Convertible Note and Derivative Liability

3 Months Ended

Oct. 31, 2014

Convertible Note and Derivative Liability [Abstract]

Convertible Note and Derivative Liability

9.Convertible Note and Derivative Liability 

On June 26, 2012, and July 10, 2012 we received an aggregate of $1,200,000 in cash consideration from nine lenders in exchange for our issuance to such lenders of secured convertible promissory notes, or the Notes, in an aggregate principal amount of $1,333,000 and certain other consideration (including shares of our common stock and warrants to acquire shares of our common stock). We refer to such transaction as the “Bridge Loan”. Pursuant to the terms of the Notes and the other agreements entered in connection with the Bridge Loan, all amounts owed thereunder became due and payable upon the closing of our underwritten public offering on September 17, 2012, and accordingly all such amounts were repaid during the three months ended October 31, 2012.

We accounted for the 132,420warrants issued in connection with the Bridge Loanin accordance with the accounting guidance for derivatives. The applicable accounting guidance sets forth a two-step model to be applied in determining whether a financial instrument is indexed to an entity’s own stock, which would qualify such financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ equity section of the entity’s balance sheet. We determined the warrants were ineligible for equity classification due to anti-dilution provisions set forth therein.  

We recorded the fair value of the warrants issued in connection with the Bridge Loan as a warrant liability due to anti-dilution provisions requiring the strike price of the warrants to be adjusted if we subsequently issue common stock at a lower stock price. The Company revalues the warrants as of the end of each reporting period. The fair value of the warrants at October 31, 2014 and July 31, 2014 was $10,000 and $9,000, respectively.  The change in fair value of the warrant liability for the three months ended October 31, 2014 was a increase of $1,000, which was recorded as a change in derivative liability in the consolidated statement of operations.  

During the three months ended October 31, 2013, there were net exercises on an aggregate of 90,699of the warrants issued in connection with the Bridge Loan, which resulted in the issuance of 73,290 shares of our common stock.  As these warrants were net exercised, as permitted under the respective warrant agreements, we did not receive any cash proceeds.  The warrants were revalued as of the settlement dates, and the change in fair value was recognized to earnings.  The Company also recognized a reduction in the warrant liability based on the fair value as of the settlement date for the warrants exercised, with a corresponding increase in additional paid-in capital. As of October 31, 2014 there are 9,709 warrants outstanding issued in connection with the Bridge Loan. No warrants issued in connection with the Bridge Loan were exercised during the three months ended October 31, 2014.

The estimated fair value of the derivative liability was computed using a Monte Carlo option pricing model based the following assumptions:

	October 31,		July 31,
	2014		2014
Volatility	186.4	%	163.5	%
Risk-free interest rate	0.49	%	0.98	%
Dividend yield	0.0	%	0.0	%
Expected life	2.2 years		2.4 years