Derivative Liability

9 Months Ended

Sep. 30, 2011

Derivative Liability

Note 9.              Derivative Liability

As discussed in Note 7, in March 2010, the Company issued a note with a variable conversion feature. This resulted in the Company recording a derivative liability in the amount of $55,000 for the variable conversion feature in accordance with ASC 480-10. During the six months ended June 30, 2011, the entire debt was converted and the $55,000 derivative liability was reclassified to additional paid-in-capital. In addition, this also resulted in the Company having to account for an aggregate number of shares of common stock issued as well as instruments convertible or exercisable into common shares that potentially may exceed the number of the Company’s total authorized common shares. Consequently, the Company was required to record a liability for the potential excess of shares over the authorized amount. The Company is required to revalue this liability no less than every quarter. The Company determined that the excess shares were related to warrants and preferred stock issued and outstanding as of June 21, 2011 and March 31, 2010. Based upon the FASB guidance, the Company determined the fair value of these excess shares using the Black-Scholes valuation model. In March 2010, the Company measured and recorded an inception liability, and has remeasured this liability quarterly. At December 31, 2010, this liability totaled $44,000. The remaining balance of the note was converted to common stock as of June 22, 2011. As of June 21, 2011, in accordance with the FASB guidance, the Company remeasured this liability. The Company recorded an unrealized benefit of $30,000 and reclassified $14,000 to additional paid-in-capital upon conversion of the entire debt. As a result, there was no derivative liability as of September 30, 2011.