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8. Derivative liability
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Sep. 30, 2011
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| 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
$0.25, as restated, 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:
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 September 30, 2011, the Company re-measured the derivative
liabilities and determined the fair value to be $942,591. For
the nine months ended September 30, 2011, the Company
recorded a gain on the change in fair value of derivatives of
$2,722,084.
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