Derivative Liabilities:

6 Months Ended

Jan. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 10 – 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 warrant instruments have been measured at fair value at January 31, 2013 and July 31, 2012 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. 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 January 31, 2013 are all currently exercisable with a weighted-average remaining life of 3.61 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 a loss of $3,783,290 within the Company’s consolidated statements of operations for the six months ended January 31, 2013 and a loss of $4,212,545 for the six months ended January 31, 2012, which is included in the consolidated statement of operations under the caption “Change in fair value of derivative liabilities”. The fair value of the warrants at January 31, 2013 and July 31, 2012 was $6,127,098 and $4,081,627, respectively, which is 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, 2011 until January 31, 2013:

	Value			No. of Warrants
Balance at August 1, 2011 – Derivative warrant liability	$	8,745,508			80,234,017
Exercise of warrants classified as derivative liability		(7,230,734	)		(49,863,260	)
Additional warrants issued in February 2012 financing		1,811,746			13,333,333
Additional warrants from price protection features of existing warrants		1,548,813			11,444,440
Decrease in fair value of derivative warrant liability		(793,706	)		n/a
Balance at July 31, 2012 – Derivative warrant liability	$	4,081,627			55,148,530
Additional warrants issued in August 2012 financing		624,797			9,375,000
Additional warrants issued in December 2012 financing		762,355			24,999,999
Additional warrants from price protection features of existing warrants		7,484,550			236,219,094
Exercise of warrants		(3,087,279	)		(109,428,097	)
Decrease in fair value of derivative warrant liability		(3,738,952	)		n/a
	$	6,127,098			216,314,526

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 January 31, 2013 and July 31, 2012. 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 January 31, 2013 and July 31, 2012 fair value calculations were as follows:

	January 31, 2013			July 31, 2012
Current exercise price	$	0.03		$	0.15
Time to expiration		3.61 years			3.9 years
Risk-free interest rate		0.65	%		0.45	%
Estimated volatility		84	%		104	%
Dividend		-0-			-0-
Stock price at period end date	$	0.045		$	0.093

Derivative convertible preferred stock liability (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 stocks. An aggregate of 24,999,999 shares of the Company’s common stock are issuable upon conversion of the Series D convertible preferred stock which was issued at the initial closing.

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 $0.03 per share, and will accrue a 9% dividend until December 10, 2015 and, beginning on December 10, 2015 and 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 December 31, 2012 and on each conversion date in cash, or at the Company’s option, in shares of common stock. In the event that the convertible preferred stock is converted prior to December 10, 2015, 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 December 10, 2015, 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 Company may become obligated to redeem the convertible preferred stock in cash upon the occurrence of certain triggering events, including the failure to provide an effective registration statement covering shares of common stock issuable upon conversion of the convertible preferred stock, material breach of certain contractual obligations to the holders of the convertible preferred stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Company’s common stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or regulated quotation services. Upon the occurrence of certain triggering events, each holder of convertible preferred stock will have the option to redeem such holder’s shares of convertible preferred stock for a redemption price payable in shares of common stock or receive an increased dividend rate of 18% on all of such holder’s outstanding convertible preferred stock.

In conjunction with the issuance of the Series D convertible preferred stock, the Company also issued 24,999,999 warrants to the investors. Subject to certain ownership limitations, the warrants will be exercisable at any time after their date of issuance and on or before the fifth-year anniversary thereafter at an exercise price of $0.03 per share of common stock. 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 this note above.

Due to the anti-dilution adjustments to the Company’s outstanding Series B and Series C preferred stock, and the various warrants with anti-dilution provisions, which resulted from the issuance of the Series D convertible preferred stock, the Company does not have sufficient authorized Common Stock to issue upon conversion of all of its outstanding preferred stock and exercise of all of its outstanding warrants. The investors have agreed that the Series D convertible preferred stock and the warrants to be issued will not be convertible or exercisable until the Company’s stockholders have authorized an amendment to the Company’s Certificate of Incorporation increasing the authorized Common Stock. The December 10, 2012 securities purchase agreement requires the Company to obtain such authorization within 120 days after closing. If stockholder approval is not obtained in that time, the investors may require the Company to redeem the preferred stock for cash.

As of January 31, 2013, none of the Series D convertible preferred stock had been converted to common stock.

Accounting for proceeds from the Series D convertible preferred stock financing

As the Company does not have sufficient authorized capital for the issuance of the shares underlying the Series D convertible preferred stock, equity treatment is not permitted under GAAP and the Series D convertible preferred stock has been classified as a derivative liability on the Company’s consolidated balance sheet. Due to the redemption provision in the event that an increase in the Company’s authorized capital is not approved by the stockholders, the Series D convertible preferred stock has been reported at its face value of $750,000. The net cash proceeds from the Series D convertible preferred stock financing were $725,000, after deduction for the investors’ legal costs of $25,000. The legal costs of $25,000, in addition to a finder’s fee of $60,000 which was paid in the Company’s stock, have been capitalized and are being amortized over the estimated life of 12 months of the Series D convertible preferred stock. The “make-whole payments” of $202,500 on the Series D convertible preferred stock were accrued as of the date of the financing and are included in Accounts Payable and Accrued Expenses (see Note 5) at January 31, 2013. The warrants that were issued with the Series D convertible preferred stock were determined to be derivatives and were valued at their estimated fair value of $762,355 as of the date of issuance. The calculation methodologies for the fair values of the derivative warrant liability are described earlier in this note above.