Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis by management provides information with respect to our financial condition and results of operations
for the fiscal years ended July 31, 2016 and 2015. This discussion should be read in conjunction with the information in the consolidated
financial statements and the notes pertaining thereto contained in
Item 8 - Financial Statements and Supplementary Data
of this Annual Report on Form 10-K for the year ended July 31, 2016 and the information discussed in
Part I, Item 1A - Risk
Factors
.
Overview
of Business
We
are engaged primarily in the research and development of drug delivery systems and technologies. Our primary focus at the present
time is our proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal) cavity
using a hand-held aerosol applicator. Through our wholly-owned subsidiary, Antigen, we have expanded our focus to include immunomedicines
incorporating proprietary vaccine formulations.
We
believe that our buccal delivery technology is a platform technology that has application to many large molecule drugs and provides
a convenient, non-invasive, accurate and cost-effective way to administer such drugs. We have identified several large molecule
drugs as possible candidates for development, including estrogen, heparin, monoclonal antibodies, human growth hormone and fertility
hormones, but to date have focused our development efforts primarily on one pharmaceutical product, Generex Oral-lyn™, an
insulin formulation administered as a fine spray into the oral cavity using our proprietary hand-held aerosol spray applicator
known as RapidMist™.
Our
wholly-owned subsidiary, Antigen, concentrates on developing proprietary vaccine formulations that work by stimulating the immune
system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or to stop attacking benign elements (i.e.,
self proteins and allergens). Our immunomedicine products are based on two platform technologies and are in the early stages of
development. Prior to exhausting our funds, we continued clinical development of Antigen’s synthetic peptide vaccines designed
to stimulate a potent and specific immune response against tumors expressing the HER-2/neu oncogene for patients with HER-2/neu
positive breast cancer in a Phase II clinical trial and patients with prostate cancer and against avian influenza in two Phase
I clinical trials. We also initiated an additional Phase I clinical trial in patients with either breast or ovarian cancer. The
synthetic vaccine technology has certain advantages for pandemic or potentially pandemic viruses, such as the H5N1 avian and H1N1
swine flu. We have established collaborations with clinical investigators at academic centers to advance these technologies.
To
date, we have received regulatory approval in Ecuador, India (subject to regulatory approval of a 2012 in-country study), Lebanon
and Algeria for the commercial marketing and sale of Generex Oral-lyn™. We have previously submitted regulatory dossiers
for Generex Oral-lyn™ in a number of other countries, including Bangladesh, Kenya, Jordan and Armenia. While we believe
these countries will ultimately approve our product for commercial sale, we do not anticipate recognizing revenues in any of these
jurisdictions in the next twelve months. No dossier related activities or product shipments have taken place during fiscal 2015
or 2016, nor are any expected to these countries during the remainder of calendar year 2016 or in calendar year 2017.
In
March 2008, we initiated Phase III clinical trials for Generex Oral-lyn™ in the U.S. with the first patient screening for
such trials at a clinical study site in Texas in April 2008. Approximately 450 patients were enrolled at approximately 70 clinical
sites around the world, including sites in the United States, Canada, Bulgaria, Poland, Romania, Russia, Ukraine and Ecuador.
The final subjects completed the trial in August 2011. After appropriate validation, the data from approximately 450 patients
was tabulated, reviewed and analyzed. Those results from the Phase III trial along with a comprehensive review and supplemental
analyses of approximately 40 prior Oral-lyn clinical studies were compiled and submitted to the FDA in late December 2011 in a
comprehensive package including a composite metanalysis of all safety data. We do not currently plan to expend significant resources
on additional clinical trials of Oral-lyn™ until after such time that we secure sufficient additional financing. However,
we have initiated a project with the University Health Network of the University of Toronto, and the University of Guelph, Ontario
to enhance the formulation of Generex Oral-lyn™ in order to reduce the number of puffs required for prandial use.
In
November 2008 we, together with our marketing partner Shreya Life Sciences Pvt. Ltd., officially launched Generex Oral-lyn™
in India under marketing name of Oral Recosulin™. Each package of Oral Recosulin™ contains two canisters of our product
along with one actuator. The product received regulatory price approval in India in January 2009. Per the requirements of the
regulatory approval in India, an in-country clinical study must be completed in India with Oral Recosulin™ before commercial
sales can commence. The field portion of the study was completed in the third calendar quarter of 2012. Shreya has advised
Generex that the dossier was submitted in December of 2012 to the Drugs Controller General (India) (DCGI), Central Drugs Standard
Control Organization, Director General of Health Services, Ministry of Health and Family Welfare, Government of India. Generex
has provided additional, detailed scientific data to support the Shreya submission. We have not recognized any revenues from the
sale of Generex Oral-lyn™ in India through fiscal year ended July 31, 2016.
In
December 2008, we, together with our marketing partner Benta S.A., received an approval to market Generex Oral-lyn™ in Lebanon.
The official product launch in Lebanon took place in May 2009. In May 2009, the Algerian health authorities granted us permission
to import and sell Generex Oral-lyn™ for the treatment of diabetes in Algeria. The official product launch in Algeria took
place in October 2009. To date, we have not recognized any revenue from the sales of Generex Oral-lyn™ in Algeria and very
minimal revenues in Lebanon. We do not anticipate any revenues to be recognized from these jurisdictions in the next twelve months.
We
face competition from other providers of alternate forms of insulin. Some of our most significant competitors, Pfizer, Eli Lilly,
and Novo Nordisk, have discontinued development and/or sale of their inhalable forms of insulin. MannKind introduced a new pulmonary
insulin which was approved by the FDA in 2014, and MannKind subsequently partnered with sanofi-aventis for a period of time to
market the product under the tradename of Afrezza.
Generex
Oral-lyn™ is not an inhaled insulin; rather, it is a buccally absorbed formulation with no pulmonary deposition. We believe
that our buccal delivery technology offers several advantages, including the ease of use, portability, avoidance of pulmonary
inhalation and safety profile. Furthermore, insulin administered through the Generex Oral-lyn™ RapidMist™ technology
is absorbed directly into the blood stream and not only acts rapidly, but returns to baseline quickly, thereby minimizing the
chance of developing hypoglycemia.
Large
pharmaceutical companies, such as Merck & Co., Inc., GlaxoSmithKline PLC, Novartis, Inc., MedImmune Inc. (a subsidiary of
Astra-Zeneca, Inc.) and others, also compete against us in the oncology, immunomedicine and vaccine markets. These companies have
competing experience and expertise in securing government contracts and grants to support research and development efforts, conducting
testing and clinical trials, obtaining regulatory approvals to market products, as well as manufacturing and marketing approved
products. As such, they are also considered significant competitors in these fields of pharmaceutical products and therapies.
There are also many smaller companies which are pursuing similar technologies in these fields who are considered to be competitors
of Generex.
We
are a development stage company with a limited history of operations, and do not expect sufficient revenues to support our operation
in the immediately foreseeable future. To date, we have not been profitable and our accumulated net loss available to shareholders
was $375,704,372 at July 31, 2016. As of July 31, 2016, our current cash position is not sufficient to meet our working capital
needs for the next twelve months. To continue operations, we will require additional funds to support our working capital requirements
and any development activities, or will need to suspend operations completely. Management is seeking various alternatives to ensure
that we can meet some of our operating cash flow requirements through financing activities, such as private placement of our common
stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition
opportunities. In addition, management is actively seeking strategic alternatives, including strategic investments and divestitures.
We have sold non-essential real estate assets which were classified as Assets Held for Investment to augment our cash position.
We cannot provide any assurance that we will obtain the required funding. Our inability to obtain required funding in the near
future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and our strategic
development plan for future growth. If we cannot successfully raise additional capital and implement our strategic development
plan, our liquidity, financial condition and business prospects will be materially and adversely affected and we may have to cease
operations.
We
operate in only one segment: the research and development of drug delivery systems and technologies for metabolic and immunological
diseases.
Accounting
for Research and Development Projects
Our
major research and development projects are the refinement of our platform buccal delivery technology, our buccal insulin project
(Generex Oral-lyn™) and Antigen’s peptide immunotherapeutic vaccines.
During
the fiscal years ended July 31, 2016 and 2015, we expended resources on the clinical testing of our buccal insulin product, Generex
Oral-lyn™. The completion of further late-stage trials in Canada and the United States may require significantly greater
funds than we currently have on hand.
During
the fiscal years ended July 31, 2016 and 2015, we expended resources on research and development relating to Antigen’s peptide
immunotherapeutic vaccines and related technologies. One Antigen vaccine is currently in Phase II clinical trials in the United
States involving patients with HER-2/neu positive breast cancer, and we have completed a Phase I clinical trial for an Antigen
vaccine for H5N1 avian influenza which was conducted at the Lebanese-Canadian Hospital in Beirut. Antigen’s prostate cancer
vaccine based on AE37 has been tested in a completed (August 2009) Phase I clinical trial in Greece.
Because
of various uncertainties, we cannot predict the timing of completion and commercialization of our buccal insulin or Antigen’s
peptide immunotherapeutic vaccines or related technologies. These uncertainties include the success of current studies, our ability
to obtain the required financing and the time required to obtain regulatory approval even if our research and development efforts
are completed and successful, our ability to enter into collaborative marketing and distribution agreements with third-parties,
and the success of such marketing and distribution arrangements. For the same reasons, we cannot predict when any products may
begin to produce net cash inflows.
Most
of our buccal delivery research and development activities to date have involved developing our platform technology for use with
insulin. As a result, we have not made significant distinctions in the accounting for research and development expenses among
products, as a significant portion of all research has involved improvements to the platform technology in connection with insulin,
which may benefit all of our potential buccal products. During the fiscal year ended July 31, 2016, approximately 47%% of our
$467,302 in research and development expenses was attributable to insulin and platform technology development. During the fiscal
year ended July 31, 2015, approximately 46% of our $1,185,384 in research and development expenses was attributable to insulin
and platform technology development.
During
the fiscal year ended July 31, 2016, approximately 53% of our $358,314 in research and development expenses was attributable to
Antigen's immunomedicine products. During the fiscal year ended July 31, 2015, approximately 54% of our $1,185,384 in research
and development expenses was attributable to Antigen's immunomedicine products.
We
ceased all material research and development activities in the first quarter of fiscal 2016 due to lack of funds.
Because
these products are in initial phases of clinical trials or early, pre-clinical stage of development (with the exception of the
Phase II clinical trials of Antigen HER-2/neu positive breast cancer vaccine that are underway), all of the expenses were accounted
for as basic research and no distinctions were made as to particular products. Due to the early stage of development, we cannot
predict the timing of completion of any products arising from this technology, or when products from this technology might begin
producing revenues.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements
which have been prepared in conformity with accounting principles generally accepted in the United States of America. It requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
We
consider certain accounting policies related to impairment of long-lived assets, intangible assets and accrued liabilities to
be critical to our business operations and the understanding of our results of operations:
Going
Concern .
As shown in the accompanying consolidated financial statements, we have not been profitable and have
reported recurring losses from operations. These factors raise substantial doubt about our ability to continue to operate
in the normal course of business. The accompanying consolidated financial statements do not include any adjustments
that might be necessary should we be unable to continue as a going concern.
Impairment
of Long-Lived Assets
. Management reviews for impairment whenever events or changes in circumstances indicate that the carrying
amount of property and equipment may not be recoverable under the provisions of accounting for the impairment of long-lived assets.
If it is determined that an impairment loss has occurred based upon expected future cash flows, the loss is recognized in the
Consolidated Statement of Operations. As of July 31, 2016, there were no indications of any impairment of our long-lived assets.
Intangible
Assets
. We have intangible assets related to patents. The determination of the related estimated useful lives and whether
or not these assets are impaired involves significant judgments. In assessing the recoverability of these intangible assets, we
use an estimate of undiscounted operating income and related cash flows over the remaining useful life, market conditions and
other factors to determine the recoverability of the asset. If these estimates or their related assumptions change in the future,
we may be required to record impairment charges against these assets. All of the Company’s patents were written down in
the fiscal year ended July 31, 2016. There were patent write downs of $320,160 in the fiscal year ended July 31, 2015.
Estimating
accrued liabilities, specifically litigation accruals
. Management's current estimated range of liabilities related to pending
litigation is based on management's best estimate of future costs. While the final resolution of the litigation could result in
amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting
period, management believes the ultimate outcome will not have a significant effect on our consolidated results of operations,
financial position or cash flows.
Share-based
compensation.
Management determines value of stock-based compensation to employees in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation. Management determines
value of stock-based compensation to non-employees and consultants in accordance with and ASC 505, Equity-Based Payments to Non-Employees.
Derivative
warrant liability
. FASB ASC 815, Derivatives and Hedging, requires all derivatives to be recorded on the consolidated
balance sheet at fair value for fiscal years beginning after December 15, 2008. As a result, certain derivative warrant
liabilities (namely those with a price protection feature) are now separately valued as of August 1, 2009 and accounted for on
our balance sheet, with any changes in fair value recorded in earnings. On our consolidated balance sheets as of July
31, 2016 and July 31, 2015, we used the binomial lattice model to estimate the fair value of these warrants. Key assumptions of
the binomial lattice option-pricing model include the market price of our stock, the exercise price of the warrants, applicable
volatility rates, risk-free interest rates, expected dividends and the instrument’s remaining term. These assumptions
require significant management judgment. In addition, changes in any of these variables during a period can result
in material changes in the fair value (and resultant gains or losses) of this derivative instrument.
Results
of Operations
Year
ended July 31, 2016 Compares to Year ended July 31, 2015
We
had a net loss for the fiscal year ended July 31, 2016 of $3,223,109 versus a net loss in the prior fiscal year (fiscal 2015)
of $2,193,358. The loss this year was caused primarily by operating expenses of $1,902,568 and an impairment loss on patents of
$1,165,364 offset by a gain due to the change in fair value of the derivative liabilities of $263,823, while in the prior year
operating expenses were $3,562,914 with a gain due to the change in fair value of the derivative liabilities of $1,448,237 and
a gain on extinguishment of debt of $551,501. The decrease in operating loss resulted from a decrease in research and development
expenses (to $467,382 from $1,185,384) and a decrease in general and administrative expenses (to $1,435,186 from $2,377530). We
did not have any revenues in either fiscal 2016 or 2015.
The
decrease in research and development expenses in the current fiscal year versus the comparative period in the previous fiscal
year is primarily due lack of resources to pursue clinical trials. Our efforts to significantly reduce expenses in all categories
also contributed to the decrease in this category. The decrease in general and administrative expenses is related to a decrease
in compensation expenses of approximately $1,730,000, offset by a forbearance fee on one of our key accounts payable in the amount
of $459,000. We also incurred reductions of expenses in most other categories due to our efforts to conserve cash pending further
strategic developments.
Our
interest expense in fiscal 2016 was $418,500 compared to the previous year’s interest expense of $350,028. Change
in fair value of derivative liabilities contributed a gain of $263,823 in fiscal 2016 as compared to a gain of $1,488,237 in fiscal
2015.
Our
net loss available to common stockholders increased to ($3,223,107) in fiscal 2016 from ($2,532,941) in fiscal 2015. The increase
was due primarily to the write-down in the value of our patents of approximately $1,165,864, as further described in Note 4 to
the
Notes to Consolidated Financial Statements
included elsewhere in this Annual Report.
Financial
Condition, Liquidity and Resources
Sources
of Liquidity
To
date we have financed our development stage activities primarily through private placements of our common stock and securities
convertible into our common stock.
As
of July 31, 2016 and the date of this Annual Report on Form 10-K, our current cash position is not sufficient to meet our working
capital needs for the next twelve months. We have been required to lay-off all of our employees, and our officers have ceased
receiving compensation. We will require additional funds to support our working capital requirements and any development or other
activities.
While
we have financed our development stage activities to date primarily through private placements of our common stock and securities
convertible into our common stock and raised approximately $534,000 million during fiscal 2016 and 2015 (including proceeds from
warrant exercises, short term loans and the issuance of preferred stock ), our cash balances have been low throughout fiscal 2016.
On
March 30, 2011, our realigned management team announced its strategic development plan for Generex’s future growth. The
plan included the proposed spin-out of Antigen Express, a reverse stock split for Generex and a rights offering to Generex stockholders.
As proposed, we would spin out Antigen Express as a separate DTC-eligible company, register its shares with the Securities and
Exchange Commission (the “SEC”), and seek to list its shares on a national securities exchange. Management believes
that the spin-out would increase value for stockholders and provide Antigen Express with ready access to capital markets to finance
its on-going clinical and regulatory initiatives. Management further believes that the spin-out would benefit Generex, by allowing
Generex to hold a controlling interest in a publicly-traded company while continuing to focus on maximizing opportunities for
its buccal drug delivery platform. The spin-out would be accomplished by the issuance of one or more dividends of Antigen Express
stock to Generex stockholders. No determination has been made as to the timing of the proposed spin-out. This plan does not constitute
an offer of any securities for sale or a solicitation of an offer to buy any securities.
Our
stockholders approved a reverse split proposal at our annual general meeting held on August 19, 2015, which approval allows the
Board to implement a reverse split in its discretion at any time prior to December 31, 2016 and is not contingent upon listing
our common stock on a national stock exchange. However, the terms of the securities purchase agreements that we entered into on
January 14, 2014, March 27, 2014 and June 24, 2015 prohibit us from undertaking a reverse or forward stock split or reclassification
of our common stock except for a reverse stock split made in conjunction with a listing of the common stock on a national securities
exchange.
Management
may seek to meet all or some of our operating cash flow requirements through financing activities, such as private placement of
our common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or
acquisition opportunities.
Upon
the filing of our Annual Report on Form 10-K on October 14, 2011, we were no longer eligible to use Form S-3 to register shares
sold to investors, as the aggregate market value of our outstanding voting and non-voting common equity held by non-affiliates
was less than $75 million. As we are required under the registration rights agreements that we entered into on January 31, 2012,
August 8, 2012, December 10, 2012, June 17, 2013, January 14, 2014, March 27, 2014 and June 24, 2015 with certain investors to
register shares of our common stock issuable upon conversion or exercise of the securities purchased by the investors, we filed
the respective registration statements on Form S-1. We incurred additional legal and accounting fees in connection with the preparation
of these Form S-1 registration statements.
In
addition, management is actively pursuing financial and strategic alternatives, including strategic investments and divestitures,
industry collaboration activities, and potential strategic partners. Management has sold non-essential real estate assets which
are classified as Assets Held for Investment to augment the company’s cash position and reduce its long-term debt.
We
will continue to require substantial funds to continue research and development, including preclinical studies and clinical trials
of our product candidates, further clinical trials for Oral-lyn™ and to commence sales and marketing efforts if the FDA
or other regulatory approvals are obtained.
Unforeseen
problems with the conduct or results of Phase III clinical trials for Oral-lyn™ or further negative developments in general
economic conditions could interfere with our ability to raise additional capital as needed, or materially adversely affect the
terms upon which such capital is available. We cannot provide any assurance that we will obtain the required funding. Our inability
to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse
effect on our operations and our strategic development plan for future growth. If we cannot successfully raise additional capital
and implement our strategic development plan, our liquidity, financial condition and business prospects will be materially and
adversely affected and we may have to cease operations.
Equity
Financings
Following
is a summary of the equity financing activities that we have completed since the beginning of the 2014 calendar year.
Financing
– June 2015
Series
G 9% Convertible Preferred Stock and Warrants
On
June 24, 2015, we entered into a securities purchase agreement with certain investors, pursuant to which we agreed to sell an
aggregate of 500 shares of our newly designated non-voting Series G 9% Convertible Preferred Stock and warrants to purchase up
to an aggregate of 100% of the shares of our common stock issuable upon conversion of the convertible preferred stock. The purchase
closed on June 25, 2015. We sold the convertible preferred stock and warrants in units, with each unit consisting of one share
of convertible preferred stock and a warrant to purchase 100% of the shares of our common stock issuable upon conversion of such
share of convertible preferred stock. Each unit was sold at a negotiated price of $1,000, for an aggregate purchase price of $500,000.
An aggregate of 33,333,333 shares of our common stock are issuable upon conversion of, or exercise of, the convertible preferred
stock and warrants. We received net proceeds of approximately $475,000 from this transaction.
Subject
to certain ownership limitations, the Series G convertible preferred stock will be convertible at the option of the holder at
any time into shares of our common stock at an effective conversion price of $0.015 per share, and will accrue a 9% dividend until
June 24, 2018 and, beginning on June 24, 2018 and on each one year anniversary thereafter, such dividend rate will increase by
an additional 3%. The dividend will be payable quarterly on September 30, December 31, March 31 and June 30, beginning on the
first such date after the original issue date and on each conversion date in cash, or at our option, in shares of common stock.
In the event that the convertible preferred stock is converted prior to June 24, 2018, we will pay the holder of the converted
preferred stock an amount equal to $270 per $1,000 of stated value of the convertible preferred stock, less the amount of all
prior quarterly dividends paid on such converted preferred stock before the relevant conversion date. Such “make-whole payment”
may be made in cash or, at our option, in shares of our common stock. In addition, beginning June 24, 2018, we will pay dividends
on shares of the convertible preferred stock equal to (on an as-if-converted-to-common-stock basis) and in the same form as dividends
(other than dividends in the form of common stock) actually paid on shares of the common stock when, as and if such dividends
are paid. We will incur a late fee of 18% per annum on unpaid dividends.
The
conversion price of the Series G convertible preferred stock will be subject to adjustment in the case of stock splits, stock
dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders.
The conversion price will also be adjusted if we sell or grant any shares of common stock or securities convertible into, or rights
to acquire, common stock at an effective price per share that is lower than the then conversion price, except in the event of
certain exempt issuances. In addition, the holders of convertible preferred stock will be entitled to receive any securities or
rights to acquire securities or property granted or issued by us pro rata to the holders of our common stock to the same extent
as if such holders had converted all of their shares of convertible preferred stock. In the event of a fundamental transaction,
such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the holders
of convertible preferred stock will be entitled to receive, upon conversion of their shares, any securities or other consideration
received by the holders of our common stock pursuant to the fundamental transaction.
We
may become obligated to redeem the Series G convertible preferred stock in cash upon the occurrence of certain triggering events,
including, material breach of certain contractual obligations to the holders of the convertible preferred stock, the occurrence
of a change in control of Generex, the occurrence of certain insolvency events relating to Generex, or the failure of our common
stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or regulated
quotation service. Upon the occurrence of certain triggering events, each holder of convertible preferred stock will have the
option to redeem such holder’s shares of convertible preferred stock for a redemption price payable in shares of common
stock or receive an increased dividend rate of 18% on all of such holder’s outstanding convertible preferred stock. Late
fees will apply on all redemption amounts not paid within five trading days of the payment date.
Subject
to certain ownership limitations, the warrants will be exercisable at any time after their date of issuance and on or before the
fifth-year anniversary thereafter at an exercise price of $0.015 per share of common stock. The exercise price of the warrants
and, in some cases, the number of shares issuable upon exercise, are subject to adjustment in the case of stock splits, stock
dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders.
The exercise price and number of shares of common stock issuable upon exercise will also be adjusted if we sell or grant any shares
of common stock or securities convertible into, or rights to acquire, common stock at an effective price per share that is lower
than the then exercise price, except in the event of certain exempt issuances. In addition, the warrant holders will be entitled
to receive any securities or rights to acquire securities or property granted or issued by us pro rata to the holders of our common
stock to the same extent as if such holders had exercised all of their warrants. In the event of a fundamental transaction, such
as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the warrant holders
will be entitled to receive, upon exercise of their warrants, any securities or other consideration received by the holders of
common stock pursuant to the fundamental transaction.
The
securities purchase agreement and the certificate of designation authorizing the Series G convertible preferred stock include
certain agreements and covenants for the benefit of the holders of the convertible preferred stock, including restrictions on
our ability to amend the certificate of incorporation and bylaws, pay cash dividends or distributions with respect to our common
stock or other junior securities, repurchase more than a
de minimis
number of shares of our common stock or other junior
securities.
With
very limited exceptions, the investors will have a pro rata right of first refusal in respect of participation in any private
debt or equity financings undertaken by us during the 12 months following the closing of the transaction.
We
offered these securities privately pursuant to Rule 506(b) of Regulation D under the Securities Act of 1933. We entered into a
registration rights agreement with the investors pursuant to which we agreed to file a registration statement with the SEC covering
the public resale of the common stock issuable upon conversion of the preferred stock, issuable as dividends on the preferred
stock, issuable upon exercise of the warrants and issued as a finders’ fee.
We
agreed to file the registration statement within 25 days of the closing of the transaction and to use our best efforts to have
the registration statement declared effective within 75 days after the filing date. The registration statement was declared effective
by the SEC on July 31, 2015.
In
addition, until the first anniversary date of the securities purchase agreement, each investor could, in its sole determination,
elect to purchase, severally and not jointly with the other investors, in one or more purchases, in the ratio of such investor's
original subscription amount to the original aggregate subscription amount of all investors, additional units consisting of convertible
preferred stock and warrants at a purchase price of $1,000 per unit with an aggregate subscription amount thereof of up to $500,000,
which units would be identical to the units of convertible preferred stock and warrants issued in connection with the June 2015
closing. To ensure that we have sufficient authorized shares of common stock to reserve for issuance if the investors exercise
this right in full, we sought stockholder approval of an amendment to our Certificate of Incorporation at our annual meeting on
August 19, 2015 to increase our authorized shares of common stock, and the amendment was approved. On September 15, 2015, we filed
the amendment increasing our authorized common stock from 1,500,000,000 shares to 2,450,000,000 shares.
In
addition, if, during the six-month period after the issuance of the warrants and continuing until such time that all of the securities
may be sold without our compliance with the current public information requirement under Securities Act rule 144(c)(1), we fail
to meet such requirement, we will pay liquidate damages equal to 2.0% of the purchase price paid by each investor, payable in
cash every 30 days until current public information for Generex is available or is no longer required for the investors to rely
on Rule 144 to transfer the securities (including underlying securities) acquired under the securities purchase agreement.
Financing
– March 2014
Series
F 9% Convertible Preferred Stock and Warrants
On
March 27, 2014, we entered into a securities purchase agreement with certain investors, pursuant to which we agreed to sell an
aggregate of 2,075 shares of our newly designated non-voting Series F 9% Convertible Preferred Stock and warrants to purchase
up to an aggregate of 100% of the shares of our common stock issuable upon conversion of the convertible preferred stock. The
purchase closed on March 28, 2014. We sold the convertible preferred stock and warrants in units, with each unit consisting of
one share of convertible preferred stock and a warrant to purchase 100% of the shares of our common stock issuable upon conversion
of such share of convertible preferred stock. Each unit was sold at a negotiated price of $1,000, for an aggregate purchase price
of $2,075,000. An aggregate of 138,333,334 shares of our common stock are issuable upon conversion of, or exercise of, the convertible
preferred stock and warrants. We received net proceeds of approximately $2,020,000 from this transaction.
Subject
to certain ownership limitations, the Series F convertible preferred stock will be convertible at the option of the holder at
any time into shares of our common stock at an effective conversion price of $0.03 per share, and will accrue a 9% dividend until
March 27, 2017 and, beginning on March 27, 2017 and on each one year anniversary thereafter, such dividend rate will increase
by an additional 3%. The dividend will be payable quarterly on September 30, December 31, March 31 and June 30, beginning on the
first such date after the original issue date and on each conversion date in cash, or at our option, in shares of common stock.
In the event that the convertible preferred stock is converted prior to March 27, 2017, we will pay the holder of the converted
preferred stock an amount equal to $270 per $1,000 of stated value of the convertible preferred stock, less the amount of all
prior quarterly dividends paid on such converted preferred stock before the relevant conversion date. Such “make-whole payment”
may be made in cash or, at our option, in shares of our common stock. In addition, beginning March 27, 2016, we will pay dividends
on shares of the Series F convertible preferred stock equal to (on an as-if-converted-to-common-stock basis) and in the same form
as dividends (other than dividends in the form of common stock) actually paid on shares of the common stock when, as and if such
dividends are paid. We will incur a late fee of 18% per annum on unpaid dividends.
The
conversion price of the Series F convertible preferred stock will be subject to adjustment in the case of stock splits, stock
dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders.
The conversion price will also be adjusted if we sell or grant any shares of common stock or securities convertible into, or rights
to acquire, common stock at an effective price per share that is lower than the then conversion price, except in the event of
certain exempt issuances. In addition, the holders of convertible preferred stock will be entitled to receive any securities or
rights to acquire securities or property granted or issued by us pro rata to the holders of our common stock to the same extent
as if such holders had converted all of their shares of convertible preferred stock. In the event of a fundamental transaction,
such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the holders
of convertible preferred stock will be entitled to receive, upon conversion of their shares, any securities or other consideration
received by the holders of our common stock pursuant to the fundamental transaction.
We
may become obligated to redeem the Series F convertible preferred stock in cash upon the occurrence of certain triggering events,
including, material breach of certain contractual obligations to the holders of the convertible preferred stock, the occurrence
of a change in control of Generex, the occurrence of certain insolvency events relating to Generex, or the failure of our common
stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or regulated
quotation service. Upon the occurrence of certain triggering events, each holder of convertible preferred stock will have the
option to redeem such holder’s shares of convertible preferred stock for a redemption price payable in shares of common
stock or receive an increased dividend rate of 18% on all of such holder’s outstanding convertible preferred stock. Late
fees will apply on all redemption amounts not paid within five trading days of the payment date.
Subject
to certain ownership limitations, the warrants will be exercisable at any time after their date of issuance and on or before the
fifth-year anniversary thereafter at an exercise price of $0.03 per share of common stock. The exercise price of the warrants
and, in some cases, the number of shares issuable upon exercise, are subject to adjustment in the case of stock splits, stock
dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders.
The exercise price and number of shares of common stock issuable upon exercise will also be adjusted if we sell or grant any shares
of common stock or securities convertible into, or rights to acquire, common stock at an effective price per share that is lower
than the then exercise price, except in the event of certain exempt issuances. In addition, the warrant holders will be entitled
to receive any securities or rights to acquire securities or property granted or issued by us pro rata to the holders of our common
stock to the same extent as if such holders had exercised all of their warrants. In the event of a fundamental transaction, such
as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the warrant holders
will be entitled to receive, upon exercise of their warrants, any securities or other consideration received by the holders of
common stock pursuant to the fundamental transaction.
The
securities purchase agreement and the certificate of designation authorizing the Series F convertible preferred stock include
certain agreements and covenants for the benefit of the holders of the convertible preferred stock, including restrictions on
our ability to amend the certificate of incorporation and bylaws, pay cash dividends or distributions with respect to our common
stock or other junior securities, repurchase more than a
de minimis
number of shares of our common stock or other junior
securities.
The
investors’ pro rata right of first refusal in respect of participation in any private debt or equity financings undertaken
by us during the 12 months following the closing of the transaction has expired.
We
offered these securities privately pursuant to Rule 506(b) of Regulation D under the Securities Act of 1933. We entered into a
registration rights agreement with the investors pursuant to which we agreed to file a registration statement with the SEC covering
the public resale of the common stock issuable upon conversion of the preferred stock, issuable as dividends on the preferred
stock, issuable upon exercise of the warrants and issued as a finders’ fee. The registration statement was declared effective
by the SEC on April 16, 2014.
In
addition, until the first anniversary date of the securities purchase agreement, each investor could, in its sole determination,
elect to purchase, severally and not jointly with the other investors, in one or more purchases, in the ratio of such investor's
original subscription amount to the original aggregate subscription amount of all investors, additional units consisting of convertible
preferred stock and warrants at a purchase price of $1,000 per unit with an aggregate subscription amount thereof of up to $2,075,000,
which units would be identical to the units of convertible preferred stock and warrants issued in connection with the March 2014
closing. These additional exercise rights expired without being exercised in March 2015.
In
addition, if, during the six-month period after the issuance of the warrants and continuing until such time that all of the securities
may be sold without our meeting the current public information requirement under Securities Act rule 144(c)(1), we fail to meet
such requirement, we will pay liquidate damages equal to 2.0% of the purchase price paid by each investor, payable in cash every
30 days until current public information for Generex is available or is no longer required for the investors to rely on Rule 144
to transfer the securities (including underlying securities) acquired under the securities purchase agreement.
Financing
– January 2014
Series
E 9% Convertible Preferred Stock and Warrants” Greenshoe”
On
June 17, 2013, we entered into a securities purchase agreement with certain investors, pursuant to which we agreed to sell an
aggregate of 1,225 shares of our newly designated non-voting Series E 9% Convertible Preferred Stock and warrants to purchase
up to an aggregate of 100% of the shares of our common stock issuable upon conversion of the convertible preferred stock. Under
the June 17, 2013 securities purchase agreement, for a period of up to one year, each investor could, in its sole determination,
elect to purchase, in one or more purchases, additional units consisting of convertible preferred stock and warrants at a purchase
price in the amount originally purchased by such investor (the “Greenshoe”). The units purchased in the Greenshoe
would be identical to the units of convertible preferred stock and warrants originally issued pursuant to the securities purchase
agreement.
On
January 14, 2014, in connection with the exercise of the Greenshoe by certain investors, we entered into a separate securities
purchase agreement, pursuant to which we agreed to sell an aggregate of 800 shares of our Series E 9% Convertible Preferred Stock
and warrants to purchase up to an aggregate of 100% of the shares of our common stock issuable upon conversion of the convertible
preferred stock. The purchase closed on January 15, 2014. Each unit was sold at a negotiated price of $1,000, for an aggregate
purchase price of $800,000. An aggregate of 53,333,336 shares of our common stock were initially issuable upon conversion of,
or exercise of, the convertible preferred stock and warrants covered by this securities purchase agreement.
The
investors’ pro rata right of first refusal in respect of participation in any private debt or equity financings undertaken
by us during the 12 months following the closing of the transaction has expired.
We
offered these securities privately pursuant to Rule 506(b) of Regulation D under the Securities Act of 1933. This offering was
subject to the registration rights agreement dated June 17, 2013 with the investors pursuant to which we agreed to file a registration
statement with the SEC covering the public resale of the common stock issuable upon conversion of the preferred stock, issuable
as dividends on the preferred stock, issuable upon exercise of the warrants and issued as a finders’ fee. The registration
statement was declared effective by the SEC on February 7, 2014.
In
addition, if, during the six-month period after the issuance of the warrants and continuing until such time that all of the securities
may be sold without our meeting the current public information requirement under Securities Act rule 144(c)(1), we fail to meet
such requirement, we will pay liquidate damages equal to 2.0% of the purchase price paid by each investor, payable in cash every
30 days until current public information for Generex is available or is no longer required for the investors to rely on Rule 144
to transfer the securities (including underlying securities) acquired under the securities purchase agreement.
Proceeds
from Warrant Exercises
In
the fiscal years ended July 31, 2016 and 2015, we received no proceeds from the exercise of outstanding warrants.
We
may receive additional proceeds from the exercise of warrants issued in February 2012, August 2012, December 2012, June 2013,
January 2014, March 2014 and June 2015 in connection with the issuance of the Series C 9% Convertible Preferred Stock, Series
D 9% Convertible Preferred Stock, Series E 9% Convertible Preferred Stock, Series F 9% Convertible Preferred Stock and Series
G 9% Convertible Preferred Stock, although some of the warrants include a cashless exercise feature.
|
•
|
In
connection with the securities purchase agreement dated August 8, 2012, we sold an aggregate
of 750 shares of our Series C 9% Convertible Preferred Stock and issued warrants exercisable
for up to 9,375,000 shares of our common stock to investors.
|
|
•
|
In
connection with the securities purchase agreement dated December 10, 2012, we sold an
aggregate of 750 shares of our Series D 9% Convertible Preferred Stock and issued warrants
exercisable for up to 24,999,999 shares of our common stock to investors.
|
|
•
|
In
connection with the securities purchase agreement dated June 17, 2013, we sold an aggregate
of 1,225 shares of our Series E 9% Convertible Preferred Stock and issued warrants exercisable
for up to 40,833,335 shares of our common stock to investors.
|
|
•
|
In
connection with the securities purchase agreement dated January 14, 2014, we sold an
aggregate of 800 shares of our Series E 9% Convertible Preferred Stock and issued warrants
exercisable for up to 26,666,668 shares of our common stock to investors.
|
|
•
|
In
connection with the securities purchase agreement dated March 27, 2014, we sold an aggregate
of 2,075 shares of our Series F 9% Convertible Preferred Stock and issued warrants exercisable
for up to 33,333,333 shares of our common stock to investors.
|
|
•
|
In
connection with the securities purchase agreement dated June 24, 2015, we sold an aggregate
of 500 shares of our Series G 9% Convertible Preferred Stock and issued warrants exercisable
for up to 33,333,333 shares of our common stock to investors.
|
As
of July 31, 2016, all of the warrants issued in the aforementioned registered direct offerings were exercisable. At
July 15, 2016, outstanding warrants issued in connection with the February 2012, August 2012, December 2012, June 2013, January
2014, March 2014 and June 2015 private placements were as follows (after adjustment for anti-dilution provisions and subsequent
exercises):
Date Issued
|
|
Aggregate No. of
Shares
Unexercised
|
|
Exercise
Price
|
|
Expiration Date
|
March
31, 2008*
|
|
|
54,545,440
|
|
|
$
|
0.015
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2012*
|
|
|
11,350,454
|
|
|
|
0.015
|
|
|
February
1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
August 10, 2012*
|
|
|
9,999,998
|
|
|
|
0.015
|
|
|
August
10, 2017
|
|
|
|
|
|
|
|
|
|
|
|
December 10, 2012*
|
|
|
16,648,288
|
|
|
|
0.015
|
|
|
December
12, 2017
|
|
|
|
|
|
|
|
|
|
|
|
June 17, 2013*
|
|
|
68,333,338
|
|
|
|
0.015
|
|
|
June
17, 2018
|
|
|
|
|
|
|
|
|
|
|
|
January 15, 2014*
|
|
|
51,333,336
|
|
|
|
0.015
|
|
|
January
15, 2019
|
|
|
|
|
|
|
|
|
|
|
|
March 27, 2014*
|
|
|
138,333,334
|
|
|
|
0.015
|
|
|
March
27, 2019
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2015*
|
|
|
33,333,333
|
|
|
|
0.015
|
|
|
June
25, 2020
|
*Upon
issuance of securities at a price per share of common stock less than the then applicable exercise price, the warrants are subject
to anti-dilution adjustment of the exercise price and to the number of shares of common stock that may be purchased upon exercise
of each warrant such that the aggregate exercise price payable upon exercise of the warrant will be the same as the aggregate
exercise price in effect immediately prior to such adjustment. Due to the anti-dilution adjustment provision of these warrants,
they have been reclassified on Generex’s balance sheet as a liability under the caption “Derivative Warrant Liability”
with any changes in fair value at each reporting period recorded in earnings in accordance with ASC 815.
Cash
Flows for the Year ended July 31, 2016
For
the fiscal year ended July 31, 2016, we used $775,483 in cash to fund our operating activities. The use for operating activities
included a net loss of $3,223,109, changes to working capital including an increase of $1,056,955 related to accounts payable
and accrued expenses, and an increase related to other current assets of $43,076.
The
use of cash was offset by non-cash expenses of $265,210 related to depreciation and amortization, $1,165,864 related to the write-off
of patents, stock-based compensation and common stock issued for interest on our convertible preferred stock of $148,500. There
was also a year-to-date non-cash gain of $263,823related to the fair valuation of the derivative liabilities at July 31, 2016.
We
had no net cash used in or provided by investing activities in the fiscal year ended July 31, 2016. In the prior year, we had
net cash used in investing activities of $90,982, representing costs incurred for patents. We did not pay maintenance fees or
other costs for patents in fiscal 2016.
We
had cash provided by financing activities in the fiscal year ended July 31, 2016 of $52,952, which pertained primarily to proceeds
from issuance of long terms debt in the amount of $50,000.
Our
net working capital at July 31, 2016 worsened to negative $8,975,894 from negative $7,217,128 at July 31, 2015, which was attributed
primarily to cash used in operations for fiscal 2016.
Conversion
of Outstanding Series A, Series B, Series C, Series D, Series E, Series F and Series G 9% Convertible Preferred Stock
As
of July 31, 2016, all of the 2,575 shares of our Series A 9% Convertible Preferred Stock had been converted into shares of our
common stock. A total of 17,166,666 shares of common stock have been issued upon the conversion of 2,575 shares of Series A convertible
preferred stock. Upon conversion, we paid the holders of the Series A convertible preferred stock a “make whole” payment
equal to $270 per $1,000 of stated value of the Series A convertible preferred stock, less the amount of all prior quarterly dividends
paid on such converted preferred stock before the relevant conversion date. We issued 6,129,666 additional shares of common stock
on such conversions of the Series A convertible preferred stock as “make-whole payments”.
As
of July 31, 2016, all of the 2,000 shares of our Series B 9% Convertible Preferred Stock had been converted into shares of our
common stock. We issued 38,520,832 shares of common stock upon the conversion of the Series B convertible preferred stock and
an additional 14,819,679 shares of common stock were issued as “make-whole payments” on such conversions.
As
of July 31, 2016, all of the 750 shares of our Series C 9% Convertible Preferred Stock had been converted into shares of our common
stock. We issued 22,916,665 shares of common stock upon the conversion of the Series C convertible preferred stock and an additional
6,664,863 shares of common stock were issued as “make-whole payments” on such conversions.
As
of July 31, 2016, all of the 750 shares of our Series D 9% Convertible Preferred Stock had been converted into shares of our common
stock. We issued 24,999,999 shares of common stock upon the conversion of the Series D convertible preferred stock and an additional
7,825,191 shares of common stock were issued as “make-whole payments” on such conversions.
As
of July 31, 2016, all of the 2,025 shares of our Series E 9% Convertible Preferred Stock had been converted into shares of our
common stock. We issued 68,333,333 shares of common stock upon the conversion of the Series E convertible preferred stock and
an additional 19,035,193 shares of common stock were issued as “make-whole payments” on such conversions.
As
of July 31, 2016, 1,955 shares of our Series F 9% Convertible Preferred Stock had been converted into shares of our common stock.
We issued 89,108,331 shares of common stock upon the conversion of the Series F convertible preferred stock and an additional
36,533,875 shares of common stock were issued as “make-whole payments” on such conversions.
As
of July 31, 2016, none of the 500 shares of our Series G 9% Convertible Preferred Stock had been converted into shares of our
common stock.
Funding
Requirements and Commitments
If
we obtain necessary financing, we expect to expend resources towards regulatory approval and commercialization of Generex Oral-lyn™
and further clinical development of our immunotherapeutic vaccines.
Our
future funding requirements and commitments and our ability to raise additional capital will depend on factors that include:
|
•
|
the timing and amount
of expense incurred to complete our clinical trials;
|
|
•
|
the costs and timing
of the regulatory process as we seek approval of our products in development;
|
|
•
|
the advancement
of our products in development;
|
|
•
|
our ability to generate
new relationships with industry partners throughout the world that will provide us with regulatory assistance and long-term
commercialization opportunities;
|
|
•
|
the timing, receipt
and amount of sales, if any, from Generex Oral-lyn™ in India, Lebanon, Algeria and Ecuador;
|
|
•
|
the cost of manufacturing
(paid to third parties) of our licensed products, and the cost of marketing and sales activities of those products;
|
|
•
|
the costs of prosecuting,
maintaining, and enforcing patent claims, if any claims are made;
|
|
•
|
our ability to maintain
existing collaborative relationships and establish new relationships as we advance our products in development;
|
|
|
|
|
•
|
our ability to obtain
the necessary financing to fund our operations and effect our strategic development plan; and
|
|
•
|
the receptivity
of the financial market to biopharmaceutical companies.
|
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors, and we do not have any non-consolidated special purpose entities.
Tabular
Disclosure of Contractual Obligations
Generex
is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required
under this item.
Recently
Adopted Accounting Pronouncements
In
June 2014, the FASB issued guidance regarding the elimination of the reporting requirement for development stage entities and
removed the definition of development stage entity from the Accounting Standards Codification. We adopted this guidance effective
for the Company’s annual fiscal year ended July 31, 2014. The adoption of this new accounting guidance resulted in the elimination
of the inception-to-date financial information in the consolidated statements of operations, statements of changes in stockholders’
deficiency and statements of cash flows, as well as the removal of the subheading “A Development Stage Company” from
the consolidated financial statements and the notes to the consolidated financial statements.
Recently
Issued Accounting Pronouncements
In
November 2014, the FASB issued guidance regarding
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued
in the Form of a Share Is More Akin to Debt or to Equity.
The guidance became effective this quarter. The Company has determined
that this accounting standard has no impact on its consolidated financial statements.
In
August 2014, the FASB issued guidance regarding disclosure of uncertainties about an entity’s ability to continue as a going
concern. The guidance became effective this quarter. The Company has determined that this accounting standard has no impact on
its consolidated financial statements.
Item
8. Financial Statements and Supplementary Data
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
July
31,
2016
|
|
July
31,
2015
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,899
|
|
|
$
|
749,965
|
|
Other
current assets
|
|
|
8,077
|
|
|
|
51,240
|
|
Total
Current Assets
|
|
|
24,976
|
|
|
|
801,205
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
(Note 3)
|
|
|
1,298
|
|
|
|
2,869
|
|
Patents
(Note 4)
|
|
|
—
|
|
|
|
1,430,016
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
26,274
|
|
|
$
|
2,234,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
DEFICIENCY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses (Note 6)
|
|
$
|
8,950,870
|
|
|
$
|
8,018,333
|
|
Loan
payable (Note 6)
|
|
|
50,000
|
|
|
|
—
|
|
Total
Current Liabilities
|
|
|
9,000,870
|
|
|
|
8,018,333
|
|
|
|
|
|
|
|
|
|
|
Derivative Warrant
Liability (Note 8 and 9)
|
|
|
2,048,846
|
|
|
|
2,363,415
|
|
|
|
|
|
|
|
|
|
|
Derivative Additional
Investment Rights Liability (Note 8 and 9)
|
|
|
193,408
|
|
|
|
142,662
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
11,243,124
|
|
|
|
10,524,410
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficiency (Note 10):
|
|
|
|
|
|
|
|
|
Series
A 9% Convertible Preferred Stock, $1,000 par value; authorized 5,500 shares, -0- issued shares at July 31, 2016 and July 31,
2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
B 9% Convertible Preferred Stock, $1,000 par value; authorized 2,000 shares, -0- issued shares at July 31, 2016 and July 31,
2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
C 9% Convertible Preferred Stock, $1,000 par value; authorized 750 shares, -0- issued shares at July 31, 2016 and July
31, 2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
D 9% Convertible Preferred Stock, $1,000 par value; authorized 750 shares, -0- issued shares at July 31, 2016 and July 31,
2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
E 9% Convertible Preferred Stock, $1,000 par value; authorized 2,450 shares, -0- issued shares at July 31, 2016 and July 31,
2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
F 9% Convertible Preferred Stock, $1,000 par value; authorized 4,150 shares, 120 and 670 issued shares at July 31, 2016 and
July 31, 2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
G 9% Convertible Preferred Stock, $1,000 par value; authorized 1,000 shares, 500 issued shares at July 31, 2016 and July 31,
2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $.001 par value; authorized 2,450,000,000 shares and 1,500,000,000 shares at July 31, 2016 and July 31, 2015, respectively;
908,541,475 and 825,496,238 issued and outstanding at July 31, 2016 and July 31, 2015, respectively
|
|
|
908,542
|
|
|
|
825,496
|
|
Additional
paid-in capital
|
|
|
362,780,108
|
|
|
|
362,556,710
|
|
Accumulated
deficit
|
|
|
(375,704,372
|
)
|
|
|
(372,481,263
|
)
|
Accumulated
other comprehensive income
|
|
|
798,872
|
|
|
|
808,737
|
|
Total
Stockholders’ Deficiency
|
|
|
(11,216,850
|
)
|
|
|
(8,290,320
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
26,274
|
|
|
$
|
2,234,090
|
|
The
accompanying notes are an Integral part of the financial statements.
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
For
the Years Ended July 31,
|
|
|
2016
|
|
2015
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
467,382
|
|
|
$
|
1,185,384
|
|
General
and administrative
|
|
|
1,435,186
|
|
|
|
2,377,530
|
|
Total
Operating Expenses
|
|
|
1,902,568
|
|
|
|
3,562,914
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(1,902,568
|
)
|
|
|
(3,562,914
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Impairment
of patents (Note 4)
|
|
|
(1,165,864
|
)
|
|
|
(320,160
|
)
|
Interest
income
|
|
|
—
|
|
|
|
6
|
|
Interest
expense
|
|
|
(418,500
|
)
|
|
|
(350,028
|
)
|
Change
in fair value of derivative liabilities (Note 9)
|
|
|
263,823
|
|
|
|
1,488,237
|
|
Gain
on extinguishment of debt (Note 6)
|
|
|
—
|
|
|
|
551,501
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(3,223,109
|
)
|
|
|
(2,193,358
|
)
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Dividend (Note 8)
|
|
|
—
|
|
|
|
339,583
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Available to Common Stockholders
|
|
$
|
(3,223,109
|
)
|
|
$
|
(2,532,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Net Loss Per Common Share (Note 12)
|
|
$
|
(.004
|
)
|
|
$
|
(.003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of Common Stock Outstanding - basic and diluted (Note 12)
|
|
|
880,941,375
|
|
|
|
793,346,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
Income:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(3,223,109
|
)
|
|
|
(2,193,358
|
)
|
Change
in foreign currency translation adjustments
|
|
|
(9,865
|
)
|
|
|
36,663
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss)
|
|
|
(3,232,974
|
)
|
|
|
(2,156,695
|
)
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Dividend (Note 8)
|
|
|
—
|
|
|
|
339,583
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss Available to Common Stockholders
|
|
$
|
(3,232,974
|
)
|
|
$
|
(2,496,278
|
)
|
The
accompanying notes are an Integral part of the financial statements.
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
Accumulated
Deficit
|
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
|
Total
Stockholders’ Deficiency
|
|
Balance
at July 31, 2014
|
|
|
1,250
|
|
|
$
|
—
|
|
|
|
778,512,092
|
|
|
$
|
778,512
|
|
|
$
|
362,307,678
|
|
|
$
|
(369,948,322
|
)
|
|
$
|
772,074
|
|
|
$
|
(6,090,058
|
)
|
Issuance of common
stock in exchange for services
|
|
|
—
|
|
|
|
—
|
|
|
|
5,809,780
|
|
|
|
5,810
|
|
|
|
127,190
|
|
|
|
—
|
|
|
|
—
|
|
|
|
133,000
|
|
Issuance of preferred
stock in financing
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common
stock upon conversion of preferred stock
|
|
|
(580
|
)
|
|
|
—
|
|
|
|
25,775,002
|
|
|
|
25,775
|
|
|
|
(25,775
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common
stock for preferred stock make whole payments
|
|
|
—
|
|
|
|
—
|
|
|
|
8,983,048
|
|
|
|
8,983
|
|
|
|
147,617
|
|
|
|
—
|
|
|
|
—
|
|
|
|
156,600
|
|
Exercise of stock
options for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
6,416,316
|
|
|
|
6,416
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,416
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,193,358
|
)
|
|
|
—
|
|
|
|
(2,193,358
|
)
|
Preferred stock
dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(339,583
|
)
|
|
|
—
|
|
|
|
(339,583
|
)
|
Currency
translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,663
|
|
|
|
36,663
|
|
Balance at July
31, 2015
|
|
|
1,170
|
|
|
$
|
—
|
|
|
|
825,496,238
|
|
|
$
|
825,496
|
|
|
$
|
362,556,710
|
|
|
$
|
(372,481,263
|
)
|
|
$
|
808,737
|
|
|
$
|
(8,290,320
|
)
|
Issuance of common
stock in exchange for services
|
|
|
—
|
|
|
|
|
|
|
|
300,000
|
|
|
|
300
|
|
|
|
4,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,500
|
|
Issuance of common
stock upon conversion of preferred stock
|
|
|
(550
|
)
|
|
|
|
|
|
|
36,666,665
|
|
|
|
36,667
|
|
|
|
(36,667
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common
stock for preferred stock make whole payments
|
|
|
|
|
|
|
|
|
|
|
20,139,207
|
|
|
|
20,139
|
|
|
|
128,361
|
|
|
|
—
|
|
|
|
—
|
|
|
|
148,500
|
|
Exercise of stock
options for cash
|
|
|
—
|
|
|
|
|
|
|
|
25,939,365
|
|
|
|
25,940
|
|
|
|
(25,940
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of stock
options for compensation liabilities
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
123,147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
123,147
|
|
Issuance of stock
options as compensation
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,297
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,297
|
|
Net loss
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,223,109
|
)
|
|
|
—
|
|
|
|
(3,223,109
|
)
|
Currency
translation adjustment
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,865
|
)
|
|
|
(9,865
|
)
|
Balance
at July 31, 2016
|
|
|
620
|
|
|
$
|
—
|
|
|
|
908,541,475
|
|
|
$
|
908,542
|
|
|
$
|
362,780,108
|
|
|
$
|
(375,704,372
|
)
|
|
$
|
798,872
|
|
|
$
|
(11,216,850
|
)
|
The
accompanying notes are an Integral part of the financial statements.
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
For
the Twelve Months
|
|
|
Ended
July 31,
|
|
|
2016
|
|
2015
|
Cash Flows From Operating
Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,223,109
|
)
|
|
$
|
(2,193,358
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
265,210
|
|
|
|
380,680
|
|
Common
stock issued for services rendered
|
|
|
4,500
|
|
|
|
133,000
|
|
Write-off
of patents
|
|
|
1,165,864
|
|
|
|
320,160
|
|
Issuance
of stock options as compensation
|
|
|
27,344
|
|
|
|
|
|
Common
stock issued for interest on convertible debentures and preferred stock
|
|
|
148,500
|
|
|
|
156,600
|
|
Change
in fair value of derivative liabilities
|
|
|
(263,823
|
)
|
|
|
(1,488,237
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
1,056,955
|
|
|
|
(117,739
|
)
|
Deferred
revenue
|
|
|
—
|
|
|
|
(223,662
|
)
|
Other
current assets
|
|
|
43,076
|
|
|
|
147,820
|
|
Net
Cash Used in Operating Activities
|
|
|
(775,483
|
)
|
|
|
(2,884,736
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities:
|
|
|
|
|
|
|
|
|
Costs
incurred for patents
|
|
|
—
|
|
|
|
(90,982
|
)
|
Net
Cash Used In Investing Activities
|
|
|
—
|
|
|
|
(90,982
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
50,000
|
|
|
|
—
|
|
Proceeds
from exercise of stock options
|
|
|
2,952
|
|
|
|
6,416
|
|
Proceeds
from issuance of preferred stock, net
|
|
|
—
|
|
|
|
475,000
|
|
Net
Cash Provided by Financing Activities
|
|
|
52,952
|
|
|
|
481,416
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rates on Cash
|
|
|
(10,535
|
)
|
|
|
(25,222
|
)
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash
and Cash Equivalents
|
|
|
(733,066
|
)
|
|
|
(2,519,524
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Year
|
|
|
749,965
|
|
|
|
3,269,489
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Year
|
|
$
|
16,899
|
|
|
$
|
749,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid in cash
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuance of stock options
to satisfy compensation liabilities
|
|
$
|
123,147
|
|
|
$
|
—
|
|
The
accompanying notes are an Integral part of the financial statements.
Note
1 - Organization of Business and Going Concern:
Generex
Biotechnology Corporation (the Company) and its wholly-owned subsidiary Generex Pharmaceuticals, Inc. has been engaged in the
research and development of drug delivery systems and technology. Since its inception, the Company has devoted its efforts and
resources to the development of a platform technology for the oral administration of large molecule drugs, including proteins,
peptides, monoclonal antibodies, hormones and vaccines, which historically have been administered by injection, either subcutaneously
or intravenously.
The
Company’s wholly-owned subsidiary, Antigen Express, Inc. (Antigen), has been engaged in research and development of technologies
and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases. The Company’s immunomedicine
products work by stimulating the immune system to either attack offending agents (i.e., cancer cells, bacteria, and viruses) or
to stop attacking benign elements (i.e., self proteins and allergens). The immunomedicine products are based on two platform technologies
that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. These technologies are
expected to greatly boost immune cell responses which diagnose and treat the ailments and conditions.
The
Company has a limited history of operations and limited revenue to date. Although the Company has had several product candidates
that are in various research or early stages of pre-clinical and clinical development, due to its lack of funding the Company
has effectively ceased these operations and is now seeking new investment opportunities (see Note 15). There can be no assurance
that the Company will be successful in completing these investment opportunities and maintaining its position as a going concern.
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has experienced negative
cash flows from operations since inception and has an accumulated deficit of approximately $376 million and a working capital
deficiency of approximately $9.0 million at July 31, 2016. The Company has funded its activities to date almost exclusively from
debt and equity financings, as well as the sale of real estate assets.
The
Company will continue to require substantial funds to implement its new investment acquisition plans. Management’s
plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common
stock, preferred stock offerings, issuances of debt and convertible debt instruments. Management is also actively pursuing
financial and strategic alternatives, including strategic investments and divestitures, industry collaboration activities and
strategic partners.
These
factors raise substantial doubt regarding the Company’s ability to continue as a going concern. There are no assurances
that such additional funding will be achieved and that the Company will succeed in its future operations. The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts
of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s inability
to obtain required funding in the near future or its inability to obtain funding on favorable terms will have a material adverse
effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional
capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially
and adversely affected, and the Company may have to cease operations.
Note
2 - Summary of Significant Accounting Policies:
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Cash
and Cash Equivalents
The
Company considers
all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents.
Property
and Equipment
Property
and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets, which range from three to thirty years. Gains and losses on depreciable assets retired or
sold are recognized in the statement of operations and comprehensive loss in the year of disposal. Repairs and maintenance expenditures
are expensed as incurred.
Patents
Capitalized
patent costs represent legal costs incurred to establish patents and a portion of the acquisition price paid attributed to patents
upon the acquisition of Antigen in August 2003. When patents reach a mature stage, any associated legal costs are comprised
mostly of maintenance fees and costs of national applications and are expensed as incurred. Capitalized patent costs are
amortized on a straight line basis over the remaining life of the patent. As patents are abandoned, the net book value of
the patent is written off.
In the fiscal year ended July 31, 2016, the Company recorded a write down of $1,165,864 (2015
- $320,160) on the Company’s patents.
Impairment
or Disposal of Long-Lived Assets and Intangibles
The
Company assesses the impairment of long-lived assets under FASB ASC Topic 360 whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment
loss only if its carrying amount is not recoverable and exceeds its fair value. The carrying amount of the long-lived asset is
not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposal of
the asset. All patents were written off in the fiscal year ended July 31, 2016.
Derivative
Warrant Liability
The
Company’s derivative warrant instruments are measured at fair value using the binomial valuation model which takes into
account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current
price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for
the term of the warrant. The liability is revalued at each reporting period and changes in fair value are recognized
in the consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative
warrant liability.” See
Note 9 – Derivative Liabilities
.
Revenue
Recognition and Deferred Revenue
Revenues
from the sale of commercial products are recognized at the time title of goods passes to the buyer and the buyer assumes the risks
and rewards of ownership. Sales are reported net of estimated returns and allowances, discounts, mail-in rebate redemptions and
credit card chargebacks. If actual sales returns, allowances, discounts, mail-in rebate redemptions or credit card chargebacks
are greater than estimated by management, additional expense may be incurred.
Research
and Development Costs
Expenditures
for research and development are expensed as incurred and include, among other costs, those related to the production of experimental
drugs, including payroll costs, and amounts incurred for conducting clinical trials. Amounts expected to be received from governments
under research and development tax credit arrangements are offset against current research and development expense.
Income
Taxes
Income
taxes are accounted for under the asset and liability method prescribed by FASB ASC Topic 740. These standards require a company
to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical
merits of the position. If the more likely than not threshold is met, a company must measure the tax position to determine
the amount to recognize in the financial statements. Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates
expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if
it is more likely than not that some or all of the deferred tax asset will not be realized. At
July 31, 2016 and 2015,
the Company had a full valuation allowance equal to the amount of the net deferred tax asset.
The
Company adopted the FASB guidance concerning accounting for uncertainty in income taxes, which clarifies the accounting and disclosure
for uncertainty in tax positions, as of August 1, 2007. The guidance requires that the Company determine whether it is more likely
than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does
not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest
amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement. Based on the Company’s
evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated
financial statements.
Stock-Based
Compensation
The
Company follows FASB ASC Topic 718 which requires that new, modified and unvested share-based payment transactions with employees,
such as grants of stock options and restricted stock, be recognized in the financial statements based on their fair value at the
grant date and recognized as compensation expense over their vesting periods. The Company estimates the fair value of stock options
as of the date of grant using the Black-Scholes option pricing model and restricted stock based on the quoted market price or
the value of the services provided, whichever is more readily determinable. The Company also follows the guidance in FASB ASC
Topic 505 for equity based payments to non-employees for equity instruments issued to consultants and other non-employees.
Net
Loss per Common Share
Basic
earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding
during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings. Refer to Note 12 for methodology for determining net loss per
share.
Comprehensive
Income/(Loss)
Other
comprehensive income/(loss), which includes only foreign currency translation adjustments, is shown in the consolidated statements
of operations and comprehensive loss and in the consolidated statements of changes in stockholders’ deficiency.
Concentration
of Credit Risk
The
Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance
Corporation and the U.S. Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and has
not experienced any collection losses with these financial institutions.
Foreign
Currency Translation
Foreign
denominated assets and liabilities of the Company are translated into U.S. dollars at the prevailing exchange rates in effect
at the end of the reporting period. Income statement accounts are translated at a weighted average of exchange rates which were
in effect during the period. Translation adjustments that arise from translating the foreign subsidiary’s financial statements
from local currency to U.S. currency are recorded in the other comprehensive loss component of stockholders’ equity.
Fair
Value of Financial Instruments
Fair
value is defined under FASB ASC Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or the most advantageous market for an asset or liability in an orderly transaction between participants
on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The standard describes a fair value hierarchy based on the levels of inputs, of which the first
two are considered observable and the last unobservable, that may be used to measure fair value. The levels are as follows:
|
•
|
Level
1 - Quoted prices in active markets for identical assets or liabilities
|
|
•
|
Level
2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable
market data for substantially the full term of the assets or liabilities
|
|
•
|
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets
or liabilities
|
The
Company’s financial instruments consist of cash and cash equivalents, other current assets, accounts payable and accrued
expenses, loan payable as well as derivative warrant liabilities and derivative additional investment rights. All of these items,
except for the derivative warrant liabilities and derivative additional investment rights, were determined to be Level 1 fair
value measurements. The carrying amounts of cash and cash equivalents, other current assets, accounts payable and accrued expenses
and the loan payable approximate their respective fair values because of the short maturities of these instruments.
The
Company has determined its derivative warrant liability and its derivative additional investment rights liability to be Level
2 fair value measurements and has used the binomial lattice model valuation method to calculate the fair value of the derivative
warrant liability and the derivative additional investment rights liability at July 31, 2016 and 2015. See
Note 9 – Derivative
Liabilities
.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
The
Company evaluates its estimates, including those related to long lived assets (including patents) impairment valuations, derivatives
and contingencies and litigation, on an ongoing basis. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Critical
accounting estimates are reviewed and discussed with the Board of Directors. The Company considers an accounting estimate to be
critical if it requires assumptions to be made that were uncertain at the time the estimate was made, if changes in the estimate
or if different estimates that could have been selected would have a material impact on our results of operations or financial
condition.
Effects
of Recent Accounting Pronouncements
Recently
Issued Accounting Pronouncements
In
November 2014, the FASB issued guidance regarding
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued
in the Form of a Share Is More Akin to Debt or to Equity.
The guidance will be effective for the Company’s first quarter
of the fiscal year ended July 31, 2017. The Company has determined that this accounting standard has no impact on its consolidated
financial statements.
In
August 2014, the FASB issued guidance regarding disclosure of uncertainties about an entity’s ability to continue as a going
concern. The guidance will be effective for the Company’s fiscal year ended July 31, 2017 and subsequent interim periods.
The Company has determined that this accounting standard has no impact on its consolidated financial statements.
Note
3 – Property and Equipment
:
The
costs and accumulated depreciation of property and equipment are summarized as follows:
|
|
July
31,
|
|
|
2016
|
|
2015
|
Furniture
and Fixtures
|
|
$
|
10,900
|
|
|
$
|
10,954
|
|
Less:
Accumulated depreciation
|
|
|
9,602
|
|
|
|
8,085
|
|
Property
and Equipment, net
|
|
$
|
1,298
|
|
|
$
|
2,869
|
|
Depreciation
expense related to property and equipment amounted to $1,517 and $1,726 for the years ended July 31, 2016 and 2015, respectively.
Note
4 - Patents
:
The
costs and accumulated amortization of patents are summarized as follows:
|
|
July
31,
|
|
|
2016
|
|
2015
|
Patents
|
|
$
|
—
|
|
|
$
|
4,705,715
|
|
Less:
Accumulated amortization
|
|
|
—
|
|
|
|
3,275,699
|
|
Patents,
net
|
|
$
|
—
|
|
|
$
|
1,430,016
|
|
Weighted
average life
|
|
|
0
years
|
|
|
|
6.6
years
|
|
Amortization
expense amounted to $281,894 and $378,954 for the years ended July 31, 2016 and 2015, respectively. No amortization expense is
expected for the years ended July 31, 2017 through 2022. During the year ended July 31, 2016, the Company wrote off patents with
a net book value of $1,165,864 as the patents had been abandoned or were no longer being used. During the year ended July 31,
2015, the Company wrote off patents with a net book value of $320,160 as the patents had been abandoned or were no longer being
used.
Note
5 - Income Taxes
:
The
Company has incurred losses since inception, which have generated net operating loss (“NOL”) carryforwards. The NOL
carryforwards arise from both United States and Canadian sources. Pre-tax (losses) arising from domestic operations (United States)
were $(1,374,725) and $(677,616) for the years ended July 31, 2016 and 2015, respectively. Pre-tax (losses) arising from foreign
operations (Canada) were $(504,101) and $(1,515,741) for the years ended July 31, 2016 and 2015, respectively. As of July 31,
2016, the Company has NOL carryforwards in Generex Biotechnology Corporation of approximately $201 million, which expire in 2018
through 2036, in Generex Pharmaceuticals Inc. of approximately $32 million, which expire in 2017 through 2036, and in Antigen
Express, Inc. of approximately $29 million, which expire in 2026 through 2036. These loss carryforwards are subject to limitation
due to the acquisition of Antigen and may be limited in future years due to certain structural ownership changes which have occurred
over the last several years related to the Company’s equity and convertible debenture financing transactions.
For
the years ended July 31, 2016 and 2015, the Company’s effective tax rate differs from the federal statutory rate principally
due to net operating losses and other temporary differences for which no benefit was recorded.
Deferred
income taxes consist of the following:
|
|
July
31,
|
|
|
2016
|
|
2015
|
Net
operating loss carryforwards
|
|
$
|
86,895,338
|
|
|
$
|
86,370,251
|
|
Other
temporary differences
|
|
|
150,004
|
|
|
|
338,000
|
|
Intangible
assets
|
|
|
—
|
|
|
|
108,022
|
|
Total
Deferred Tax Assets
|
|
|
87,045,342
|
|
|
|
86,816,273
|
|
Valuation
Allowance
|
|
|
(86,678,987
|
)
|
|
|
(86,816,273
|
)
|
Deferred
Tax Liabilities
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(366,355
|
)
|
|
|
—
|
|
Other
temporary differences
|
|
|
—
|
|
|
|
—
|
|
Total
Deferred Tax Liabilities
|
|
|
—
|
|
|
|
—
|
|
Net
Deferred Income Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended July
31, 2016 and 2015 is as follows:
|
|
July
31,
|
|
|
2016
|
|
2015
|
Federal
statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Increase
(decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
Imputed
interest income on intercompany receivables from foreign subsidiaries
|
|
|
4
|
|
|
|
4
|
|
Non-deductible
or non-taxable items
|
|
|
(3
|
)
|
|
|
(24
|
)
|
Other
temporary differences
|
|
|
26
|
|
|
|
170
|
|
Change
in valuation allowance
|
|
|
7
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
As
of July 31, 2016, the Company had no tax benefits which have not been fully allowed for, and no adjustment to its financial position,
results of operations or cash flows was required. The Company does not expect that unrecognized tax benefits will increase within
the next twelve months. The Company records interest and penalties related to tax matters within other expense on the accompanying
consolidated statement of operations. These amounts are not material to the consolidated financial statements for the periods
presented. Generally, tax years 2013 to 2016 remain open to examination by the Internal Revenue Agency or other tax jurisdictions
to which the Company is subject. The Company’s Canadian tax returns are subject to examination by federal and provincial
taxing authorities in Canada. Generally, tax years 2008 to 2016 remain open to examination by the Canada Revenue Agency or other
tax jurisdictions to which the Company is subject.
Note
6 - Accounts Payable and Accrued Expenses
:
Accounts
payable and accrued expenses consist of the following:
|
|
July
31,
|
|
|
2016
|
|
2015
|
Accounts Payable and Accruals
- General and Administrative
|
|
$
|
3,750,638
|
|
|
$
|
3,156,951
|
|
Accounts Payable and Accruals - Research and
Development
|
|
|
4,395,061
|
|
|
|
3,861,902
|
|
Accounts Payable and Accruals - Selling and
Marketing
|
|
|
326,229
|
|
|
|
326,250
|
|
Accrued Make-whole Payments on Convertible Preferred
Stock (See Note 8)
|
|
|
167,400
|
|
|
|
315,900
|
|
Executive Compensation
and Directors’ Fees Payable
|
|
|
311,542
|
|
|
|
357,330
|
|
Total
|
|
$
|
8,950,870
|
|
|
$
|
8,018,333
|
|
In
the fiscal year ended July 31, 2016 the Company did not have extinguishment of debt. In the fiscal year ended July 31, 2015 the
Company had a gain on extinguishment of debt of $327,839 related to the final settlement of a previously owed balance to a vendor.
In addition, the Company wrote off a balance of $223,662 previously reported as deferred revenue on the consolidated balance sheets.
These amounts have been reported on the Company’s consolidated statements of operations and comprehensive loss under the
caption “Gain on extinguishment of debt” and are included in the changes in accounts payable and accrued expenses
and deferred revenue categories, respectively in the consolidated statements of cash flows.
During
the year the Company received a loan in the amount of $50,000 in order to fund certain operating costs. This loan is unsecured,
due on demand and bears interest at a rate of 9% per annum.
Note
7 - Commitments and Contingent Liabilities
:
Leases
As
at July 31, 2016 the Company does not have any outstanding operating lease agreements for the use of operating space, vehicles
and office equipment.
Lease
expense amounted to approximately $25,000 and $59,000 for the years ended July 31, 2016 and 2015, respectively.
Pending
Litigation
In
February 2001, a former business associate of the former Vice President of Research and Development (“VP”) of the
Company and an entity known as Centrum Technologies Inc. (“CTI”) commenced an action in the Ontario Superior Court
of Justice against the Company and the VP seeking, among other things, damages for alleged breaches of contract and tortious acts
related to a business relationship between this former associate and the VP that ceased in July 1996. The plaintiffs’ statement
of claim also seeks to enjoin the use, if any, by the Company of three patents allegedly owned by CTI. The three patents are entitled
Liquid Formulations for Proteinic Pharmaceuticals
,
Vaccine Delivery System for Immunization, Using Biodegradable Polymer
Microspheres
, and
Controlled Releases of Drugs or Hormones in Biodegradable Polymer Microspheres
. It is the Company’s
position that the buccal drug delivery technologies which are the subject matter of the Company’s research, development,
and commercialization efforts, including Generex Oral-lyn™ and the RapidMist™ Diabetes Management System, do not make
use of, are not derivative of, do not infringe upon, and are entirely different from the intellectual property identified in the
plaintiffs’ statement of claim. On July 20, 2001, the Company filed a preliminary motion to dismiss the action of CTI as
a nonexistent entity or, alternatively, to stay such action on the grounds of want of authority of such entity to commence the
action. The plaintiffs brought a cross motion to amend the statement of claim to substitute Centrum Biotechnologies, Inc. (“CBI”)
for CTI. CBI is a corporation of which 50 percent of the shares are owned by the former business associate and the remaining 50
percent are owned by the Company. Consequently, the shareholders of CBI are in a deadlock. The court granted the Company’s
motion to dismiss the action of CTI and denied the plaintiffs’ cross motion without prejudice to the former business associate
to seek leave to bring a derivative action in the name of or on behalf of CBI. The former business associate subsequently filed
an application with the Ontario Superior Court of Justice for an order granting him leave to file an action in the name of and
on behalf of CBI against the VP and the Company. The Company opposed the application. In September 2003, the Ontario Superior
Court of Justice granted the request and issued an order giving the former business associate leave to file an action in the name
of and on behalf of CBI against the VP and the Company. A statement of claim was served in July 2004. The Company is not able
to predict the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss,
if any, from this legal proceeding.
On
May 20, 2011, Ms. Perri filed a statement of claim (subsequently amended) in the Ontario Superior Court of Justice, naming as
defendants the Company and certain directors of the Company, Mr. Barratt, Ms. Masterson, Mr. McGee, and Mr. Fletcher. In this
action, Ms. Perri has alleged that defendants engaged in discrimination, harassment, bad faith and infliction of mental distress
in connection with the termination of her employment with the Company. Ms. Perri is seeking damages in this action in excess of
$7,000,000 for, among other things, breach of contract, breach of fiduciary duty, violations of the Ontario Human Rights Code
and aggravated and punitive damages. On September 20, 2011, the defendants filed a statement of defense and counterclaim, also
naming Time Release Corp., Khazak Group Consulting Corp., and David Khazak, C.A. as defendants by counterclaim, and seeking damages
of approximately $2.3 million in funds that the defendants allege Ms. Perri wrongly caused the Company to pay to third parties
in varying amounts over several years and an accounting of certain third-party payments, plus interests and costs. The factual
basis for the counterclaim involves payments made by the Company to third parties believed to be related to Ms. Perri. The Company
intends to defend this action and pursue its counterclaim vigorously and is not able to predict the ultimate outcome of this legal
proceeding at the present time or to estimate an amount or range of potential loss, if any, from this legal proceeding.
On
June 1, 2011, Golden Bull Estates Ltd. filed a claim (subsequently amended) in the Ontario Superior Court of Justice, naming the
Company, 1097346 Ontario, Inc. and Generex Pharmaceuticals, Inc. as defendants. The plaintiff, Golden Bull Estates Ltd., is controlled
by Ms. Perri. The plaintiff alleges damages in the amount of $550,000 for breach of contract, $50,000 for punitive damages, plus
interest and costs. The plaintiff’s claims relate to an alleged contract between the plaintiff and the Company for property
management services for certain Ontario properties owned by the Company. The Company terminated the plaintiff’s property
management services in April 2011. Following the close of pleadings, the Company served a motion for summary judgment. The plaintiff
responded by amending its statement of claim to include a claim to the Company’s interest in certain of its real estate
holdings. The plaintiff moved for leave to issue and register a Certificate of Pending Litigation in respect of this real estate.
The motion was not successful in respect of any current real estate holdings of the Company. The Company is not able to predict
the ultimate outcome of this legal proceeding at the present time or to estimate an amount or range of potential loss, if any,
from this legal proceeding.
In
December 2011, a vendor of the Company commenced an action against the Company and its subsidiary, Generex Pharmaceuticals, Inc.,
in the Ontario Superior Court of Justice claiming damages for unpaid invoices including interest in the amount of $429,000, in
addition to costs and further interest. The Company responded to this statement of claim and also asserted a counterclaim
in the proceeding for $200,000 arising from the vendor’s breach of contract and detinue, together with interest and costs.
On November 16, 2012, the parties agreed to settle this action and the Company has agreed to pay the plaintiff $125,000, following
the spinout of its subsidiary Antigen, from the proceeds of any public or private financing related to Antigen subsequent to such
spinout. Each party agreed to execute mutual releases to the claim and counterclaim to be held in trust by each party’s
counsel until payment of the settlement amount. Following payment to the plaintiff, the parties agree that a Consent Dismissal
Order without costs will be filed with the court. If the Company fails to make the payment following completion of any post-spinout
financing related to Antigen or any other subsidiaries, the Plaintiffs may take out a judgment in the amount of the claim plus
interest of 3% per annum and costs fixed at $25,000.
The
Company is involved in certain other legal proceedings in addition to those specifically described herein. Subject to the uncertainty
inherent in all litigation, the Company does not believe at the present time that the resolution of any of these legal proceedings
is likely to have a material adverse effect on the Company’s consolidated financial position, operations or cash flows.
With
respect to all litigation, as additional information concerning the estimates used by the Company becomes known, the Company reassesses
its position both with respect to accrued liabilities and other potential exposures.
Employment
Agreements
As
of July 31, 2015, the Company had an employment arrangement with its President & Chief Executive Officer, whereby the Company
is required to pay an annual base salary of $475,000. The term of service for this executive extended through March 16, 2008,
which term had not been formally extended as of July 31, 2015. In the event the agreement is terminated, by reason other than
cause, death, voluntary retirement or disability, the Company is required to pay the employee in one lump sum twelve months’
base salary and the average annual bonus. During fiscal 2016 this executive resigned and the Company is no longer subject to the
potential termination payment.
As
of July 31, 2015, the Company has an at will employment agreement with an Antigen employee requiring the Company to pay an annual
aggregate salary of $260,480 to the employee. In the event the agreement is terminated by reason other than death, disability,
a voluntary termination not for good reason (as defined in the agreement) or a termination for cause, the Company is required
to pay the employee severance of six months’ salary ($130,240), in accordance with the terms of the individual’s employment
agreement. During fiscal 2016 this executive resigned and the Company is no longer subject to the potential termination payment.
Note
8 - Series A, B, C, D, E, F & G 9% Convertible Preferred Stock:
Series
A 9% Convertible Preferred Stock
The
Company has authorized 5,500 shares of Series A 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per
share. Pursuant to a securities purchase agreement dated July 8, 2011, the Company sold an aggregate of 2,575 shares of convertible
preferred stock, as well as accompanying warrants to purchase 17,166,666 shares of common stock. An aggregate of 17,166,666 shares
of the Company’s common stock were issuable upon conversion of the convertible preferred stock which was issued at the initial
closing. As of the end of the Company’s fiscal year 2012, all of the issued Series A 9% Convertible Preferred Stock had
been converted to common stock. There were 17,166,666 shares of common stock issued upon the conversion of the Series A convertible
preferred stock and 6,129,666 shares of common stock issued as “make-whole payments” on such conversions.
Series
B 9% Convertible Preferred Stock
The
Company has authorized 2,000 shares of Series B 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per
share. Pursuant to a securities purchase agreement dated January 31, 2012, the Company sold an aggregate of 2,000 shares of Series
B convertible preferred stock, as well as accompanying warrants to purchase 13,333,333 shares of common stock. An aggregate of
13,333,333 shares of the Company’s common stock were issuable upon conversion of the Series B convertible preferred stock
which was issued at the initial closing. On December 10, 2012, the triggering of the price protection features of the Series B
convertible preferred stock resulted in a decrease of the conversion price from $0.08 to $0.03 per share and a corresponding increase
in the number of common shares underlying the remaining 792 shares of Series B convertible preferred stock as of December 10,
2012 from 9,897,500 to 26,393,333. As of the end of the Company’s fiscal year 2013, all of the issued Series B 9% Convertible
Preferred Stock had been converted to common stock. There were 38,520,832 shares of common stock issued upon the conversion of
the Series B convertible preferred stock and 14,819,679 shares of common stock issued as “make-whole payments” on
such conversions.
Series
C 9% Convertible Preferred Stock
The
Company has authorized 750 shares of Series C 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per
share. Pursuant to a securities purchase agreement dated August 8, 2012, the Company sold an aggregate of 750 shares of Series
C convertible preferred stock, as well as accompanying warrants to purchase 9,375,000 shares of common stock. An aggregate of
9,375,000 shares of the Company’s common stock were issuable upon conversion of the Series C convertible preferred stock
which was issued at the initial closing. On December 10, 2012, the triggering of the price protection features of the Series C
convertible preferred stock resulted in a decrease of the conversion price from $0.08 to $0.03 per share and a corresponding increase
in the number of common shares underlying the 650 shares of Series C convertible preferred stock as of December 10, 2012 from
8,125,000 to 21,666,666. As of the end of the Company’s fiscal year 2013, all of the issued Series C 9% Convertible Preferred
Stock had been converted to common stock. There were 22,916,665 shares of common stock issued upon the conversion of the Series
C convertible preferred stock and 6,664,863 shares of common stock issued as “make-whole payments” on such conversions.
Series
D 9% Convertible Preferred Stock
The
Company has authorized 750 shares of Series D 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per
share. Pursuant to a securities purchase agreement dated December 10, 2012, the Company sold an aggregate of 750 shares of Series
D convertible preferred stock, as well as accompanying warrants to purchase 24,999,999 shares of common stock. An aggregate of
24,999,999 shares of the Company’s common stock were issuable upon conversion of the Series D convertible preferred stock
which was issued at the initial closing. As of the end of the Company’s fiscal year 2013, all of the Series D convertible
preferred stock had been converted to common stock. There were 24,999,999 shares of common stock issued upon the conversion of
the Series D convertible preferred stock and 7,825,191 shares of common stock issued as “make-whole payments” on such
conversions.
Series
E 9% Convertible Preferred Stock
The
Company has authorized 2,450 shares of Series E 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per
share. Pursuant to a securities purchase agreement dated June 17, 2013, the Company sold an aggregate of 1,225 shares of Series
E convertible preferred stock, as well as accompanying warrants to purchase 40,833,335 shares of common stock. An aggregate of
40,833,335 shares of the Company’s common stock are issuable upon conversion of the Series E convertible preferred stock
which was issued at the initial closing on June 17, 2013. Pursuant to a securities purchase agreement dated January 14, 2014,
the Company sold an aggregate of 800 shares of Series E convertible preferred stock, as well as accompanying warrants to purchase
26,666,668 shares of common stocks. An aggregate of 26,666,668 shares of the Company’s common stock are issuable upon conversion
of the Series E convertible preferred stock which was issued at the closing on January 15, 2014. The conversion price for the
Series E Convertible Preferred Stock was adjusted from $0.03 to $0.015 after the Series G Convertible Preferred Stock financing
on June 24, 2015 and the number of common shares underlying the 25 Series E Convertible Preferred Stock outstanding at that date
increased from 833,333 to 1,666,666. As of July 31, 2015, all of the Series E convertible preferred stock had been converted to
common stock. There were 68,333,333 shares of common stock issued upon the conversion of the Series E convertible preferred stock
and
19,035,193 shares of common stock issued as “make-whole payments” on such conversions.
Similar
to the accounting treatment of the Series F and G 9% Convertible Preferred Stock below, as the assigned fair values of the various
components of the financing were greater than the net cash proceeds from the transaction, the excess of $472,279 was treated as
a “deemed dividend” for accounting purposes and was reported on the Company’s consolidated statement of operations
and comprehensive loss for the fiscal year ended July 31, 2014 under the caption “Preferred Stock Dividend”.
Series
F and G 9% Convertible Preferred Stock
The
Company has authorized 4,150 shares of Series F 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per
share. Pursuant to a securities purchase agreement dated March 27, 2014, the Company sold an aggregate of 2,075 shares of Series
F convertible preferred stock, as well as accompanying warrants to purchase 69,166,667 shares of common stock. An aggregate of
69,166,667 shares of the Company’s common stock were issuable upon conversion of the Series F convertible preferred stock
which was issued at the closing on March 27, 2014.
The
Company has authorized 1,000 shares of Series G 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per
share. Pursuant to a securities purchase agreement dated June 24, 2015, the Company sold an aggregate of 500 shares of Series
G convertible preferred stock, as well as accompanying warrants to purchase 33,333,333 shares of common stock. An aggregate of
33,333,333 shares of the Company’s common stock are issuable upon conversion of the Series G convertible preferred stock
which was issued at the closing on June 24, 2015.
Subject
to certain ownership limitations, the convertible preferred stock is convertible at the option of the holder at any time into
shares of the Company’s common stock at an effective conversion price of $0.015 per share (Note: The conversion price for
the Series F Convertible Preferred Stock was adjusted from $0.03 to $0.015 in conjunction with the Series G Convertible Preferred
Stock financing on June 24, 2015), and will accrue a 9% dividend until the third year anniversary of the issuances. On each one-year
anniversary thereafter, such dividend rate will increase by an additional 3%. The dividend is payable quarterly on September 30,
December 31, March 31 and June 30, beginning on June 30, 2014 and June 30, 2015, respectively, and on each conversion date in
cash, or at the Company’s option, in shares of common stock. In the event that the Series F and G convertible preferred
stock is converted prior to March 27, 2017 and June 24, 2018, respectively, the Company will pay the holder of the converted preferred
stock an amount equal to $270 per $1,000 of stated value of the convertible preferred stock, less the amount of all prior quarterly
dividends paid on such converted preferred stock before the relevant conversion date. Such “make-whole payment” may
be made in cash or, at the Company’s option, in shares of its common stock. In addition, beginning on the third anniversary
date of the issuances, the Company will pay dividends on shares of preferred stock equal to (on an as-if-converted-to-common-stock
basis) and in the same form as dividends (other than dividends in the form of common stock) actually paid on shares of the common
stock when, and if such dividends are paid. The Company will incur a late fee of 18% per annum on unpaid dividends.
The
conversion price of the convertible preferred stock is subject to adjustment in the case of stock splits, stock dividends, combinations
of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. The conversion price
will also be adjusted if the Company sells or grants any shares of common stock or securities convertible into, or rights to acquire,
common stock at an effective price per share that is lower than the then conversion price, except in the event of certain exempt
issuances. In addition, the holders of convertible preferred stock will be entitled to receive any securities or rights to acquire
securities or property granted or issued by the Company pro rata to the holders of its common stock to the same extent as if such
holders had converted all of their shares of convertible preferred stock. In the event of a fundamental transaction, such as a
merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations, the holders of convertible
preferred stock will be entitled to receive, upon conversion of their shares, any securities or other consideration received by
the holders of the Company’s common stock pursuant to the fundamental transaction. The conversion price for the Series F
Convertible Preferred Stock was adjusted from $0.03 to $0.015 for the Series F Convertible Preferred Stock in conjunction with
the Series G Convertible Preferred Stock on June 24, 2015 and the number of common shares underlying the 838 Series F Convertible
Preferred Stock outstanding at that date increased from 27,941,667 to 55,883,333.
In
conjunction with the issuance of the Series F convertible preferred stock in March 2014 and the issuance of the Series G convertible
preferred stock in June 2015, the Company also issued 69,166,667 and 33,333,333 warrants, respectively to the investors. Subject
to certain ownership limitations, the warrants will be exercisable at any time after their respective dates of issuance and on
or before the fifth-year anniversary thereafter at an exercise price of $0.015 per share of common stock (Note: The conversion
price for the warrants issued in the Series F Convertible Preferred Stock financing was adjusted from $0.03 to $0.015 in conjunction
with the Series G Convertible Preferred Stock financing on June 24, 2015 and the number of warrants increased from 69,166,667
to 138,333,334).
The
exercise price of the warrants and, in some cases, the number of shares issuable upon exercise, are subject to adjustment in the
case of stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions
to common stockholders. The exercise price and number of shares of common stock issuable upon exercise will also be adjusted if
the Company sells or grants any shares of common stock or securities convertible into, or rights to acquire, common stock at an
effective price per share that is lower than the then exercise price, except in the event of certain exempt issuances. In addition,
the warrant holders will be entitled to receive any securities or rights to acquire securities or property granted or issued by
the Company pro rata to the holders of its common stock to the same extent as if such holders had exercised all of their warrants.
In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations
or recapitalizations, the warrant holders will be entitled to receive, upon exercise of their warrants, any securities or other
consideration received by the holders of the Company’s common stock pursuant to the fundamental transaction. These warrants
have been classified as derivative liabilities and are described further in
Note 9 – Derivative Liabilities
.
In
addition, until the first anniversary date of the March 2014 securities purchase agreement and the first anniversary of the August
19, 2015 shareholder approval of the increase in authorized stock, respectively, each investor may, in its sole determination,
elect to purchase, severally and not jointly with the other investors, in one or more purchases, in the ratio of such investor's
original subscription amount to the original aggregate subscription amount of all investors, additional units consisting of convertible
preferred stock and warrants at a purchase price of $1,000 per unit with an aggregate subscription amount thereof of up to $2,075,000
and $500,000, respectively, which units will have terms identical to the units of convertible preferred stock and warrants issued
in connection with the March 2014 and June 2015 closings. These additional investment rights of the investors have been classified
as derivative liabilities and are described further in
Note 9 – Derivative Liabilities
.
The March 2014 additional
investment rights expired on March 27, 2015 and none had been exercised up to that date. The June 2015 additional investment rights
expire on August 19, 2016 and none have been exercised to date.
As
of July 31, 2016, 1,955 of the Series F convertible preferred stock had been converted to common stock. There were 89,108,331
shares of common stock issued upon the conversion of the Series F convertible preferred stock and 36,533,878 shares of common
stock issued as “make-whole payments” on such conversions. As of July 31, 2016, none of the Series G convertible preferred
stock had been converted to common stock.
Accounting
for proceeds from the Series F convertible preferred stock financing
The
initial cash proceeds, net of issuance costs of $55,000, from the Series F convertible preferred stock financing in March 2014
were $2,020,000. The proceeds from the financing were allocated first to the warrants that were issued in the financing, second
to the additional investment rights associated with the financing and then to the make whole payments and subsequent issuance
costs. As the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a “deemed
dividend” for accounting purposes and was reported on the Company’s consolidated statement of operations and comprehensive
loss for the fiscal year ended July 31, 2014 under the caption “Preferred Stock Dividend”. The calculation methodologies
for the fair values of the derivative warrant liability and the derivative additional investment rights liability are described
in
Note 9 – Derivative Liabilities
below. The fair values assigned to each component and the calculation of the amount
of the deemed dividend are as follows:
Accounting
allocation of initial proceeds
|
|
|
Net
proceeds
|
|
$
|
2,020,000
|
|
Derivative
warrant liability fair value
|
|
|
(2,016,064
|
)
|
Derivative
additional investment rights fair value
|
|
|
(863,735
|
)
|
Other
issuance costs (finders’ fee)
|
|
|
(166,000
|
)
|
Make
whole payments liability
|
|
|
(560,250
|
)
|
Deemed
dividend
|
|
$
|
(1,586,050
|
)
|
The
initial “make-whole payments” of $560,250 on the Series F convertible preferred stock were accrued as of the date
of the financing and the remaining balance of $32,400 after conversions (2015 - $180,900) is included in Accounts Payable and
Accrued Expenses (see Note 6) at July 31, 2016.
Accounting
for proceeds from the Series G convertible preferred stock financing
The
initial cash proceeds, net of issuance costs of $25,000, from the Series G convertible preferred stock financing in June 2015
were $475,000. The proceeds from the financing were allocated first to the warrants that were issued in the financing, second
to the additional investment rights associated with the financing and then to the make whole payments and subsequent issuance
costs. As the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a “deemed
dividend” for accounting purposes and was reported on the Company’s consolidated statement of operations and comprehensive
loss for the fiscal year ended July 31, 2015 under the caption “Preferred Stock Dividend”. The calculation methodologies
for the fair values of the derivative warrant liability and the derivative additional investment rights liability are described
in
Note 9 – Derivative Liabilities
below. The fair values assigned to each component and the calculation of the amount
of the deemed dividend are as follows:
Accounting
allocation of initial proceeds
|
|
|
Net
proceeds
|
|
$
|
475,000
|
|
Derivative
warrant liability fair value
|
|
|
(354,535
|
)
|
Derivative
additional investment rights fair value
|
|
|
(285,048
|
)
|
Other
issuance costs (finders’ fee)
|
|
|
(40,000
|
)
|
Make
whole payments liability
|
|
|
(135,000
|
)
|
Deemed
dividend
|
|
$
|
(339,583
|
)
|
The
initial “make-whole payments” of $135,000 on the Series G convertible preferred stock were accrued as of the date
of the financing and the balance (no conversions have taken place) is included in Accounts Payable and Accrued Expenses (see Note
6) at July 31, 2016 and 2015.
Note
9 - Derivative Liabilities:
Derivative
warrant liability
The
Company has warrants outstanding with price protection provisions that allow for the reduction in the exercise price of the warrants
in the event the Company subsequently issues stock or securities convertible into stock at a price lower than the exercise price
of the warrants. Simultaneously with any reduction to the exercise price, the number of shares of common stock that may be purchased
upon exercise of each of these warrants shall be increased or decreased proportionately, so that after such adjustment the aggregate
exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately
prior to such adjustment.
Accounting
for Derivative Warrant Liability
The
Company’s derivative instruments have been measured at fair value at July 31, 2016 and 2015 using the binomial lattice model.
The Company recognizes all of its warrants with price protection in its consolidated balance sheets as a liability. The liability
is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations
and comprehensive loss. The initial recognition and subsequent changes in fair value of the derivative warrant liability have
no effect on the Company’s consolidated cash flows.
The
derivative warrants outstanding at July 31, 2016 are all currently exercisable with a weighted-average remaining life of 2.1 years.
The
revaluation of the warrants at the end of the respective reporting periods resulted in the recognition of a gain of $314,569 within
the Company’s consolidated statements of operations and comprehensive loss for the fiscal year ended July 31, 2016 and a
gain of $626,763 within the Company’s consolidated statements of operations and comprehensive loss for the fiscal year ended
July 31, 2015, which are included in the consolidated statement of operations and comprehensive loss under the caption “Change
in fair value of derivative liabilities”. The fair values of the warrants at July 31, 2016 and 2015 were $2,048,846 and
$2,363,415, respectively, which are reported on the consolidated balance sheets under the caption “Derivative Warrant Liability”.
The following summarizes the changes in the value of the derivative warrant liability from August 1, 2014 until July 31, 2016:
|
|
Value
|
|
No.
of Warrants
|
Balance
at August 1, 2014 – Derivative warrant liability
|
|
$
|
2,635,643
|
|
|
|
239,788,852
|
|
Additional
warrants from price protection features of existing warrants
|
|
|
2,111,077
|
|
|
|
239,788,852
|
|
Additional
warrants issued in June 2015 financing
|
|
|
354,535
|
|
|
|
33,333,333
|
|
Decrease
in fair value of derivative warrant liability
|
|
|
(2,737,840
|
)
|
|
|
n/a
|
|
Balance
at July 31, 2015 – Derivative warrant liability
|
|
|
2,363,415
|
|
|
|
512,911,037
|
|
Forfeited
or expired
|
|
|
(455,573
|
)
|
|
|
(129,033,516
|
)
|
Increase
in fair value of derivative warrant liability
|
|
|
141,004
|
|
|
|
n/a
|
|
Balance
at July 31, 2016 – Derivative warrant liability
|
|
$
|
2,048,846
|
|
|
|
383,877,521
|
|
Fair
Value Assumptions Used in Accounting for Derivative Warrant Liability
The
Company has determined its derivative warrant liability to be a Level 2 fair value measurement and has used the binominal lattice
pricing model to calculate the fair value as of July 31, 2016 and July 31, 2015. The binomial lattice model requires six basic
data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated
volatility of the stock price in the future, and the dividend rate. Because the warrants contain the price protection feature,
the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the
valuation calculations. The key inputs used in the July 31, 2016 and July 31, 2015 fair value calculations were as follows:
|
|
July
31, 2016
|
|
July
31, 2015
|
Current
exercise price
|
|
$
|
0.015
|
|
|
$
|
0.015
|
|
Time
to expiration
|
|
|
2.1
years
|
|
|
|
2.5
years
|
|
Risk-free
interest rate
|
|
|
0.76
|
%
|
|
|
1.08
|
%
|
Estimated
volatility
|
|
|
101
|
%
|
|
|
82
|
%
|
Dividend
|
|
|
-0-
|
|
|
|
-0-
|
|
Stock
price at period end date
|
|
$
|
0.008
|
|
|
$
|
0.010
|
|
Fair
Value Assumptions Used in Accounting for Derivative Additional Investment Rights Liability
The
Company has determined the derivative additional investment rights liability to be a Level 2 fair value measurement and has used
the binominal lattice pricing model to measure the fair value. The additional investment rights from the March 2014 Series F financing
expired in March 2015 and their value at July 31, 2016 is zero. The fair value of the derivative liability associated with the
additional investment rights was determined to be $193,408 (June 2015 Series G financing) and $142,662 (June 2015 Series G financing)
at July 31, 2016 and 2015, respectively.
The
key inputs used in the fair value calculation at July 31, 2016 and 2015 were as follows:
|
|
July
31, 2016
|
|
July
31, 2015
|
Underlying
number of units of convertible preferred stock
|
|
|
500
|
|
|
|
500
|
|
Underlying
number of units of warrants
|
|
|
33,333,333
|
|
|
|
33,333,333
|
|
Current
exercise price of warrants
|
|
$
|
0.015
|
|
|
$
|
0.015
|
|
Current
conversion price of preferred stock
|
|
$
|
0.015
|
|
|
$
|
0.015
|
|
Time
to expiration
|
|
|
0.05
years
|
|
|
|
1.05
years
|
|
Risk-free
interest rate
|
|
|
0.38
|
%
|
|
|
0.30
|
%
|
Estimated
volatility
|
|
|
13
|
%
|
|
|
79
|
%
|
Dividend
|
|
|
-0-
|
|
|
|
-0-
|
|
Stock
price at period end date
|
|
$
|
0.008
|
|
|
$
|
0.010
|
|
The
revaluation of the additional investment rights in the fiscal year ended July 31, 2016, resulted in the recognition of a loss
of $50,746 and in the fiscal year ended July 31, 2015, the revaluation resulted in the recognition of a gain of $861,474. The
gains and losses are recorded within the Company’s consolidated statements of operations and comprehensive loss under the
caption “Change in fair value of derivative liabilities”.
Note
10 - Stockholders’ Deficiency
:
Warrants
As
of July 31, 2016, the Company has the following warrants to purchase common stock outstanding:
Number
of Shares to be Purchased*
|
|
Warrant
Exercise Price per Share
|
|
Warrant
Expiration Date
|
|
54,545,440
|
|
|
$
|
0.015
|
|
|
September
30, 2016
|
|
11,350,454
|
|
|
$
|
0.015
|
|
|
February
1, 2017
|
|
9,999,998
|
|
|
$
|
0.015
|
|
|
August
10, 2017
|
|
16,648,288
|
|
|
$
|
0.015
|
|
|
December
12, 2017
|
|
68,333,338
|
|
|
$
|
0.015
|
|
|
June
17, 2018
|
|
51,333,336
|
|
|
$
|
0.015
|
|
|
January
15, 2019
|
|
138,333,334
|
|
|
$
|
0.015
|
|
|
March
27, 2019
|
|
33,333,333
|
|
|
$
|
0.015
|
|
|
June
25, 2020
|
|
383,877,521
|
|
|
|
|
|
|
|
*
All outstanding warrants are subject to price protection provisions as described below.
There
are 383,877,521 warrants outstanding as of July 31, 2016. During the fiscal year ended July 31, 2016, 129,033,516 warrants, which
had an exercise price of $0.015 per warrant, expired. There were no warrants exercised for the fiscal year ended July 31, 2016.
The outstanding warrants at July 31, 2016 have a weighted average exercise price of $0.015 per share and have a weighted average
remaining life of 2.1 years.
As
of July 31, 2016, the Company has 383,877,521 warrants with a current exercise price of $0.015 which have price protection provisions
that allow for the reduction in the current exercise price upon the occurrence of certain events, including the Company’s
issuance of common stock or securities convertible into or exercisable for common stock, such as options and warrants, at a price
per share less than the exercise price then in effect. For instance, if the Company issues shares of its common stock or options
exercisable for or securities convertible into common stock at an effective price per share of common stock less than the exercise
price then in effect, the exercise price will be reduced to the effective price of the new issuance. Simultaneously with any reduction
to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall
be increased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants
shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. There are a limited number of
permitted types of stock and equity instrument issuances for each series of warrants which will not invoke the price protection
provisions of these warrants. The conversion price for all previously outstanding warrants was adjusted from $0.03 to $0.015 in
conjunction with the Series G Convertible Preferred Stock financing on June 24, 2015 and the total number of previously outstanding
warrants increased from 239,788,852 to 479,577,704, in addition to the 33,333,333 warrants issued in the financing.
The
Company accounts for the warrants with price protection provisions in accordance with FASB ASC Topic 815 as described in
Note
9 - Derivative Liabilities
above. As of July 31, 2016, there were a total of 383,877,521 warrants with an estimated fair value
of $2,048,846, which are identified on the consolidated balance sheets under the caption “Derivative Warrant Liability”.
Preferred
Stock
The
Company has authorized 1,000,000 shares of preferred stock with a par value of one-tenth of a cent ($.001) per share. The preferred
stock may be issued in various series and shall have preference as to dividends and to liquidation of the Company. The Company’s
Board of Directors is authorized to establish the specific rights, preferences, voting privileges and restrictions of such preferred
stock, or any series thereof. At July 31, 2016, 120 shares of the Company’s non-voting Series F 9% Convertible Preferred
Stock and 500 shares of the Company’s non-voting Series G 9% Convertible Preferred Stock were issued and outstanding. At
July 31, 2015, 670 shares of the Company’s non-voting Series F 9% Convertible Preferred Stock and 500 shares of the Company’s
non-voting Series G 9% Convertible Preferred Stock were issued and outstanding. See
Note 8 - Series A, B, C, D, E, F and G
9% Convertible Preferred Stock
.
Equity
Instruments Issued for Services Rendered
During
the years ended July 31, 2016 and 2015, the Company issued stock options, warrants and shares of common stock in exchange for
services rendered to the Company. The fair value of each stock option and warrant was valued using the Black Scholes pricing model
which takes into account as of the grant date the exercise price and expected life of the stock option or warrant, the current
price of the underlying stock and its expected volatility, expected dividends on the stock and the risk free interest rate for
the term of the stock option or warrant. Shares of common stock are valued at the quoted market price on the date of grant. The
fair value of each grant was charged to the related expense in the consolidated statement of operations for the services received
(see Note 11).