815-40 Put Warrant Liabilities
ASC 815-40 Put Warrants, warrants for put shares should be
classified as liabilities and measured at fair value at the
end of each reporting period with the change in fair value
recorded to earnings. As a result, the fair value of the
warrants granted to Inovas debt holders in prior years were recorded
as derivative liabilities at inception. These liabilities are subsequently
measured at fair value at the end of each reporting period with the changes recorded to earnings. As of July
31, 2012, Inova had $201,250 of derivative liabilities as a result of these provisions.
815-15 Conversion Option and Warrant Liabilities
fiscal 2010, Inova determined that the instruments embedded in a convertible put note exercised by one of Inovas lenders
should be classified as liabilities and recorded at fair value
due to their being no explicit limit to the number of
shares to be delivered upon settlement of the above conversion options.
the number of shares to be issued upon settlement cannot be determined under these instruments, Inova cannot determine whether
it will have sufficient authorized shares at a given date to
settle any other of its share-settleable instruments. As a result
of this, under ASC 815-15 Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in, a Company's Own Stock
(formerly EITF 00-19), the conversion options noted above and all
other share-settleable instruments are classified as liabilities. Inova has
three conversion options embedded in notes payable agreements and
8,839,513 warrants to purchase Inova common stock that are classified
as liabilities as a result of the provisions of the convertible put notes. As of July 31, 2012, Inova had $1,037,073 of derivative
liabilities as a result of these provisions.
table summarizes the derivative liabilities included in the consolidated balance sheet:
|| || || |
|Balance at April 30, 2012||
|Extinguishment of derivative liabilities
(see Note 8)||
|| || || |
|Addition of derivative liabilities (see
|| || || |
|Change in fair value||
|Balance at July 31, 2011||
|| || || |
values its warrant derivatives and simple conversion option derivatives using the Black-Scholes option-pricing model. Assumptions
used include (1) 4% risk-free interest rate, (2) warrant life
is the remaining contractual life of the warrants, (3) expected
volatility 261% to 390%, (4) zero expected dividends (5) exercise
prices as set forth in the agreements, (6) common stock price
of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.
Inova valued the conversion options and reset provisions
under its convertible put exercise note with Boone using a Monte Carlo simulation model utilizing present value and various probabilities
of events. Assumptions used include (1) 0.34% risk free rate, (2) conversion prices as set forth in the agreement, (3) expected
Inova stock price volatility of 261%, (4) expected Desert stock price volatility of 25%, and (6)
common stock price of the underlying share on the valuation date.
Inova valued the note as a combination of the underlying debt
payment and series of two options. Since the options are mutually
exclusive, the Monte Carlo simulation was used to estimate when either of the options is exercisable.
When both are exercisable Inova assumed that the more valuable of the two would be exercised.