UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

Amendment No. 2

 

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended July 31, 2016

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number 000-25169

 

GENEREX BIOTECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		98-0178636
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
4145 North Service Road, Suite 200 Burlington, Ontario, Canada (Address of principal executive offices)		L7L 6A3
		(Zip Code)

 

(416) 364-2551

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
Common Stock, $.001 par value per share		None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    

Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  

Yes ☐ No ☒

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  

 

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☒

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes ☐ No ☒

 

As of July 31, 2016 , the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $3,854,750 based on the average bid and asked price at which such stock was last sold as of such date. Generex Biotechnology Corporation has no non-voting common equity. At December 29, 2016 there were 908,541,475 shares of common stock outstanding.

 

Generex Biotechnology Corporation

Form 10-K/A

July 31, 2016

 

 

EXPLANATORY NOTE

 

 

The purpose of this amendment on Form 10-K/A to Generex Biotechnology Corp's Annual Report on Form 10-K for the year ended July 31, 2016, filed with the Securities and Exchange Commission on January 15, 2017 is solely to furnish the Report of the Independent Registered Accounting Firm which was inadvertently omitted form the Form 10-K

 

No other changes have been made to the Form 10-K. This Amendment No. 2 to the Form 10-K speaks as of the original filing date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-K.

 

 

 Item 8. Financial Statements and Supplementary Data

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board or Directors and Shareholders of Generex Biotechnology Corporation

 

We have audited the accompanying consolidated balance sheets of Generex Biotechnology Corporation (“Generex”) and subsidiaries as of July 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficiency and cash flows for the years then ended. Our audit also includes the financial statement schedule listed in the index under Item 15. Generex’s management is responsible for these consolidated financial statements and the financial statement schedule listed in the index under Item 15. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Generex is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Generex internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Generex as of July 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1, the Company’s experience of negative cash flows from operations since inception and its dependency upon future financing, which is uncertain due to the limitations imposed by previous financings on future financings, raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

Chartered Professional Accountants

Licensed Public Accountants

 

Mississauga, Canada

January 13, 2017

 

 

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
		July 31, 2016				July 31, 2015
ASSETS
Current Assets:
Cash and cash equivalents		$	16,899			$	749,965
Other current assets			8,077				51,240
Total Current Assets			24,976				801,205
Property and Equipment (Note 3)			1,298				2,869
Patents (Note 4)			—				1,430,016
TOTAL ASSETS		$	26,274			$	2,234,090
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses (Note 6)		$	8,950,870			$	8,018,333
Loan payable (Note 6)			50,000				—
Total Current Liabilities			9,000,870				8,018,333
Derivative Warrant Liability (Note 8 and 9)			2,048,846				2,363,415
Derivative Additional Investment Rights Liability (Note 8 and 9)			193,408				142,662
Total Liabilities			11,243,124				10,524,410
Commitments and Contingencies (Note 7)
Stockholders’ Deficiency (Note 10):
Series A 9% Convertible Preferred Stock, $1,000 par value; authorized 5,500 shares, -0- issued shares at July 31, 2016 and July 31, 2015, respectively			—				—
Series B 9% Convertible Preferred Stock, $1,000 par value; authorized 2,000 shares, -0- issued shares at July 31, 2016 and July 31, 2015, respectively			—				—
Series C 9% Convertible Preferred Stock, $1,000 par value; authorized 750 shares, -0- issued shares at July 31, 2016 and July 31, 2015, respectively			—				—
Series D 9% Convertible Preferred Stock, $1,000 par value; authorized 750 shares, -0- issued shares at July 31, 2016 and July 31, 2015, respectively			—				—
Series E 9% Convertible Preferred Stock, $1,000 par value; authorized 2,450 shares, -0- issued shares at July 31, 2016 and July 31, 2015, respectively			—				—
Series F 9% Convertible Preferred Stock, $1,000 par value; authorized 4,150 shares, 120 and 670 issued shares at July 31, 2016 and July 31, 2015, respectively			—				—
Series G 9% Convertible Preferred Stock, $1,000 par value; authorized 1,000 shares, 500 issued shares at July 31, 2016 and July 31, 2015, respectively			—				—
Common stock, $.001 par value; authorized 2,450,000,000 shares and 1,500,000,000 shares at July 31, 2016 and July 31, 2015, respectively; 908,541,475 and 825,496,238 issued and outstanding at July 31, 2016 and July 31, 2015, respectively			908,542				825,496
Additional paid-in capital			362,780,108				362,556,710
Accumulated deficit			(375,704,372	)			(372,481,263	)
Accumulated other comprehensive income			798,872				808,737
Total Stockholders’ Deficiency			(11,216,850	)			(8,290,320	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY		$	26,274			$	2,234,090

 

The accompanying notes are an Integral part of the financial statements.

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
		For the Years Ended July 31,
		2016				2015
Operating Expenses:
Research and development		$	467,382			$	1,185,384
General and administrative			1,435,186				2,377,530
Total Operating Expenses			1,902,568				3,562,914
Operating Loss			(1,902,568	)			(3,562,914	)
Other Income (Expense):
Impairment of patents (Note 4)			(1,165,864	)			(320,160	)
Interest income			—				6
Interest expense			(418,500	)			(350,028	)
Change in fair value of derivative liabilities (Note 9)			263,823				1,488,237
Gain on extinguishment of debt (Note 6)			—				551,501
Net Loss			(3,223,109	)			(2,193,358	)
Preferred Stock Dividend (Note 8)			—				339,583
Net Loss Available to Common Stockholders		$	(3,223,109	)		$	(2,532,941	)
Basic and Diluted Net Loss Per Common Share (Note 12)		$	(.004	)		$	(.003	)
Weighted Average Number of Shares of Common Stock Outstanding - basic and diluted (Note 12)			880,941,375				793,346,901
Other Comprehensive Income:
Net Loss			(3,223,109	)			(2,193,358	)
Change in foreign currency translation adjustments			(9,865	)			36,663
Comprehensive (Loss)			(3,232,974	)			(2,156,695	)
Preferred Stock Dividend (Note 8)			—				339,583
Comprehensive Loss Available to Common Stockholders		$	(3,232,974	)		$	(2,496,278	)

 

The accompanying notes are an Integral part of the financial statements.

 

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
			Preferred Stock								Common Stock
			Shares				Amount				Shares				Amount				Additional Paid-In Capital				Accumulated Deficit				Accumulated Other Comprehensive Income				Total Stockholders’ Deficiency
Balance at July 31, 2014			1,250			$	—				778,512,092			$	778,512			$	362,307,678			$	(369,948,322	)		$	772,074			$	(6,090,058	)
Issuance of common stock in exchange for services			—				—				5,809,780				5,810				127,190				—				—				133,000
Issuance of preferred stock in financing			500				—				—				—				—				—				—				—
Issuance of common stock upon conversion of preferred stock			(580	)			—				25,775,002				25,775				(25,775	)			—				—				—
Issuance of common stock for preferred stock make whole payments			—				—				8,983,048				8,983				147,617				—				—				156,600
Exercise of stock options for cash			—				—				6,416,316				6,416				—				—				—				6,416
Net loss			—				—				—				—				—				(2,193,358	)			—				(2,193,358	)
Preferred stock dividend			—				—				—				—				—				(339,583	)			—				(339,583	)
Currency translation adjustment			—				—				—				—				—				—				36,663				36,663
Balance at July 31, 2015			1,170			$	—				825,496,238			$	825,496			$	362,556,710			$	(372,481,263	)		$	808,737			$	(8,290,320	)
Issuance of common stock in exchange for services			—								300,000				300				4,200				—				—				4,500
Issuance of common stock upon conversion of preferred stock			(550	)							36,666,665				36,667				(36,667	)			—				—				—
Issuance of common stock for preferred stock make whole payments											20,139,207				20,139				128,361				—				—				148,500
Exercise of stock options for cash			—								25,939,365				25,940				(25,940	)			—				—				—
Issuance of stock options for compensation liabilities			—								—				—				123,147				—				—				123,147
Issuance of stock options as compensation			—								—				—				30,297				—				—				30,297
Net loss			—								—				—				—				(3,223,109	)			—				(3,223,109	)
Currency translation adjustment			—								—				—				—				—				(9,865	)			(9,865	)
Balance at July 31, 2016			620			$	—				908,541,475			$	908,542			$	362,780,108			$	(375,704,372	)		$	798,872			$	(11,216,850	)

 

 

The accompanying notes are an Integral part of the financial statements.

 

 

GENEREX BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
		For the Twelve Months
		Ended July 31,
		2016				2015
Cash Flows From Operating Activities:
Net loss		$	(3,223,109	)		$	(2,193,358	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			265,210				380,680
Common stock issued for services rendered			4,500				133,000
Write-off of patents			1,165,864				320,160
Issuance of stock options as compensation			27,344
Common stock issued for interest on convertible debentures and preferred stock			148,500				156,600
Change in fair value of derivative liabilities			(263,823	)			(1,488,237	)
Changes in operating assets and liabilities:
Accounts payable and accrued expenses			1,056,955				(117,739	)
Deferred revenue			—				(223,662	)
Other current assets			43,076				147,820
Net Cash Used in Operating Activities			(775,483	)			(2,884,736	)
Cash Flows From Investing Activities:
Costs incurred for patents			—				(90,982	)
Net Cash Used In Investing Activities			—				(90,982	)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt			50,000				—
Proceeds from exercise of stock options			2,952				6,416
Proceeds from issuance of preferred stock, net			—				475,000
Net Cash Provided by Financing Activities			52,952				481,416
Effect of Exchange Rates on Cash			(10,535	)			(25,222	)
Net Decrease in Cash and Cash Equivalents			(733,066	)			(2,519,524	)
Cash and Cash Equivalents, Beginning of Year			749,965				3,269,489
Cash and Cash Equivalents, End of Year		$	16,899			$	749,965
Supplemental Disclosure of Cash Flow Information:
Interest paid in cash		$	—			$	—
Issuance of stock options to satisfy compensation liabilities		$	123,147			$	—

 

The accompanying notes are an Integral part of the financial statements.

 

 

Note 1 - Organization of Business and Going Concern:

 

Generex Biotechnology Corporation (the Company) and its wholly-owned subsidiary Generex Pharmaceuticals, Inc. has been engaged in the research and development of drug delivery systems and technology. Since its inception, the Company has devoted its efforts and resources to the development of a platform technology for the oral administration of large molecule drugs, including proteins, peptides, monoclonal antibodies, hormones and vaccines, which historically have been administered by injection, either subcutaneously or intravenously.

 

The Company’s wholly-owned subsidiary, Antigen Express, Inc. (Antigen), has been engaged in research and development of technologies and immunomedicines for the treatment of malignant, infectious, autoimmune and allergic diseases.  The Company’s immunomedicine products 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). The immunomedicine products are based on two platform technologies that were discovered by an executive officer of Antigen, the Ii-Key hybrid peptides and Ii-Suppression. These technologies are expected to greatly boost immune cell responses which diagnose and treat the ailments and conditions.

 

The Company has a limited history of operations and limited revenue to date. Although the Company has had several product candidates that are in various research or early stages of pre-clinical and clinical development, due to its lack of funding the Company has effectively ceased these operations and is now seeking new investment opportunities (see Note 15). There can be no assurance that the Company will be successful in completing these investment opportunities and maintaining its position as a going concern.

 

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 $376 million and a working capital deficiency of approximately $9.0 million at July 31, 2016. The Company has funded its activities to date almost exclusively from debt and equity financings, as well as the sale of real estate assets.

 

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, 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 consolidated 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.

 

Note 2 - Summary of Significant Accounting Policies:

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

 

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

 

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which range from three to thirty years. Gains and losses on depreciable assets retired or sold are recognized in the statement of operations and comprehensive loss in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.

 

Patents

Capitalized patent costs represent legal costs incurred to establish patents and a portion of the acquisition price paid attributed to patents upon the acquisition of Antigen in August 2003.  When patents reach a mature stage, any associated legal costs are comprised mostly of maintenance fees and costs of national applications and are expensed as incurred.  Capitalized patent costs are amortized on a straight line basis over the remaining life of the patent.  As patents are abandoned, the net book value of the patent is written off. In the fiscal year ended July 31, 2016, the Company recorded a write down of $1,165,864 (2015 - $320,160) on the Company’s patents.

 

Impairment or Disposal of Long-Lived Assets and Intangibles

The Company assesses the impairment of long-lived assets under FASB ASC Topic 360 whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable and exceeds its fair value. The carrying amount of the long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the asset. All patents were written off in the fiscal year ended July 31, 2016.

 

Derivative Warrant Liability

The Company’s derivative warrant instruments are measured at fair value using the binomial valuation model which takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, 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 warrant.  The liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative warrant liability.” See Note 9 – Derivative Liabilities.

 

Revenue Recognition and Deferred Revenue

Revenues from the sale of commercial products are recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. Sales are reported net of estimated returns and allowances, discounts, mail-in rebate redemptions and credit card chargebacks. If actual sales returns, allowances, discounts, mail-in rebate redemptions or credit card chargebacks are greater than estimated by management, additional expense may be incurred.

  

Research and Development Costs

Expenditures for research and development are expensed as incurred and include, among other costs, those related to the production of experimental drugs, including payroll costs, and amounts incurred for conducting clinical trials. Amounts expected to be received from governments under research and development tax credit arrangements are offset against current research and development expense.

 

Income Taxes

Income taxes are accounted for under the asset and liability method prescribed by FASB ASC Topic 740. These standards require a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.  If the more likely than not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized. At July 31, 2016 and 2015, the Company had a full valuation allowance equal to the amount of the net deferred tax asset.

 

 

The Company adopted the FASB guidance concerning accounting for uncertainty in income taxes, which clarifies the accounting and disclosure for uncertainty in tax positions, as of August 1, 2007. The guidance requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement. Based on the Company’s evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements.

 

Stock-Based Compensation

The Company follows FASB ASC Topic 718 which requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model and restricted stock based on the quoted market price or the value of the services provided, whichever is more readily determinable. The Company also follows the guidance in FASB ASC Topic 505 for equity based payments to non-employees for equity instruments issued to consultants and other non-employees.

 

Net Loss per Common Share

Basic earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. Refer to Note 12 for methodology for determining net loss per share.

 

Comprehensive Income/(Loss)

Other comprehensive income/(loss), which includes only foreign currency translation adjustments, is shown in the consolidated statements of operations and comprehensive loss and in the consolidated statements of changes in stockholders’ deficiency.

 

Concentration of Credit Risk

The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance Corporation and the U.S. Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and has not experienced any collection losses with these financial institutions.

 

Foreign Currency Translation

Foreign denominated assets and liabilities of the Company are translated into U.S. dollars at the prevailing exchange rates in effect at the end of the reporting period. Income statement accounts are translated at a weighted average of exchange rates which were in effect during the period. Translation adjustments that arise from translating the foreign subsidiary’s financial statements from local currency to U.S. currency are recorded in the other comprehensive loss component of stockholders’ equity.

 

Fair Value of Financial Instruments

Fair value is defined under FASB ASC Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for an asset or liability in an orderly transaction between participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The levels are as follows:

 

•

Level 1 - Quoted prices in active markets for identical assets or liabilities

 

•

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities

 

•

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities

 

 

The Company’s financial instruments consist of cash and cash equivalents, other current assets, accounts payable and accrued expenses, loan payable as well as derivative warrant liabilities and derivative additional investment rights. All of these items, except for the derivative warrant liabilities and derivative additional investment rights, were determined to be Level 1 fair value measurements. The carrying amounts of cash and cash equivalents, other current assets, accounts payable and accrued expenses and the loan payable approximate their respective fair values because of the short maturities of these instruments.

 

The Company has determined its derivative warrant liability and its derivative additional investment rights liability to be Level 2 fair value measurements and has used the binomial lattice model valuation method to calculate the fair value of the derivative warrant liability and the derivative additional investment rights liability at July 31, 2016 and 2015. See Note 9 – Derivative Liabilities.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

The Company evaluates its estimates, including those related to long lived assets (including patents) impairment valuations, derivatives and contingencies and litigation, on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Critical accounting estimates are reviewed and discussed with the Board of Directors. The Company considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, if changes in the estimate or if different estimates that could have been selected would have a material impact on our results of operations or financial condition.

 

Effects of Recent Accounting Pronouncements

 

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 will be effective for the Company’s first quarter of the fiscal year ended July 31, 2017. 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 will be effective for the Company’s fiscal year ended July 31, 2017 and subsequent interim periods. The Company has determined that this accounting standard has no impact on its consolidated financial statements.

 

Note 3 – Property and Equipment:

 

The costs and accumulated depreciation of property and equipment are summarized as follows:

 

		July 31,
		2016				2015
Furniture and Fixtures		$	10,900			$	10,954
Less: Accumulated depreciation			9,602				8,085
Property and Equipment, net		$	1,298			$	2,869

 

Depreciation expense related to property and equipment amounted to $1,517 and $1,726 for the years ended July 31, 2016 and 2015, respectively.

 

 

Note 4 - Patents:

 

The costs and accumulated amortization of patents are summarized as follows:

 

		July 31,
		2016				2015
Patents		$	—			$	4,705,715
Less: Accumulated amortization			—				3,275,699
Patents, net		$	—			$	1,430,016
Weighted average life			0 years				6.6 years

 

Amortization expense amounted to $281,894 and $378,954 for the years ended July 31, 2016 and 2015, respectively. No amortization expense is expected for the years ended July 31, 2017 through 2022. During the year ended July 31, 2016, the Company wrote off patents with a net book value of $1,165,864 as the patents had been abandoned or were no longer being used. During the year ended July 31, 2015, the Company wrote off patents with a net book value of $320,160 as the patents had been abandoned or were no longer being used.

 

Note 5 - Income Taxes:

 

The Company has incurred losses since inception, which have generated net operating loss (“NOL”) carryforwards. The NOL carryforwards arise from both United States and Canadian sources. Pre-tax (losses) arising from domestic operations (United States) were $(1,374,725) and $(677,616) for the years ended July 31, 2016 and 2015, respectively. Pre-tax (losses) arising from foreign operations (Canada) were $(504,101) and $(1,515,741) for the years ended July 31, 2016 and 2015, respectively. As of July 31, 2016, the Company has NOL carryforwards in Generex Biotechnology Corporation of approximately $201 million, which expire in 2018 through 2036, in Generex Pharmaceuticals Inc. of approximately $32 million, which expire in 2017 through 2036, and in Antigen Express, Inc. of approximately $29 million, which expire in 2026 through 2036. These loss carryforwards are subject to limitation due to the acquisition of Antigen and may be limited in future years due to certain structural ownership changes which have occurred over the last several years related to the Company’s equity and convertible debenture financing transactions.

 

For the years ended July 31, 2016 and 2015, the Company’s effective tax rate differs from the federal statutory rate principally due to net operating losses and other temporary differences for which no benefit was recorded.

 

Deferred income taxes consist of the following:

 

		July 31,
		2016				2015
Net operating loss carryforwards		$	86,895,338			$	86,370,251
Other temporary differences			150,004				338,000
Intangible assets			—				108,022
Total Deferred Tax Assets			87,045,342				86,816,273
Valuation Allowance			(86,678,987	)			(86,816,273	)
Deferred Tax Liabilities
Intangible assets			(366,355	)			—
Other temporary differences			—				—
Total Deferred Tax Liabilities			—				—
Net Deferred Income Taxes		$	—			$	—

 

 

A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended July 31, 2016 and 2015 is as follows:

 

		July 31,
		2016				2015
Federal statutory rate			(34.0	)%			(34.0	)%
Increase (decrease) in income taxes resulting from:
Imputed interest income on intercompany receivables from foreign subsidiaries			4				4
Non-deductible or non-taxable items			(3	)			(24	)
Other temporary differences			26				170
Change in valuation allowance			7				(116	)
Effective tax rate			—	%			—	%

 

As of July 31, 2016, the Company had no tax benefits which have not been fully allowed for, and no adjustment to its financial position, results of operations or cash flows was required. The Company does not expect that unrecognized tax benefits will increase within the next twelve months. The Company records interest and penalties related to tax matters within other expense on the accompanying consolidated statement of operations. These amounts are not material to the consolidated financial statements for the periods presented. Generally, tax years 2013 to 2016 remain open to examination by the Internal Revenue Agency or other tax jurisdictions to which the Company is subject. The Company’s Canadian tax returns are subject to examination by federal and provincial taxing authorities in Canada. Generally, tax years 2008 to 2016 remain open to examination by the Canada Revenue Agency or other tax jurisdictions to which the Company is subject.

 

Note 6 - Accounts Payable and Accrued Expenses:

 

Accounts payable and accrued expenses consist of the following:

 

		July 31,
		2016				2015
Accounts Payable and Accruals - General and Administrative		$	3,750,638			$	3,156,951
Accounts Payable and Accruals - Research and Development			4,395,061				3,861,902
Accounts Payable and Accruals - Selling and Marketing			326,229				326,250
Accrued Make-whole Payments on Convertible Preferred Stock (See Note 8)			167,400				315,900
Executive Compensation and Directors’ Fees Payable			311,542				357,330
Total		$	8,950,870			$	8,018,333

 

In the fiscal year ended July 31, 2016 the Company did not have extinguishment of debt. In the fiscal year ended July 31, 2015 the Company had a gain on extinguishment of debt of $327,839 related to the final settlement of a previously owed balance to a vendor. In addition, the Company wrote off a balance of $223,662 previously reported as deferred revenue on the consolidated balance sheets. These amounts have been reported on the Company’s consolidated statements of operations and comprehensive loss under the caption “Gain on extinguishment of debt” and are included in the changes in accounts payable and accrued expenses and deferred revenue categories, respectively in the consolidated statements of cash flows.

 

During the year the Company received a loan in the amount of $50,000 in order to fund certain operating costs. This loan is unsecured, due on demand and bears interest at a rate of 9% per annum.

 

Note 7 - Commitments and Contingent Liabilities:

 

Leases

As at July 31, 2016 the Company does not have any outstanding operating lease agreements for the use of operating space, vehicles and office equipment.

 

Lease expense amounted to approximately $25,000 and $59,000 for the years ended July 31, 2016 and 2015, respectively.

 

 

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, Ms. Perri 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, Mr. Barratt, Ms. Masterson, Mr. 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.

 

Employment Agreements

As of July 31, 2015, the Company had an employment arrangement with its President & Chief Executive Officer, whereby the Company is required to pay an annual base salary of $475,000. The term of service for this executive extended through March 16, 2008, which term had not been formally extended as of July 31, 2015. In the event the agreement is terminated, by reason other than cause, death, voluntary retirement or disability, the Company is required to pay the employee in one lump sum twelve months’ base salary and the average annual bonus. During fiscal 2016 this executive resigned and the Company is no longer subject to the potential termination payment.

 

As of July 31, 2015, the Company has an at will employment agreement with an Antigen employee requiring the Company to pay an annual aggregate salary of $260,480 to the employee. In the event the agreement is terminated by reason other than death, disability, a voluntary termination not for good reason (as defined in the agreement) or a termination for cause, the Company is required to pay the employee severance of six months’ salary ($130,240), in accordance with the terms of the individual’s employment agreement. During fiscal 2016 this executive resigned and the Company is no longer subject to the potential termination payment. 

 

Note 8 - Series A, B, C, D, E, F & G 9% Convertible Preferred Stock:

 

Series A 9% Convertible Preferred Stock

The Company has authorized 5,500 shares of Series A 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per share. Pursuant to a securities purchase agreement dated July 8, 2011, the Company sold an aggregate of 2,575 shares of convertible preferred stock, as well as accompanying warrants to purchase 17,166,666 shares of common stock. An aggregate of 17,166,666 shares of the Company’s common stock were issuable upon conversion of the convertible preferred stock which was issued at the initial closing. As of the end of the Company’s fiscal year 2012, all of the issued Series A 9% Convertible Preferred Stock had been converted to common stock. There were 17,166,666 shares of common stock issued upon the conversion of the Series A convertible preferred stock and 6,129,666 shares of common stock issued as “make-whole payments” on such conversions.

 

  

Series B 9% Convertible Preferred Stock

The Company has authorized 2,000 shares of Series B 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per share. Pursuant to a securities purchase agreement dated January 31, 2012, the Company sold an aggregate of 2,000 shares of Series B convertible preferred stock, as well as accompanying warrants to purchase 13,333,333 shares of common stock. An aggregate of 13,333,333 shares of the Company’s common stock were issuable upon conversion of the Series B convertible preferred stock which was issued at the initial closing. On December 10, 2012, the triggering of the price protection features of the Series B convertible preferred stock resulted in a decrease of the conversion price from $0.08 to $0.03 per share and a corresponding increase in the number of common shares underlying the remaining 792 shares of Series B convertible preferred stock as of December 10, 2012 from 9,897,500 to 26,393,333. As of the end of the Company’s fiscal year 2013, all of the issued Series B 9% Convertible Preferred Stock had been converted to common stock. There were 38,520,832 shares of common stock issued upon the conversion of the Series B convertible preferred stock and 14,819,679 shares of common stock issued as “make-whole payments” on such conversions.

 

Series C 9% Convertible Preferred Stock

The Company has authorized 750 shares of Series C 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per share. Pursuant to a securities purchase agreement dated August 8, 2012, the Company sold an aggregate of 750 shares of Series C convertible preferred stock, as well as accompanying warrants to purchase 9,375,000 shares of common stock. An aggregate of 9,375,000 shares of the Company’s common stock were issuable upon conversion of the Series C convertible preferred stock which was issued at the initial closing. On December 10, 2012, the triggering of the price protection features of the Series C convertible preferred stock resulted in a decrease of the conversion price from $0.08 to $0.03 per share and a corresponding increase in the number of common shares underlying the 650 shares of Series C convertible preferred stock as of December 10, 2012 from 8,125,000 to 21,666,666. As of the end of the Company’s fiscal year 2013, all of the issued Series C 9% Convertible Preferred Stock had been converted to common stock. There were 22,916,665 shares of common stock issued upon the conversion of the Series C convertible preferred stock and 6,664,863 shares of common stock issued as “make-whole payments” on such conversions.

 

Series D 9% Convertible Preferred Stock

The Company has authorized 750 shares of Series D 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per share. Pursuant to a securities purchase agreement dated December 10, 2012, the Company sold an aggregate of 750 shares of Series D convertible preferred stock, as well as accompanying warrants to purchase 24,999,999 shares of common stock. An aggregate of 24,999,999 shares of the Company’s common stock were issuable upon conversion of the Series D convertible preferred stock which was issued at the initial closing. As of the end of the Company’s fiscal year 2013, all of the Series D convertible preferred stock had been converted to common stock. There were 24,999,999 shares of common stock issued upon the conversion of the Series D convertible preferred stock and 7,825,191 shares of common stock issued as “make-whole payments” on such conversions.

 

Series E 9% Convertible Preferred Stock 

The Company has authorized 2,450 shares of Series E 9% Convertible Preferred Stock with a stated value of one thousand ($1,000) per share. Pursuant to a securities purchase agreement dated June 17, 2013, the Company sold an aggregate of 1,225 shares of Series E convertible preferred stock, as well as accompanying warrants to purchase 40,833,335 shares of common stock. An aggregate of 40,833,335 shares of the Company’s common stock are issuable upon conversion of the Series E convertible preferred stock which was issued at the initial closing on June 17, 2013. Pursuant to a securities purchase agreement dated January 14, 2014, the Company sold an aggregate of 800 shares of Series E convertible preferred stock, as well as accompanying warrants to purchase 26,666,668 shares of common stocks. An aggregate of 26,666,668 shares of the Company’s common stock are issuable upon conversion of the Series E convertible preferred stock which was issued at the closing on January 15, 2014. The conversion price for the Series E Convertible Preferred Stock was adjusted from $0.03 to $0.015 after the Series G Convertible Preferred Stock financing on June 24, 2015 and the number of common shares underlying the 25 Series E Convertible Preferred Stock outstanding at that date increased from 833,333 to 1,666,666. As of July 31, 2015, all of the Series E convertible preferred stock had been converted to common stock. There were 68,333,333 shares of common stock issued upon the conversion of the Series E convertible preferred stock and 19,035,193 shares of common stock issued as “make-whole payments” on such conversions.

 

Similar to the accounting treatment of the Series F and G 9% Convertible Preferred Stock below, as the assigned fair values of the various components of the financing were greater than the net cash proceeds from the transaction, the excess of $472,279 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, 2014 under the caption “Preferred Stock Dividend”.

 

 

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 69,166,667 shares of common stock. An aggregate of 69,166,667 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 33,333,333 shares of common stock. An aggregate of 33,333,333 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 $0.015 per share (Note: The conversion price for the Series F Convertible Preferred Stock was adjusted from $0.03 to $0.015 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 $0.03 to $0.015 for the Series F Convertible Preferred Stock 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 27,941,667 to 55,883,333.

 

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 69,166,667 and 33,333,333 warrants, respectively to the investors. Subject to certain ownership limitations, the warrants will be exercisable at any time after their respective dates of issuance and on or before the fifth-year anniversary thereafter at an exercise price of $0.015 per share of common stock (Note: The conversion price for the warrants issued in the Series F Convertible Preferred Stock financing was adjusted from $0.03 to $0.015 in conjunction with the Series G Convertible Preferred Stock financing on June 24, 2015 and the number of warrants increased from 69,166,667 to 138,333,334).

 

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 may, in its sole determination, elect 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 will have 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 had been exercised up to that date. The June 2015 additional investment rights expire on August 19, 2016 and none have been exercised to date.

 

As of July 31, 2016, 1,955 of the Series F convertible preferred stock had been converted to common stock. There were 89,108,331 shares of common stock issued upon the conversion of the Series F convertible preferred stock and 36,533,878 shares of common stock issued as “make-whole payments” on such conversions. As of July 31, 2016, none of the Series G convertible preferred stock had been converted to common stock.

 

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 operations and comprehensive loss 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			(2,016,064	)
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 $32,400 after conversions (2015 - $180,900) is included in Accounts Payable and Accrued Expenses (see Note 6) at July 31, 2016.

 

 

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 balance (no conversions have taken place) is included in Accounts Payable and Accrued Expenses (see Note 6) at July 31, 2016 and 2015.

 

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 July 31, 2016 and 2015 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 July 31, 2016 are all currently exercisable with a weighted-average remaining life of 2.1 years.

 

The revaluation of the warrants at the end of the respective reporting periods resulted in the recognition of a gain of $314,569 within the Company’s consolidated statements of operations and comprehensive loss for the fiscal year ended July 31, 2016 and a gain of $626,763 within the Company’s consolidated statements of operations and comprehensive loss for the fiscal year ended July 31, 2015, 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 July 31, 2016 and 2015 were $2,048,846 and $2,363,415, 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, 2014 until July 31, 2016:

 

 

		Value				No. of Warrants
Balance at August 1, 2014 – Derivative warrant liability		$	2,635,643				239,788,852
Additional warrants from price protection features of existing warrants			2,111,077				239,788,852
Additional warrants issued in June 2015 financing			354,535				33,333,333
Decrease in fair value of derivative warrant liability			(2,737,840	)			n/a
Balance at July 31, 2015 – Derivative warrant liability			2,363,415				512,911,037
Forfeited or expired			(455,573	)			(129,033,516	)
Increase in fair value of derivative warrant liability			141,004				n/a
Balance at July 31, 2016 – Derivative warrant liability		$	2,048,846				383,877,521

 

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 July 31, 2016 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 July 31, 2016 and July 31, 2015 fair value calculations were as follows:

 

		July 31, 2016				July 31, 2015
Current exercise price		$	0.015			$	0.015
Time to expiration			2.1 years				2.5 years
Risk-free interest rate			0.76	%			1.08	%
Estimated volatility			101	%			82	%
Dividend			-0-				-0-
Stock price at period end date		$	0.008			$	0.010

  

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 additional investment rights from the March 2014 Series F financing expired in March 2015 and their value at July 31, 2016 is zero. The fair value of the derivative liability associated with the additional investment rights was determined to be $193,408 (June 2015 Series G financing) and $142,662 (June 2015 Series G financing) at July 31, 2016 and 2015, respectively.

 

The key inputs used in the fair value calculation at July 31, 2016 and 2015 were as follows:

 

		July 31, 2016				July 31, 2015
Underlying number of units of convertible preferred stock			500				500
Underlying number of units of warrants			33,333,333				33,333,333
Current exercise price of warrants		$	0.015			$	0.015
Current conversion price of preferred stock		$	0.015			$	0.015
Time to expiration			0.05 years				1.05 years
Risk-free interest rate			0.38	%			0.30	%
Estimated volatility			13	%			79	%
Dividend			-0-				-0-
Stock price at period end date		$	0.008			$	0.010

 

The revaluation of the additional investment rights in the fiscal year ended July 31, 2016, resulted in the recognition of a loss of $50,746 and in the fiscal year ended July 31, 2015, the revaluation resulted in the recognition of a gain of $861,474. The gains and losses 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 - Stockholders’ Deficiency:

 

Warrants

As of July 31, 2016, the Company has the following warrants to purchase common stock outstanding:

 

Number of Shares to be Purchased*				Warrant Exercise Price per Share				Warrant Expiration Date
	54,545,440			$	0.015			September 30, 2016
	11,350,454			$	0.015			February 1, 2017
	9,999,998			$	0.015			August 10, 2017
	16,648,288			$	0.015			December 12, 2017
	68,333,338			$	0.015			June 17, 2018
	51,333,336			$	0.015			January 15, 2019
	138,333,334			$	0.015			March 27, 2019
	33,333,333			$	0.015			June 25, 2020
	383,877,521

* All outstanding warrants are subject to price protection provisions as described below.

 

There are 383,877,521 warrants outstanding as of July 31, 2016. During the fiscal year ended July 31, 2016, 129,033,516 warrants, which had an exercise price of $0.015 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 $0.015 per share and have a weighted average remaining life of 2.1 years.

 

As of July 31, 2016, the Company has 383,877,521 warrants with a current exercise price of $0.015 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 $0.03 to $0.015 in conjunction with the Series G Convertible Preferred Stock financing on June 24, 2015 and the total number of previously outstanding warrants increased from 239,788,852 to 479,577,704, in addition to the 33,333,333 warrants issued in the financing.

 

The Company accounts for the warrants with price protection provisions in accordance with FASB ASC Topic 815 as described in Note 9 - Derivative Liabilities above. As of July 31, 2016, there were a total of 383,877,521 warrants with an estimated fair value of $2,048,846, which are identified on the consolidated balance sheets under the caption “Derivative Warrant Liability”.

 

Preferred Stock

The Company has authorized 1,000,000 shares of preferred stock with a par value of one-tenth of a cent ($.001) per share. The preferred stock may be issued in various series and shall have preference as to dividends and to liquidation of the Company. The Company’s Board of Directors is authorized to establish the specific rights, preferences, voting privileges and restrictions of such preferred stock, or any series thereof. At July 31, 2016, 120 shares of the Company’s non-voting Series F 9% Convertible Preferred Stock and 500 shares of the Company’s non-voting Series G 9% Convertible Preferred Stock were issued and outstanding. At July 31, 2015, 670 shares of the Company’s non-voting Series F 9% Convertible Preferred Stock and 500 shares of the Company’s non-voting Series G 9% Convertible Preferred Stock were issued and outstanding. See Note 8 - Series A, B, C, D, E, F and G 9% Convertible Preferred Stock.

 

 

Equity Instruments Issued for Services Rendered

During the years ended July 31, 2016 and 2015, the Company issued stock options, warrants and shares of common stock in exchange for services rendered to the Company. The fair value of each stock option and warrant was valued using the Black Scholes pricing model which takes into account as of the grant date the exercise price and expected life of the stock option or warrant, 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 stock option or warrant. Shares of common stock are valued at the quoted market price on the date of grant. The fair value of each grant was charged to the related expense in the consolidated statement of operations for the services received (see Note 11).

 

Note 11 – Stock-Based Compensation:

 

Stock Option Plans

As of July 31, 2016, 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 12,000,000 shares of common stock are reserved for issuance under the 2001 Stock Option Plan (the 2001 Plan) and 135,000,000 shares of common stock are reserved for issuance under the 2006 Stock Plan as amended (the 2006 Plan). At July 31, 2016, there were 4,138,916 and 64,484,808 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.

 

Share-based employee compensation related to stock options for the years ended July 31, 2016 and 2015 amounted to $30,297 and $0 for each year and were charged to the consolidated statements of operations and comprehensive loss.  In addition, during 2016 the Company issued 15,393,364 stock options in satisfaction of deferred compensation amounts totalling $123,147 owing to executives at that time (2015 – nil). Share-based employee compensation related to common stock grants for the years ended July 31, 2016 and 2015 amounted to $0 for both fiscal years.

 

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 fiscal years ended July 31, 2016 and 2015.

 

 

The following is a summary of the common stock options granted, forfeited or expired and exercised under the Plan:

 

		Options				Weighted Average Exercise Price per Share
Outstanding - July 31, 2014			37,964,390			$	0.06
Forfeited or expired			(1,315,000	)		$	0.69
Exercised			(6,416,316	)		$	0.001
Outstanding - July 31, 2015			30,233,074			$	0.05
Granted			18,345,768			$	0.001
Forfeited or expired			(3,000,000	)		$	0.28
Exercised			(25,939,365	)		$	0.001
Outstanding - July 31, 2016			19,639,477			$	0.03
Exercisable - July 31, 2016			19,639,477			$	0.03

 

The 19,639,477 outstanding options at July 31, 2016 had a weighted average remaining contractual term of 2.79 years.

 

There were no non-vested common stock options granted, vested or forfeited under the Plan for the fiscal year ended July 31, 2016. As of July 31, 2015, the Company did not have any unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.

 

During the twelve months ended July 31, 2016, the Company granted 18,345,768 options to executives, employees and directors in full and final payment of obligations to pay such individuals deferred salary or director fees. The options were issued in lieu of cash payment of deferred compensation amounts due to such individuals. The stock options had an exercise price equal to $0.001 per share and were made pursuant to the terms of the Company's 2006 Stock Plan. The options were fully vested at the dates of the grants and expire on the fifth anniversary of the respective dates of grant. The grants were valued at the amount of deferred compensation owed to each such individual. The Company did not grant any options during the twelve months ended July 31, 2015.

 

The following table summarizes information on stock options outstanding at July 31, 2016:

 

					Options Outstanding and Options Exercisable
	Range of Exercise Price				Number Outstanding at July 31, 2016				Weighted Average Exercise Price				Weighted Average Remaining Life (Years)				Aggregate Intrinsic Value
$	0.001				18,789,477			$	0.001				2.76
$	0.64				850,000			$	0.64				3.61
					19,639,477			$	0.029				2.79			$	129,647

 

		For the Years Ended July 31,
		2016				2015
Aggregate Intrinsic Value of Options Exercised		$	363,151			$	129,908
Cash Received for Exercise of Stock Options		$	2,952			$	6,416

 

The intrinsic value is calculated as the difference between the market value as of July 31, 2016 and 2015 and the exercise price of the shares on the respective dates. The market values as of July 31, 2016 and 2015 were $0.079 and $0.010, respectively, based on the high and low bid information for July 31, 2016 and 2015. 

 

Note 12 - Net Loss per Share:

 

Basic loss per share (“EPS”) and Diluted EPS for the years ended July 31, 2016 and 2015 have been computed by dividing the net loss available to common stockholders for each respective period by the weighted average shares outstanding during that period. All outstanding options, warrants, non-vested restricted stock and shares to be issued upon conversion of the outstanding convertible preferred stock, representing approximately 456,010,331 and 642,204,110 incremental shares, have been excluded from the respective 2016 and 2015 computation of diluted EPS as they are anti-dilutive.

 

 

Note 13 - Segment Information:

 

The Company follows FASB ASC Topic 815 which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. This Topic also establishes standards for related disclosures about products and services, geographic areas, and major customers.

 

This Topic uses a management approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. The Company’s management reporting structure provides for only one segment: the research, development and commercialization of drug delivery systems and technologies for metabolic and immunological diseases.

 

The countries in which the Company had identifiable assets are presented in the following table. Identifiable assets are those that can be directly associated with a geographic area.

 

 

		2016				2015
Identifiable Assets
Canada		$	25,930			$	1,004,337
United States			344				1,229,753
Total		$	26,274			$	2,234,090

 

Note 14 – Quarterly Information (Unaudited):

 

The following schedule sets forth certain unaudited financial data for the preceding eight quarters ending July 31, 2016. In our opinion, the unaudited information set forth below has been prepared on the same basis as the audited information and includes all adjustments necessary to present fairly the information set forth herein. The operating results for the quarter are not indicative of results for any future period.

 

			Q1				Q2				Q3				Q4
Fiscal Year July 31, 2016:
Revenues, net		$	-0-			$	-0-			$	-0-			$	-0-
Operating loss		$	(1,317,579	)		$	(157,532	)		$	(144,298	)		$	(283,159	)
Net income/(loss)		$	(1,731,265	)		$	(47,390	)		$	918,361			$	(2,362,815	)
Net income/(loss) available to common stockholders		$	(1,731,265	)		$	(47,390	)		$	918,361			$	(2,362,815	)
Net income/(loss) per share		$	(0.0020	)		$	(0.0001	)		$	0.0010			$	(0.0027	)
Fiscal Year July 31, 2015:
Revenues, net		$	-0-			$	-0-			$	-0-			$	-0-
Operating loss		$	(908,469	)		$	(835,147	)		$	(851,601	)		$	(967,797	)
Net income/(loss)		$	49,623			$	(511,916	)		$	(1,396,157	)		$	(334,908	)
Net income/(loss) available to common stockholders		$	49,623			$	(511,916	)		$	(1,396,157	)		$	(674,491	)
Net loss per share		$	0.0001			$	(0.0006	)		$	(0.0018	)		$	(0.0008	)

 

 

Note 15 - Subsequent Events:

 

On August 26, 2016, the Company signed a Letter of Intent to acquire 51% of Hema Diagnostic Systems, LLC (“HDS”) for consideration of $250,000 worth of the Company’s restricted common stock. The number of stock issued for the transaction will be calculated based on the average over-the-counter closing price of the Company’s common stock for the ten trading days immediately preceding the Closing Date. The Company will also issue, in consideration for the purchase, a warrant to acquire 15,000,000 shares of Generex common stock, at a per-share strike price equal to the over-the-counter closing price of the Company’s stock on the date that the restricted common stocks were issued. It is the Company’s intention to initiate a reverse stock-split following the acquisition of HDS. This acquisition of HDS has not been finalized as at the date of yet, and it is expected to finalize during the fiscal year 2017.

 

On December 27, 2016, the Company filed a Certificate of Amendment to effect a reverse stock split. Upon approval by the Financial Industry Regulatory Authority (“FINRA”), each 1,000 shares of the Company’s common stock issued and outstanding at the effective time shall automatically be combined into one issued, fully paid and non-assessable share of common stock. This potential reverse stock-split has not been reflected in the share or per share amounts disclosed in these consolidated financial statements.

 

The Company has evaluated subsequent events occurring after the balance sheet date through the date the consolidated financial statements were issued.

 

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to report to be signed on its behalf by the undersigned, thereunto duly authorized this 18th day of January 2017.

 

GENEREX BIOTECHNOLOGY CORPORATION
By:	/s/ Mark A. Fletcher
	Name: Mark A. Fletcher
	Title:   President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name		Capacity in Which Signed		Date
/s/ Mark A. Fletcher		President and Chief Executive Officer and General Counsel and Secretary and Director (Principal Executive Officer and Principal Financial Officer)		January 18, 2017
Mark A. Fletcher
/s/ Brian T. McGee		Director		January 18, 2017
Brian T. McGee