Annual report pursuant to section 13 and 15(d)

7. Derivative liability

v2.3.0.11
7. Derivative liability
 12 Months Ended
Dec. 31, 2011
Derivative Instruments and Hedging Activities Disclosure [Text Block]
7.     
Derivative liability

In June 2010, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  Under the authoritative guidance, effective January 1, 2010, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.  The strike price of the warrants issued by the Company, in connection with certain convertible note offerings made during 2009 and 2010, in the aggregate of 8,522,500 warrants, exercisable at $.30 per share, contain exercise prices that may fluctuate based on the occurrence of future offerings or events.  As a result, theses warrants are not considered indexed to the Company’s own stock.  The Company characterized the fair value of these warrants as derivative liabilities upon issuance.  The FASB’s guidance requires the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

The derivative liabilities were valued using a probability weighted average series of Black-Scholes-Merton models as a valuation technique with the following assumptions:

         
Fair Value of Warrants
 
   
No. of
Warrants
   
December 31,
2010
   
2011
Issuance
 
December 31,
2011
 
Risk-free interest rate
       
0.61%
   
–
 
0.12%
 
Expected volatility
       
120%
   
–
 
92%
 
Expected life (in years)
       
1.75 – 2.00
   
–
 
.75 – 1.00
 
Expected dividend yield
       
0%
   
–
 
0%
 
Fair Value:
                           
2009 Summer Warrants
   
1,870,000
   
$
804,100
     
–
 
$
332,998
 
2009 Wellfleet Warrants
   
100,000
     
129,000
     
–
   
17,807
 
2009 Fall Warrants
   
6,352,500
     
2,731,575
   
$
–
   
1,292,334
 
Total Fair Value
   
8,322,500
   
$
3,664,675
   
$
–
 
$
1,643,139
 

The risk-free interest rate is based on the yield available on U.S. Treasury securities.  The Company estimates volatility based on the historical volatility of its common stock.  The expected life warrants are based on the expiration date of the related warrants.  The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future.

As of December 31, 2011, The Company re-measured the derivative liabilities and determined the fair value to be $1,585,932.  For the year ended December 31, 2011, the Company recorded an income on the change in the fair value of derivatives of $2,078,743.