Annual report pursuant to Section 13 and 15(d)

8. Derivative Liability

8. Derivative Liability
12 Months Ended
Dec. 31, 2015
Derivative Liability [Abstract]  
Derivative Liability

Pursuant to current accounting pronouncements, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The FASB’s guidance requires the fair value of these liabilities be re-measured at the end of every reporting period. The Company characterized the fair value of these warrants as derivative liabilities upon issuance and re-measured every reporting period with the change in value reported in the accompanying statement of operations.


In 2009 and 2010, in connection with certain convertible note offerings, the Company granted warrants to purchase an aggregate of 8,522,500 shares of the Company’s common stock. The warrants are initially exercisable at $0.30 per share with exercise prices that may fluctuate based on the occurrence of future offerings or events. At December 31, 2012, a total of 4.4 million warrants remained outstanding with a fair value of $3,221,138.


In January 2013, the remaining 4.4 million warrants expired or were exercised at which time the warrants had a fair value of $3,441,752, which resulted in a loss of $220,614 due to the change in the fair value of the derivative liability. Furthermore, as a result of the exercise and expiration of these warrants, the Company recorded a gain of $3,441,752 due to the extinguishment of the corresponding derivative liability. There were no similar warrants issued or outstanding in 2015 and 2014.


The derivative liabilities were valued using a probability weighted average of Black-Scholes Option Pricing models as a valuation technique, which approximates the Monte Carlo and other binominal valuation techniques with the following assumptions:


    January 15
Risk-free interest rate     0.12%  
Expected volatility     92%  
Expected life (in years)     0.75 - 1.00  
Expected dividend yield     0%  
Fair Value:        
2009 Warrants     3,441,752  
Total Fair Value   $ 3,441,752  


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 stockholders in the past nor is it expected to pay any dividends in the foreseeable future.