Derivative Liability

12 Months Ended

Dec. 31, 2012

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 Cumulative Convertible Preferred Stock (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, 2012 and December 31, 2011 was insignificant.

In 2010, the Company issued 8,048 shares of Series B Preferred Stock and 2,211 shares of Series C Preferred Stock. 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 aggregate fair value of the embedded conversion feature on the Series B Preferred Stock and the Series C Preferred Stock was approximately $309 at December 31, 2010. In March, 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 provisions. 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 at March 30, 2011.The fair market value of the derivative liability at December 31, 2012, was $3.

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, 2012, the fair value of the warrants was $2.

The Company issued an aggregate of 8,643 warrants related to the bridge financings in April and November 2012. Included in the April 2012 warrants were 349 warrants issued as finder's fees. The November warrants issued included 3,000 warrants issued to related parties as administrative fees and 294 warrants issued as finder's fees. The warrants were valued using a modified Black Scholes pricing model. Additional information with respect to these warrants is presented in the table below.

Issue Date	Number of warrants issued	Exercise price	Risk free interest rate	Expected life	Expected volatility	Dividend yield	Derivative liability value on date of issue
4/23/2012	5,349	$ 0.05	1.78%	3 years	205.3%	$ -	$ 50
11/15/2012	3,294	$ 0.05	1.58%	3 years	202.2%	$ -	$ 8

The fair value of the outstanding derivative liabilities at December 31, 2012, and December 31, 2011, was $128 and $281, 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, 2012	December 31, 2011
Expected term	0.3 to 2.80 years	0.5 to 2.90 years
Volatility	205.3%	204.7% - 315.2%
Risk-free interest rate	1.78	0.06 - 0.36%
Dividend yield	0%	0%

Fair value measurements:

Changes in the fair value of the level 3 derivative liability for the year ended December 31, 2012, are as follows:

	Derivative Liability
Balance at January 1, 2011	$ 281
Additional liabilities recorded related to warrants issued for services	55
Additional liabilities recorded related to warrants issued for services	3
Gain on derivative liability	(211)
Balance at December 31, 2012	$ 128

Assets and liabilities measured at fair value as of December 31, 2012, are as follows:

	Value at December 31, 2012	Quoted prices in active markets	Significant other observable inputs	Significant unobservable inputs
		(Level 1)	(Level 2)	(Level 3)
Derivative liability	$ 128	$ -	$ -	$ 128