Derivative liability

9 Months Ended

Sep. 30, 2012

Derivative Liability, Fair Value, Net [Abstract]

Derivative liability

9. Derivative liability

In November 2011, the Company issued a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of August 9, 2012. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately$42,000 and $49,000, respectively. The debt discount was amortized over the life of the note, and the Company recognized approximately $34,000 of interest expense related to amortization during 2012. As of September 30, 2012 the discount related to the note was fully amortized. In June 2012, the convertible note converted into approximately 1,326,000 shares of common stock. At the conversion date, the amortized discount was fully recognized as interest expense. The derivative liability has been adjusted to fair value each reporting period, including the conversion date, with unrealized gain (loss) reflected in other income and expense.

In April 2012, the Company issued a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of January 18, 2013. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately$42,000 and $62,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $25,600 of interest expense related to amortization during 2012. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.

In July 2012, the Company issued a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of January 18, 2013. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately$42,500 and $48,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $12,700 of interest expense related to amortization during 2012. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.

On April 24 2012 (the “Closing date”), the Company issued a convertible promissory note for $278,000. The lender funded $75,000 to the Company, and the lender at their discretion may fund additional amounts to the Company. The note matures one year from the closing date. If the Company pays the note within 90 days of the closing date, the interest rate is 0%. If the note is not paid within 90 days of the closing date, a one-time interest charge of 5% will be applied to the unpaid principal amount. The conversion option price associated with the note is the lesser of $0.10 or 70% of the lowest trade price in the 25 trading days previous to any conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately$75,000 and $100,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $27,800 of interest expense related to amortization during 2012. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.

As of September 30, 2012, the unrealized gain on the above derivatives was approximately $35,000.

Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2012 and 2011 related to the above derivative liability are as follows:

	Fair Value Measurements at September 30, 2012 (1)						Fair Value Measurements at December 31, 2011(1)
	Using Level 2			Total			Using Level 2			Total
Liabilities:
Derivative liabilities	$	(157,777	)	$	(157,777	)	$	(40,756	)	$	(40,756	)
Total liabilities	$	(157,777	)	$	(157,777	)	$	(40,756	)	$	(40,756	)

(1) The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of September 30, 2012 or 2011.

The Company’s derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Company’s common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in determining fair value.