Acquisition of Hema Diagnostics Systems, LLC

3 Months Ended

Oct. 31, 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 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 1,117,011 shares of Generex common stock valued at $253,721, plus 420 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 was required to issue a further 4,830,000 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.  As of October 31, 2018, no shares or warrants relating to this acquisition have been issued. Subsequent to period end, the call option was exercised and the Company acquired the remaining 49% of HDS (Note 13).

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	$	.23		1,117,011	$	253,721
Common Stock after closing	$	.23		420		95
Common Stock post reverse stock split	$	.23		4,830,000		1,097,100
Total purchase price				5,947,431	$	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 2017, management made a redetermination and estimated that it was more likely than not that the shareholder approval to increase authorized share capital would be obtained and the Call Option will be exercised.

During the fiscal year 2018, there was an increase in authorized shares, but the warrants were not issued until subsequent to period end. Per an agreement with warrant holder, such warrants were not subject to the stock dividend and no adjustment to the exercise price (Note 13).

As of July 31, 2018, the fair value of the warrants was $24,962,507 and Call Option was $2,168,211. The change in the fair value of the contingent purchase consideration of $39,027,901 was recorded in the consolidated statements of operations and comprehensive income (loss) for the year ending July 31, 2018.

As of October 31, 2018, the fair value of the warrants was $4,005,240 and Call Option was $756,041. The change in the fair value of the contingent purchase consideration of $19,545,098 was recorded in the consolidated statements of operations and comprehensive income for the three months ending October 31, 2018.

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 October 31, 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:

	October 31, 2018			July 31, 2018
Exercise price		2.50			2.50
Time to expiration		3.26 years			3.47 years
Risk-free interest rate		3.15	%		2.77	%
Estimated volatility		135.07	%		143.97	%
Dividend		—			—
Stock price at valuation date	$	0.47		$	0.1

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 three months ended October 31, 2018 and year ended July 31, 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:

	October 31, 2018			July 31, 2018
Risk-free interest rate		2.49	%		2.44	%
Estimated volatility		128.52	%		129.95	%
Remaining Term		1.22 years			1.47 years
Stock price at valuation date	$	0.4975		$	0.0976