• Filing Date: 2013-04-12
  • Form Type: 10-K
  • Description: Annual report
v2.4.0.6
DERIVATIVE LIABILITIES
12 Months Ended
Dec. 31, 2012
DERIVATIVE LIABILITIES  
DERIVATIVE LIABILITIES

NOTE 13 – DERIVATIVE LIABILITIES

 

Beginning in 2008, the Company issued stock purchase warrants to various lenders and investors as part of note payable agreements and stock subscription agreements.  These warrants were immediately exercisable and some contained provisions for cashless exercise under certain circumstances. The warrants ranged in term from three to five years and had expiration dates ranging from December 31, 2012 to December 31, 2017. The warrants also contained anti-dilution provisions including provisions for the adjustment of the exercise price if the Company issues common stock or common stock equivalents at a price less than the exercise price.  As of December 31, 2012, the Company had outstanding warrants entitling the holders to purchase 17,143,468 shares of the Company’s common stock up on exercise.

 

In addition, beginning in 2010, the Company issued convertible debentures and notes payable to various lenders.  These debentures and notes were convertible at discounts ranging from 30% to 50% of the fair market value of the Company’s common stock.  In accordance with ASC Topic No. 470-20-25-4, the Company recorded the intrinsic value of the embedded beneficial conversion feature present in the convertible instruments by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital.  As of December 31, 2012, the Company had outstanding convertible debt in the principal amount of $473,645 and outstanding convertible debentures in the principal amount of $350,000.

 

As of December 31, 2012, the Company did not have a sufficient number of common shares authorized to fulfill the possible exercise of all outstanding warrants and the conversion of all outstanding debentures and convertible notes payable. As a result, the Company determined that the warrants and the embedded beneficial conversion features of the debt instruments do not qualify for equity classification.  Accordingly, the warrants and beneficial conversion features are treated as derivative liabilities and are carried at fair value.

 

 

 The Company estimates the fair value of the derivative warrant liabilities by using the American Option Binomial Model, a Level 3 input, with the following assumptions used:

 

Dividend yield:

1%

Expected volatility

283.86% to 549.88%

Risk free interest rate

.36% to .83%

Expected life (years)

1.00 to 5.00

 

 

The following table sets forth the changes in the fair value of derivative liabilities for the years ended December 31, 2012 and 2011:

 

Balance, December 31, 2010

 

$

(2,310,983

)

Change in Fair Value of Warrant Derivative Liability

 

 

1,237,803

 

Change in Fair Value of Beneficial Conversion Derivative Liability

 

 

(763,098

)

Adjustments to Warrant Derivative Liability

 

 

(2,749,453

)

Adjustment to Beneficial Conversion Derivative Liability

 

 

(260,599

)

Adjustment to Debenture Derivative Liability

 

 

(571,195

)

Balance, December 31, 2011

 

$

(5,417,525

)

Change in Fair Value of Warrant Derivative Liability

 

 

3,461,614

 

Change in Fair Value of Beneficial Conversion Derivative Liability

 

 

879,514

 

Change in Fair Value of Debenture Derivative Liability

 

 

309,933

 

Adjustments to Warrant Derivative Liability

 

 

(1,245,647

)

Adjustment to Beneficial Conversion Derivative Liability

 

 

164,657

 

Adjustment to Debenture Derivative Liability

 

 

510,880

 

Balance, December 31, 2012

 

 

(1,336,576

)