Derivative Liabilities

9 Months Ended

Apr. 30, 2017

Notes to Financial Statements

Derivative Liabilities

Note 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.

Accounting for Derivative Warrant Liability

The Company’s derivative instruments have been measured at fair value at April 30, 2017 and July 31, 2016 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.

There are no derivative warrants outstanding at April 30, 2017.

The revaluation of the warrants at the end of the respective reporting periods resulted in the recognition of a gain of $516,509 within the Company’s consolidated statements of operations for the nine months ended April 30, 2017 and a gain of $275,604 within the Company’s consolidated statements of operations and comprehensive loss for the nine months ended April 30, 2016, 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 April 30, 2017 and July 31, 2016 were $0 and $2,048,846, 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, 2016 until April 30, 2017:

	Value			No. of Warrants
Balance at August 1, 2016 - Derivative warrant liability	$	2,048,846			383,878
Forfeited or expired		(240,906	)		(65,896	)
Warrants exercised		(1,532,336	)		(317,982	)
Decrease in fair value of derivative warrant liability		(275,604	)		n/a
Balance at April 30, 2017 - Derivative warrant liability	$	—			—

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 April 30, 2017 and July 31, 2016. 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 fair value calculations were as follows:

	July 31, 2016
Current exercise price	$	20.00
Time to expiration		2.1 years
Risk-free interest rate		0.76	%
Estimated volatility		101	%
Dividend		—
Stock price at period end date	$	10.00

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 series G additional investment rights expired in August 2016. As all additional investment rights have expired, their value at April 30, 2017 is $nil (July 31, 2016 - $193,408)

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

	July 31, 2016
Underlying number of units of convertible preferred stock		500
Underlying number of units of warrants		33,333
Current exercise price of warrants	$	15.00
Current conversion price of preferred stock	$	15.00
Time to expiration		0.05 years
Risk-free interest rate		0.38	%
Estimated volatility		13	%
Dividend		-0-
Stock price at period end date	$	8.00

The revaluation of the additional investment rights in the nine -month period ended April 30, 2017, resulted in the recognition of a gain of $193,408 and in the nine -month period ended April 30, 2016, the revaluation resulted in the recognition of a loss of $16,231. The respective gains are recorded within the Company’s consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative liabilities”.