Derivative Liabilities

6 Months Ended

Jun. 30, 2011

Derivative Liabilities

(8) Derivative Liabilities

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.  The conversion feature of the Company’s secured convertible related party notes payable (described in Note 7), and the related warrants, do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future. In accordance with the FASB authoritative guidance, the conversion feature of the Notes was separated from the host contract (i.e., the Notes) and recognized as a derivative instrument.  Both the conversion feature of the Notes and the related warrants have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations. 

The derivative liabilities were valued using the Binomial valuation technique with the following assumptions:

	June 30,			December 31,
	July 3, 1905			July 2, 1905
Conversion Feature:
Risk-free interest rate		0.19	%		0.21	%
Expected volatility		169.9	%		91.5	%
Expected life (in months)	10 to 11			4 to 5
Expected dividend yield		0	%		0	%
Warrants:
Risk-free interest rate	2.5 to 3.2		%	2.6 to 2.8		%
Expected volatility		169.9	%	91 to 92		%
Expected life (in years)	8 to 9.5			8.42 to 9.83
Expected dividend yield		0	%		0	%
Fair Value:
Conversion feature	$	3,796,267		$	2,017,663
Warrants		6,965,431			5,746,305
	$	10,761,698		$	7,763,968

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock. The expected life of the conversion feature of the notes was based on the term of the notes and the expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future.

As of June 30, 2011 and December 31, 2010, the fair value of the derivative liability was $10,761,698 and $7,763,968, respectively.  For the three and six months ended June 30, 2011, the Company recorded a change in fair value of the derivative liabilities of ($4,456,378) and ($2,997,730), respectively.