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7. Derivative liability | 12 Months Ended
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Dec. 31, 2012
Derivative Liability |
Note 7. Derivative liability | In June 2010, 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, 2010, 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 $0.30 per share, contains 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. During 2012, 220,000 of these warrants expired and 3,690,000 were exercised. 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 accompanying 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 |
|  | No. of Warrants |  |  | December 31, 2011 |  |  | 2012 Issuance |  | December 31, 2012 |
Risk-free interest rate |  |  |  |  | 0.12% |  |  | – |  | 0.02% |
Expected volatility |  |  |  |  | 92% |  |  | – |  | 165% |
Expected life (in years) |  |  |  |  | 0.75 – 1.00 |  |  | – |  | 0.04 |
Expected dividend yield |  |  |  |  | 0% |  |  | – |  | 0% |
Fair Value: |  |  |  |  |  |  |  |  |  |  |  |  |  |
2009 Summer Warrants |  |  | – |  |  | $ | 332,998 |  |  |  | – |  | $ | – |
2009 Wellfleet Warrants |  |  | – |  |  |  | 17,807 |  |  |  | – |  |  | – |
2009 Fall Warrants |  |  | 4,412,500 |  |  |  | 1,292,334 |  |  | $ | – |  |  | 3,221,138 |
Total Fair Value |  |  | 4,412,500 |  |  | $ | 1,643,139 |  |  | $ | – |  | $ | 3,221,138 |
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. During the years ended December 31, 2012 and 2011, the Company recorded a loss of $4,023,094 and a gain of $2,021,536 respectively due to the change in the fair value of the derivatives. Furthermore, during the years ended December 31, 2012, the Company recognized a gain of $2,445,095 due to the extinguishment of the derivative liabilities resulting from the expiration of 220,000 warrants and exercise of 3,690,000 warrants to shares of common stock. At December 31, 2012, the Company determined the fair value of these derivative liabilities to be $3,221,138.

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- Definition Tabular disclosure of derivative liabilities at fair value. + References No definition available. + Details
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