Derivative Liabilities

3 Months Ended

Oct. 31, 2015

Notes to Financial Statements

Derivative Liabilities

Note 8 – 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 October 31, 2015 and July 31, 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 comprehensive income. 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 October 31, 2015 are all currently exercisable with a weighted-average remaining life of 2.23 years.

The revaluation of the warrants at the end of the respective reporting periods resulted in the recognition of a loss of $161,900 within the Company’s consolidated statements of operations for the three months ended October 31, 2015 and a gain of $517,466 within the Company’s consolidated statements of comprehensive (loss) / income for the three months ended October 31, 2014, which are included in the consolidated statement of comprehensive (loss) / income under the caption “Change in fair value of derivative liabilities”. The fair values of the warrants at October 31, 2015 and July 31, 2015 were $2,525,315 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, 2015 until October 31, 2015:

		Value	No. of Warrants
Balance at August 1, 2015 – Derivative warrant liability	$	2,363,415	512,911,037
Decrease in fair value of derivative warrant liability		161,900	n/a
Balance at October 31, 2015 – Derivative warrant liability	$	2,525,315	512,911,037

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, 2015 and July 31, 2014. 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, 2015 and July 31, 2015 fair value calculations were as follows:

		October 31, 2015			July 31, 2015
Current exercise price	$	0.015		$	0.015
Time to expiration		2.2			2.5 years
Risk-free interest rate		1.05	%		1.08	%
Estimated volatility		95	%		82	%
Dividend		0			0
Stock price at period end date	$	0.0082		$	0.01

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 Series F additional investment rights expired in March 2015. The fair value of the Series G derivative liability associated with the additional investment rights was determined to be $296,725 at October 31, 2015 (July 31, 2015 - $142,662).

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

	October 31, 2015			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		0.80 years			1.05 years
Risk-free interest rate		0.23	%		0.30	%
Estimated volatility		106	%		79	%
Dividend		0			0
Stock price at period end date	$	0.0082			0.01

The revaluation of the additional investment rights in the three-month period ended October 31, 2015, resulted in the recognition of a loss of $154,063 and in the three-month period ended October 31, 2014, the revaluation resulted in the recognition of a gain of $194,512. The respective loss and gain are recorded within the Company’s consolidated statements of comprehensive (loss) / income under the caption “Change in fair value of derivative liabilities”.