Veneto Acquisition

3 Months Ended

Oct. 31, 2018

Notes to Financial Statements

Veneto Acquisition

Note 11 – Veneto Acquisition:

On October 3, 2018, we entered into an Asset Purchase Agreement (the “Agreement”) with Veneto Holdings, L.L.C. (“Veneto”) to purchase certain assets of Veneto.  

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

The aggregate purchase price for the Assets, is $35,000,000 including the Promissory Note.  At the Second Closing, the Company will pay the principal of the Promissory Note plus interest to Veneto, (ii) $9,000,000 will be paid by the Company into a trust or other fiduciary account acceptable to Veneto to be used exclusively for satisfaction of certain contingent liabilities of Veneto and subsidiaries of Veneto not being acquired by the Company, (iii) $3,000,000 will be paid by the Company into an escrow account to secure potential obligations of Veneto in respect of the Second Closing date working capital and under the indemnification provisions of the Agreement and (iv) the balance will be payable directly to Veneto in cash.

The Company has also entered into a temporary fee-for-service arrangement with Veneto and one of its subsidiaries for Veneto to provide management, personnel, operational, administrative and other services with respect to the First Closing Assets pending the Second Closing. At the Second Closing, all of Veneto personnel providing these services are expected to become employees or consultants of the Company, and Veneto will no longer provide the services.

As the First Closing, the Promissory Note issued to Veneto in the original principal amount of $15,000,000 with interest at an annual rate of 5.0% and guaranteed by Generex and Joseph Moscato, and secured by a first priority security interest in the Company’s assets other than the First Closing Assets was subsequently cancelled upon the issuance of the a new promissory note on the Second Closing in the principal amount of $35,000,000 with an annual of 12.0% and guaranteed by Generex and Joseph Moscato. There was $62,500 of accrued interest on the $15,000,000 note in the three months ended October 31, 2018. (See Subsequent Event Note 13)

	“First Closing” completed on October 3, 2018		“Second Closing” completed on November 1, 2018		Total
Cash and cash equivalents	$	2,410,150	$	—	$	2,410,150
Accounts receivable, net		1,935,078		—		1,935,078
Inventory, net		1,068,856		—		1,068,856
Prepaid expenses		95,803		—		95,803
Property and equipment, net		652,590		—		652,590
Other receivables		1,014,316		—		1,014,316
Notes receivable - LT		1,387,763		—		1,387,763
Other assets, net		61,348		—		61,348
Intangible assets, net		—		7,110,000		7,110,000
Total assets acquired		8,625,905		7,110,000		15,735,905
Total current liabilities		2,509,887		—		2,509,887
Notes payable		—		3,403,948		3,403,948
Total liabilities assumed		2,509,887		3,403,948		5,913,835
Net identifiable assets acquired		6,116,018		3,706,052		9,822,070
Goodwill		8,883,982		16,293,948		25,177,930
Total consideration transferred	$	15,000,000	$	20,000,000	$	35,000,000

19

Fair Value of the Veneto Acquisition

The following table summarizes the allocation of the preliminary purchase price as of the Veneto acquisition as of the First Closing and the Second Closing:

The significant intangible assets identified in the purchase price allocation discussed above include developed software and technology, referral base (recurring revenue from the MSO investments and their use of Company owned pharmacies) and non-compete agreements with continued employment of key employees. Tradenames and trademarks were not valued as tradenames and trademarks will not be maintained going forward. To value the developed software and technology, the Company utilized the relief from royalty method, a form of the income approach to value the developed software and technology which assumes a limited technology life and market share adjusted by assumed obsolescence with a terminal value. The referral base was valued using a multi-period excess earnings method, a form of the income approach. The Company utilized the with and withhout method, a form of the income approach to value non-compete agreements with Generex.

The preliminary amounts assigned to the identifiable intangible assets, the estimated useful lives, and the estimated amortization expense related to these identifiable intangible assets are as follows:

	Preliminary Fair Value		Average Estimated Life		Amortization for Year Ended July 31, 2018
Developed Software/Technology	$	780,000		5	$	156,000
Referral Base		3,920,000		15		261,333
Non-compete agreements		2,410,000		3		803,333
	$	7,110,000			$	1,220,667

Intangible assets are generally amortized on a straight-line basis over the useful lives of the assets.

Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. Goodwill for Veneto Acquisition was $8.9 million as of the date of the First Closing and $16.3 million as of the date of the Second Closing.