Derivative Liability

3 Months Ended

Oct. 31, 2015

Derivative Liability [Abstract]

Derivative Liability

9.  Derivative Liability

On October 23, 2015 (the “Closing Date”), we closed a private placement financing (the “Private Placement Financing”), where we issued 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).

We accounted for the combined 15,333,332 warrants issued in connection with the 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.

The estimated fair value of the derivative liabilities at the Closing Date and at October 31, 2015, was $7,008,000 and $6,964,000. The following assumptions were used as inputs to the Monte Carlo option pricing model at October 31, 2015: for the five year warrant, stock price of $0.75 and a warrant exercise price of $0.45 as of the valuation date; our historical stock price volatility of 90%; risk free interest rate on U.S. treasury notes of 1.5%; warrant expiration of 5.0 years; for the six month warrant, stock price of $0.75 and a warrant exercise price of $0.45 as of the valuation date; our historical stock price volatility of 90%; risk free interest rate on U.S. treasury notes of 0.2%; warrant expiration of 0.5 years.

On the 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 Closing Date. We have revalued the derivative liability as of October 31, 2015, and will continue to do so on each subsequent balance sheet date until the securities to which to derivative liabilities relate are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense.

As of October 31, 2015, we had a warrant liability of $5,000 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, 2015: stock price of $0.75 and a warrant exercise price of $0.20 as of the valuation date; our historical stock price volatility of 89.61%; risk free interest rate on U.S. treasury notes of 0.34%; warrant expiration of 1.15 years.

On October 31, 2015, the total value of the derivative liabilities was $6,969,000. The change in fair value of the warrant liability for the three months ended October 31, 2015 and 2014, was a decrease of $43,000 and an increase of $1,000, respectively, which was recorded as a change in derivative liability in the consolidated statement of operations.