Acquisition of Hema Diagnostics Systems, LLC

9 Months Ended

Apr. 30, 2017

Business Combinations [Abstract]

Acquisition of Hema Diagnostics Systems, LLC

Note 12 - 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. The Acquisition Agreement also provide the Company with a call option to acquire the remaining 49% of HDS and a retirement of HDS shareholder loans in the amount of $13,239,837 (the “Call Option”)

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
Total 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 until such time that an increase in authorized capital has been approved. At the time of closing, Management was not of the opinion that it is more likely than not that the warrant will be issued and the Call Option will be exercised, accordingly no values have been attributed to the warrant and Call Option at closing. During the current quarter, , management made a redetermination and changed its opinion that it was more likely than not that the shareholder approval to increase authorized shares capital would be approved and the Call Option will be exercised. Accordingly, management recorded the fair value of the warrant of $56,667,507 as a liability and the Call Option of $7,129,671 as an asset as of April 30, 2017. The change in the fair value of the contingent purchase consideration of $49,537,836 was recorded in the condensed interim consolidated statements of operations and comprehensive loss.

Fair Value Assumptions Used in Accounting for Warrants

The Company used the Black-Scholes option-pricing model to calculate the fair value of the warrants as of April 27, 2017. The Black-Scholes option-pricing 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. The key inputs used in the April 27, 2017 fair value calculations were as follows:

Exercise price	$	2.50
Time to expiration		4.7 years
Risk-free interest rate		1.81	%
Estimated volatility		120	%
Dividend		—
Stock price at valuation date	$	4.37

Fair Value Assumptions Used in Accounting for Call Option

The Company used the Monte Carlo model to calculate the fair value of the call option as of April 27, 2017. The valuations are based on assumptions as of the valuation date with regard to the value of the asset acquired net of impairment, the risk-free interest rate, the estimated volatility of the stock price in the future, the time to expiration and the stock price at the date of valuation.

The following assumptions were used in estimating the value of the options as of April 27, 2017:

Value of asset acquired, net	$	7,704,827
Risk-free interest rate		1.44	%
Estimated volatility		120	%
Remaining Term		2.73
Stock price at valuation date	$	4.66

The preliminary purchase price allocation of HDS was determined to be as follows:

Purchase price allocation:
Net assets of HDS			(13,642,899	)
Non-controlling interest			(1,297,939	)
In-Process Research & Development			1,955,932
Goodwill			14,335,822
Total Purchase Price	51% Ownership	$	1,350,916

Goodwill and Intangible Assets

The change in the carrying amount of goodwill and other intangible assets for the nine months ended April 30, 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 April 30, 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.