Quarterly report pursuant to sections 13 or 15(d)

8. Derivative liability

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8. Derivative liability
6 Months Ended
Jun. 30, 2012
Derivative Liability  
NOte 8. Derivative liability

In June 2008, 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, 2009, 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 8,322,500 warrants, exercisable at $.25 per share, contain exercise prices that may fluctuate based on the occurrence of future offerings or events.  As a result, these 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 
   June 30, 2012   December 31,
2011
 
Risk-free interest rate   0.16%   0.12%
Expected volatility   117%   92%
Expected life (in years)   0.25 – 0.50    0.75 – 1.00 
Expected dividend yield   0%   0%
Fair Value:          
2009 Summer Warrants   367,896    332,998 
2009 Wellfleet Warrants       17,807 
2009 Fall Warrants   1,357,242    1,292,334 
Total Fair Value  $1,725,138   $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 June 30, 2012, the Company re-measured the derivative liabilities and determined the fair value to be $1,725,138. For the six months ended June 30, 2012, the Company recorded a loss on the change in fair value of derivatives of $167,575 and a gain on extinguishment of derivative liability of $85,576 due to exercise of warrants to shares of common stock.