Derivative Liability

12 Months Ended

Dec. 31, 2011

Derivative liability [Abstract]

Derivative liability

9. Derivative liability

The Company has determined that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company's own stock and (b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. The Company applies a two-step model in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the scope exception.

The Company determined that certain warrants related to the Company's financings and the embedded conversion feature on the Series A-1 Preferred Stock required liability classification because of certain provisions that may have resulted in an adjustment to the number of shares upon settlement and an adjustment to their exercise or conversion. The fair value of the embedded conversion feature for the Series A-1 Preferred Stock at December 31, 2011 and December 31, 2010 was insignificant.

In August 2010 and December 2010, the Company issued 8,048 shares of Series B Preferred Stock and 2,211 shares of Series C Preferred Stock, respectively. At December 31, 2010, the Company determined that the embedded conversion feature on these shares required liability classification due to the impact the anti-dilution provisions could have had on the number of shares issuable upon conversion. The fair value of the embedded conversion feature on the Series B Preferred Stock at December 31, 2010, was approximately $136, and the fair value of the embedded conversion feature on the Series C Preferred Stock was approximately $179. On March 31, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock by amending the anti-dilution. As a result of these amendments, the Series B Preferred Stock and Series C Preferred Stock no longer required liability classification. On the date of these amendments, the Company revalued the conversion features on these shares, resulting in a loss of $47, and reclassified the derivative value to equity, resulting in a decrease in the derivative liability of $363.

In March 2011, the Company issued fee warrants to related parties to purchase 1,778 shares of common stock in connection with a private placement sale of 800 shares of Series C Preferred Stock and recorded a derivative liability of $4 as of March 30, 2011, and the fair market value of the derivative liability at December 31, 2011, was $4.

In August 2011, the Company issued 1,000 warrants as part of consulting agreements and recorded a derivative liability. The Company ascribed a value of $1 to the warrants using a modified Black Scholes pricing model with the following assumptions: risk free interest rate of 7%, expected life of three years, expected volatility of 190%, and a dividend yield of 0. The warrants have a three year life and expire on August 11, 2014. As of December 31, 2011, the fair value of the warrants was $1.

The fair value of the outstanding derivative liabilities at December 31, 2011, and December 31, 2010, was $281 and $499, respectively.

The Company uses a discounted Black-Scholes pricing model to calculate the fair value of its preferred share and warrant liabilities. Key assumptions used to apply these models are as follows:

	December 31, 2011	December 31, 2010
Expected term	0.05 to 2.90 years	0.5 to 4.00 years
Volatility	204.7% - 315.2%	141.5% - 184.1%
Risk-free interest rate	0.06% - 0.36%	0.29% - 1.02%
Dividend yield	0%	0%

Fair value measurements:

Assets and liabilities measured at fair value as of December 31, 2011, are as follows:

	Value at	Quoted prices in active markets	Significant other observable inputs	Significant unobservable inputs
	December 31, 2011	(Level 1)	(Level 2)	(Level 3)
Derivative liability	$ 281	$ -	$ -	$ 281

Changes in the fair value of the level 3 derivative liability for the year ended December 31, 2011, are as follows:

	Derivative Liability
Balance at January 1, 2010	$      499
Additional liabilities recorded related to warrants issued for services	32
Reclassification of conversion feature on the Series B and Series C Preferred Stock to equity	(363)
Loss on derivative liability	113
Balance at December 31, 2011	$      281