Annual report pursuant to section 13 and 15(d)

NOTE 9 - DERIVATIVE LIABILITIES

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NOTE 9 - DERIVATIVE LIABILITIES
12 Months Ended
Dec. 31, 2011
Derivative Instruments and Hedging Activities Disclosure [Text Block]
NOTE 9 - DERIVATIVE LIABILITIES

Convertible Debentures

Conversion features associated with the extinguished Convertible Debentures represented an embedded derivative which the Company had accounted for as a free-standing financial instrument.  As of December 31, 2010 the embedded derivative amounted to $1,177,845. This amount was adjusted to $767,279 at April 12, 2011, the date of repayment of the YA Global Convertible Debentures. The $767,279 was recorded as a gain on the extinguishment of the derivative liability since the YA Global Convertible Debentures have been repaid. For the year ended December 31, 2011 the Company recorded a gain on valuation of derivative in the amounts of $410,566 as compared to a gain on valuation of derivative in the amount of $483,081 for the year ended December 31, 2010, respectively.

The estimated fair value of the financial instruments has been calculated based on a Black-Scholes pricing model using the following assumptions:

   
April 12, 2011
   
December 31, 2010
 
Fair market value of stock
 
$
0.00013
   
$
0.00013
 
Exercise price
 
$
0.0001
   
$
0.0001
 
Dividend yield
   
0.00
%
   
0.00
%
Risk free interest rate
   
0.24
%
   
0.29
%
Expected volatility
   
145.01
%
   
183.32
%
Expected life
 
0.71 Year
   
1 Year
 

Convertible Promissory Note

The conversion feature associated with the Meller Note represents an embedded derivative. At January 28, 2011 the Company recorded the conversion option as a liability, recorded a debt discount of $51,000, and charged Other Expense - Loss on Valuation of Derivative for $53,821, resulting primarily from calculation of the conversion price, and a derivative liability of $104,821. For the year ended December 31, 2011, the Company recorded a Gain on Valuation of Derivative in the amount of $5,290 from the calculation of the derivative liability.

In May 2011 the conversion feature was modified, which resulted in the extinguishment of this derivative liability in the amount of $99,531 recorded through additional paid-in capital.

The estimated fair value of the embedded derivative had been calculated based on a Black-Scholes pricing model using the following assumptions:

   
May 17 , 2011
   
At Inception
 
Fair market value of stock
 
$
0.00013
   
$
0.00013
 
Exercise price
 
$
0.00005
   
$
0.00005
 
Dividend yield
   
0.00
%
   
0.00
%
Risk free interest rate
   
0.41
%
   
0.24
%
Expected volatility
   
169.92
%
   
182.35
%
Expected life
 
0.83 Year
   
1 Year