|3 Months Ended|
Jan. 31, 2011
|Notes to Financial Statements|
NOTE 10 DERIVATIVE LIABILITY
In June 2008, the FASB issued new accounting guidance which requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instruments contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 and should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings. The Company has assessed its outstanding equity-linked financial instruments and has concluded that, effective November 1, 2009, the value our warrants will need to be recorded as a derivative liability due to the fact that the conversion price is subject to adjustment based on subsequent sales of securities. The cumulative effect of the change in accounting principle on November 1, 2009 includes an increase in our derivative liability related to the fair value of the conversion feature of $3,306,807. Fair value at November 1, 2009 was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.36-1.44%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 302.22%; (4) an expected life of the warrants of 1.41-3.32 years and (5) estimated fair value of common stock of $0.08 per share.
At January 31, 2011 we recalculated the fair value of the conversion feature subject to derivative accounting and have determined that the fair value at January 31, 2011 is $199,480. The fair value of the conversion features was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.15-0.58%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 314%; (4) an expected life of the conversion feature of 0.16-2.07 years and (5) estimated fair value of common stock of $0.02 per share.
We have recorded a gain of $273,904 during the three months ended January 31, 2011 related to the change in fair value during the quarter.
See Note 15 of the Unaudited Condensed Consolidated Financial Statement on current status of Warrants and Derivative Liability.