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v2.4.0.6
NOTE 7. DERIVATIVE LIABILITIES
9 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
NOTE 7. DERIVATIVE LIABILITIES

 

NOTE 7 - DERIVATIVE LIABILITIES

 

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 did not have fixed settlement provisions were deemed to be derivative instruments.  The Note and warrants issued related to the private placement described in Notes 4, 5 and 6 do not have fixed settlement provisions because their conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future.  The conversion feature and warrants have been characterized as derivative liabilities to 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 probability weighted average Black-Scholes-Merton valuation techniques with the following average assumptions:

 

    September 30, 2012     Upon Issuance     December 31, 2011  
                   
Warrants:                  
  Risk-free interest rate     0.41 %     0.87 %     0.46 %
  Expected volatility     169 %     129 %     86.20 %
  Expected life   3.22 years     5.0 years     4.45 years  
  Expected dividend yield     0.00 %     0.00 %     0.00 %
                         
Fair value of conversion feature   $ 2,210,816     $ -     $ 177,258  
Fair value of warrants   $ 5,449,113     $ 697,350     $ 7,760,535  
Total fair value   $ 7,659,929     $ 697,350     $ 7,937,793  

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank, the Company uses the historical volatility of its common stock in 2012. In the prior year, the Company used an average volatility rate of similar publicly traded companies as an input to its fair value calculations. During the current period, the Company determined that its stock price has matured and there is a consistent level of trading activity, as such, the Company used the volatility percentage of its common stock.

 

 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, 2012 and December 31, 2011, the aggregate derivative liability was $7,659,929 and $7,937,793, respectively.  For the three and nine months ended September 30, 2012, the Company recorded a gain from the decrease in fair value of the derivative liabilities of $1,595,933 and $975,698, respectively.  For the three and nine months ended September 30, 2011, the Company recorded a gain from the decrease in fair value of the derivative liabilities of $3,546,042 and $3,241,440, respectively.