Item
1. Financial Statements
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
UNAUDITED
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
January
31, 2017
|
|
July
31,
2016
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
75,039
|
|
|
$
|
16,899
|
|
Accounts
receivable, net
|
|
|
980
|
|
|
|
—
|
|
Inventory,
net
|
|
|
20,998
|
|
|
|
—
|
|
Other
current assets
|
|
|
102,416
|
|
|
|
8,077
|
|
Total
Current Assets
|
|
|
199,433
|
|
|
|
24,976
|
|
Property and Equipment
|
|
|
3,944
|
|
|
|
1,298
|
|
Intangible asset (Note
10)
|
|
|
1,955,932
|
|
|
|
—
|
|
Deposit (Note 6)
|
|
|
500,000
|
|
|
|
—
|
|
Other
assets, net
|
|
|
43,984
|
|
|
|
—
|
|
TOTAL
ASSETS
|
|
$
|
2,703,293
|
|
|
$
|
26,274
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses (Note 4)
|
|
$
|
9,697,952
|
|
|
$
|
8,950,870
|
|
Loan
to related parties (Note 5)
|
|
|
14,047,544
|
|
|
|
—
|
|
Loan
payable (Note 4)
|
|
|
50,000
|
|
|
|
50,000
|
|
Total
Current Liabilities
|
|
|
23,795,496
|
|
|
|
9,000,870
|
|
Derivative Warrant
Liability (Note 8 and 9)
|
|
|
2,567,328
|
|
|
|
2,048,846
|
|
Derivative
Additional Investment Rights Liability (Note 8 and 9)
|
|
|
—
|
|
|
|
193,408
|
|
Total
Liabilities
|
|
|
26,362,824
|
|
|
|
11,243,124
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficiency (Note 8)
|
|
|
|
|
|
|
|
|
Series
A 9% Convertible Preferred Stock, $1,000 par value; authorized 5,500 shares, -0- issued shares at January 31, 2017 and July
31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
B 9% Convertible Preferred Stock, $1,000 par value; authorized 2,000 shares, -0- issued shares at January 31, 2017 and July
31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
C 9% Convertible Preferred Stock, $1,000 par value; authorized 750 shares, -0- issued shares at January 31, 2017 and July
31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
D 9% Convertible Preferred Stock, $1,000 par value; authorized 750 shares, -0- issued shares at January 31, 2017 and July
31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
E 9% Convertible Preferred Stock, $1,000 par value; authorized 2,450 shares, -0- issued shares at January 31, 2017 and July
31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
F 9% Convertible Preferred Stock, $1,000 par value; authorized 4,150 shares, -0- and 120 issued shares at January 31, 2017
and July 31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Series
G 9% Convertible Preferred Stock, $1,000 par value; authorized 1,000 shares, Shares, 350 and 500 issued shares at January
31, 2017 and July 31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $.001 par value; authorized 2,450,000 and 2,450,000 shares at January 31, 2017 and July 31, 2016, respectively; 992,009
and 908,541 issued and outstanding at January 31, 2017 and July 31, 2016, respectively
|
|
|
992
|
|
|
|
909
|
|
Common
stock payable
|
|
|
1,097,100
|
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
364,064,374
|
|
|
|
363,687,741
|
|
Accumulated
deficit
|
|
|
(390,900,038
|
)
|
|
|
(375,704,372
|
)
|
Accumulated
other comprehensive income
|
|
|
807,385
|
|
|
|
798,872
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
1,270,656
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Deficiency
|
|
|
(23,659,531
|
)
|
|
|
(11,216,850
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
2,703,293
|
|
|
$
|
26,274
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these unaudited condensed interim consolidated financial statements
|
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
UNAUDITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
|
|
Three
Months Ended
January 31,
|
|
Six
Months Ended
January 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
75,640
|
|
|
$
|
67,628
|
|
|
$
|
75,640
|
|
|
$
|
245,198
|
|
General
and administrative
|
|
|
140,087
|
|
|
|
89,904
|
|
|
|
242,905
|
|
|
|
1,229,913
|
|
Total
operating expenses
|
|
|
215,727
|
|
|
|
157,532
|
|
|
|
318,545
|
|
|
|
1,475,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(215,727
|
)
|
|
|
(157,532
|
)
|
|
|
(318,545
|
)
|
|
|
(1,475,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(126,669
|
)
|
|
|
(102,187
|
)
|
|
|
(243,508
|
)
|
|
|
(199,910
|
)
|
Impairment
of goodwill (Note 10)
|
|
|
(14,335,822
|
)
|
|
|
—
|
|
|
|
(14,335,822
|
)
|
|
|
—
|
|
Change
in fair value of derivative liabilities (Note 9)
|
|
|
(1,104,969
|
)
|
|
|
212,329
|
|
|
|
(325,074
|
)
|
|
|
(103,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
|
(15,783,187
|
)
|
|
|
(47,390
|
)
|
|
|
(15,222,949
|
)
|
|
|
(1,778,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) attributable
to noncontrolling interests
|
|
|
(27,283
|
)
|
|
|
—
|
|
|
|
(27,283
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Available to Common Stockholders
|
|
$
|
(15,755,904
|
)
|
|
$
|
(47,390
|
)
|
|
$
|
(15,195,666
|
)
|
|
$
|
(1,778,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) per Common
Share (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(17.16
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(16.63
|
)
|
|
$
|
(2.07
|
)
|
Diluted
|
|
|
(17.16
|
)
|
|
|
(0.05
|
)
|
|
|
(16.63
|
)
|
|
|
(2.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used to Compute
(Loss) per Share (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
918,416
|
|
|
|
870,325
|
|
|
|
913,479
|
|
|
|
860,226
|
|
Diluted
|
|
|
918,416
|
|
|
|
870,556
|
|
|
|
913,479
|
|
|
|
860,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
(15,755,904
|
)
|
|
|
(47,390
|
)
|
|
|
(15,195,666
|
)
|
|
|
(1,778,655
|
)
|
Change
in foreign currency translation adjustments
|
|
|
1,339
|
|
|
|
(2,152
|
)
|
|
|
8,513
|
|
|
|
(5,087
|
)
|
Comprehensive
Income (Loss) and Comprehensive Income (Loss) Available to Common Stockholders
|
|
$
|
(15,754,565
|
)
|
|
$
|
(49,542
|
)
|
|
$
|
(15,187,153
|
)
|
|
$
|
(1,783,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
|
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
UNAUDITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Common
Stock Payable
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other Comprehensive Income
|
|
Sub
Total
|
|
Noncontrolling
Interest
|
|
Total
Stockholders’
Deficiency
|
Balance
at July 31, 2015
|
|
|
1,170
|
|
|
$
|
—
|
|
|
|
825,496
|
|
|
$
|
826
|
|
|
$
|
—
|
|
|
$
|
363,381,380
|
|
|
$
|
(372,481,263
|
)
|
|
$
|
808,737
|
|
|
$
|
(8,290,320
|
)
|
|
$
|
—
|
|
|
$
|
(8,290,320
|
)
|
Issuance
of common stock in exchange for services
|
|
|
—
|
|
|
|
—
|
|
|
|
300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,500
|
|
|
|
—
|
|
|
|
4,500
|
|
Issuance
of common stock upon conversion of preferred stock
|
|
|
(550
|
)
|
|
|
—
|
|
|
|
36,667
|
|
|
|
37
|
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
of common stock for preferred stock make whole payments
|
|
|
—
|
|
|
|
—
|
|
|
|
20,139
|
|
|
|
20
|
|
|
|
—
|
|
|
|
148,480
|
|
|
|
—
|
|
|
|
—
|
|
|
|
148,500
|
|
|
|
—
|
|
|
|
148,500
|
|
Exercise
of stock options for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
25,939
|
|
|
|
26
|
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
of stock options for compensation liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
123,147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
123,147
|
|
|
|
—
|
|
|
|
123,147
|
|
Issuance
of stock options as compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,297
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,297
|
|
|
|
—
|
|
|
|
30,297
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,223,109
|
)
|
|
|
—
|
|
|
|
(3,223,109
|
)
|
|
|
—
|
|
|
|
(3,223,109
|
)
|
Currency
translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,865
|
)
|
|
|
(9,865
|
)
|
|
|
—
|
|
|
|
(9,865
|
)
|
Balance
at July 31, 2016
|
|
|
620
|
|
|
|
—
|
|
|
|
908,541
|
|
|
|
909
|
|
|
|
—
|
|
|
|
363,687,741
|
|
|
|
(375,704,372
|
)
|
|
|
798,872
|
|
|
|
(11,216,850
|
)
|
|
|
—
|
|
|
|
(11,216,850
|
)
|
Issuance
of common stock upon conversion of preferred stock
|
|
|
(270
|
)
|
|
|
—
|
|
|
|
18,000
|
|
|
|
18
|
|
|
|
—
|
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
of common stock for preferred stock make whole payments
|
|
|
—
|
|
|
|
—
|
|
|
|
8,923
|
|
|
|
9
|
|
|
|
—
|
|
|
|
72,891
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,900
|
|
|
|
—
|
|
|
|
72,900
|
|
Exercise
of warrants for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
3,333
|
|
|
|
3
|
|
|
|
—
|
|
|
|
49,997
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
Issuance
of common stock and warrants for acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
53,211
|
|
|
|
53
|
|
|
|
1,097,100
|
|
|
|
253,763
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,350,916
|
|
|
|
—
|
|
|
|
1,350,916
|
|
Noncontrolling
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,297,939
|
|
|
|
1,297,939
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,195,666
|
)
|
|
|
—
|
|
|
|
(15,195,666
|
)
|
|
|
(27,283
|
)
|
|
|
(15,222,949
|
)
|
Currency
translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,513
|
|
|
|
8,513
|
|
|
|
—
|
|
|
|
8,513
|
|
Balance
at January 31, 2017
|
|
|
350
|
|
|
$
|
—
|
|
|
|
992,008
|
|
|
$
|
992
|
|
|
$
|
1,097,100
|
|
|
$
|
364,064,374
|
|
|
$
|
(390,900,038
|
)
|
|
$
|
807,385
|
|
|
$
|
(24,930,187
|
)
|
|
$
|
1,270,656
|
|
|
$
|
(23,659,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
|
GENEREX
BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
|
UNAUDITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
January 31,
|
|
|
|
2017
|
|
|
|
2016
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(15,195,666
|
)
|
|
$
|
(1,778,655
|
)
|
Adjustments to reconcile
net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
123,106
|
|
Stock
compensation expense
|
|
|
—
|
|
|
|
27,344
|
|
Common
stock issued for services rendered
|
|
|
—
|
|
|
|
4,500
|
|
Loss
on goodwill impairment
|
|
|
14,335,822
|
|
|
|
—
|
|
Loss
on disposal of property and equipment
|
|
|
1,276
|
|
|
|
—
|
|
Common
stock issued for make-whole payments on preferred stock
|
|
|
72,900
|
|
|
|
113,400
|
|
Change
in fair value of derivative liabilities
|
|
|
325,074
|
|
|
|
103,634
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
256,046
|
|
|
|
662,839
|
|
Other
current assets
|
|
|
(24,535
|
)
|
|
|
45,412
|
|
Net
cash (used) in operating activities
|
|
|
(229,083
|
)
|
|
|
(698,420
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Deposit
on investment
|
|
|
(500,000
|
)
|
|
|
—
|
|
Net
(loss) attributed to non-controlling interest
|
|
|
(27,283
|
)
|
|
|
—
|
|
Investment
in non-controlling interest
|
|
|
99,593
|
|
|
|
—
|
|
Net
cash (used) in investing activities
|
|
|
(427,690
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Loan
proceeds from related party
|
|
|
656,153
|
|
|
|
—
|
|
Proceeds
from exercise of warrants
|
|
|
50,000
|
|
|
|
2,952
|
|
Net
cash provided by financing activities
|
|
|
706,153
|
|
|
|
2,952
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
49,380
|
|
|
|
(695,468
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
Beginning of Period
|
|
|
16,899
|
|
|
|
749,965
|
|
Effects
of currency translation on cash and cash equivalents
|
|
|
8,760
|
|
|
|
(22,729
|
)
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
75,039
|
|
|
$
|
31,768
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these unaudited condensed interim consolidated financial statements
|
Generex
Biotechnology Corporation
Notes
to the Unaudited Condensed Interim Consolidated Financial Statements
January
31, 2017
(Unaudited)
Note
1 - Basis of Presentation:
Generex
Biotechnology Corporation (“Generex” or the “Company”), was formed in the State of Delaware on September
4, 1997 and its year-end is July 31. It is engaged primarily in the research and development of drug delivery systems and the
use of the Company’s proprietary technology for the administration of formulations of large molecule drugs to the oral (buccal)
cavity using a hand-held aerosol applicator; and through the Company’s wholly-owned subsidiary, Antigen Express, Inc. (“Antigen”),
has undertaken work on immunomedicines incorporating proprietary vaccine formulations.
On
January 18, 2017, the Company closed an Acquisition Agreement pursuant to which the Company acquired a 51% interest in Hema
Diagnostic Systems, LLC, (“HDS”) a Florida limited liability company established in December, 2000 to market and distribute
rapid test devices including infectious diseases. (See Note 10) Since 2002, HDS has been developing an expanding line of rapid
diagnostic tests (RDTs) including such diseases as Human Immunodeficiency Virus (HIV) – 1/2, tuberculosis, malaria, hepatitis,
syphilis, typhoid and dengue as well as other infectious diseases.
The
accompanying unaudited interim consolidated financial statements (“interim statements”) have been prepared pursuant
to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by generally
accepted accounting principles for complete financial statements are not included herein. The interim statements should be read
in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report
on Form 10-K. The results for the six-month period ended January 31, 2017 may not be indicative of the results for the entire
year.
Interim
statements are subject to possible adjustments in connection with the annual audit of the Company’s accounts for fiscal
year 2017. In the Company’s opinion, all adjustments necessary for a fair presentation of these interim statements have
been included and are of a normal and recurring nature.
On
March 14, 2017, the Company effected a one-for-one thousand (1:1,000) reverse stock split whereby the Company (i)
decreased the number of authorized shares of Common Stock by a ratio equal to one-for-one thousand (1:1,000) (the “Reverse
Split Ratio”), and (ii) correspondingly and proportionately decreased, by a ratio equal to the Reverse Split Ratio, the
number of issued and outstanding shares of Common Stock (the “Reverse Stock Split”). Proportional adjustments
for the reverse stock split were made to the Company's outstanding stock options, warrants and equity incentive plans for all
periods presented.
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 $391 million and a working capital
deficiency of approximately $23.6 million at January 31, 2017. The Company has funded its activities to date almost exclusively
from debt and equity financings, as well as the sale of non-essential real estate assets in fiscal 2012 through the first quarter
of fiscal 2014.
The
Company will continue to require substantial funds to implement its new investment acquisition plans. Management’s
plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common
stock, preferred stock offerings, and issuances of debt and convertible debt instruments. Management is also actively pursuing
financial and strategic alternatives, including strategic investments and divestitures, industry collaboration activities and
strategic partners.
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 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.
Business
combinations
Business
combinations are accounted for using the acquisition method of accounting. Acquisition cost is measured as the aggregate of the
fair value at the date of acquisition of the assets given, equity instruments issued or liabilities incurred or assumed. Acquisition
related costs are expensed as incurred (except for those costs arising on the issue of equity instruments which are recognized
directly in equity). Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are
measured at fair value on the acquisition date. Goodwill is measured as the excess of the acquisition cost and the amount of any non-controlling interest,
over the fair value of the identifiable net assets acquired.
Note
2 - Effects of Recent Accounting Pronouncements:
Recently
Issued Accounting Pronouncements
We
have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof
that have effective dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements
that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have
a material impact on the Company’s reported financial position or operations in the near term. The applicability of any
standard is subject to the formal review of our financial management and certain standards are under consideration.
In
August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15, Presentation of Financial Statements-
Going Concern. The Update provides guidance on management’s responsibility in evaluating whether there is substantial doubt
about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period,
management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s
ability to continue as a going concern within one year from the date the financial statements are issued. The guidance became
effective this quarter. The Company has determined that this accounting standard has no impact on its consolidated financial statements.
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.
On
May 8, 2015, the FASB issued ASU 2015-08,
“Business Combinations (Topic 805) Pushdown Accounting,
” which conforms
the FASB’s guidance on pushdown accounting with the SEC’s guidance. ASU 2015-08 is effective for annual periods beginning
after December 15, 2015. This ASU has not had a material impact on the consolidated financial statements.
In
November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires that an
entity classify deferred tax assets and liabilities as noncurrent on the balance sheet. Prior to the issuance of the standard,
deferred tax assets and liabilities were required to be separated into current and noncurrent amounts on the basis of the classification
of the related asset or liability. This ASU is effective for the Company on April 1, 2017, with early adoption permitted. The
adoption of ASU No. 2015-17 is not expected to have a material impact on the Company's condensed consolidated financial statements
or related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing
diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The
standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2)
settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds
from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions
received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable
cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period.
The Company is currently evaluating the impact of adoption of ASU 2016-15.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires that a
statement of cash flows should include the total of cash, cash equivalents, and amounts generally described as restricted cash
or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The Company is evaluating
the effect that ASU 2016-18 will have on its consolidated financial statements and is considering early adoption of the standard.
In
January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(Topic
350),
which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of
goodwill allocated to the reporting unit. The Company will adopt the standard effective October 1, 2020. The adoption is not expected
to have a material impact on the consolidated financial statements.
The
Company does not expect the adoption of any other recent accounting pronouncements to have a material impact on its financial
statements.
Note
3 - Stock-Based Compensation:
As
of January 31, 2017, the Company had two stockholder-approved stock incentive plans under which shares and options exercisable
for shares of common stock have been or may be granted to employees, directors, consultants and advisors. A total of 12,000 shares
of common stock are reserved for issuance under the 2001 Stock Option Plan (the 2001 Plan) and 135,000 shares of common stock
are reserved for issuance under the 2006 Stock Plan as amended (the 2006 Plan). At January 31, 2017, there were 4,139 and 64,485
shares of common stock reserved for future awards under the 2001 Plan and 2006 Plan, respectively. The Company issues new shares
of common stock from the shares reserved under the respective Plans upon conversion or exercise of options and issuance of restricted
shares.
The
2001 and 2006 Plans (the Plans) are administered by the Board of Directors (the Board). The Board is authorized to select from
among eligible employees, directors, advisors and consultants those individuals to whom options are to be granted and to determine
the number of shares to be subject to, and the terms and conditions of the options. The Board is also authorized to prescribe,
amend and rescind terms relating to options granted under the Plans. Generally, the interpretation and construction of any provision
of the Plans or any options granted hereunder is within the discretion of the Board.
The
Plans provide that options may or may not be Incentive Stock Options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive ISOs, while employees and non-employee directors, advisors
and consultants are eligible to receive options which are not ISOs, i.e. “Non-Qualified Options.” The options granted
by the Board in connection with its adoption of the Plans were Non-Qualified Options. In addition, the 2006 Plan also provides
for restricted stock grants.
The
fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model or the value of
the services provided, whichever is more readily determinable. The Black-Scholes option pricing model takes into account, as of
the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest rate for the term of the option. The Black-Scholes option
pricing model was not used to estimate the fair value any option grants in the quarter ended January 31, 2017 or in the fiscal
year ended July 31, 2016.
The
following is a summary of the common stock options granted, forfeited or expired and exercised under the Plans for the six months
ended January 31, 2017:
|
|
Options
|
|
Weighted
Average Exercise Price per Share
|
|
Aggregate
Intrinsic Value
|
Outstanding:
Aug. 1, 2016 and Jan. 31, 2017
|
|
|
19,639
|
|
|
$
|
28.66
|
|
|
$
|
70,836
|
|
Exercisable, January
31, 2017
|
|
|
19,639
|
|
|
$
|
28.66
|
|
|
$
|
70,836
|
|
The
19,639 outstanding options at January 31, 2017 had a weighted average remaining contractual term of 1.51 years. Options typically
vest over a period of two to four years and have a contractual life of five to ten years.
There
were no non-vested common stock options granted, vested or forfeited under the Plan for the six months ended January 31, 2017.
There was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans
at January 31, 2017.
Note
4 - Accounts Payable and Accrued Expenses:
Accounts
payable and accrued expenses consist of the following:
|
|
January
31,
2017
|
|
July
31,
2016
|
Accounts
Payable and Accruals - General and Administrative
|
|
$
|
4,167,354
|
|
|
$
|
3,750,638
|
|
Accounts Payable and
Accruals - Research and Development
|
|
|
4,682,092
|
|
|
|
4,395,061
|
|
Accounts Payable and
Accruals - Selling and Marketing
|
|
|
385,891
|
|
|
|
326,229
|
|
Accrued Make-whole
Payments on Convertible Preferred Stock (see Note 8)
|
|
|
94,500
|
|
|
|
167,400
|
|
Executive
Compensation and Directors’ Fees Payable
|
|
|
368,114
|
|
|
|
311,542
|
|
Total
|
|
$
|
9,697,952
|
|
|
$
|
8,950,870
|
|
In
addition to accounts payable and accrued expenses, the Company has a loan payable in the amount of $50,000. This loan is unsecured,
due on demand and bears interest at 9% per annum.
Note
5 - Loan to Related Parties
HDS
received substantially all of its funding from a shareholder, who owned 98.9% of the Company as of December 31, 2016. The loan
is unsecured, matures on December 31, 2019 and accrues interest at 0.75% per annum, increased from 0.21% for the 2015 calendar
year. As of January 31, 2017, the outstanding balance was $13,307,837.
The
Company also owes $656,153 to two shareholders and $83,554 to another related party. These amount are both unsecured and non-interest
bearing with no fixed terms of repayment.
Note
6 - Commitments and Contingencies:
Agreements
On
January 16, 2017, the Company and Emmaus Life Sciences, Inc. (“Emmaus”) entered into a letter of intent (“LOI”)
contemplating that the Company will acquire a controlling interest of the outstanding capital stock of Emmaus for a total consideration
of $225,000,000 in cash and Generex stock. The purchase price for shares of stock of the Emmaus Shares will consist of $10,000,000
in cash and $215,000,000 worth of shares of the Company’s common stock (“Company Shares”), which will be valued
at $3.80 per share at the closing of this transaction, provided that if a material event occurs that increases the fair market
value of the Company Shares prior to the Closing, the value attributed to the Company Shares will be increased to such higher
market value up to a maximum of $12.00 per share. As of January 31, 2017, Generex has paid a deposit of $500,000 to Emmaus and
is obligated to pay an additional deposit of $1,500,000 by March 30, 2017 (see note 11). The Company must then pay an additional
$2,000,000 upon signing of the formal purchase agreement and the remaining $6,000,000 upon closing.
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, Rose Perri, a former officer of the Company, 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, John Barratt, Brian Masterson, Mark 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.
Note
7 - Net (Loss) / Income Per Share (“EPS”):
Basic
EPS and diluted EPS for the three and six-month period ended January 31, 2017 have been computed by dividing the net loss available
to common stockholders for the period by the weighted average shares outstanding during the period. All outstanding stock options,
non-vested restricted stock, warrants and common stock underlying convertible preferred stock, representing 375,972 incremental
shares at January 31, 2017, have been excluded from the computation of diluted EPS as they are anti-dilutive.
Basic
EPS and diluted EPS for the three and six-month period ended January 31, 2016 have been computed by dividing the net loss available
to common stockholders for the period by the weighted average shares outstanding during the period. All outstanding stock options,
non-vested restricted stock, warrants and common stock underlying convertible preferred stock, representing 621,837 incremental
shares at January 31, 2016, have been excluded from the computation of diluted EPS as they are anti-dilutive.
Note
8 - Stockholders’ Deficiency:
Common
Stock
On
January 18, 2017, the Company issued 53,211 shares of common stock for the acquisition of 51% of HDS and is obligated to issue
230,000 shares of common stock upon the conclusion of the Company’s reverse stock split.
No
options were exercised during the six months ended January 31, 2017.
Warrants
As
of January 31, 2017, there are 326,000 warrants outstanding. There were no warrants issued for the six months ended January 31,
2017. There were 3,333 warrants exercised at an exercise price of $15.00 per share with proceeds of $50,000 for the six months
ended January 31, 2017. During that period, 54,545 warrants expired. The outstanding warrants at January 31, 2017 have a weighted
average exercise price of $15.00 per share and have a weighted average remaining life of 1.6 years.
As
of January 31, 2017, the Company has 326,000 warrants with a current exercise price of $15.00 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
Company accounts for the warrants with price protection provisions in accordance with FASB ASC Topic 815 as described in
Note
9 - Derivative Liabilities
below. As of January 31, 2017, there were a total of 326,000 warrants with an estimated fair value
of $2,567,328, which are identified on the interim consolidated balance sheets under the caption “Derivative Warrant Liability”.
Series
A, B, C, D and E 9% Convertible Preferred Stock
All
of the Company’s Series A, B, C, D and E 9% Convertible Preferred Stocks were converted prior to the beginning of the Company’s
2017 fiscal year.
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 69,167 shares of common stock. An aggregate of 69,167
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 shares of common stock. An aggregate of 33,333
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 $15.00 per share (Note: The conversion price for
the Series F Convertible Preferred Stock was adjusted from $30.00 to $15.00 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 $30.00 to $15.00 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 27,942 to 55,883.
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 69,167 and 33,333 warrants, respectively to the investors. Subject to certain
ownership limitations, the warrants are exercisable at any time after their respective dates of issuance and on or before the
fifth-year anniversary thereafter at an exercise price of $15.00 per share of common stock (Note: The conversion price for the
warrants issued in the Series F Convertible Preferred Stock financing was adjusted from $30.00 to $15.00 in conjunction with the
Series G Convertible Preferred Stock financing on June 24, 2015 and the number of warrants increased from 69,167 to 138,333).
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 had the right, in its sole determination,
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 would have had 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 have been exercised. The June 2015 additional investment rights
expired on August 19, 2016 and none had been exercised up to that date.
As
of January 31, 2017, 2,075 of the Series F convertible preferred stock had been converted to common stock. There were 97,108 shares
of common stock issued upon the conversion of the Series F convertible preferred stock and 40,769 shares of common stock issued
as “make-whole payments” on such conversions. As of January 31, 2017, 150 of the Series G convertible preferred stock
had been converted to common stock. There were 10,000 shares of common stock issued upon the conversion of the Series G convertible
preferred stock and 4,688 shares of common stock issued as “make-whole payments” on such conversions.
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 comprehensive (loss)
/ income 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
|
|
|
(2,016,065
|
)
|
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 $0 after conversions (July 31, 2016 - $32,400) is included in Accounts Payable and
Accrued Expenses (see Note 4) at January 31, 2017.
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 remaining balance of $94,500 after conversions (July 31, 2016 - $135,000) is included in Accounts Payable
and Accrued Expenses (see Note 4) at January 31, 2017.
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 January 31, 2017 and July 31, 2016 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 January 31, 2017 are all currently exercisable with a weighted-average remaining life of 1.88
years.
The
revaluation of the warrants at the end of the respective reporting periods resulted in the recognition of a loss of $518,482 within
the Company’s consolidated statements of operations for the six months ended January 31, 2017 and a gain of $30,684 within
the Company’s consolidated statements of operations and comprehensive loss for the six months ended January 31, 2016, 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 January 31, 2017 and July 31, 2016 were $2,567,328 and $2,048,846,
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, 2016 until January 31, 2017:
|
|
Value
|
|
No.
of Warrants
|
Balance
at August 1, 2016 - Derivative warrant liability
|
|
$
|
2,048,846
|
|
|
|
383,878
|
|
Forfeited
or expired
|
|
|
(240,906
|
)
|
|
|
(54,545
|
)
|
Warrants
exercised
|
|
|
—
|
|
|
|
(3,333
|
)
|
Increase
in fair value of derivative warrant liability
|
|
|
759,388
|
|
|
|
n/a
|
|
Balance
at January 31, 2017 - Derivative warrant liability
|
|
$
|
2,567,328
|
|
|
|
326,000
|
|
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 January 31, 2017 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 January 31, 2017 and July 31, 2016 fair value calculations were as follows:
|
|
January
31,
2017
|
|
July
31,
2016
|
Current exercise price
|
|
$
|
15.00
|
|
|
$
|
20.00
|
|
Time to expiration
|
|
|
1.6
years
|
|
|
|
2.1
years
|
|
Risk-free interest
rate
|
|
|
1.46
|
%
|
|
|
0.76
|
%
|
Estimated volatility
|
|
|
167
|
%
|
|
|
101
|
%
|
Dividend
|
|
|
—
|
|
|
|
—
|
|
Stock price at period
end date
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
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 series F additional investment rights expired in March 2015.
The series G additional investment rights expired in August 2016. As all additional investment rights have expired, their value
at January 31, 2017 is $nil (July 31, 2016 - $193,408)
The
key inputs used in the fair value calculation at July 31, 2016 were as follows:
|
|
|
July
31,
2016
|
|
Underlying
number of units of convertible preferred stock
|
|
|
500
|
|
Underlying
number of units of warrants
|
|
|
33,333
|
|
Current
exercise price of warrants
|
|
$
|
15.00
|
|
Current
conversion price of preferred stock
|
|
$
|
15.00
|
|
Time
to expiration
|
|
|
0.05
years
|
|
Risk-free
interest rate
|
|
|
0.38
|
%
|
Estimated
volatility
|
|
|
13
|
%
|
Dividend
|
|
|
-0-
|
|
Stock
price at period end date
|
|
$
|
8.00
|
|
The
revaluation of the additional investment rights in the six -month period ended January 31, 2017, resulted in the recognition of
a gain of $193,408 and in the six -month period ended January 31, 2016, the revaluation resulted in the recognition of a loss
of $134,138. The respective loss and gain 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 - Acquisition of Hema Diagnostics Systems, LLC
On
January 18, 2017, the Company acquired a 51% interest in Hema Diagnostic Systems, LLC (“HDS”), pursuant to the Acquisition
Agreement. At closing, the Company acquired 4,950 of HDS’s 10,000 previously outstanding limited liability company units
in exchange for 53,191 shares of Generex common stock valued at $250,000, plus 20 shares of Generex common stock issued to HDS
in exchange for 300 new limited liability company units.
Following
the closing and the completion of Company’s reverse stock split, the Company is required to issue a further 230,000 shares
of common stock and issue a warrant to a former shareholder of HDS to acquire 15,000,000 additional shares of Generex common stock
for $2.50 per share. The issue of this warrant is contingent upon the Company obtaining approval from its shareholders for an
increase in its authorized share capital. The total consideration was valued at $1,350,916 on the date of the acquisition.
Fair
Value of the HDS Assets
The
intangibles assets acquired include In–Process Research & Development (“IPR&D”). The Fair Value of the
IPR&D intangible asset using an Asset Cost Accumulation methodology as of January 18, 2017 (the “Valuation Date”)
was determined to be $1,955,932.
The
net purchase price of HDS was determined to be as follows:
|
|
Stock
Price at Closing
|
|
Shares
|
|
Fair
Value
|
Purchase price:
|
|
|
|
|
|
|
Common
Stock at closing
|
|
$
|
4.77
|
|
|
|
53,191
|
|
|
$
|
253,721
|
|
Common Stock after
closing
|
|
$
|
4.77
|
|
|
|
20
|
|
|
|
95
|
|
Common
Stock post reverse stock split
|
|
$
|
4.77
|
|
|
|
230,000
|
|
|
|
1,097,100
|
|
Net purchase
price
|
|
|
|
|
|
|
|
|
|
$
|
1,350,916
|
|
As
of January 18, 2017, the issue of the warrant to acquire 15,000,000 additional common shares of Generex was contingent upon shareholder
approval of an increase in the Company’s authorized capital stock. No warrant has been issued by the Company and terms of
the warrant have not been finalized. Management is not of the opinion that it is more likely than not that the warrant will be
issued and accordingly no value has been attributed to it.
The
preliminary purchase price allocation of HDS was determined to be as follows:
Purchase
price allocation:
|
|
|
|
Net
assets of HDS
|
|
|
|
|
|
(13,642,900
|
)
|
Non-controlling
interest
|
|
|
|
|
|
(1,297,939
|
)
|
In-Process
Research & Development
|
|
|
|
|
|
1,955,932
|
|
Goodwill
|
|
|
|
|
|
14,335,823
|
|
Total
Purchase Price
|
|
51%
Ownership
|
|
|
$
|
1,350,916
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
49%
Ownership
|
|
|
$
|
1,297,939
|
|
Goodwill
and Intangible Assets
The
change in the carrying amount of goodwill and other intangible assets for the six months ended January 31, 2017, is as follows:
|
|
Total
|
|
Goodwill
|
|
Other Intangibles, net
|
Balance as of July 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Acquisition of HDS
|
|
|
16,291,754
|
|
|
|
14,335,822
|
|
|
|
1,955,932
|
|
Current year amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of goodwill
|
|
|
(14,335,822
|
)
|
|
|
(14,335,822
|
)
|
|
|
—
|
|
Balance as of January 31, 2017
|
|
$
|
1,955,932
|
|
|
$
|
—
|
|
|
$
|
1,955,932
|
|
Intangible
assets are generally amortized on a straight-line basis over the useful lives of the assets.
Goodwill
represents the excess of the purchase price over the fair market value of net assets acquired. Goodwill for HDS was $14.3 million
as of the date of the acquisition. The Company conducted an impairment assessment of goodwill and determined that the goodwill
should be fully impaired.
Note
11 - Subsequent Events:
The
Company has evaluated subsequent events occurring after the balance sheet date through the date the consolidated financial statements
were issued and identified the following for disclosure:
During
February 2017, the Company offered all current warrant holders an option to exercise their warrants on a cashless basis at a reduced
exercise price. The Company issued a total of 103,809 shares of common stock in connection with the exercise of 314,684 warrants.
During
February 2017, the Company issued 33,939 shares of common stock for the conversion of 350 shares of Series G convertible preferred
stock and the related make-whole payments.
The
Emmaus LOI required that Generex pay a deposit of $1,500,000 to Emmaus within three weeks of January 16, 2017, which was February
6, 2017. On February 6, 2017, the Company and Emmaus entered into waiver agreements extending the time for Generex to make the
deposit until February 24, 2107, and otherwise amending the LOI.
On
March 3, 2017, Generex and Emmaus entered into a further waiver and amendment to the LOI which provided that Generex must
provide a $500,000 deposit on or prior to March 6, 2017 and within ten (10) days of the Company’s effectiveness of the
reverse stock split of its common stock, the Company shall provide an additional deposit of $3,000,000. The payment of
$500,000 was made and accepted on March 6, 2017. FINRA approved the reverse stock split effective March 18, 2017, therefore
the additional deposit of $3,000,000 is due March 30, 2017.
On
March 6, 2017, Generex entered into a Securities Purchase Agreement with an investor, pursuant to which the Company agreed to
issue a Convertible Note due March 6, 2018 (“Note”) in the principal amount of $674,855. Consideration received for
the Note was $562,379, comprised of $500,000 in cash, the cancellation of a $50,000 demand Note the Company had issued to the
investor in May 2016, $3,879 in accrued interest on the prior note and $8,500 in legal fees for the investor’s counsel,
which the Company was obligated to pay pursuant to the Securities Purchase Agreement. The remaining $112,476. of principal amount
represents original issue discount.
Since
January 31, 2017, the former majority shareholder of HDS has made further advances and/or loans to HDS totaling $149,000 as of
the date of this filing.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the terms the “Company,”
“Generex,” “we,” “us,” or “our” refer to Generex Biotechnology Corporation, a
Delaware corporation. The following discussion and analysis by management provides information with respect to our financial condition
and results of operations for the three month periods ended January 31, 2017 and 2016. Effective January 18, 2017, we acquired
a 51% interest in Hema Diagnostic Systems, LLC, a Florida limited liability company (referred to as “HDS”). Our balance
sheet at January 31, 2017 includes our interest in HDS and our interest in the results of operations of HDS for the period January
18, 2017 through January 31, 2017 is included in our Consolidated Statement of Operations and Comprehensive Loss for the quarter
ended January 31, 2017. This discussion should be read in conjunction with the information contained in
Part I, Item 1A - Risk
Factors
and
Part II, Item 8 - Financial Statements and Supplementary Data
in our Annual Report on Form 10-K for the
year ended July 31, 2016, as amended, and the information contained in
Part I, Item 1 - Financial Statements
and
Part
II, Item 1A- Risk Factors
in this Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2017.
Forward-Looking
Statements
We
have made statements in this
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
and elsewhere in this Quarterly Report on Form 10-Q of Generex Biotechnology Corporation for the fiscal quarter ended January
31, 2017 that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 (the "Act"). The Act limits our liability in any lawsuit based on forward-looking statements that we have
made. All statements, other than statements of historical facts, included in this Quarterly Report that address activities, events
or developments that we expect or anticipate will or may occur in the future, including such matters as our projections, future
capital expenditures, business strategy, competitive strengths, goals, expansion, market and industry developments and the growth
of our businesses and operations, are forward-looking statements. These statements are based on currently available operating,
financial and competitive information. These statements can be identified by introductory words such as “may,” "expects,"
“anticipates,” "plans," "intends," "believes," "will," "estimates"
or words of similar meaning, and by the fact that they do not relate strictly to historical or current facts. Our forward-looking
statements address, among other things:
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our
expectations concerning product candidates for our technologies;
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our expectations
concerning funding of obligations related to potential acquisitions and generally completing acquisitions;
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our expectations
concerning existing or potential development and license agreements for third-party collaborations, acquisitions and joint
ventures;
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our expectations
concerning product candidates for our technologies;
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our expectations
regarding the cost of raw materials and labor, consumer preferences, the effect of government regulations on the Company’s
business, the Company’s ability to compete in its industry, as well as future economic and other conditions both generally
and in the Company’s specific geographic markets.
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our expectations
concerning product candidates for our technologies;
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our expectations
of when regulatory submissions may be filed or when regulatory approvals may be received; and
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our expectations
of when commercial sales of our products in development may commence and when actual revenue from the product sales may be
received.
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Any
or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions that we might
make or by known or unknown risks and uncertainties. Actual outcomes and results may differ materially from what is expressed
or implied in our forward-looking statements. Among the factors that could affect future results are:
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the
inherent uncertainties of product development based on our new and as yet not fully proven technologies;
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the risks and uncertainties
regarding the actual effect on humans of seemingly safe and efficacious formulations and treatments when tested clinically;
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the inherent uncertainties
associated with clinical trials of product candidates;
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the inherent uncertainties
associated with the process of obtaining regulatory approval to market product candidates;
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the inherent uncertainties
associated with commercialization of products that have received regulatory approval;
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the decline in our
stock price; and
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our current lack
of financing for operations and our ability to obtain the necessary financing to fund our operations and effect our strategic
development plan.
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Additional
factors that could affect future results of our historical business are set forth in
Part I, Item 1A Risk Factors
of our
Annual Report on Form 10-K for the year ended July 31, 2016, as amended, and in
Part II, Item 1A. Risk Factors
of this
Quarterly Report on Form 10-Q. Additional factors that could affect future results of HDS are set forth under
Risk Factors
in
Item 2.01. Completion of Acquisition or Disposition of Assets
,” in our Current Report on Form 8-K January
17, 2017. We caution investors that the forward-looking statements contained in this Quarterly Report must be interpreted and
understood in light of conditions and circumstances that exist as of the date of this Quarterly Report. We expressly disclaim
any obligation or undertaking to update or revise forward-looking statements to reflect any changes in management's expectations
resulting from future events or changes in the conditions or circumstances upon which such expectations are based.
Executive
Summary
Preliminary
Note
As
of October 2015 (the first quarter of fiscal 2016), we laid off all of our employees, ceased compensating our officers, and suspended
substantially all of our operations due to lack of funds. On January 17, 2017, we entered into an Acquisition Agreement (the “Acquisition
Agreement”) with the equity owners of Hema Diagnostic Systems, LLC (“HDS”) pursuant to which we acquired a majority
of the equity interests in HDS in exchange for shares of our common stock and our obligation to issue common stock purchase warrants
(the “Acquisition”). The Acquisition closed on January 18, 2017. We have the right to acquire the remainder of the
HDS equity interests for nominal consideration provided that the stock and warrants have a specified value and we have registered
for resale the Company’s shares issued to the HDS equity owners. We intend to focus resources on HDS’ business as
well as other potential acquisition candidates going forward, but do not intend to discontinue our pre-Acquisition activities.
Reference’s
to HDS include its two wholly owned subsidiaries, Rapid Medical Diagnostics Corp. and Hema Diagnostic Systems Panama, S.A.. Rapid
Medical Diagnostics Corp. was established to develop products and hold patents used by Hema Diagnostic Systems, LLC. Hema Diagnostic
Systems Panama, S.A. was established to distribute Hema Diagnostic Systems, LLC’s products in Central and South America.
Prior to the Acquisition, equity interest in Hema Diagnostic Systems Panama, S.A. and Rapid Diagnostic Systems were separately
held by the equity owners of HDS, and financial statements of the three companies were prepared on a combined basis, as they were
under common control and management. Immediately prior to closing of the Acquisition, the equity owners contributed to HDS the
equity of the other two companies, making them wholly owned subsidiaries of HDS.
The
description below of our results of operations relates primarily to our historical business. We will not pursue our historical
business if we do not receive substantial financing for that purpose.
Overview
of Business
Generex’s
Historical Business
We
have been engaged primarily in the research and development of drug delivery systems and technologies. Our primary focus was 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 Express, Inc. (“Antigen”), we have undertaken work
on 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. We have undertaken clinical development work in respect 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. The synthetic vaccine technology has certain advantages for pandemic or potentially pandemic viruses, such as the H5N1
avian and H1N1 swine flu. In addition to developing vaccines for pandemic influenza viruses, we have undertaken vaccine development
efforts for seasonal influenza virus, HIV, HPV, melanoma, ovarian cancer, allergy and Type I diabetes mellitus.
Hema
Diagnostic Systems
Hema
Diagnostic Systems LLC (which we refer to as “HDS”) was established in December, 2000 to market and distribute rapid
test devices for infectious diseases. Since 2002, we have been developing an expanding line of rapid diagnostic tests (RDTs) for
such diseases as Human Immunodeficiency Virus (HIV) – 1/2, tuberculosis, malaria, hepatitis, syphilis, typhoid and dengue
as well as other infectious diseases. We distribute our own products and manufacture our devices in-house as well as through contract
manufacturers. Some sub-components, made to our specifications, are produced in China, India and Germany. Our products are rapid
immunochromatographic medical diagnostics that are administered at the point of care (POC) level and which can produce results
as in as little as 10-15 minutes.
Due
to the potential infectious character of the whole blood test sample, our Express series of RDTs are designed to perform and deliver
test results while within the sealed Express housing, carefully controlling the potentially infectious test sample. This design
helps to increase our ability to control the possibility of cross-contamination. Most of our competitors’ products, while
inexpensive, are not as user-friendly, require substantially more training and have greater risk of cross- contamination.
Our products are subject to extensive regulatory
oversight by government and other organizations and rely on international regulatory approvals for sale into markets outside of
the USA. Domestically, our devices would require U.S. Food and Drug Administration (“FDA”) approval and in some cases,
international sales require World Health Organization (“WHO”) approval.
We
maintain a FDA registered facility in Miramar, Florida and are certified under both ISO9001 and ISO13485 for the “Design,
Development, Production and Distribution” of the in-vitro devices. Approval of our HIV rapid test has been issued by the
United States Agency for International Development (“USAID”). USAID approval allows us to offer our product to those
countries where USAID provides such funding. Some of our products have qualified for and use the European Union issued “CE”
Mark, which allows us to enter into CE Member countries subject to individual country documentation and approval. Currently, two
malaria rapid tests are approved under World Health Organization (“WHO”) guidelines with a third awaiting approval
in December 2016 pending test results. WHO approval is necessary for those countries which rely upon the expertise of the WHO,
as well as for non-governmental organization (“NGO”) funding. HDS products have also received registrations and approvals
issued by other foreign governments. HDS is currently in the planning phase for entering into the newly announced, WHO “Pre-Qualified
Approval” process for other HDS tests. This process allows expedited approval of rapid tests, reducing the current 24-30
month process time down to approximately 6-9 months. HDS products are also listed and offered internationally through the UNICEF
and UNDP. On February 2016, we entered into a Long Term Agreement with the WHO for the approved rapid tests. While receiving small
orders resulting from this Agreement, we anticipate larger orders from the WHO as our relationship expands.
We
maintain current U.S. Certificates of Exportability that are issued by two FDA divisions-CBER and CDRH. CBER (Center for Biologicals
Evaluation and Research) is the FDA regulatory division that oversees biological devices and which include our HIV, Hepatitis
B and Hepatitis C. The other division, Center for Devices and Radiological Health (“CDRH”), is responsible for the oversight of
other HDS devices which include Tuberculosis, Syphilis, and the remaining product line. Certificates of Exportability are issued
to Hema Diagnostic Systems. Our HDS facility maintains FDA Establishment Registration status and is in accord with GMP (Good Manufacturing
Practice) as confirmed by the FDA.
We
do not currently have FDA approval to sell any of our products in the United States. We anticipate submitting our devices to the
FDA under a Pre-Market Approval Application (PMA) or through the 510K process. The 510K would require the appropriate regulatory
administrative submissions as well as a limited scientific review by the FDA to determine completeness (acceptance and filing
reviews); in-depth scientific, regulatory, and Quality System review by appropriate FDA personnel (substantive review); review
and recommendation by the appropriate advisory committee (panel review); and final deliberations, documentation, and notification
of the FDA decision. The PMA process is more extensive, requiring clinical trials to support the application. We expect to apply
to FDA for approval of our first RDT to be submitted to the FDA for 510K approval within the next 3 months. We anticipate the
FDA process will be completed within 9 months after submission. During this timeline we will be preparing documentation for additional
rapid tests to undergo either the FDA PMA or 510k process.
Financial
Condition
Generex’s
historical business was in the development stage and we do not expect sufficient revenues to support our operation in the immediately
foreseeable future. To date, neither Generex nor HDS has been profitable. HDS’ owner’s deficit was $13,622,289 at
December 31, 2016. Generex’s consolidated net loss available to shareholders was $15,195,666 for the six months ended January
31, 2107. As of January 31, 2017, our current cash position is not sufficient to meet our working capital needs for the next twelve
months. As of that date, we had suspended most of our operations. To continue operations, we will require additional funds to
support our working capital requirements and any development activities, or will need to suspend operations. HDS’ past activities
have been primarily financed by loans and capital contributions from its former primary owner. That source of funds will no longer
be available. HDS entered into the Acquisition with the expectation that the existence of a public market for Generex’s
stock would enable it to access financing from various sources. We cannot provide any assurance that we will obtain the required
funding. 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. Management has sold non-essential real estate assets which were
classified as Assets Held for Investment to augment its 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.
Generex
Oral-lyn™
Regulatory
Approvals and Clinical Trials
To
date, we have received regulatory approval in Ecuador, India (subject to marketing approval of in-country clinical study), Lebanon
and Algeria for the commercial marketing and sale of Generex Oral-lyn™. No dossier related activities took place in any
other countries during fiscal 2016 or the first quarter of fiscal 2017, nor are any expected during the remainder of fiscal 2017.
In
March 2008, we initiated Phase III clinical trials for this product 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 have been enrolled to date at approximately 70 clinical
sites around the world, including sites in the United States, Canada, Bulgaria, Poland, Romania, Russia, Ukraine and Ecuador.
The first Oral-lyn™ global Phase III trial initiated in April 2008 had a final patient visit date 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 meta-analysis
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 additional financing.
Marketing
We
have entered into licensing and distribution agreements with a number of multinational distributors to assist us with the process
of gaining regulatory approval for the registration, marketing, distribution, and sale of Generex Oral-lyn™ in countries
throughout the world. Under these licensing and distribution agreements, excluding one with Dong Sung Pharm Co. in South Korea,
we may or may not receive an upfront license fee, but the distributor will bear any and all costs associated with the procurement
of governmental approvals for the sale of Generex Oral-Lyn™, including any clinical and regulatory costs. We possess the
worldwide marketing rights to our oral insulin product.
In
India, a marketing plan has been submitted by Shreya Life Sciences Pvt. Ltd., to Generex on the marketing strategy for the distribution
of Oral Recosulin™, the trademark under which Shreya will market Generex Oral-lyn™ within India. The marketing plan
also includes post-approval marketing studies. 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. The marketing acceptance dossier has been submitted to the Indian regulatory
authority. 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 the first quarter of the 2016 fiscal year.
We
do not currently plan to expend significant resources on additional clinical trials or to further the commercialization of Generex
Oral-lyn™ until after such time that we secure additional financing.
Cancer
and Immunotherapeutic Vaccine Platforms
Our
wholly-owned subsidiary Antigen Express is developing proprietary vaccine formulations based upon two platform technologies that
were discovered by its founder, the Ii-Key hybrid peptides and Ii-Suppression. These technologies are applicable for either antigen-specific
immune stimulation or suppression, depending upon the dosing and formulation of its products. Using active stimulation, we are
focusing on major diseases such as breast, prostate and ovarian cancer, melanoma, influenza (including H5N1 avian and H1N1 swine
flu) and HIV. Autoimmune diseases such as diabetes and multiple sclerosis are the focus of our antigen-specific immune suppression
work.
Antigen’s
immunotherapeutic vaccine AE37 is currently in Phase II clinical trials for patients with HER-2/neu positive breast cancer. The
trial is being conducted with the United States Military Cancer Institute's (USMCI) Clinical Trials Group and will examine the
rate of relapse in patients with node-positive or high-risk node-negative breast cancer after two years. The study is randomized
and will compare patients treated with AE37 plus the adjuvant GM-CSF versus GM-CSF alone. The Phase II trial follows a Phase I
trial that demonstrated safety, tolerability, and immune stimulation of the AE37 vaccine in breast cancer patients.
Based
on positive results in trials of the AE37 vaccine in breast cancer patients, we entered into an agreement in August 2006 with
the Euroclinic, a private center in Athens, Greece, to commence clinical trials with the same compound as an immunotherapeutic
vaccine for prostate cancer. A Phase I trial involving 29 patients was completed in August 2009, which similarly showed safety,
tolerability and induction of a specific immune response. Agreements, as well as a protocol, are in place for initiation of a
Phase II clinical trial once additional funding is available.
The
same technology used to enhance immunogenicity is being applied in the development of a synthetic peptide vaccine for H5N1 avian
influenza and the 2009 H1N1 swine flu. In April 2007, a Phase I clinical trial of Antigen’s proprietary peptides derived
from the hemagglutinin protein of the H5N1 avian influenza virus was initiated in healthy volunteers in the Lebanese-Canadian
Hospital in Beirut, Lebanon. We have completed the first portion of the Phase I trial. Modified peptide vaccines for avian influenza
offer several advantages over traditional egg-based or cell-culture based vaccines. Modified peptide vaccines can be manufactured
by an entirely synthetic process which reduces cost and increases both the speed and quantity of vaccine relative to egg- or cell-culture
based vaccines. Another advantage is that the peptides are derived from regions of the virus that are similar enough in all H5N1
and H1N1 virus strains such that they would not have to be newly designed for the specific strain to emerge in a pandemic.
A
Physician’s Investigational New Drug (“IND”) application for the Phase I and Phase II trials in patients with
stage II HER-2/neu positive breast cancer has been filed with the FDA. The Phase I trial was completed at the Walter Reed Army
Medical Center in Washington, D.C., and the Phase II trial is taking place at 13 sites, including 11 in the U.S., one in Germany
and one in Greece. A Physician’s Investigational New Drug application for a Phase I trial in patients with breast or ovarian
cancer also has been filed with the FDA and this Phase I trial is being conducted in Dallas, Texas at the Mary Crowley Cancer
Center. Applications were filed and approvals obtained for a Phase I prostate cancer trial using AE37 in Athens, Greece from the
Hellenic Organization of Drugs, and this Phase I trial was completed in August 2009. The Ministry of Health in Lebanon gave approval
for Phase I trial of our experimental H5N1 prophylactic vaccine in Beirut, Lebanon following submission of an application. All
other immunomedicine products are in the pre-clinical stage of development.
In-Vitro
Medical Diagnostic Devices Administered At The Point Of Care Level
HDS
develops, manufactures, and distributes in-vitro medical diagnostics for infectious diseases administered at the point of care
level with results as soon as 10-15 minutes. We manufacture and sell rapid diagnostic devices based upon its own proprietary EXPRESS
technology as well as cassette devices based on customary designs used generally in the industry. Since its founding, Hema has
been developing and continues to develop an expanding line of Rapid Diagnostic Tests (RDTs) including those for the following
infectious diseases such as Human Immunodeficiency Virus (HIV) – ½ w/p24Ab, tuberculosis-XT, malaria, hepatitis,
syphilis, typhoid, dengue and other infectious diseases. Recent advances in device platform technology can be directly applied
to individual test strip which is disease specific line. These technologies further increase the performance capabilities of each
test and its’ ability to detect diseases in an efficient and cost-effective manner.
HDS
is also in the process of developing the platform for the qualitative testing for other infectious diseases including Typhoid,
Chikungunya, Zika and other diseases. A new HDS housing, designated as the Rapid 1-2-3 Hema Express III Sepsis, is currently in
the design evaluation process phase.
Due
to the potential infectious character of the whole blood test sample, HDS’ Express series of RDTs are designed to perform
and deliver test results while within the sealed Express housing. This increases the ability to control the possibility of cross-contamination.
Competition
We
face competition from other providers of alternate forms of insulin. Some of our most significant competitors, Pfizer, Eli Lilly,
and Novo Nordisk, have announced that they will discontinue development and/or sale of their inhalable forms of insulin. Generex
Oral-lyn™ is not an inhaled insulin; rather, it is a buccally absorbed formulation with no residual pulmonary deposition.
We believe that our buccal delivery technology offers several advantages over inhalation, 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.
The
following descriptions of our competitors for buccal insulin products and immunomedicine technology were obtained from their filings
with the Securities and Exchange Commission, information available on their web sites and industry research reports.
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MannKind
Corporation’s product candidates include AFREZZA®, a mealtime insulin therapy
being studied for use in adult patients with type 1 and type 2 diabetes. MannKind received
FDA approval in June 2014 and the product is now commercially available in the United
States.
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Amylin
Pharmaceuticals, Inc. received FDA approval in January 2012 for Bydureon, an extended-release
injectable formulation, which is the first once-a-week therapy for the treatment of type
2 diabetes.
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There
are several companies that are working on developing products which involve the oral
delivery of analogs of insulin. Oramed Pharmaceuticals is developing an orally ingestible
insulin capsule which is currently in Phase II clinical trials. Biocon Limited has developed
IN-105, a tablet for the oral delivery of insulin, which is currently in phase II trials.
Diabetology has developed Capsulin IR, an insulin capsule which is currently in Phase
II clinical trials. Access Pharmaceuticals has developed Cobalamin, an oral insulin which
is currently in pre-clinical trials. Dance Pharmaceuticals is developing an inhaled insulin
product based on Aerogen’s proprietary OnQ Aerosol Generator technology.
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There
are also a number of companies developing alternative means of delivering insulin in
the form of oral pills, transdermal patches, and intranasal methods, which are at early
stages of development. In addition to other delivery systems for insulin, there are numerous
products, such as sulfonylureas (Amaryl®and Glynase®), biguanides (branded and
generic metformin products), thiazolidinediones (Avandia®and Actos®), glucagon-like
peptide 1 (Byetta®and Victoza®), and dipeptidyl peptidase IV inhibitors (Januvia®
and Onglyza™), which have been approved for use in the treatment of Type 2 diabetics
in substitution of, or in addition to, insulin therapy. These products may also be considered
to compete with insulin products.
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Bavarian
Nordic, Inc. employs a DNA vector-based technology platform to design and develop immunotherapeutic
vaccines for different cancers. Their most advanced compound, PROSTVAC, is in a pivotal
Phase III trial in patients with prostate cancer. Additionally, they have a HER2 vaccine
in a Phase I/II trial in patients with breast cancer. They have recently presented data
on studies combining their MVA-BN-HER2 cancer vaccine with different immune checkpoint
inhibitors.
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Advaxis,
Inc. uses a proprietary technique to bioengineer Listeria bacteria to create a specific
antigen that can stimulate an immune response after recognition by the recipient’s
immune system. Advaxis’ most advanced product candidate is ADXS-HPV, which is in
Phase II trials for HPV-associated CIN (cervical intraepithelial neoplasia) and recurrent
cervical cancer. The company has recently partnered with MedImmune to initiate combination
studies utilizing their most advanced ADXS-HPV with MedImmune’s anti-PD-L1 immune
checkpoint inhibitor in patients with advanced, recurrent or refractory human papillomavirus
(HPV)-associated cervical or head and neck cancer.
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Amgen
Inc.’s BiTE® technology uses the body’s cell destroying T cells to attack
tumor cells. Amgen’s lead product candidate blinatumomab (MT103) has completed
a Phase II clinical trial in patients with minimal residual disease positive acute lymphoblastic
leukemia.
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Sanofi
Pasteur Inc., the vaccine division of sanofi-aventis and one of the largest vaccines
companies in the world, has product candidates including inoculations against 20 varieties
of infectious diseases. It received FDA approval for an H5N1 avian influenza vaccine
in April 2007 and for an H1N1 vaccine in September 2009.
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Galena
Biopharma’s (formerly Rxi Pharmaceuticals Corporation) NeuVax™, is currently
in Phase III clinical trials to evaluate NeuVax™ for the treatment of early stage,
HER2-positive breast cancer. Clinical trials are currently underway to test NeuVax™
as a treatment for prostate cancer, and to use NeuVax™ in combination with Herceptin®
to target breast cancer.
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In
May 2010, BioSante Pharmaceuticals, Inc. announced that it was restarting development
of the GVAX™ vaccine for the treatment of prostate cancer (originally developed
by Cell Genesys, Inc.) and is in Phase II human clinical trials. In addition to GVAX
prostate product, BioSante has several other cancer vaccines which are in Phase II clinical
development including vaccines for leukemia, breast cancer and pancreatic cancer and
has vaccines in Phase I clinical development including vaccines for colorectal cancer
and melanoma.
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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.
The
medical diagnostics industry is a multi-billion dollar international industry and is intensely competitive. Many of our
competitors in this industry are substantially larger and have greater financial, research, manufacturing and marketing resources.
We believe our scientific and technological capabilities as well as our proprietary technology and know-how relating to our rapid
tests, particularly for the development and manufacture of tests for the detection of antibodies to infectious diseases, are very
strong.
Alere,
Inmc. is our main competitor and one of the major player in RTDs for infectious diseases. Alere markets the Alere HIV Combo Ag/Ab
test, which uses the lateral flow technology patent. Alere acquired the patent from Abbott over a decade ago. Alere subsequently
acquired Standard Diagnostics of Korea and Accon of China.
Standard
Diagnostics was a state-funded entity in South Korea established to build and expand into the international markets under its
own brand until it was acquired by Inverness, the predecessor to Alere, in 2006.
With
funding from Inverness for regulatory registrations and a previously established cassette product line, Standard was able to capture
a strong market share of purchased for use in Africa with funding from WHO and the Global Fund. Currently, Standard is the strongest
competitor on an international basis, incorporating a cassette design into each of their products.
Chembio
Diagnostic Systems, Inc. is a publicly-traded diagnostic company that develops, manufactures and commercializes diagnostic solutions.
Chembio uses its patented Next Generation DPP (Dual Path Platform) technology that makes claims of significant advantages over
the Alere’s lateral-flow technology.
It
has continued building its product line and entered into US FDA approval for a rapid HIV test approved for professional use only
in the United States.
As
infectious diseases are epidemic and in the minds of the public, there will be more competitors coming into the market place.
However, we believe competition will be based upon the implementation of a cassette or a “dipstick” format.
Brief Company Background
Prior to our acquisition of a controlling interest
in HDS, we were a development stage company. From inception through the end of the quarter ended January 31, 2017, we have received
only limited revenues from operations. Our non-HDS business did not have any revenue for the six months ended January 31, 2017
or in the fiscal year ended July 31, 2016
We operate in two segments. Our historical
business operates in the research and development of drug delivery systems and technologies for metabolic and immunological diseases.
HDS operates in the development, manufacture and distribution of in-vitro medical diagnostic devices (RDTs) administered at the
point of care level.
We
were incorporated in the State of Delaware in 1997. Our principal executive offices are located at 10102 USA Today Way Miramar,
Florida 33025. Our telephone number is (416) 364-2551. We maintain an Internet website at
www.generex.com
. We
make available free of charge on or through our website our filings with the SEC.
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.
Due
to lack of funds, we did not expend any resources on research and development in the first quarter of fiscal 2017. Previously,
we expended resources on the clinical testing and results analysis of our buccal insulin product, Generex Oral-lyn™. In
July 2007, we received no objection from the FDA to proceed with our long-term multi-center Phase III study protocol for Generex
Oral-lyn™. The first Oral-lyn global Phase III trial initiated in April 2008 had a final patient visit date 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 meta-analysis of
all safety data. The completion of late-stage trials in Canada and the United States will require significantly greater funds
than we currently have on hand. We do not currently plan to expend significant resources on additional clinical trials of Oral-lyn™
until after such time that we secure additional financing.
Previously,
we expended resources on research and development relating to Antigen’s peptide immunotherapeutic vaccines and related technologies.
Antigen has one vaccine currently in Phase II clinical trials in the United States involving patients with HER-2/neu positive
breast cancer and has completed a Phase I clinical trial for a vaccine for H5N1 avian influenza 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 in all jurisdictions
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. Insubstantial amounts have been expended on projects with other drugs, including morphine and fentanyl, and those projects
involved a substantial amount of platform technology development. 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.
We
did not expend any resources on research and development in the first quarter of fiscal 2017. Previously, in accounting
for research and development of Antigen’s products, 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 interim consolidated financial statements
which have been prepared in conformity with accounting principles generally accepted in the United States of America for interim
financial statements. These principles require 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 consolidated interim 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 consolidated interim financial statements do not include any adjustments that might
be necessary should we be unable to continue as a going concern.
Inventory
.
HDS’ inventory is stated at the lower of cost or net realizable value. Cost is determined using the Weighted Average method.
We periodically evaluates our inventory for any obsolete or slow moving items based on production lots and advances in production
design or technology. Any inventory determined to be obsolete or slow moving is removed from inventory and disposed or a provision
is made to reduce slow moving inventory to its net realizable value. At December 31, 2016, HDS recorded a reserve for obsolescence
of nil.
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 Statement of Operations. Pursuant
to the acquisition of HDS at the time of closing on January 18, 2017, the Company recorded $14,335,822 of goodwill, and as of January
31, 2017, the Company fully impaired the goodwill.
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. Prior to the acquisition of HDS, all of the Company’s
patents had been written down in the fiscal year ended July 31, 2016. Pursuant to the acquisition of HDS, the Company recorded
a stepped-up basis in In-Process Research and Development of HDS in the amount of $1,955,932 to be amortized over ten (10) years.
Our intangible assets consist of patent patented technology and trademarks.
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 liabilities
. FASB
ASC 815, Derivatives and Hedging, requires all derivatives to be recorded on the balance sheet at fair value for fiscal years
beginning after December 15, 2008. As a result, certain derivative warrant liabilities 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. For
our balance sheets as of July 31, 2015 and January 31, 2017, we used the binomial lattice model to estimate the fair value of
these derivative liabilities. 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
Three
months ended January 31, 2017 compared to three months ended January 31, 2016
We
had a net loss for the quarter ended January 31, 2017 in the amount of $15,783,187 versus net loss of $47,390 in the corresponding
quarter of the prior fiscal year. The increase in net loss year’s fiscal quarter was primarily attributable to a write-off
of goodwill of $14,335,822 derived from the HDS acquisition, and $1,104,969 in the change in fair value of derivative liabilities.
Our operating loss for the quarter ended January 31, 2017 increased to 215,727 compared to $157,532 in the same fiscal quarter
of fiscal 2016. The increase in operating loss resulted from an increase in general and administrative expenses (to
$140,087 from $89,904 and research and development costs to 75,640 from 67,628. We did not have revenue in either of the quarters
ended January 31, 2017 or 2016.
Our
interest expense in the second quarter of fiscal 2017 was $126,669 compared to the previous year’s fiscal quarter at $102,187.
Change in fair value of derivative liabilities contributed a loss of $1,104,969 in the second quarter of fiscal 2017 compared
to a gain of $212,329 in the second quarter of fiscal 2016.
Six
months ended January 31, 2017 compared to six months ended January 31, 2016
We had a net loss for the six months ended
January 31, 2017 of $15,222,949 versus a net loss of $1,778,655 in the corresponding six months of the prior fiscal year. The loss
in this year’s fiscal six months was caused primarily by a write-off of goodwill of $14,335,822 derived from the HDS acquisition,
and $1,104,969 in the change in fair value of derivative liabilities in addition to our operating expenses of $215,727. The loss
in the corresponding six months of the prior year was due primarily to operating expenses of $1,475,111.
Our operating loss for the six months ended
January 31, 2017 decreased to $318,545 compared to $1,475,111 in the same fiscal period of 2016. The decrease in operating loss
resulted primarily from a suspension of most of our operations due to lack of funds, from a decrease in research and development
expenses (to $75,640 from $245,198) and a decrease in general and administrative expenses (to $242,905 from $1,229,913). We did
not have revenue in either of the six-month periods ended January 31, 2017 or 2016.
The decrease in research and development expenses
in the six months ended January 31, 2017 versus the comparative six months in the previous fiscal year is primarily due to our
current efforts to reduce expenditures to conserve cash with limited research and development costs attributed to the acquisition
of HDS in the amount of $20,473.
Our interest expense in the first six
months of fiscal 2017 was $243,508 compared to the previous year’s fiscal six months at $199,910. Change in fair value of
derivative liabilities contributed a loss of $325,074 in the first six months of fiscal 2017 compared to a loss of $103,634 in
the first six months of fiscal 2016.
The
net operating losses attributed to HDS or the period between January 18, 2017 and January 31, 2018 amount to 52,435, primarily
from general and administrative expenses of 31,962 and research and development costs of $20,473.
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. HDS financed
its development stage activities primarily from capital contributions and loans from its previous primary owner.
As of January 31, 2017, 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
in our historical operations, and our officers ceased receiving compensation as of October, 2015. Therefore, we will require additional
funds to support our working capital requirements and any development or other activities. HDS will require additional funds to
support its working capital requirements and any development or other activities, or will need to curtail its research and development
and other planned activities or suspend operations. HDS will no longer be able to rely on its former primary owner for necessary
financing. Going forward, HDS will rely on Generex financing activities to fund HDS operations, development and 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
we did not receive any funds from these activities, or from exercise of outstanding warrants during the six-month period ended
January 31, 2017. Subsequent to January 31, 2017, we eliminated through amendment, exercise and conversion of all of our outstanding
common stock purchase warrants and the outstanding shares of our Series G 9% Convertible Preferred Stock. All of the warrants were
exercised on a “cashless” basis. This will result in the elimination of a significant derivative liability on our balance
sheet for periods after February 9, 2017. Because the warrants were issued on a cashless basis, however, we received no funds from
the exercise of the warrants.
Management will seek to meet all or some of
our operating cash flow requirements through financing activities, such as private placements 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 may pursue 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. 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. We have suspended most of our operations due to lack of capital. 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 completely.
Equity
Financings
We
did not engage in any equity financing during fiscal 2016 or fiscal 2017 through January 31, 2017.
On
March 6, 2017 we received $500,000 in net proceeds from the sale of our Convertible Note Due March 6, 2018 (“Note”)
in the principal amount of $674,854.96
.
The purchase price of the Note was $562,379.13 comprised of $500,000 in cash, the
cancellation of a $50,000 demand Note the Company had issued to the investor in May, 2016, $3,879.13 in accrued interest on the
prior note and $8,500 in legal fees for the investor’s counsel, which the Company was obligated to pay pursuant to the Securities
Purchase Agreement. The remaining $112,475.83 of principal amount represents original issue discount. The entire net proceeds
of this Note were used to pay a $500,000 deposit to Emmaus Life Sciences, Inc. pursuant to our Letter of intent with Emmaus, as
amended.
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.
As
of April 30, 2016, all of the warrants issued in the aforementioned registered direct
offerings were exercisable. At April 30, 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):
•
|
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 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 25,000 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 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 26,667 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 69,167 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 shares of our common stock to investors.
|
Date
Issued
|
|
Aggregate
No. of Shares Unexercised
|
|
Exercise
Price
|
|
Expiration
Date
|
February
1, 2012*
|
|
|
11,350
|
|
|
$
|
15.00
|
|
|
February
1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
August 10, 2012*
|
|
|
1,000
|
|
|
|
15.00
|
|
|
August
10, 2017
|
|
|
|
|
|
|
|
|
|
|
|
December 10, 2012*
|
|
|
16,648
|
|
|
|
15.00
|
|
|
December
12, 2017
|
|
|
|
|
|
|
|
|
|
|
|
June 17, 2013*
|
|
|
68,333
|
|
|
|
15.00
|
|
|
June
17, 2018
|
|
|
|
|
|
|
|
|
|
|
|
January 15, 2014*
|
|
|
51,333
|
|
|
|
15.00
|
|
|
January
15, 2019
|
|
|
|
|
|
|
|
|
|
|
|
March 27, 2014*
|
|
|
138,333
|
|
|
|
15.00
|
|
|
March
27, 2019
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2015*
|
|
|
30,000
|
|
|
|
15.00
|
|
|
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 Six months ended January
31, 2017
For the six months ended January 31, 2017,
we used $229,083 in cash to fund our operating activities. The use for operating activities included a net loss of $15,195,666,
changes to working capital including the impairment of goodwill of $14,335,822, an increase of $183,146 related to accounts payable
and accrued expenses, offset by an increase related to other current assets of $24,535, a loss on disposal of property and equipment,
a loss in the change in fair value of derivative liabilities of $325,074 and $ 145,800 for common stock issued for make-whole payments
on preferred stock
On January 16, 2017, Joseph Moscato, the Company’s
new Chief Executive Officer and a director, and Lawrence Salvo, the Company’s new Senior Vice President and a director, advance
the Company $500,000, which the Company paid to Emmaus Life Sciences, Inc. pursuant to our LOI. The Company does not have any formal
arrangement for repayment of the amounts advanced by Mr. Moscato and Mr. Salvo.
Otherwise, we had no cash provided by financing
activities in the six months ended January 31, 2017.
Our net working capital deficiency at January
31, 2017 increased to $23.6 million from $9 million at July 31, 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 January 31, 2017, 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 17,1677 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 630 additional shares of common stock on such conversions of the Series A
convertible preferred stock as “make-whole payments”.
As of January 31, 2017, 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 38,521 shares
of common stock upon the conversion of the Series B convertible preferred stock and an additional 14,820 shares of common stock
were issued as “make-whole payments” on such conversions.
As of January 31, 2017, all of the 750 shares
of our Series C 9% Convertible Preferred Stock had been converted into shares of our common stock. We issued 22,917 shares of common
stock upon the conversion of the Series C convertible preferred stock and an additional 6,65 shares of common stock were issued
as “make-whole payments” on such conversions.
As of January 31, 2017, all of the 750 shares
of our Series D 9% Convertible Preferred Stock had been converted into shares of our common stock. We issued 25,000 shares of common
stock upon the conversion of the Series D convertible preferred stock and an additional 7,825 shares of common stock were issued
as “make-whole payments” on such conversions.
As of January 31, 2017, 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 shares of common
stock upon the conversion of the Series E convertible preferred stock and an additional 19,035 shares of common stock were issued
as “make-whole payments” on such conversions.
As of January 31, 2017, 2,075 shares of the
Series F 9% Convertible Preferred Stock had been converted to common stock. We issued 97,108,331 shares of common stock upon conversion
of the Series F convertible preferred stock and 40,769,172 shares of common stock issued as “make-whole payments” on
such conversions.
As of January 31, 2017, 150 shares of the Series
G 9% Convertible Preferred Stock had been converted to common stock. We issued 10,000 shares of common stock upon conversion of
the Series G convertible preferred stock and 4,688 shares of common stock issued as “make-whole payments” on such conversions.
Subsequently, the remaining 350 shares of our
Series G convertible preferred stock were 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.
|
We are obligated to pay Emmaus Life Sciences, Inc. a deposit of
$3,000,000 by March 30, 2017, pursuant to our Letter of Intent with Emmaus. Pursuant to the terms of the Letter of Intent, at the
closing of the proposed transaction with Emmaus, we will be required to pay an additional $6,000,000.
On March 6, 2017 we received $500,000 in net
proceeds from the sale of our Convertible Note Due March 6, 2018 (“Note”) in the principal amount of $674,854.96
.
The purchase price of the Note was $562,379.13 comprised of $500,000 in cash, the cancellation of a $50,000 demand Note the
Company had issued to the investor in May, 2016, $3,879.13 in accrued interest on the prior note and $8,500 in legal fees for the
investor’s counsel, which the Company was obligated to pay pursuant to the Securities Purchase Agreement with the investor.
The remaining $112,475.83 of principal amount represents original issue discount. The entire net proceeds of this Note were used
to pay the initial deposit to Emmaus pursuant to our Letter of Intent, as described below. If the Note is not converted, we will
be obliged to pay the $674,854.96 in cash in March, 6 2018
.
Stephen Berkman (“Berkman”), who
holds a 49% ownership interest in HDS, has continued to provide additional advances and unsecured loans to HDS, and we expect that
Berkman will do so until such time that the Company completes additional financing. As of January 31, 2017, Berkman held $13,307,837
in unsecured loans against HDS. The loan matures on December 31, 2019 and accrues interest for the 2016 calendar year at 0.75%
per annum, which was increased from 0.21% for the 2015 calendar year.
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 the Company’s 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.
Certain Related Party Transactions
On January 16, 2017, Joseph Moscato, the Company’s
Chief Executive Officer and director, and Lawrence Salvo, the Company’s Senior Vice President and director, advanced the
Company $500,000, which the Company paid to Emmaus Life Sciences, Inc. pursuant to our Letter of Intent with Emmaus. The Company
does not have any formal arrangement for repayment of the amounts advanced by Mr. Moscato and Mr. Salvo.
In addition to the Emmaus payment, during the
six-month period ended January 31, 2017, Mr. Moscato and Mr. Salvo advanced to Generex an aggregate of $121,164 for legal and accounting
and other expenses incurred in the acquisition of HDS, preparing and filing SEC reports, paying our transfer agent and other expenses.
The Company does not have any formal arrangement with Mr. Moscato for repayment of these amounts.
On January 16, 2017, the Company and
Emmaus Life Sciences, Inc. (“Emmaus”) entered into a letter of intent (“LOI”) contemplating that the
Company will acquire a controlling interest of the outstanding capital stock of Emmaus (the “Emmaus Shares”) for
a total consideration of $225,000,000 in cash in Generex stock. The purchase price for the Emmaus Shares will consist of
$10,000,000 in cash and $215,000,000 worth of shares of the Company’s common stock (“Company Shares”),
which will be valued at $3.80 per share at the closing, provided that if a material event occurs that increases the fair
market value of the Company Shares prior to the Closing, the value attributed to of the Company Shares will be increased to
such higher market value up to a maximum of $12.00 per share. Under the LOI, we have paid total deposits of $1,000,000 to
Emmaus and are obligated to pay Emmaus an additional deposit of $3,000,000 by March 30, 2017.
On January 25, 2017, Dr. Yutaka Niihara, MD,
MPH, Chairman and CEO of Emmaus joined Generex’s Board of Directors as executive Chairman.
Berkman holds a 49% ownership interest in
HDS, has continued to provide additional advances and unsecured loans to HDS, and we expect that Berkman will do so until such
time that the Company completes additional financing. As of January 31, 2017, Berkman held $13,307,837 in unsecured loans against
HDS. The loan matures on December 31, 2019 and accrues interest for the 2016 calendar year at 0.75% per annum, which was increased
from 0.21% for the 2015 calendar year.
Recently
Adopted Accounting Pronouncements
None
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.
In
February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis (“ASU
2015-02”), which provides guidance on evaluating whether a reporting entity should consolidate certain legal entities. Specifically,
the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities
(“VIEs”) or voting interest entities. Further, the amendments eliminate the presumption that a general partner should
consolidate a limited partnership, as well as affect the consolidation analysis of reporting entities that are involved with VIEs,
particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for interim and annual
reporting periods beginning after December 15, 2016, with early adoption permitted. A reporting entity may apply the amendments
using a modified retrospective approach or a full retrospective application. We are currently evaluating the impact, if any, that
adopting ASU 2015-02 will have on HDS’ financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize
(i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors;
however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard
will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of
the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently reviewing the provisions
of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.