Acquisition of Hema Diagnostics Systems, LLC

9 Months Ended

Apr. 30, 2018

Business Combinations [Abstract]

Acquisition of Hema Diagnostics Systems, LLC

Note 8 - Acquisition of Hema Diagnostics Systems, LLC:

On January 18, 2017, the Company acquired a 51% interest in 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 $253,721, plus 20 shares of Generex common stock issued to HDS in exchange for 300 new limited liability company units. The Acquisition Agreement also provides the Company with a call option to acquire the remaining 49% of HDS and a retirement of HDS shareholder loans in the amount of $13,431,706 (including interest) (the “Call Option”) for the aggregate purchase price of $1.

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 $2,911,377.

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 determined that is was remote that the warrant would be issued and the Call Option would be exercised, accordingly no values have been attributed to the warrant and Call Option at closing. During the fiscal year 2017, after the issuance of Series I Preferred Stock, management made a redetermination and concluded that it was probable that the shareholder approval to increase authorized share capital would be obtained and the Call Option will be exercised. Accordingly, management recorded the fair value of the warrant of $66,060,026 as a liability and the Call Option of $4,237,829 as an asset as of July 31, 2017. During the fiscal year 2018, there was an increase in authorized shares, but the warrants still have not been issued.

As of April 30, 2018, the fair value of the warrant and Call Option was $41,229,890 and $2,757,815, respectively. For the three months ended April 30, 2018, the change in the fair value of the contingent purchase consideration of $4,573,493 was recorded as a loss in the condensed interim consolidated statements of operations and comprehensive income (loss). For the nine months ended April 30, 2018, the change in the fair value of the contingent purchase consideration of $23,350,122 was recorded as a gain in the condensed interim consolidated statements of operations and comprehensive income (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 30, 2018. 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 fair value calculations were as follows:

	April 30, 2018			July 31, 2017
Exercise price	$	2.50			2.50
Time to expiration		3.72 years			4.47 years
Risk-free interest rate		2.62	%		1.84	%
Estimated volatility		182.67	%		122.7	%
Dividend		—			—
Stock price at valuation date	$	2.95			5.05

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 30, 2018. 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 Call Option:

	April 30, 2018			July 31, 2017
Risk-free interest rate		2.10	%		1.34	%
Estimated volatility		133.4	%		143.9	%
Remaining Term		1.71			2.47
Stock price at valuation date	$	2.95			5.05

Goodwill and Intangible Assets

The change in the carrying amount of goodwill and other intangible assets for the period ended April 30, 2018, is as follows:

	Other Intangibles, net		Goodwill		Total
Balance as of July 31, 2017	$	2,911,377	$	—	$	2,911,377
Current period amortization		—		—		—
Additions from pharmacy acquisition		276,380				276,380
Balance as of April 30, 2018	$	3,187,757	$	—	$	3,187,757

Intangible assets are generally amortized on a straight-line basis over the useful lives of the assets. The Company is currently not amortizing the in-process research and development until it becomes commercially viable and placed in service. At the time when the intangible assets are placed in service the Company will determine a useful life.

Goodwill for HDS was valued at $14.3 million as of the date of acquisition.  It was later determined that the value of goodwill was $13.4 million due to the change in estimates of in-process research and development.

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. When the acquisition transaction closed in January 2017, HDS was a development-stage entity and its liabilities exceeded the aggregate value of its assets. Utilizing discounted cash flow (DCF) valuation methodology, Generex determined that HDS has forecasted losses throughout the reasonably foreseeable future with a nominal terminal value. In addition, there was a high degree of uncertainty as to the future cash flows of HDS. Therefore, the Company concluded that the implied goodwill arising out of the acquisition was zero and should be properly characterized as fully impaired as of July 31, 2017.