LIABILITY FOR EQUITY-LINKED FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 9 – LIABILITY FOR EQUITY-LINKED FINANCIAL INSTRUMENTS

The Company adopted ASC 815- Derivatives and Hedging (“ASC 815”) on January 1, 2009. ASC 815 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity's own stock. It is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which was the Company's first quarter of 2009. Many of the warrants issued by the Company contain a strike price adjustment feature, which upon adoption of ASC 815, changed the classification (from equity to liability) and the related accounting for warrants with a $479,910 estimated fair value of as of January 1, 2009. An adjustment was made to remove $486,564 from paid-in capital (the cumulative values of the warrants on their grant dates), a positive adjustment of $6,654 was made to accumulated deficit, representing the gain on valuation from the grant date to January 1, 2009, and booked $479,910 as a liability. The warrants issued in 2011 do not contain a strike price adjustment feature and, therefore, are not treated as a liability.

The January 1, 2009 valuation was computed using the Black-Scholes valuation model based upon a 2.5-year expected term, an expected volatility of 63%, an exercise price of $.46 per share, a stock price of $.35, a zero dividend rate and a 1.37% risk free interest rate. Subsequent to January 1, 2009 these warrants were revalued at the end of each quarter and a gain or loss was recorded based upon their increase or decrease in value during the quarter. Likewise, new warrants that were issued during 2009 and 2010 were valued, using the Black-Scholes valuation model on their date of grant and an entry was made to reduce paid-in capital and increase the liability for equity-linked financial instruments. These warrants were also re-valued at the end of each quarter based upon their expected life, the stock price, the exercise price, assumed dividend rate, expected volatility and risk free interest rate. A significant reduction in the liability was realized in 2010 primarily due to a reduction from $.50 to $.22 per share in the underlying share price. The Company realized a slight increase in the liability for existing warrants during the first quarter of 2011 primarily due to a reduction in the spread between the exercise price and the market price of the underlying shares, but this was more than offset by a decrease in the liability for new warrants that were issued during the quarter as a result of a reduction in the underlying market price of the stock.

The inputs to the Black-Scholes model during 2011 and 2010 were as follows:

Stock price	$	.08 to $.50
Exercise price	$	.01 to $.65
Expected life	2.00 to 6.5		years
Expected volatility	54% to 68		%
Assumed dividend rate		-	%
Risk free interest rate	.13% to 2.97		%

The original valuations, annual gain/(loss) and end of year valuations are shown below:

	Initial Value		2009 Gain (Loss)			2010 Gain(Loss)		YTD 2011 Gain(Loss)		Value at 9/30/2011
January 1, 2009 Adoption	$	479,910	$	(390,368	)	$	868,772		1,506	$	0
Warrants issued in quarter ended 6/30/2009		169,854		20,847			149,007		(10,498)		12,101
Warrants issued in quarter ended 9/30/2009		39,743		(738	)		40,419		(2,902)		2,964
Warrants issued in quarter ended 12/31/2009		12,698		617			12.053		(1,068)		1,095
Subtotal	$	702,205
Warrants issued in quarter ended 3/31/2010		25,553					25,014		(7,115)		7,654
Warrants issued in quarter ended 6/30/2010		31,332					30,740		(7,677)		8,269
Warrants issued in quarter ended 9/30/2010		31,506					20,811		(44,834)		55,449
Warrants issued in quarter ended 3/31/2011		265,815							265,815		0
Warrants issued in quarter ended 6/30/2011		20,692							20,692		0
Total	$	1,077,104		(369,642	)	$	1,145,292	$	213,919	$	87,533