Restatement of previously issued condensed interim consolidated financial statements

6 Months Ended

Jan. 31, 2019

Notes to Financial Statements

Restatement of previously issued condensed interim consolidated financial statements

Note 2 – Restatement of previously issued condensed interim consolidated financial statements

The Company determined that its previously issued condensed interim consolidated financial statements as of and for the three and six months ended January 31, 2019, as originally filed with the Securities and Exchange Commission on March 25, 2019, should no longer be relied upon since the auditors had not completed their interim review and their comments were not incorporated into the documents as filed primarily related the recent acquisitions of the assets and operations Veneto Holdings LLC, valuation and purchase price allocations of the acquisition of Regentys and Olaregen and related notes and disclosures.

The effects of these restatement adjustments on (i) the Company’s Condensed Interim Consolidated Balance Sheet as of January 31, 2019, (ii) the Company’s Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended January 31, 2019, (iii) the Company’s Condensed Interim Consolidated Statement of Stockholders’ Equity/(Deficit) for the six months ended January 31, 2019 and (iv) the Company’s Condensed Consolidated Statement of Cash Flows for the six months ended January 31, 2018 are presented below.

The restatement adjustments are described below: 

• Our balance sheets as of January 31, 2019 by recording an overall increase in Total Assets and Total Liabilities, Redeemable Non-Controlling Interest, and Stockholder’s Equity by approximately $310,000 as a result of recording approximately $4.0 million of Redeemable Non-Controlling Interest, and reclassification of $3.0 million of Additional Paid-in Capital and a reduction of approx. $1.8 million of Preferred Series A Stock related to the acquisition of Regentys Corporation; and by recording approximately $750,000 of Additional Paid-in Capital, and reclassification and reduction of approx. $1.0 million of Preferred Series A Stock and additional reclassifications of accounts receivable and an increase in cash of approximately $187,000 related to the recent acquisitions. Goodwill and intangible assets had a net decrease of approx. $19,000 which included: increase of $143,000 to account for the reduction of impairment of Grainland’s intangible assets, increase of $400,000 related to the purchase price allocation adjustment of goodwill for the Regentys acquisition, decrease of $250,000 related to the purchase price allocation adjustment of goodwill for the Olaregen acquisition, decrease of approx. $6,000 to goodwill which should have been classified as other current assets and decrease of intangible assets of approx. $305,000 to record amortization on Veneto intangible assets.

• Our statements of operations for the three months and six months ended January 31, 2019. As a result of the restatement, our consolidated net income for the three months and six months ended January 31, 2018 increased by approximately $167,000, and a reclassification and elimination of intercompany accounts and transactions resulting in a reduction of approximately $1.4 million of Revenues and General and Administrative Expenses related to the operations of the Veneto acquisition, and a reduction and reclassification of an Impairment of a Long-Lived Asset by approximately $142,000 related other activities.

• Our statement of cash flows for the six months ended January 31, 2019 resulted in an increase in cash of approximately $187,000 primarily from changes in the operations of the acquired assets from Veneto acquisition.

• Additional notes and comments follow each following statement comparing the financial statements and amounts previously filed with the restated financial statements and amounts.

Impacts of restatement

The effects of the restatement on the line items within the Company’s condensed interim consolidated balance sheets as of January 31, 2019 are as follows:

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
	January 31, 2019
	As previously reported			Adjusted				Restated
ASSETS
Current Assets
Cash and cash equivalents	$	2,186,377		$	187,444		(a) (b)	$	2,373,821
Accounts receivable, net		2,466,138			(170,077	)	(a)		2,296,061
Inventory, net		1,099,508			—				1,099,508
Other current assets		280,271			6,168		(c)		286,439
Total current assets		6,032,294			23,535				6,055,829
Property and equipment		645,607			—				645,607
Notes receivable - noncurrent (Note 10)		1,406,051			—				1,406,051
Goodwill and intangible assets (Note 11)		64,939,874			(18,713	)	(c)		64,921,161
Patents, net		21,987			—				21,987
Other assets, net		18,821			—				18,821
TOTAL ASSETS	$	73,064,634		$	4,822			$	73,069,456
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities
Accounts payable and accrued expenses	$	16,917,095		$	(53,104	)	(d)	$	16,863,991
Notes payable, current (Note 10 and 12)		40,919,835			48,486		(d)		40,968,321
Loans from related parties (Note 4)		13,200			—				13,200
Other current liabilities		—			4,620		(d)		4,620
Deferred tax liability (Note 10)		1,930,495			(540	)	(e)		1,929,955
Total Current Liabilities		59,780,625			(538	)			59,780,087
Notes payable - noncurrent		149,637			(149,637	)	(f)		—
Other noncurrent liabilities		—			171,562		(g)		171,562
Derivative liability - convertible notes (Note 12)		2,545,810			(192,671	)	(h)		2,353,139
Derivative liability - warrants (Note 12)		—			192,671		(h)		192,671
Warrants to be issued (Note 10)		—			—				—
Total Liabilities		62,476,072			21,387				62,497,459
Redeemable non-controlling interest (Note 8)		—			4,073,898		(i)		4,073,898
Stockholders’ Equity (Note 7)
Series H Convertible Preferred Stock, $.001 par value; authorized 109,000 shares, 0 and 63,000 issued shares at January 31, 2019 and July 31, 2018, respectively		—			—				—
Series I Convertible Preferred Stock, $.001 par value; authorized 6,000 shares, 0 and 16,590 issued shares at January 31, 2019 and July 31, 2018, respectively		—			—				—
Regentys Series A Redeemable Convertible Preferred Stock, $0.0001 par value; authorized 2,793,192 shares, issued shares at January 31, 2019 and July 31, 2018, respectively.		1,815,575			(1,815,575	)	(j)(c)		—
Olaregen Series A Preferred Stock, $0.001 par value; authorized 592,683 and 0 shares at January 31, 2019 and July 31, 2018, respectively; 592,683 and 0 issued shares at January 31, 2019 and July 31, 2018, respectively		1,000,000			(1,000,000	)	(k)(c)		—
Common stock, $.001 par value; authorized 750,000,000 and 750,000,000 shares at January 31, 2019 and July 31, 2018, respectively; 60,362,164 and 22,430,121 issued and outstanding at January 31, 2019 and July 31, 2018, respectively		60,362			—				60,362
Common stock payable		201,294			—				201,294
Additional paid-in capital		384,414,252			2,966,116		(l)(c)(j)(k)		387,380,368
Accumulated deficit		(403,460,965	)		(167,104	)	(b)(c)(e)(f)(g)		(403,628,069	)
Accumulated other comprehensive income		800,446			—				800,446
Non-controlling interest (Note 7)		25,757,598			(4,073,900	)	(i)		21,683,698
Total Stockholders’ Equity		10,588,562			(16,565	)			10,571,997
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY	$	73,064,634		$	4,822			$	73,069,456
Going Concern (Note 1)
Commitments & Contingencies (Note 5)
Subsequent Events (Note 12)

(a) Adjustment of $170,077 to (1) increase "Cash" and (2) decrease "Accounts receivable" to recognize the collection of $170,077 of accounts receivables related to the Veneto acquired assets

(b) Adjustment of $17,367 to decrease "Cash" to record the payment of interest related to the Veneto acquired assets.

(c) Adjustment recorded to reduce the impairment of long-lived assets of $230,932 to $88,311 related to the closing of the Grainland pharmacy, (2) increase goodwill by $400,000 related to the purchase price allocation of the Regentys acquisition, (3) decrease goodwill by $250,000 related to the purchase price allocation of the Olaregen acquisition, (4) decrease goodwill by $6,168 which should have been classified as other current assets, (5) decrease intangible assets by $305,166 to recognize amortization expense on Veneto intangible assets.

(d) Adjustment to (1) reclassify $53,104 of "Accrued interest" to "Notes payable, current" related to the acquisition of Olaregen, and (2) reclassify $4,620 from "Notes payable" to "Other current liability".

(e) Adjustment of $540 of "Deferred tax liability" related to the Olaregen purchase price allocation.

(f) Adjustment of $149,637 to reduce "Notes payable" to (1) reclassify $140,271 related to deferred rent against "General and administrative expenses", and (2) to reclass $9,366 to "Other noncurrent liabilities" related to finance leases.

(g) Adjustment of $171,562 to increase "Other noncurrent liabilities" to (1) reclassify $162,196 related leasehold tenant allowance, and (2) $9,366 related to finance leases from "Note payable - noncurrent" to "Other noncurrent liabilities."

(h) Adjustment to reclassify $192,671 from "Derivative liability - convertible notes" to "Derivative liability - warrants".

(i) Adjustment to reclassify $4,033,898 from "Non-controlling interest" to 'Redeemable non-controlling interest" related to the purchase price allocation of the Regentys acquisition.

(j) Adjustment to eliminate  $1,815,575 of Regentys Series A Preferred Stock in conjunction with the revised purchase price allocation of the Regentys acquisition

(k) Adjustment to eliminate  $1,000,000 of Olaregen Series A Preferred Stock in conjunction with the revised purchase price allocation of the Olaregen acquisition

(l) Adjustment to reduce "Additional paid-in capital" (APIC) of $2,996,116 due to a reduction of APIC of (1) $2,215,575 related to the Regentys acquisition, and (2) $750,541 related to the Olaregen acquisition.

The effects of the restatement on the line items within the Company’s condensed interim consolidated statements of operations and comprehensive income for the six months ended January 31, 2019 are as follows:

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
	Six Months Ended January 31, 2019
	As previously reported			Adjusted				Restated
Revenue, net	$	6,567,942		$	(1,406,529	)	(a)(b)	$	5,161,413
Total Revenue		6,567,942			(1,406,529	)			5,161,413
Cost of Goods Sold		2,882,300			—				2,882,300
Gross Profit		3,685,642			(1,406,529	)			2,279,113
Operating expenses
Research and development		991,005			—				991,005
General and administrative		9,868,110			(1,096,805	)	(b)(a)		8,771,305
Total operating expenses		10,859,115			(1,096,805	)			9,762,310
Operating Loss		(7,173,473	)		(309,724	)			(7,483,197	)
Other Income (Expense):
Interest expense		(2,262,936	)		—				(2,262,936	)
Interest income		768			—				768
Changes in fair value of contingent purchase consideration (Note 10)		15,147,591			—				15,147,591
Change in fair value of derivative liability (Note 12)		142,725			—				142,725
Impairment of long-lived assets (Note 10)		(242,139	)		142,620		(c)		(99,519	)
Other income, net		(47,436	)		—				(47,436	)
Net Income		5,565,100			(167,104	)			5,397,996
Net loss attributable to noncontrolling interests (Note 7)		(360,403	)		—				(360,403	)
Net Income Available to Common Stockholders	$	5,925,503		$	(167,104	)		$	5,758,399
Net Income per Common Share
Basic	$	0.16		$	(0.00	)		$	0.16
Diluted	$	0.16		$	(0.02	)		$	0.14
Shares Used to Compute Income per Share (Note 6)
Basic		36,387,206			(0.00	)			36,387,206
Diluted		36,387,206			(0.00	)			41,514,648
Comprehensive Income:
Net Income	$	5,925,503		$	(167,104	)		$	5,758,399
Change in foreign currency translation adjustments		2,024			—				2,024
Comprehensive Income Available to Common Stockholders	$	5,927,527		$	(167,104	)		$	5,760,423

(a) Revenue adjustment of $1,406,529 was reduced to eliminate intercompany revenue related to the Veneto acquisition against "general and administrative expenses."

(b) General and administrative expense adjustment of $1,096,805 was primarily due to (1) reduce and eliminate an intercompany account related to the Veneto acquired operations against "revenues" for $1,406,529, (2) a $17,367 decrease in "General and administrative expenses" to record interest expense originating from the Veneto acquired operations and increase "cash", (3) adjustment to correct and remove deferred rent expense of $21,925 recorded against rent expense related to the Veneto acquired assets, and (4) adjustment to recognize $305,166 amortization expense on Veneto intangible assets acquired in November 3, 2018 "Second Closing."

(c) Reclassification and reduction of "Impairment of goodwill" to "Impairment of long-lived assets" of $142,620 related to the closing of the Grainland Pharmacy.

The effects of the restatement on the line items within the Company’s condensed interim consolidated statement of cash flow as of January 31, 2019 are as follows:

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
	January 31, 2019
		As previously reported			Adjusted			Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	5,565,100		$	(167,104	)	$	5,397,996
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		73,034			305,166			378,200
Issuance of stock options as compensation		924,845			—			924,845
Changes in fair value of contingent purchase consideration		(15,147,591	)		—			(15,147,591	)
Change in fair value of derivative liabilities - convertible notes		202,500			(380,344	)		(177,844	)
Change in fair value of derivative liabilities - warrants		—			35,119			35,119
Impairment of long-lived assets		—			99,519			99,519
Changes in operating assets and liabilities:
Accounts receivable		516,822			170,067			686,889
Inventory		389,924			(3,937	)		385,987
Accounts payable and accrued expenses		3,285,385			11,245			3,296,630
Accrued interest on notes receivable		(18,288	)		—			(18,288	)
Other current assets		9,094			(6,158	)		2,936
Other assets, net		(10,997	)		—			(10,997	)
Other current liabilities		—			4,620			4,620
Other noncurrent liabilities		—			171,562			171,562
Net used in operating activities		(4,210,172	)		239,755			(3,970,417	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(10,070	)		(16,601	)		(26,671	)
Purchase of intangible assets		—			(26,488	)		(26,488	)
Disposal of property and equipment		(5,393	)		5,393			—
Issuance of note payable		13,986			(13,986	)		—
Cash received in acquisition of a business		1,722,814			—			1,722,814
Net cash provided by (used in) investing activities		1,721,337			(51,682	)		1,669,655
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds from related party		(3,305	)		—			(3,305	)
Payment of notes payable		(28,011	)		(629	)		(28,640	)
Proceeds from note payable		3,524,460			—			3,524,460
Investment in subsidiary by noncontrolling interest		133,679			—			133,679
Net cash provided by financing activities		3,626,823			(629	)		3,626,194
Effects of currency translation on cash and cash equivalents		2,024			—			2,024
Net increase (decrease) in cash and cash equivalents		1,140,012			187,444			1,327,456
Cash and cash equivalents, beginning of period		1,046,365			—			1,046,365
Cash and cash equivalents, end of period	$	2,186,377		$	187,444		$	2,373,821
Supplemental Disclosure of Cash Flow Information
Acquisition of Veneto assets & liabilities - First Closing	$	—		$	(13,947,462	)	$	(13,947,462	)
Acquisition of Veneto assets & liabilities - Second Closing	$	—		$	(19,948,909	)	$	(19,948,909	)
Acquisition of Regentys assets & liabilities	$	—		$	(337,538	)	$	(337,538	)
Acquisition of Olaregen assets & liabilities	$	—		$	212,355		$	212,355
Extinguishment of HDS debt	$	—		$	(14,056,109	)	$	(14,056,109	)
Note payable issued for acquisition of a business	$	—		$	35,000,000		$	35,000,000
Discounts on note payable and convertible debt	$	—		$	165,833		$	165,833
Market value of convertible notes	$	—		$	(2,110,000	)	$	(2,110,000	)
Derivative liability - convertible notes	$	—		$	2,530,983		$	2,530,983
Derivative liability - convertible warrants	$	—		$	157,552		$	157,552
Conversion of series H 9% convertible preferred stock to common stock	$	—		$	25,200		$	25,200
Conversion of series I 9% convertible preferred stock to common stock	$	—		$	6,631		$	6,631