|9 Months Ended|
Sep. 30, 2012
|Notes to Financial Statements|
|NOTE 5 - Derivative Liabilities||
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 Companys common stock. As of September 30, 2012, 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.
In March 2011, the Company commenced a private placement. The private placement structure consists of a series of identical subscription agreements for the sale of units comprised of shares of the Companys 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 common shares down round price protection expired on August 15, 2012; resulting in a gain of $512,345, during 2012, due their removal from the derivative liability. 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 Entitys Own Equity, the Company recorded a derivative liability for the warrants issued in the transactions.
The fair values of the Companys derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, using a Monte Carlo simulation. At September 30, 2012, the Company recorded current derivative liabilities of $2,810,001. The change in fair value of the derivative liabilities for the three months ended September 30, 2012 and 2011 was a gain of $213,089, and a loss of ($401,710), respectively, which were reported as other income/(expense) in the consolidated statements of operations. The change in fair value of the derivative liabilities for the nine months ended September 30, 2012 and 2011 was a gain of $407,079, and a loss of ($986,216), respectively, which were also reported as other income/(expense) in the consolidated statements of operations.
Key inputs and assumptions:
For issuances of notes, common stock and warrants:
s Stock prices on all measurement dates were based on the fair market value
s 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
s The probability of future financing was estimated at 100%
s Computed volatility of 65%
s Risk free rates ranging from 0.03% to 0.78%
For issuances of non-employee warrants:
s Computed volatility of 61% to 73%
s Risk free rates ranging from 0.28% to 1.04%
s Expected life (years) from 3.00 to 6.00
See Note 9, discussing fair value measurements.