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Stockholders’ Deficiency

12 Months Ended

Jul. 31, 2017

Note 11 - 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. As at year end the shares have yet to be issued.

During January 2017, the Company issued 8,000 shares of common stock for the conversion of 120 shares of Series F convertible preferred stock, plus 4,235 shares for the related make-whole payments issued to convert the accumulated dividend payable.

During January 2017, the Company issued 10,000 shares of common stock for the conversion of 150 shares of Series G convertible preferred stock, plus 4,688 shares for the related make-whole payments issued to convert the accumulated dividend payable.

During February 2017, the Company issued 23,333 shares of common stock for the conversion of 350 shares of Series G convertible preferred stock, plus 10,606 shares for the related make-whole payments issued to convert the accumulated dividend payable.

On February 9, 2017, the Company offered all current warrant holders an option to exercise immediately all outstanding common stock purchase warrants on a cashless basis at a reduced exercise price of $7.40 per share from $15.00 per share. The Company agreed to issue a total of 103,809 shares of common stock in connection with the exercise of 314,649 warrants in connection with the following outstanding warrants:

	Warrants Exercised		Shares Agreed to be Issued
Series C 9% Convertible Preferred Stock		10,000		3,299
Series D 9% Convertible Preferred Stock		16,649		5,492
Series E 9% Convertible Preferred Stock		119,667		39,481
Series F 9% Convertible Preferred Stock		138,333		45,639
Series G 9% Convertible Preferred Stock		30,000		9,898
		314,649		103,809

As of the date of this filing, 31,195 shares have been issued and 72,614 shares remain to be issued resulting in additional common stock payable $1,071,851 as of July 31, 2017.

Warrants

As of July 31, 2016, the Company had 383,877 warrants with a current exercise price of $15 which have price protection provisions that allow for the reduction in the current exercise price upon the occurrence of certain events, including the Company’s issuance of common stock or securities convertible into or exercisable for common stock, such as options and warrants, at a price per share less than the exercise price then in effect. For instance, if the Company issues shares of its common stock or options exercisable for or securities convertible into common stock at an effective price per share of common stock less than the exercise price then in effect, the exercise price will be reduced to the effective price of the new issuance. Simultaneously with any reduction to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall be increased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. There are a limited number of permitted types of stock and equity instrument issuances for each series of warrants which will not invoke the price protection provisions of these warrants. The conversion price for all previously outstanding warrants was adjusted from $30.00 to $15.00 in conjunction with the Series G Convertible Preferred Stock financing on June 24, 2015 and the total number of previously outstanding warrants increased from 239,788 to 479,577, in addition to the 33,333 warrants issued in the financing.

During the year ended July 31, 2016, 129,033 warrants, which had an exercise price of $15 per warrant, expired. There were no warrants exercised for the fiscal year ended July 31, 2016. The outstanding warrants at July 31, 2016 have a weighted average exercise price of $15 per share and have a weighted average remaining life of 2.1 years.

As of July 31, 2016, there were a total of 383,877 warrants with an estimated fair value of $2,048,846, which were identified on the consolidated balance sheets under the caption “Derivative Warrant Liability”.

During the year ended July 31, 2017, 65,896 warrants expired. There were 3,333 warrants exercised at an exercise price of $15.00 per share with proceeds of $50,000 for the year ended July 31, 2017 and 314,649 warrants were exercised on a cashless basis at a reduced exercise price of $7.40 issuing 103,809 shares of common stock. As of July 31, 2017, there are no warrants issued or outstanding.

The Company accounts for the warrants with price protection provisions in accordance with FASB ASC Topic 815 as described in Note 12 - Derivative Liabilities.

Series A, B, C, D, E, F, and G 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 in February 2017, the Company adjusted exercise further to $7.40 and all remaining outstanding warrants were exercised). Prior to conversion, the warrants, were entitled to accrue a 9% dividend until the third-year anniversary of the issuances. On each one-year anniversary thereafter, such dividend rate increased 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 was 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 was 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 was also to 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 were 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 were 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 and the exercise price further adjusted from $15.00 to $7.40 during February 2017.

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; and in February 2017, the Company adjusted exercise further to $7.40 and all remaining outstanding warrants were exercised). Prior to conversion, the exercise price of the warrants and, in some cases, the number of shares issuable upon exercise, was 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 could have been 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 had been 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 could have been 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. Until such time that these warrants were exercised, these warrants had been classified as derivative liabilities and are described further in Note 12 - 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 had been classified as derivative liabilities and are described further in Note 12 - 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 July 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 July 31, 2017, 500 of the Series G convertible preferred stock had been converted to common stock. There were 33,333 shares of common stock issued upon the conversion of the Series G convertible preferred stock and 15,294 shares of common stock issued as “make-whole payments” on such conversions. As of July 31, 2017, there were no shares of Series F and Series G convertible preferred stock outstanding.

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 12 - 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. The remaining balance as of July 31, 2017 and July 31, 2016, after all conversions, are $-0- and $32,400, respectively, and is included in Accounts Payable and Accrued Expenses.

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 12 - 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. The remaining balance as of July 31, 2017 and 2016, after all conversions, are $-0- and $135,000, respectively, and is in Accounts Payable and Accrued Expenses.

Series H and Series I Convertible Preferred Stock

The Company has authorized 109,000 shares of designated non-voting Series H Convertible Preferred Stock with a stated value of one thousand ($1,000) per share and authorized 6,000 shares of designated non-voting Series I Convertible Preferred Stock with a stated value of one thousand ($1,000) per share pursuant to the Purchase Agreement dated March 27, 2017. The Series H Preferred Stock was scheduled to be sold in four tranches to the Purchaser. Under the Securities Purchase Agreement, in the event the Purchaser failed to purchase 100% of the shares of Preferred Stock at any given Closing, the Company can decline to sell any further securities to the Purchaser (the Purchase Agreement”).

The Series H and Series I Convertible Preferred Stock are convertible at the option of the holder at any time into shares of the Company’s common stock at an effective conversion price of $2.50 per share. An aggregate of 46,000,000 shares of the Company’s common stock would be issuable upon conversion of both the Series H and Series I Preferred Stock if all shares of such preferred stock contemplated by the securities purchase agreement are issued.

Neither Series H nor Series I Convertible Preferred Stock have special dividend rights. If the Company pays dividends on its common stock, the holders of the preferred stock will receive dividends in the amount they would have received had they converted the preferred stock to common stock.

The Series I Preferred Stock have a special one-time voting rights that provide at the first meeting of the Company’s stockholders following the initial issuance of the Preferred Stock, and all adjournments of such meeting, the Preferred Stock shall be entitled to vote on (i) the election of individuals to serve as members of the Board of Directors, and (ii) any proposal to increase the authorized number of shares of Common Stock. The Preferred Stock, as a class, shall be entitled to cast a number of votes on such proposal equal to fifty percent (50%) of the total number of votes entitled to be cast at such meeting (determined as of the record date for such meeting) by all other outstanding shares of the Company’s capital stock. Each share of Preferred Stock shall be entitled to cast a number of votes equal to the aggregate number determined pursuant to the last sentence divided by one thousand (1,000).

At closing of the first tranche on March 28, 2017, the Company issued 3,000 shares of Series H Preferred Stock for a purchase price of $3,000,000. The proceeds of this sale were paid directly on the Company’s behalf to Emmaus as an additional deposit under the Company’s Emmaus LOI. An aggregate of 1,200,000 shares of the Company’s common stock are issuable upon conversion of the Series H Preferred Stock sold as of July 31, 2017.

On April 17, 2017, the Purchaser failed to close the sale of Series I Preferred Stock despite the Company being ready, willing and able to proceed and the Company terminated the Purchaser’s rights on April 23, 2017. Under the Securities Purchase Agreement, in the event the Purchaser fails to purchase 100% of the shares of Preferred Stock, the Company can decline to sell any further securities to the Purchase. On April 23, 2017 the Company notified the Purchaser in writing that its rights to purchase additional shares were forfeit.

Conversion of Debt to Officers into Series I Preferred Stock

On April 27, 2017, the Company converted the “Moscato – Salvo Advances” (Note 6) after applying a 20% original issue discount, the same as the original issue discount negotiated at arm’s length with Alpha on March 6, 2017. Moscato converted $390,984 (including $65,164 original issue discount) into 391 shares of Series I Convertible Preferred Stock. Salvo converted $399,363 (including $66,560 original issue discount) into 399 shares of Series I Convertible Preferred Stock. The total original issue discount was $131,724 and was recorded as amortization of debt discount.