating expenses are 104.4% to 23.4% from 2019 through 2023.
After tax net margins excluding the non controlling interest
distributions are
approximately 40.8% by 2023 and 20.4% by 2028 on the incremental
revenue generated by the acquired assets.
Taxes are estimated at 24.000% of net income.
The forecast primary included revenue and sales associated with
Excellagen and limited revenues associated
with Cord Products and Exassome.
No value was attributed to Excellasome as no Phase I trial has
been scheduled and/or initiated.
material anticipated changes from historical pricing,
margins and expense levels; and
For Regentys, The reference data is based on market analysis of the 2830
Drugs (Biotechnology); 2834 Drugs
(Pharmaceutical); and 8060 Healthcare Products industries.
For Olaregen, the reference data is based on market
analysis of the 2830 Drugs (Biotechnology); 2834
Drugs (Pharmaceutical); and 8060 Healthcare Products
industries. the risk adjusted discount rate
applied to the project s cash flows.
Response:
For Regentys, the following stages and investor expected rate of return for
each stage were considered:
1st Stage companies performing market studies, testing,
prototypes, and perhaps manufacturing limited
amounts of product. (Rate of Return from 30% to 60%)
2nd Stage companies expanding where a viable product exists, and
a market has been established. (Rate of
Return from 25% to 50%).
3rd Stage rapid ramp up of sales and profit margins are
acceptable, but internally generated cash is insufficient
to meet expansion needs. (Rate of Returns 15% to 30%).
The assets and consulting services acquired generated moderate historical
revenue growth, consequently, we viewed
Regentys transitioning from 1st stage to 2nd stage and that a discount rate in
a range of 25% to 50% was appropriate to
use in the valuation of the Company. The Company growth is highly dependent on
the investment in sales/marketing
while leveraging shared resources of the acquired businesses to bring the
Company to significant revenue generation and
positive fair value using the income approach. The discount rate within this
range was quantified using a Build up
approach.
For Olaregen, revenues were projected to increase with long-term growth based
on industry levels. Gross margins were
projected to remain mostly flat at historical levels. Net margins were
projected to increase based on a portion of operating
expenses being fixed with only inflation adjustments. We evaluated four
scenarios ranging from meeting management
expectations to product failure. The cash flows were discounted at a 23.7% WACC
and the scenarios were weighted
equally (25% each) to account for the risk of success. Regentys expected
material cash inflows start in 2022-2023 as sales
ramp up. Revenues were projected to increase as market penetration increases in
the short term and at industry growth
rates in the long-term. Gross margins and net margins were projected to remain
mostly flat. Upfront R&D expenses
through 2021 were projected above $14M. The cash flows were discounted at a
23.1% WACC and a decision tree
methodology was applied with a cumulative success rate to complete all phases
of approval to product launch at 3.9%.
In periods subsequent to the purchase of significant
in-process research and development, tell us
the status of efforts to complete all of your significant
in-process research and development
projects, including those other than the assets acquired in
the Olaregen and Regentys acquisitions,
Page 28 of 33
and the impact of any delays on your expected investment
return, results of operations and
financial condition.
Response: For Regentys: Since acquisition, Regentys has advanced the regulatory
and clinical components to commence
the pilot studies with the completion of the product development. However,
delays in funding have slowed the final
product development steps. The impact in delays caused by Coronavirus have not
been fully determined.
For Olaregen: Since acquisition, Excellagen became commercially viable with
active sales. The impact related the
COVID-19 pandemic, and the reduction of elective surgeries and medical
procedures, the sales of Excellagen have
slowed, but the long-term viability has not been impacted. The further funding
is required to permit its use in a room
temperature application required in many VA hospitals will impact the
overall potential sales associated with the VA.
The Cord Products requires additional funding so that research and development
can be completed to allow it to remain a
commercially viable and competitive. Without funding, the Cord Productions
would lack the ability to generate future
sales which could significantly reduce it Regentys to full exploit and generate
revenues from Cord Products. No value was
attributed to Excellasome as part of the valuation of In-Process Research and
Development. Therefore, the lack of
funding would not cause of reduction in the anticipated values, but long-term
funding provided to complete this project
could increase positively the value and return on the investment in Regentys.
Regentys, page 107
11. You state that you acquired a 51% interest in Regentys for total
consideration of $15,000,000, which
consisted of a $400,000 cash payment and a promissory note of
$14,600,000. Please provide us the
following:
a calculation of how the non-controlling interest of
$9,870,762 was determined,
Response: The total consideration paid is based on a convergence method in an
Option Pricing Model ( OPM ) using the
Regentys capital structure and assigned value of each class of stock and equity
instrument outstanding at the time of
acquisition. See table below. The overall value of Regentys was determined to
be $28,689,865. The net purchase price for
51% of the Regentys equaled $14,745,205 which included $14,345,205 representing
the discounted value of the note
payable of $14,600,000) and the original $400,000 cash deposit. Therefore, the
initial calculation of the fair value of the
non-controlling interest was determined to be $13,944,660. As part of the
Regentys equity structure, an allocation of
$4,073,898 was made to Redeemable non-controlling interest. The remaining
value was reported at the non-controlling
interest in the amount of $9,870,762 ($13,944,660 less $4,073,898).
an analysis of the methodology and assumptions used as
described on page 108 to determine the
redeemable non-controlling interest of $4,073,898 were
determined,
Response: The Option Pricing Model was utilized to determine the fair value of
the Series A Preferred shares as of
1/7/19 based on the various equity linked instruments in the capital structure
of Regentys, including the 12,048,161
newly issued common shares issued to Generex. The assumptions utilized in the
OPM included a 3 term to
liquidity, a corresponding risk free rate based on the term of 2.53%, 0%
dividends, and a volatility based on the
term of 101% (based on comparable company volatility analysis).
Based on the structure of the Company s equity linked instruments, we
developed breakpoints based on the
conversion prices and exercise prices of the various convertible debt,
preferred stock, and outstanding options and
warrants. These breakpoints were used to allocate value as each instrument
would be exercised/converted as it was
in the money. The first tranche, which consists of stock prices below the
lowest conversion price of the convertible
debt and preferred stock, all value is assigned to the liquidation
preference/convertible debt balance. The Black
Scholes option pricing model was utilized to estimate the value of each
tranche by utilizing the breakpoint as the
exercise price.
To allocate the value to the equity linked instruments, we calculated
allocation percentages for each equity linked
instrument. The value of each tranche is determined by subtracting the value of
the previous tranche, which is
Page 29 of 33
multiplied by the applicable allocation percentages, and summed to yield the
total value of each equity linked
instrument.
We iterated the total Regentys enterprise value until the value of the shares
received was equal to the consideration
paid. This yielded a fully-diluted market cap of $28,689,865. This yielded a
per share value for the Series A shares
at $1.46 with a total value of $4,073,898.
Common
Shares/ Share Value
Value Per Total Value
Units Equivalent
Per-Share/Unit CSE To Class
Convertible Debt 0 -
0.00 0.00 0
Series A Preferred 2,793,192 2,793,192
1.46 1.46 4,073,898
Series B Preferred 0 -
0.00 0.00 0
Common Stock 18,419,897 18,419,897
1.22 1.22 22,543,288
Options at $0.02 69,000 69,000
1.21 1.21 83,480
Options at $0.04 165,000 165,000
1.20 1.20 197,411
Options at $0.28 78,000 78,000
1.07 1.07 83,196
Options at $0.29 6,000 6,000
1.06 1.06 6,373
Options at $0.34 171,000 171,000
1.04 1.04 177,905
Options at $0.36 4,000 4,000
1.03 1.03 4,128
Options at $0.41 627,000 627,000
1.01 1.01 634,503
Options at $0.71 118,000 118,000
0.91 0.91 107,451
Options at FV 979,375 979,375
0.79 0.79 778,232
Warrants at $1.50 0 -
0.00 0.00 0
Total
0.00 28,689,865
and how the fair value of the assets acquired of $907,833
equates to the amount of the assets
disclosed in the table on page 107.
Response: The line Total Fair Value of Assets Acquired is the sum total
of all the lines and amounts above in the table
on Page 107 and the line is missing an underscore line above to indicate a
subtotal of the above.
Olaregen, page 108
12. You state on pages 5 and 109 that in January 2019 you acquired a 51%
interest in Olaregen for total
consideration of $400,000 of cash and a note receivable of
$11,472,664. You state on page 113 that your
interest was increased to 62% in May 2019 upon acquisition of the
Series A preferred stock in Olaregen in
exchange for 4 million shares of your common stock plus the issuance
of a $2 million promissory note. In
August 2019, subsequent to your balance sheet date, your interest
increased to 76%.
Please provide us the following:
a calculation of how the non-controlling interest was
determined,
Response: The initial acquisition agreements provided for 51% on fully diluted
basis to insure Generex would always
have the controlling interest in Olaregen if an option or warrant was
exercised. The non-controlling interest calculation
was based upon the outstanding shares of Olaregen. Due to subsequent
acquisitions of stock from third parties, Generex
increased its interests (percentage) in Olaregen to 62% when it acquired the
592,683 outstanding Series A shares and
further to 76% when it acquired an additional 900,000 shares.
Post-
Fully Post-
Acquisition
Post Diluted Acquisition
of 900,000
Closing % of Series A
Undiluted % Shares Undiluted %
Olaregen Therapeutics LLC 900,000 14% 900,000
14% 0
All Other Shareholders 1,466,187 23% 1,466,187
23% 1,466,187 23%
Page 30 of 33
Series A 592,683 9%
0% 0%
Generex Biotechnology 3,282,632 51%
3,875,315 62% 4,775,315 77%
Total Shares Outstanding 6,241,502 96%
6,241,502 100% 6,241,502 100%
Outstanding Warrants 177,800 3%
Employee Options 60,000 1%
Fully Diluted 6,479,302 100%
how the fair value of the assets acquired of $2,461,400
equates to the amount of the assets
disclosed in the table on page 109, and
Response: The line Total Fair Value of Assets Acquired is the sum total
of all the lines and amounts above in the table
on page 109 and the line is missing an underscore line above to indicate a
subtotal of the above
how you are accounting for the additional interest
purchased in May and August 2019.
Response: The line Total Fair Value of Assets Acquired is the sum total
of all the lines and amounts above in the same
table and the line is missing an underscore line above to indicate a subtotal
of the above. The additional interest purchased
in May and August 2019 was accounted for as an equity transaction in accordance
with ASC 810-10-45-23.
Item 9A. Controls and Procedures, page 114
13. You state in your Management's Report on Internal Control Over
Financial Reporting on page 115 that
you have evaluated the effectiveness of your disclosure controls and
procedures and concluded that your
disclosure controls and procedures were not effective. Please present
your assessment of the effectiveness
of the disclosure controls and procedures under the subheading for
"Evaluation of Disclosure Controls
and Procedures" and a separate assessment relating to your assessment
of internal controls over financial
reporting under the Management's Report on Internal Control over
Financial Reporting subheading.
Refer to Items 307 and 308 of Regulation S-K.
Please also revise your Risk Factor on page 42 to address your
determination of effectiveness of the
disclosure controls and procedures and internal control over financial
reporting separately.
Response:
Based on the Staff s request, please see the following:
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that
information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in the SEC s rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure
that information required to be disclosed in our reports filed or
submitted under the Exchange Act is
accumulated and communicated to our management, including our Chief
Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure.
Our management, with the participation of our principal executive
officer and our principal financial
officer, has evaluated, as of the end of the period covered by this
Form 10-K, the design adequacy and
operating the effectiveness of our disclosure controls and procedures
(as defined in as required by Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act )).
Based on that evaluation, our principal executive officer and
principal financial officer have concluded that
our disclosure controls and procedures as of such date were not
effective at ensuring that information
required to be disclosed by us in the reports that we file or submit
under the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified
in the Securities Exchange
Commission s rules and forms.
Page 31 of 33
On March 26, 2019 the Company issued a restatement of its Quarterly Report on
form 10-Q for the quarter
ended January 31, 2019. After investigation and inquiry, the company
implemented new procedures
designed to prevent the circumstances from arising in the future, which was
previously disclosed and
publicity available on EDGAR. The company believes that the primary increase in
acquisition activities
which resulted in a temporary gap of accounting resources.
To address these deficiencies, the Company implemented additional procedures
designed to accelerate the
tempo of upwardly reporting subsidiaries and the visibility of receipt of
reports by the parent company,
plus recently hired of a corporate controller and increased its outsourced
financial reporting accounting
services to enhance the controls and financial reporting process. In addition,
the Company is implementing
a new centralized accounting system to provide cohesion across the enterprise
and standardize the close
process across all subsidiaries
MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for the preparation of the financial
statements and related
financial information appearing in this Annual Report on Form 10-K. The
financial statements and notes
have been prepared in conformity with U.S. GAAP. The management of the Company
is also responsible
for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a-
15(f) and 15d-15(f) under the Exchange Act. A company s internal control over
financial reporting is
defined as 0 PTe events, and there can be no assurance that any design will
succeed in achieving its stated
goals under all potential future conditions.
As of July 31, 2019, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in and as required by Rules
13a-15(e) and 15d-15(e) under the Exchange Act) and concluded that, subject to
the inherent limitations,
our disclosure controls and procedures were not effective due to the existence
of several significant
deficiencies culminating in material weaknesses in our internal control over
financial reporting because of
inadequate segregation of duties over authorization, review and recording of
transactions, lack of a
centralized accounting system, as well as the financial reporting of such
transactions.
To address these internal control deficiencies, management performed additional
analyses and other
procedures to ensure that the financial statements included herein fairly
present, in all material respects,
our financial position, results of operations and cash flows for the periods
presented.
We have been working and are currently working to remediate the material
weaknesses described above,
including assessing the need for additional remediation steps and implementing
additional measures to
remediate the underlying causes that gave rise to the material weaknesses by
(i) adding additional
personnel in the future when working capital permits; (ii) implementing a new
centralized accounting
system to provide cohesion across the enterprise and standardize the close
process across all subsidiaries;
(iii) working with our independent registered public accounting firm to refine
our internal procedures; and
(iv) performing a complete review of its internal controls during 2020.
We believe we have taken appropriate and reasonable steps to make the necessary
improvements to
remediate these internal control deficiencies, however we cannot be certain
that our remediation efforts
will ensure that our management designs, implements and maintains adequate
controls over our financial
processes and reporting in the future or that the changes made will be
sufficient to address and eliminate
the material weaknesses previously identified. Our inability to remedy any
additional deficiencies or
material weaknesses that may be identified in the future could, among other
things, have a material adverse
effect on our business, results of operations and financial condition, as well
as impair our ability to meet
our quarterly, annual and other reporting requirements under the Securities
Exchange Act of 1934 in a
timely manner, and require us to incur additional costs or to divert management
resources.
As of July 31, 2015, the Company became eligible to report as a smaller
reporting company. As a smaller
reporting company under the SEC rules and regulations, we are currently not
subject to the requirements of
Page 32 of 33
independent auditor attestation of management s assessment of our internal
controls over financial
reporting set forth in Section 404(b) of the Sarbanes Oxley Act of 2002 because
the Dodd Frank Wall
Street Reform and Consumer Protection Act signed into law on July 21, 2010
permanently exempted
companies that are not accelerated filers or large accelerated filers
under the SEC rules from Section
404(b) requirements; therefore, this Annual Report does not include an
attestation report of the Company s
registered public accounting firm regarding internal control over financial
reporting.
Related Risk Factor on page 42, broken into separate risk factors:
Our disclosure controls and procedures may not be effective in future periods
as a result of existing or
newly identified material weaknesses in disclosure controls and procedures.
Effective disclosure controls and procedures are necessary for us to ensure
that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and
reported within the time periods specified in the SEC s rules and forms
provide reasonable assurance with
respect to our financial report. If we cannot provide reasonable assurance with
respect to our financial
reports, our reputation and operating results could be harmed. Pursuant to the
Sarbanes-Oxley Act of 2002,
we are required to furnish management s evaluation of the effectiveness of
such controls and procedures.
If we fail to maintain the adequacy of our controls and procedures, including
any failure to implement
required new or improved controls and procedures, or if we experience
difficulties in their implementation,
our business and operating results could be adversely impacted, we could fail
to meet our reporting
obligations, and our business and stock price could be adversely affected.
At July 31, 2019, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act ) and concluded that
our disclosure controls and procedures were not effective at ensuring that
information required to be
disclosed by us in the reports that we file or submit under the Exchange Act,
is recorded, processed,
summarized and reported within the time periods specified in the Securities
Exchange Commission s rules
and forms. We have not made a formal determination that our disclosure control
and procedures are
effective since that date.
We believe we have taken appropriate and reasonable steps to make the necessary
improvements to
remediate these deficiencies, however we cannot be certain that our remediation
efforts will ensure that our
management designs, implements and maintains adequate controls and procedures
in the future or that the
changes made will be sufficient to address and eliminate the material
weaknesses previously identified.
Our inability to remedy any additional deficiencies or material weaknesses that
may be identified in the
future could, among other things, have a material adverse effect on our
business, results of operations and
financial condition, as well as impair our ability to meet our quarterly,
annual and other reporting
requirements under the Exchange Act in a timely manner, and require us to incur
additional costs or to
divert management resources.
Our internal controls over financial reporting may not be effective in future
periods as a result of
existing or newly identified material weaknesses in internal controls.
Effective internal controls are necessary for us to provide reasonable
assurance with respect to our
financial reports and to effectively prevent fraud. If we cannot provide
reasonable assurance with respect
to our financial reports and effectively prevent fraud, our reputation and
operating results could be harmed.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to furnish a report
by management on
internal control over financial reporting, including management s assessment
of the effectiveness of such
control. If we fail to maintain the adequacy of our internal controls,
including any failure to implement
required new or improved controls, or if we experience difficulties in their
implementation, our business
and operating results could be adversely impacted, we could fail to meet our
reporting obligations, and our
business and stock price could be adversely affected.
At July 31, 2019, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of
the design and operation of our internal controls and procedures (as defined in
Rules 13a-15(f) and 15d-15
Page 33 of 33
(f) under the Securities Exchange Act of 1934, as amended (the
Exchange Act ) and concluded that,
subject to the inherent limitations, our internal controls were not
effective due to the existence of several
significant deficiencies culminating in material weaknesses in our
internal control over financial reporting
because of inadequate segregation of duties over authorization, review
and recording of transactions, as
well as the financial reporting of such transactions. We have not made
a formal determination that our
disclosure control and procedures are effective since that date.
We believe we have taken appropriate and reasonable steps to make the
necessary improvements to
remediate these deficiencies, however we cannot be certain that our
remediation efforts will ensure that our
management designs, implements and maintains adequate controls over our
financial processes and
reporting in the future or that the changes made will be sufficient to
address and eliminate the material
weaknesses previously identified. Our inability to remedy any
additional deficiencies or material
weaknesses that may be identified in the future could, among other
things, have a material adverse effect
on our business, results of operations and financial condition, as well
as impair our ability to meet our
quarterly, annual and other reporting requirements under the Exchange
Act in a timely manner, and require
us to incur additional costs or to divert management resources.
14. You refer to a restatement which was included in your Form 10-Q/A for
the period ended January 31,
2019. In this respect, please tell us the basis for eliminating the
intercompany revenue of $1,406,529
against the general and administrative expenses as noted on page 12 of
the 10-Q/A.
Response: As part of the acquisition of Veneto, there were services between
provided between various subsidiaries. As
part of a group pharmacy operations, one of the entities was providing
administrative services for another subsidiary
designated as Revenue - VSA Fees - Intercompany while another subsidiary
recorded an expense of VSA Fees
Intercompany. Similarly, intercompany fees were charged for Adjudication
Services recorded as income by on subsidiary
and expenses by another subsidiary, and the same for intercompany MSO Fees.
Since income and expense was being
recognized between subsidiaries consolidated by the Company, then these
amounts are required to be eliminated. In the
previous filing, these expenses were reflected as general administration
services as were deemed management services.
Thank you for your attention.
Sincerely yours,
Gary M. Miller
Gary A. Miller
cc: Joseph Moscato, Chief Executive Officer
Mark Corrao, Chief Financial Officer
Anthony Crisci, Esq.