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DERIVATIVES LIABILITIES, WARRANTS AND OTHER OPTIONS | 12 Months Ended
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Sep. 30, 2011
Notes to Financial Statements |
DERIVATIVES LIABILITIES, WARRANTS AND OTHER OPTIONS | Below is a chart showing the derivative liabilities, the number of warrants and other options outstanding at September 30, 2011:
Warrant | Issue Date | Shares Issuable upon Exercise of Warrant | Exercise Price | Expiration Date | Reference
Series K | 8/4/06 | 2,318,396 | $ 0.40 | 2/4/12 | 1
Series N | 8/18/08 | 3,890,782 | 0.40 | 8/18/14 | 1
Series A | 6/24/09 | 1,303,472 | 0.50 | 12/24/14 | 1
C. Schleuning (Series A) | 7/8/09 | 167,500 | 0.50 | 01/08/15 | 1
Series B | 9/4/09 | 500,000 | 0.68 | 9/4/14 | 1
Series C | 8/20/09 – 8/26/09 | 4,634,886 | 0.55 | 2/20/15 | 1
Series E | 9/21/09 | 714,286 | 1.75 | 8/12/14 | 1
Series L | 4/18/07 | 951,669 | 0.75 | 4/17/12 | 2
Series L (repriced) | 4/18/07 | 1,000,000 | 0.56 | 4/17/13 | 2
Series M | 4/18/07 | 1,221,668 | 2.00 | 4/17/12 | 2
Series M (modified) | 4/18/07 | 6,000,000 | 0.60 | 7/31/14 | 2
Series O | 3/6/09 | 6,500,000 | 0.25 | 3/6/16 | 3
Private Investors | 5/30/03- 6/30/09 | 8,609,375 | 0.47 – 1.25 | 5/30/13 - 7/18/14 | 4
Warrants held by Officer and Director | 6/24/09- 7/6/09 | 3,497,539 | 0.40 – 0.50 | 12/24/14 – 1/6/15 | 5
Consultants | 5/22/03 – 7/16/09 | 837,500 | 0.28 – 2.00 | 8/23/12 - 10/14/15 | 6
1. Derivative Liabilities See below for details of the balances of derivative instruments at September 30, 2011 and 2010.
| September 30, 2011 | September 30, 2010
Series K warrants | $69,552 | $1,002,502
2009 financings warrants |  |
(Series A thru E) | 1,375,458 | 4,037,066
2008 warrants reclassified from equity |
to derivative liabilities on |  |
October 1, 2009 (Series N) | 817,063 | 1,906,483
Convertible notes issued in settlement (Note 11) | 4,999,000 | -
Total derivative liabilities | $7,261,073 | $6,946,051
On October 1, 2009, the Company reviewed all outstanding warrants in accordance with the requirements of Codification 815-40-15-7, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. This topic provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The warrant agreements provide for adjustments to the exercise price for certain dilutive events, which includes an adjustment to the number of shares issuable upon the exercise of the warrant in the event that the Company makes certain equity offerings in the future at a price lower than the exercise prices of the warrant instruments. Under the provisions of Codification 815-40-15-7, the warrants are not considered indexed to the Company’s stock because future equity offerings or sales of the Company’s stock are not an input to the fair value of a “fixed-for-fixed” option on equity shares, and equity classification is therefore precluded. In August 2008, 2,075,084 Series N warrants were issued to two investors in connection with a financing. In June 2009, the 2,075,084 warrants were reset from $0.75 to $0.40. The additional cost of the warrants of $123,013 was recorded as a debit and a credit to additional paid in capital. In addition, the investors were issued 1,815,698 warrants exercisable at $0.40 per share at an initial cost of $404,460. The additional cost of the warrants was recorded as a debit and a credit to additional paid in capital. In accordance with the requirements of Codification 815-40-15-7, effective October 1, 2009, 3,890,782 Series N warrants issued in August 2008 were determined to be subject to the requirements of this topic and were valued using the Black-Scholes formula as of October 1, 2009 at $6,186,343. The Series N warrants were recognized as a liability in the Company’s condensed consolidated balance sheet at fair value with a corresponding adjustment to accumulated deficit and are being marked-to-market each reporting period. The Series N warrants were revalued on September 30, 2011 and 2010 at $817,063 and $1,906,483, respectively, which resulted in a gain on derivatives and a decrease in derivative liabilities of $1,089,420 and $4,279,860, respectively due to the decrease in the Company’s stock price. The Company accounted for the Series K and A through E Warrants as derivative liabilities in accordance with Codification 815-10, “Accounting for Derivative Instruments and Hedging Activities”. In accordance with Codification 815-40-15-7, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. These warrants do not qualify for equity accounting and must be accounted for as a derivative liability since the Warrant Agreement provides the holder with the right, at its option, to require the Company to a cash settlement of the warrants at Black-Scholes value in the event of a Fundamental Transaction, as defined in the Warrant Agreement. Since the occurrence of a Fundamental Transaction is not entirely within the Company's control, there exist circumstances that would require net-cash settlement of the warrants while holders of shares would not receive a cash settlement. In August 2006, the Company issued 4,825,581 Series K warrants at $0.95. In connection with the April 2007 financing and issuance of Series L and M warrants, there was a reset of the conversion price of the Series K warrants to $0.75. The Series K note holders received 1,286,819 additional Series K warrants as well. In connection with the June 2009 financing and issuance of the Series A warrants, there was a reset of the conversion price of the Series K notes and the exercise price of the Series K warrants from $0.75 to $0.40. The Series K note holders received 5,348,357 additional Series K warrants as well. The cost of these additional warrants is included in the fair value of the remaining warrants at September 30, 2011. During the year ended September 30, 2011, the Company recorded a gain of $932,950 on the remaining Series K warrants. During the year ended September 30, 2010, the Company recorded a gain of $2,856,355 on the remaining Series K warrants. During the year ended September 30, 2009, the Company recorded a loss of $3,991,910 on the remaining Series K warrants and a loss of $2,145,754 on the conversion of Series K convertible notes. During the year ended September 30, 2011, no Series K warrants were exercised. During the year ended September 30, 2010, 1,335,221 Series K warrants, on which the Company recognized a gain on exercise of $280,223, were exercised. When the warrants were exercised, the value of these warrants was converted from derivative liabilities to equity. During the year ended September 30, 2009, 3,015,852 Series K warrants were exercised, on which the Company recognized a loss of $413,602. For the year ended September 30, 2011, the Company recorded a gain of $2,225,887 on the Series A through E derivative instruments. During year ended September 30, 2010, the Company recognized a gain of $12,993,883 on the remaining Series A through E derivative instruments. During the year ended September 30, 2009, the Company recorded a loss of $21,109,155 on the Series A thru E derivative instruments. In June 2009, the Company issued 10,116,560 Series A warrants exercisable at $0.50 per share in connection with the June financing. The cost of the warrants of $2,775,021 was recorded as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2011, 1,303,472 of these warrants remained outstanding. In accordance with Codification 815-40-15-7, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. As of September 30, 2010, the fair value of these derivative liabilities totaled $599,596. As of September 30, 2011, the value of the remaining derivative liabilities totaled $260,694. During the year ended September 30, 2011, no Series A warrants were exercised. During the year ended September 30, 2010, 8,813,088 Series A warrants, on which the Company recognized a total gain of $8,433,451 were exercised. When the warrants were exercised, the value of these warrants was converted from derivative liabilities to equity. During the year ended September 30, 2009 no Series A warrants were exercised. In July 2009, the Company issued warrants to a private investor. The 167,500 warrants were issued with an exercise price of $0.50 per share and valued at $43,550 using the Black Scholes method. The cost of the warrants was accounted for as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2011, 167,500 warrants remained outstanding. In accordance with Codification 815-40-15-7, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. As of September 30, 2010, the fair value of these derivative liabilities totaled $77,050. As of September 30, 2011, the value of the remaining derivative liabilities totaled $33,500. In September 2009, the Company received a $2,000,000 loan. In connection with the loan, the Company issued 500,000 Series B warrants with an exercise price of $0.68 per share. The cost of the warrants of $245,000 was recorded as a debit to discount on note payable and a credit to additional paid in capital. This cost was amortized to interest expense when the loan was repaid. As of September 30, 2011, 500,000 Series B warrants remained outstanding. In accordance with Codification 815-40-15-7, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. As of September 30, 2010, the fair value of these derivative liabilities totaled $220,000. As of September 30, 2011, the value of the remaining derivative liabilities totaled $90,000. In August 2009, the Company received additional financing. In connection with the financing, the Company issued 4,850,501 Series C warrants exercisable at $0.55 per share. The cost of the warrants of $1,455,150 was recorded as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2011, 4,093,169 of these warrants remained outstanding. In accordance with Codification 815-40-15-7, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. As of September 30, 2010, the fair value of these derivative liabilities totaled $2,231,230. As of September 30, 2011, the value of the remaining derivative liabilities totaled $818,634. Also in August 2009, the Company completed an offering to the original Series K investors. Issued with an exercise price of $0.55 per share, the 541,717 Series C warrants were valued at $249,190. The warrants were accounted for as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2011, 541,717 of the Series C warrants remained outstanding. In accordance with Codification 815-40-15-7, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. As of September 30, 2010, the fair value of these derivative liabilities totaled $249,190. As of September 30, 2011, the value of the remaining derivative liabilities totaled $108,343. During the years ended September 30, 2011 and 2010, 757,331 and -0- Series C warrants were exercised, respectively. The Company recognized a gain on exercise of $232,891 and $-0-, respectively. When the warrants were exercised, the value of these warrants was converted from derivative liabilities to equity. Series C warrants transferred to equity totaled $202,830 and $-0-, respectively. No Series C warrants were exercised in the year ended September 30, 2009. In September 2009, the Company issued 4,714,284 Series D warrants with an exercise price of $1.50 per share in connection with a financing. The cost of the warrants of $3,488,570 was calculated and was recorded as a debit and a credit to additional paid in capital. In addition, 714,286 Series E warrants were issued with an exercise price of $1.75 per share to the placement agent on the transaction. The cost of $664,286 was accounted for as a debit to additional paid in capital and a credit to derivative liabilities. On September 21, 2011, all 4,714,284 Series D warrants expired. As of September 30, 2011, 714,286 Series E warrants remained outstanding. In accordance with Codification 815-40-15-7, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. As of September 30, 2010, the fair value of these derivative liabilities totaled $660,000. As of September 30, 2011, the value of the remaining derivative liabilities totaled $64,287. Accounting for the Senior Convertible Note and Redeemable Series A Convertible Preferred Stock – The Senior Secured Convertible Note falls within the scope of ASC 815. Under ASC 815-15-25-4 through 6 or ASC 825-10-10-1, the Company may make an irrevocable election to initially and subsequently measure a hybrid financial instrument in its entirety at fair value. Any change in fair value between the respective reporting dates shall be recognized as a gain or loss. Based on the Company’s analysis of the Senior Secured Convertible Note, the Company identified several embedded derivative features. The Company elected, in accordance with ASC 825-10-10-1, to initially and subsequently carry the instrument at fair value without bifurcating the embedded derivatives. For the year ended September 30, 2011, the Company recorded a loss of $49,000 on the Senior Secured Convertible Notes. The Series A Convertible Preferred Stock falls within the scope of ASC 480 because the conversion option was considered nonsubstantive. ASC 480-10-30-1 states, “Mandatorily redeemable financial instruments shall be measured initially at fair value.” Therefore, immediately after initially recording Series A Convertible Preferred Stock, the carrying value of the instrument in its entirety must be adjusted to fair value as of the issuance date with the difference recorded as a loss. The Company also elected to adopt the fair value option ASC 825. The Series A Convertible Preferred Stock should be measured in its entirety and reported at fair value at each reporting date for so long as shares remain outstanding. Any change in fair value between the respective reporting dates will be recognized as a gain or loss. During the year ended September 30, 2011, the Company redeemed all of the Series A Convertible Preferred Stock. See Note 11 for additional discussion on preferred stock and convertible notes. 2. Series L and M Warrants On April 18, 2007, the Company completed a $15 million private financing. Shares were sold at $0.75, a premium over the closing price of the previous two weeks. The financing was accompanied by 10 million warrants with an exercise price of $0.75 and 10 million warrants with an exercise price of $2.00. The warrants are known as Series L and Series M warrants, respectively. In September 2008, 2,250,000 of the original Series L warrants were repriced at $0.56 and extended for one year to April 17, 2013. The increase in the value of the warrants of $173,187 was recorded as a debit and a credit to additional paid-in capital in accordance with the original accounting for the Series L warrants. As of September 30, 2011, 1,000,000 of the Series L warrants at the reduced exercise price of $0.56 and 951,669 at the original exercise price of $0.75 remained outstanding. On March 12, 2010, the Company temporarily reduced the exercise price of the Series M warrants, originally issued on April 18, 2007. The exercise price was reduced from $2.00 to $0.75. At any time prior to June 16, 2010 investors could have exercised the Series M warrants at a price of $0.75 per share. For every two Series M warrants exercised prior to June 16, 2010 the investor would have received one Series F warrant. Each Series F warrant would have allowed the holder to purchase one share of the Company’s common stock at a price of $2.50 per share at any time on or before June 15, 2014. After June 15, 2010 the exercise price of the Series M warrants reverted back to $2.00 per share. Any person exercising a Series M warrant after June 15, 2010 would not receive any Series F warrants. The Series M warrants expire on April 17, 2012. An analysis of the modification to the warrants determined that the modification increased the value of the warrants by $1,432,456. This cost was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend. This cost is included in modification of warrants and increased the net loss available to shareholders on the condensed, consolidated statements of operations. There were no exercises of the Series M warrants at the reduced price and the exercise price of the Series M warrants reverted back to $2.00 on June 16, 2010. On August 3, 2010, the Company’s Board of Directors approved an amendment to the terms of the Series M warrants held by an investor. The investor was the owner of 8,800,000 warrants priced at $2.00 per share. The investor may now purchase 6,000,000 shares of the Company’s common stock (reduced from 8,800,000) at a price of $0.60 per share. An analysis of the modification to the warrants determined that the modification increased the value of the warrants by $100,000. The adjustment was recorded as a debit and a credit to additional paid-in capital. In addition, 1,221,668 Series M warrants at the original exercise price of $2.00 were outstanding as of September 30, 2011. On February 1, 2011, 6,000,000 Series M warrants at a price of $0.60 per share, were extended for two years. This cost was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend. This cost is included in modification of warrants and increased the net loss available to shareholders on the consolidated statements of operations. The additional value of $661,457 was calculated using the Black Scholes method using the following assumptions.
| Original | Extended
| Warrants | Warrants
Expected stock risk volatility | 104.00% | 97.40%
Risk-free interest rate | 0.61% | 1.04%
Expected life of warrant | 1.51 Year | 3.51 Years
3. Licensing Agreement Warrants On March 6, 2009, the Company entered into a licensing agreement with Byron Biopharma LLC (“Byron”) under which the Company granted Byron an exclusive license to market and distribute the Company’s cancer drug Multikine in the Republic of South Africa. Pursuant to the agreement Byron will be responsible for registering the product in South Africa. Once Multikine has been approved for sale, the Company will be responsible for manufacturing the product, while Byron will be responsible for sales in South Africa. Revenues will be divided equally between the Company and Byron. To maintain the license Byron, among other requirements, made a $125,000 payment to the Company on March 8, 2010. On March 30, 2009, and as further consideration for its rights under the licensing agreement, Byron purchased 3,750,000 Units from the Company at a price of $0.20 per Unit. Each Unit consisted of one share of the Company’s common stock and two warrants. Each warrant entitles the holder to purchase one share of the Company’s common stock at a price of $0.25 per share. The warrants expire on March 6, 2016. The Company filed a registration statement to register the shares issuable upon the exercise of the warrants. The Units were accounted for as an equity transaction using the Black Scholes method to value the warrants. The fair value of the warrants was calculated to be $1,015,771. During the year end September 30, 2011, 1,000,000 warrants were exercised for which the Company received $250,000. As of September 30, 2011, 6,500,000 of these warrants remained outstanding. 4. Private Investor Warrants Between May 2003 and April 2006 the Company issued 1,900,000 warrants as part of a financing to a private investor at an exercise price between $0.47 and $1.25. As of September 30, 2011, 1,200,000 warrants remain outstanding. In January 2009, as part of an amended lease agreement on the manufacturing facility, the Company repriced 3,000,000 warrants issued to the lessor in July 2007 at $1.25 per share and which were to expire on July 12, 2013. These warrants were repriced at $0.75 per share and expire on January 26, 2014. The cost of this repricing and extension of the warrants was $70,515 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital. In addition, 787,500 additional warrants were given to the lessor of the manufacturing facility on the same date, exercisable at a price of $0.75 per share, and will expire on January 26, 2014. The cost of these warrants was $45,207 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital. As of September 30, 2011, 3,787,500 warrants remained outstanding. Between March 31 and June 30, 2009, 2,296,875 new warrants were issued at $0.75 to the leaseholder on the manufacturing facility in consideration for the deferment of rent payments. The cost of these new warrants of $251,172 was recorded as a debit to research and development and a credit to additional paid in capital. As of September 30, 2011, 2,296,875 warrants remained outstanding. Between July 2005 and May 2006 1,925,000 warrants were issued to a private investor. In July 2009, 375,000 warrants held by the investor were extended for two years. The additional value of the warrants of $24,061 was calculated using the Black Scholes method using the following assumptions. This cost was accounted for as a debit and a credit to additional paid in capital. In February 2011, 1,325,000 warrants issued to the investor with an exercise price between $0.56 and $0.82 were extended for three years. The additional value of $406,912 was calculated using the Black Scholes method using the following assumptions. This cost was accounted for as a debit and a credit to additional paid in capital.
| Original | Extended
| Warrants | Warrants
Expected stock risk volatility | 104.00% | 97.8-103.7%
Risk-free interest rate | 0.15% | 1.04%
Expected life of warrant | 0.02-0.50 Year | 3.02-3.50 Years
As of September 30, 2011, 1,325,000 warrants remained outstanding. 5. Warrants held by Officer and Director Between December 2008 and June 2009, Maximilian de Clara, the Company’s President and a director, loaned the Company $1,104,057. In June 2009, the Company issued 1,648,244 warrants exercisable at $0.40 per share to the holder of a note from the Company. The warrants are exercisable at any time prior to December 24, 2014. These warrants were valued at $65,796 using the Black Scholes method. In July 2009, as consideration for a further extension of the loan, the Company issued 1,849,295 warrants exercisable at $0.50 per share to the holder of the note that was amended for the second time. These warrants were valued at $341,454 using the Black Scholes method and can be exercised at any time prior to January 6, 2015. The first warrants were recorded as a discount to the loan and a credit to additional paid-in capital. The second warrants were recorded as a debit to derivative loss of $831,230, a premium of $341,454 on the loan and a credit to additional paid in capital of $489,776. The first warrants were amortized as interest expense at the time of the second amendment. On the second amendment, $338,172 of the premium was amortized as a reduction to interest expense as of September 30, 2009. The balance of the premium of $3,282 was amortized as a reduction to interest expense in October 2009. As of September 30, 2011, 3,497,539 warrants remained outstanding. See Note 8 for additional information. 6. Options held by Consultants As of September 30, 2011, 837,500 options that were issued to consultants as payment for services provided between May 2003 and July 2009 remained outstanding, of which 742,500 options were issued from the Non-Qualified Stock Option plans. Between May 2009 and July 2009, 442,500 options were issued with exercise prices between $0.28 and $0.60 per share to three consultants, for past services, at a cost of $74,461 using the Black Scholes method. The options were accounted for as a debit to general and administrative expense and a credit to additional paid in capital. Also in July 2009, the Company issued 200,000 options to a consultant with an exercise price of $0.38 per share. The cost of these options, $43,702, was accounted for as a debit to research and development and a credit to additional paid in capital. In August 2010, 70,000 options issued to a consultant with an exercise price between $0.63 and $0.70 were extended for two years at a cost of $15,477. This cost was accounted for as a credit to additional paid in capital and a debit to general and administrative expense. In October 2010, 80,000 options issued to a consultant with an exercise price of $2.00 were extended for five years from the current expiration date. The additional value of $30,186 was accounted for as a credit to additional paid in capital and a debit to general and administrative expense.

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