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DERIVATIVE LIABILITY AND FAIR VALUE MEASUREMENTS
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9 Months Ended |
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Jun. 30, 2011
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| Notes to Financial Statements | |
| DERIVATIVE LIABILITY AND FAIR VALUE MEASUREMENTS |
NOTE 7 DERIVATIVE LIABILITY AND FAIR VALUE MEASUREMENTS
Effective July 31, 2009, the Company adopted ASC Topic No. 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entitys own stock. On January 15, 2010 the Company issued 5,583,336 warrants with an exercise price of $0.55 to warrant holders that had exercised warrants during the period at $0.18. On December 30, 2010 the Company issued 2,520,000 warrants with an exercise price of $0.55 that were attached to shares sold to a group of institutional and accredited investors for gross proceeds of $1,050,000.
The exercise price of both sets of these warrants are subject to reset provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than $0.18 and $0.25, respectively. If these provisions are triggered, the exercise price of all their warrants will be reduced. As a result, the warrants are not considered to be solely indexed to the Companys own stock and are not afforded equity treatment.
The fair value of the derivative liability was calculated using a Lattice Model that values the compound embedded derivatives based on future projections of the various potential outcomes. The assumptions that were analyzed and incorporated into the model included the conversion feature with the full ratchet and weighted average anti-dilution reset, expectations of future stock price performance and expectations of future issuances based on the Companys prior stock history, prior issuances of stock, and expected capital requirements. Probabilities were assigned to various scenarios in which the reset provisions would go into effect and weighted accordingly.
The total fair value of the warrants issued on January 15, 2010, amounting to $2,868,242 has been recognized as a derivative liability on the date of issuance with all future changes in the fair value of these warrants being recognized in earnings in the Companys statement of operations under the caption Other income (expense) Gain (loss) on warrant derivative liability until such time as the warrants are exercised or expire. Because these warrants were issued in conjunction with common stock that had been exchanged for warrants with an exercise price of $0.18, the fair value on the date of issuance includes the net cash proceeds from the sale of stock of $1,005,000 and the fair value of $0.18 warrants being forfeited valued on the date of exercise at $2,867,856.
The total fair value of the warrants issued on December 30, 2010, amounting to $528,847 has been recognized as a derivative liability on the date of issuance with all future changes in the fair value of these warrants being recognized in earnings in the Companys statement of operations under the caption Other income (expense) Gain (loss) on warrant derivative liability until such time as the warrants are exercised or expire. The total cash proceeds of $1,050,000 were first applied to the warrants with the remaining $521,153 allocated to the common shares and recorded in additional paid-in capital.
ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as another income or expense item. The Companys only two assets or liabilities measured at fair value on a recurring basis are its derivative liabilities associated with the above warrants. At June 30, 2011, the Company revalued the warrants and determined that, during the nine months ended June 30, 2011, the Companys derivative liability increased by $2,945,196 to $4,861,699. The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation.
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