Quarterly report pursuant to sections 13 or 15(d)

DERIVATIVE INSTRUMENTS

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DERIVATIVE INSTRUMENTS
 9 Months Ended
Jul. 31, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

9. DERIVATIVE INSTRUMENTS

 

The table below lists the Company’s derivative instruments as of July 31, 2012:

 

Description   Principal     Original
Issue
Discount		     Warrant
Liability		     Embedded
Derivative
Liability		  
Total Valuation at October 31, 2011   $ 8,976,071     $ 1,300,347     $ 6,391,071     $ 946,046  
Issuance of December 2011 Notes     1,232,353       258,178       -       306,568  
Conversion of Bridge Notes     (169,000 )                     -  
Conversion of May 2011 Notes     (1,924,060 )                     (341,342 )
Conversion of October 2011 Notes     (1,227,500 )                     (329,433 )
Partial Note Repayments     (52,941 )                        
Conversion of Long-term Convertible Promissory Notes     (540,000 )                        
Exchange of Warrants                     59,572          
Accreted Interest             (532,559 )                
Change in FV                     (923,052 )     159,657  
Total Valuation at January 31, 2012   $ 6,294,923     $ 1,025,966     $ 5,527,591     $ 741,496  
Exchange of Bridge Notes     52,941               -          
Conversion of May 2011 Notes     (38,000 )                     (5,016 )
Conversion of December 2011 Notes     (827,500 )                     (160,677 )
Exchange of Warrants                     (134,796 )        
Accreted Interest             (569,419 )                
Change in FV                     (2,302,707 )     (438,054 )
Total Valuation at April 30, 2012   $ 5,482,364     $ 456,547     $ 3,090,088     $ 137,749  
                                 
Issuance of May 2012 Notes     953,333             291,400        
Debt for Equity Exchange: May and October 2011, December 2011 Notes     (4,473,673 )     (200,632 )             (115,046 )
Debt for Equity Exchange: Bridge Notes     (50,000 )             (4,750 )        
July 2012Exchange of Warrants                     (407,501 )        
JMJ Settlement Agreement     540,000                          
JMJ Note Conversions     (712,800 )                        
Accreted Interest             (229,392 )                
Change in FV                     (1,703,252 )     (20,567 )
Total Valuation at July 31, 2012   $ 1,739,224       26,523       1,265,985       2,136  

 

Warrant Liability/Embedded Derivative Liability

 

Warrant Liability

 

As of July 31, 2012, the Company had approximately 99.6 million of its total approximately 114.7 million total warrants classified as liabilities (liability warrants). Of these 99.6 million liability warrants, approximately 64.8 million warrants are outstanding and 34.8 million warrants are exchange warrants - nonexercisable. The Company utilizes the BSM Model to calculate the fair value of these warrants at issuance and at each subsequent reporting date. For those warrants with exercise price reset features (anti-dilution provisions), the Company computes multiple valuations, each quarter, using an adjusted BSM model, to account for the various possibilities that could occur due to changes in the inputs to the BSM model as a result of contractually-obligated changes (for example, changes in strike price to account for down-round provisions). The Company effectively weights each calculation based on the likelihood of occurrence to determine the value of the warrants at the reporting date. Approximately 47 million of our 99.6 million liability warrants are subject to anti-dilution provisions. A certain number of liability warrants contain a cash settlement provision in the event of a fundamental transaction (as defined in the common stock purchase warrant). Any changes in the fair value of the warrant liability (i.e. - the total fair value of all outstanding liability warrants at the balance sheet date) between reporting periods will be reported on the statement of operations.

 

At July 31, 2012, the fair value of the warrant liability was approximately $1,266,000. For the three months ended July 31, 2012 and July 31, 2011, the Company reported income of approximately $1.7 million and $6.9 million, respectively, due to changes in the fair value of the warrant liability. For the nine months ended July 31, 2012 and July 31, 2011, the Company reported income of approximately $4.9 million and approximately $5.8 million, respectively, due to changes in the fair value of the warrant liability.

 

Embedded Derivative Liability

 

The Company has convertible features (Embedded Derivatives) in its outstanding convertible promissory notes .  The Embedded Derivatives are recorded as liabilities at issuance.  These Embedded Derivatives are valued using the Black-Scholes Model (BSM Model) and are subject to revaluation at each reporting date. Any change in fair value between reporting periods will be reported on the statement of operations.

 

At July 31, 2012, the fair value of the Embedded Derivative Liability was approximately $2,140. For the three months ended July 31, 2012 and July 31, 2011, the Company reported income of approximately $28,000 and approximately $2.2 million, respectively, due to changes in the fair value of the Embedded Derivative Liability partially resulting from debt to equity exchanges during the period. . For the nine months ended July 31, 2012 and July 31, 2011, the Company recorded income of approximately $307,000 and approximately $1.3 million, respectively, due to changes in the fair value of the Embedded Derivative Liability.