v2.3.0.11
Derivative Liabilities
 6 Months Ended
Jun. 30, 2011
Derivative Liabilities  
Derivative Liabilities

NOTE 9 – DERIVATIVE LIABILITIES

Under ASC 815, share-linked contracts which contain full ratchet anti-dilution provisions are not considered indexed to a company's own stock for purposes of determining whether it meets the first part of the scope exception in ASC 815-10-15-74. The application of this standard required us to (1) evaluate our instrument's contingent exercise provisions and (2) evaluate the instrument's settlement provisions. Based upon applying this approach to instruments within the scope of the consensus, we determined that certain of our warrants which were classified in stockholders' equity on December 31, 2008, no longer met the definition of Indexed to a Company's Own Stock provided in the Consensus. Accordingly, effective on January 1, 2009, we were required to reclassify those Warrants, at their fair value to liabilities. ASC 815 "Derivatives and Hedging" requires that 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 following is a list of the common shares indexed to derivative financial instruments as of June 30, 2011 and December 31, 2010, and other salient terms:

 

     Exercise
Price		      Common shares
indexed		  

Class A Warrants (Class A-1 & Class A-2)

    $ 1.50         2,218,690   

Class B Warrants

    $ 2.25         1,112,487   

Class BD-2 Warrants

    $ 1.50         477,479   

Class BD-3 Warrants

    $ 2.25         238,740   

Class BD-4 Warrants

    $ 1.50         66,121   

Class BD-5 Warrants

    $ 3.00         66,121   
     

 

 

  

Total number of common shares indexed to derivative instruments

         4,179,638   
     

 

 

  

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Effective January 1, 2011, we changed our method for valuing our derivative warrants from a Black-Scholes Merton Model, adjusted to give effect to the anti-dilution features (the Noreen Wolfson Model) to Binomial Lattice. Binomial Lattice was considered by our management to be more appropriate because it both provides for early exercise scenarios and incorporates the down-round anti-dilution protection possibilities that could arise in early exercise scenarios.

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Lattice models) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.

The following tables summarize the components of derivative liabilities as of June 30, 2011, December 31, 2010 and activity in our derivative liability balances during the year:

 

     December 31,
2010		     Derivative
gains/
(losses)		      June 30,
2011		  

Class A Warrants (Class A-1 & Class A-2)

    $ 138,091      $ 138,027       $ 64   

Class B Warrants

      226,360        152,714         73,646   

Class BD-2 Warrants

      41,092        41,092         —     

Class BD-3 Warrants

      9,396        9,396         —     

Class BD-4 Warrants

      3,022        3,022         —     

Class BD-5 Warrants

      721        721         —     
  

 

 

    

 

 

     

 

 

  

Fair values

    $ 418,682      $ 344,972       $ 73,710   
  

 

 

    

 

 

     

 

 

  

Significant assumptions (or ranges):

        

Trading market values (1)

    $ 0.72         $ 0.68   

Term (years)

      0.6-2.61           0.12-2.25   

Volatility (1)

      89.38% - 111.12 %         45.22% - 95.88 % 

Risk-free rate (2)

      0.19% - 1.05 %         0.03% - 0.45 % 

Fair value hierarchy:

 

  (1) Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. Our trading market values and the volatilities that are calculated thereupon are level 1 inputs.

 

  (2) Level 2 inputs are inputs other than quoted prices that are observable. We use the current published yields for zero-coupon US Treasury Securities, with terms nearest the remaining term of the warrants for our risk free rate.

 

  (3) Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are classified as level 3 in their entirety. The remaining term used equals the remaining contractual term as our best estimate of the expected term.

 

ASC 820-10-55-62 Fair Value Measurements and Disclosures provides that for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, a reconciliation is required of the beginning and ending balances. The reconciliation of our derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2011 is as follows:

 

     Warrant
Derivative		  

Beginning balance, January 1, 2011

    $ 418,682   

Total (gains) or losses included in earnings

      (291,578 ) 

Issuances

      —     
  

 

 

  

Ending balance March 31, 2011

      127,104   

Total (gains) or losses included in earnings

      (53,394 ) 

Issuances

      —     
  

 

 

  

Ending balance, June 30, 2011

    $ 73,710   
  

 

 

  

The following tables summarize the effects on our income (loss) associated with changes in the fair values of our derivative financial instruments:

 

     Three months
Ended
June 30,
2011		      Three months
ended
June  30,
2010		  

Class A Warrants (Class A-1 & Class A-2)

    $ 8,960       $ 71,661   

Class B Warrants

      42,942         2,983   

Class C Warrants

      —           29,200   

Class D Warrants

      —           5,600   

Class F Warrants (Class F-1 & Class F-2)

      —           1,850   

Class BD-2 Warrants

      1,241         6,384   

Class BD-3 Warrants

      72         1,709   

Class BD-4 Warrants

      172         469   

Class BD-5 Warrants

      7         152   

Final adjustment Put liability

      —           32,000   
  

 

 

     

 

 

  
   $ 53,394       $ 152,008