Derivative Liabilities

3 Months Ended

Oct. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liabilities

9. Derivative Liabilities

On October 23, 2015 (the “October Closing Date”), we completed a first closing of a private placement financing (the “2015 Private Placement Financing”), where we issued, among other securities, a warrant to purchase up to an aggregate of 6,666,666 shares of common stock with a term of five years and a warrant to purchase up to an aggregate of 8,666,666 shares of common stock with a term of six months (See Note 10 to these consolidated financial statements).

On November 23, 2015, we completed a second and final closing of the 2015 Private Placement Financing, where we issued, among other securities a warrant to purchase up to an aggregate of 2,222,217 shares of common stock with a term of five years and a warrant to purchase up to an aggregate of 2,820,670 shares of common stock with a term of six months.

We accounted for the combined 20,376,219 warrants issued in connection with the 2015 Private Placement Financing in 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.

During the fiscal year ended July 31, 2016, (i) all 2,820,670 of the six-month warrants issued in the second and final closing were exercised, (ii) the six-month warrants issued in the first closing expired and (iii) the five-year warrants issued in the first closing were cancelled.

On the October Closing Date, the derivative liabilities were recorded at an estimated fair value of $7,008,000. Given that the fair value of the derivative liabilities exceeded the total proceeds of the private placement of $6,000,000, no net amounts were allocated to the common stock. The $1,008,000 amount by which the recorded liabilities exceeded the proceeds was charged to other expense at the October Closing Date.

As of October 31, 2016, we had a warrant liability of $1,952,000 related to the 2,222,217 warrants outstanding issued in connection with the November closing of the 2015 Private Placement Financing. The following assumptions were used as inputs to the model at October 31, 2016: stock price of $1.10 per share and a warrant exercise price of $0.45 per share as of the valuation date; our historical stock price volatility of 90.00%; risk free interest rate on U.S. treasury notes of 1.2%; warrant expiration of 4.1 years.

In addition, as of October 31, 2016, we had a warrant liability of $9,000 related to 132,420 warrants issued pursuant to a Bridge Loan financing that occurred during the fourth quarter of 2012. Currently there are 9,709 warrants outstanding issued in connection with the Bridge Loan. The following assumptions were used as inputs to the model at October 31, 2016: stock price of $1.10 per share and a warrant exercise price of $0.20 per share as of the valuation date; our historical stock price volatility of 55.89%; risk free interest rate on U.S. treasury notes of 0.20%; warrant expiration of 0.15 years.

On October 31, 2016, the total value of the derivative liabilities was $1,961,000. The change in fair value of the warrant liabilities for the three months ended October 31, 2016 and 2015, was an increase of $159,000 and a decrease of $43,000, respectively, which was recorded as a change in derivative liabilities in the condensed consolidated statement of operations. We have revalued the derivative liabilities as of October 31, 2016, and will continue to do so on each subsequent balance sheet date until the securities to which the derivative liabilities relate are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense.