ASC
815-40 Put Warrant Liabilities
Under
ASC** **815-40 “Put** **Warrants”,** **warrants** **for** **put** **shares** **should** **be
classified** **as** **liabilities** **and** **measured** **at** **fair** **value** **at** **the**
**end** **of each** **reporting** **period** **with** **the** **change** **in** **fair** **value
recorded** **to** **earnings.** **As** **a** **result,** **the** **fair** **value** **of** **the
warrants** **granted** **to** **Inova’s debt** **holders** **in** **prior** **years** **were** **recorded
as** **derivative** **liabilities** **at** **inception.** **These** **liabilities** **are** **subsequently
measured** **at** **fair** **value at the end of each reporting period with the changes recorded to earnings. As of July
31, 2012, Inova had $201,250 of derivative liabilities as a result of these provisions.
ASC
815-15 Conversion Option and Warrant Liabilities
During
fiscal 2010, Inova determined that the instruments embedded in a convertible put note exercised by one of Inova’s lenders
should** **be** **classified** **as** **liabilities** **and** **recorded** **at** **fair** **value
due** **to** **their** **being** **no** **explicit** **limit** **to** **the** **number** **of**
**shares** **to** **be** **delivered upon settlement of the above conversion options.
Because
the number of shares to be issued upon settlement cannot be determined under these instruments, Inova cannot determine whether
it** **will** **have** **sufficient** **authorized** **shares** **at** **a** **given** **date** **to
settle** **any** **other** **of** **its** **share-settleable** **instruments.** **As** **a** **result
of** **this, under** **ASC** **815-15 “Accounting** **for** **Derivative** **Financial** **Instruments
Indexed** **to** **and** **Potentially** **Settled** **in,** **a** **Company's** **Own** **Stock”
(formerly** **EITF** **00-19),** **the** **conversion** **options** **noted** **above** **and** **all
other** **share-settleable** **instruments** **are** **classified** **as** **liabilities.** **Inova has**
**three** **conversion** **options** **embedded** **in** **notes** **payable** **agreements** **and
8,839,513** **warrants** **to** **purchase** **Inova** **common** **stock** **that** **are classified
as liabilities as a result of the provisions of the convertible put notes. As of July 31, 2012, Inova had $1,037,073 of derivative
liabilities as a result of these provisions.
The following
table summarizes the derivative liabilities included in the consolidated balance sheet:
Derivative Liabilities | |
| | |
Balance at April 30, 2012 | |
$ | 1,461,265 | |
Extinguishment of derivative liabilities
(see Note 8) | |
| | |
Addition of derivative liabilities (see
Note 8) | |
| | |
Change in fair value | |
| (222,942 | ) |
Balance at July 31, 2011 | |
$ | 1,238,323 | |
__Valuation Models__ | |
| | |
Inova
values its warrant derivatives and simple conversion option derivatives using the Black-Scholes option-pricing model. Assumptions
used** **include** **(1)** **4%** **risk-free** **interest** **rate,** **(2)** **warrant** **life**
**is** **the** **remaining** **contractual** **life** **of** **the** **warrants,** **(3)** **expected
volatility** **261%** **to** **390%,** **(4)** **zero** **expected** **dividends** **(5)** **exercise
prices** **as** **set** **forth** **in** **the** **agreements,** **(6)** **common** **stock** **price
of** **the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.
Inova valued the conversion options and reset provisions
under its convertible put exercise note with Boone using a Monte Carlo simulation model utilizing present value and various probabilities
of events. Assumptions used include (1) 0.34% risk free rate, (2) conversion prices as set forth in the agreement, (3) expected
Inova stock price volatility of 261%, (4) expected Desert stock price volatility** **of** **25%,** **and** **(6)**
**common** **stock** **price of** **the** **underlying** **share** **on** **the** **valuation** **date.
Inova** **valued** **the** **note** **as** **a** **combination** **of the** **underlying** **debt**
**payment** **and series** **of** **two** **options.** **Since** **the** **options** **are** **mutually
exclusive, the** **Monte** **Carlo** **simulation** **was** **used to estimate when either of the options is exercisable.
When both are exercisable Inova assumed that the more valuable of the two would be exercised. |