Quarterly report pursuant to sections 13 or 15(d)

8. Derivative liability

v2.3.0.11
8. Derivative liability
 6 Months Ended
Jun. 30, 2011
Derivative Instruments and Hedging Activities Disclosure [Text Block]
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 8,522,500 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
 
   
June 30,
2011
   
December 31,
2010
 
Risk-free interest rate
   
0.45%
     
0.61%
 
Expected volatility
   
115%-120%
     
120%
 
Expected life (in years)
   
1.25 – 1.50
     
1.75 – 2.00
 
Expected dividend yield
   
0%
     
0%
 
Fair Value:
               
2009 Summer Warrants
 
$
462,537
   
$
804,100
 
2009 Wellfleet Warrants
   
24,735
     
129,000
 
2009 Fall Warrants
   
1,613,819
     
2,731,575
 
Total Fair Value
 
$
2,101,091
   
$
3,664,675
 

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, 2011, the Company re-measured the derivative liabilities and determined the fair value to be $2,101,091. For the six months ended June 30, 2011, the Company recorded a gain on the change in fair value of derivatives of $1,563,584.