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Derivative Liabilities
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Dec. 31, 2011
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| Derivative Liabilities [Text Block] |
As discussed in Note 6 under Bridge Financing, the Company issued convertible notes payable that provide for the issuance of warrants to purchase its common stock at a future date. The conversion term for the convertible notes is variable based on certain factors. The number of warrants to be issued is based on the future price of the Company’s common stock. As of December 31, 2011, the number of warrants to be issued remains indeterminate.
Due to the fact that the number of warrants issuable is indeterminate, the equity environment is tainted and all additional warrants and convertible debt are included in the value of the derivative.
Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants / shares to be issued were recorded as derivative liabilities on the issuance date.
As discussed in Note 8 the Company commenced a private placement in late March 2011. The private placement structure consists of a series of identical subscription agreements for the sale of units comprised of shares of the Company’s common stock at a price of $1.50 per share and an equivalent number of warrants at an exercise price of $2.00. Both the common shares and the warrants contain anti-dilutive, or down round, price protection. The down round protection for the common shares terminates on the earlier of the date on which an effective registration statement is filed with the SEC covering the shares, or the shares become freely tradable pursuant to Rule 144 promulgated under the Securities Act of 1933. The down round protection for the warrant terminates when the warrant expires or is exercised. Pursuant to ASC 815-15 Embedded Derivatives and ASC 815-40 Contracts in Entity’s Own Equity, the Company determined that the down round price protection on the common stock represents a derivative liability. Additionally, the Company recorded a derivative liability for the warrants issued in the transactions.
The fair values of the Company’s derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, using a Monte Carlo simulation. At December 31, 2011, the Company recorded current derivative liabilities of $1,573,859. The change in fair value of the derivative liabilities for the year ended December 31, 2011 was a loss of $1,234,145, and for the year ended December 31, 2010 was a loss of $14,861, which were reported as other income/(expense) in the consolidated statements of operations.
See note 9, discussing fair value measurements.
Key inputs and assumptions:
- Stock prices on all measurement dates were based on the fair market value
- Down round protection is based on the subsequent issuance of common stock at prices less than $1.50 per share and warrants less than $2.00 per share
- The probability of future financing ranges from 80% to 100%, increasing with the term of the instrument valued
- Computed volatility of 65%
- Risk free rates ranging from 0.03% to 1.84%
See note 9, discussing fair value measurements.
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