Derivative Liabilities

3 Months Ended

Oct. 31, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

 11.    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.  As of August 1, 2009, the Company accounted for its warrants with price protection in accordance with FASB ASC Topic 815.

Accounting for Derivative Warrant Liability

The Company’s derivative warrant instruments have been measured at fair value at October 31, 2011 and July 31, 2011 using the binomial lattice model.  The Company recognizes all of its warrants with price protection in its consolidated balance sheet as liabilities.  The liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations.  The initial recognition and subsequent changes in fair value of the derivative warrant liability have no effect on the Company’s cash flows.

The derivative warrants outstanding at October 31, 2011 are all currently exercisable with a weighted-average remaining life of 4.45 years.

The revaluation of the warrants at each reporting period, as well as the charges associated with issuing additional warrants due to the price protection features, resulted in the recognition of income of $2,690,709 and $869,532 within the Company’s interim consolidated statements of operations for the three months ended October 31, 2011 and 2010, respectively, which is included in the total under the caption “Change in fair value of derivative liabilities”.  The fair value of the warrants at October 31, 2011 and July 31, 2011 is $6,054,799 and $8,745,508, respectively, which is reported on the consolidated balance sheet under the caption “Derivative Warrant Liability”.  The following summarizes the changes in the value of the derivative warrant liability from August 1, 2010 until October 31, 2011:

	Value			No. of Warrants
Balance at August 1, 2010 – Derivative warrant liability	$	5,679,721			16,503,340
Additional warrants issued in January to April 2011 financings		3,415,536			16,056,000
Additional warrants issued in July 2011 financing		1,871,167			17,166,666
Additional warrants from price protection features of existing warrants		3,867,678			30,508,011
Decrease in fair value of derivative warrant liability		(6,088,594	)		n/a
Balance at July 31, 2011 – Derivative warrant liability		8,745,508			80,234,017
Decrease in fair value of derivative warrant liability		(2,690,709	)		n/a
Balance at October 31, 2011 – Derivative warrant liability	$	6,054,799			80,234,017

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 October 31, 2011 and July 31, 2011.  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 October 31, 2011 and July 31, 2011 fair value calculations were as follows:

	October 31, 2011			July 31, 2011
Current exercise price	$0.15 and $0.25			$0.15 and $0.25
Time to expiration	4.45 years			4.70 years
Risk-free interest rate		0.99	%		1.23	%
Estimated volatility		102	%		108	%
Dividend		-0-			-0-
Stock price at period end date	$	0.092		$	0.13

Derivative additional investment rights liability

The benefit received by the participants in the July 2011 Series A 9% Convertible Preferred Stock transaction (see Note 10) in respect to the right to make an additional investment with the same terms as the July 2011 transaction was determined to be an embedded derivative instrument and has been measured at fair value using the binomial lattice model.  The liability will be revalued at each subsequent reporting period prior to its expiry in July 2012 and any changes in fair value will be recognized in the consolidated statements of operations.  The initial recognition and subsequent changes in fair value of the derivative additional investment rights liability have no effect on the Company’s cash flows.

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 fair value of the derivative liability associated with the additional investment rights was determined to be $515,000 at July 31, 2011 and $77,250 at October 31, 2011.  The key inputs used in the fair value calculations were as follows:

	October 31, 2011			July 31, 2011
Current exercise price of warrants	$	0.25		$	0.25
Current conversion price of preferred stock	$	0.15		$	0.15
Time to expiration	0.75 years			1.0 years
Risk-free interest rate		0.11	%		1.23	%
Estimated volatility		56	%		58	%
Dividend		-0-			-0-
Stock price	$	0.092		$	0.13

The revaluation of the additional investment rights at the October 31, 2011 reporting period, resulted in the recognition of income of $437,750 within the Company’s consolidated statements of operations for the three months ended October 31, 2011, which is included in the total under the caption “Change in fair value of derivative liabilities”.