Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

4. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

· Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

· Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

· Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The Company's liability for reclassified equity contracts were measured using significant unobservable (Level 3) inputs. There were no assets measured at fair value using unobservable inputs either as of or during the three months ended March 31, 2011 or as of or during the three months ended March 31, 2012.

As a result of the Company entering into convertible promissory notes and issuing warrants to purchase common stock, the Company's total potential outstanding common stock exceeded the Company’s authorized shares by approximately 109 million shares as of December 31, 2011, as also discussed in Note 7. As a result the Company was required to value a number of shares equal to the excess issuable on exercise of warrants and options and on conversion of convertible notes and recognize the value as a liability. The Company’s stockholders approved an increase in the number of authorized shares sufficient to cover the excess as of February 6, 2012. At that time, the liability was remeasured, with changes in value included in other income/(expense), and then reclassified to additional paid-in capital.

The following table represents the activity for the Company’s liability for reclassified equity contracts for the periods ended March 31, 2011 and 2012:

	2011		2012
Beginning balance	$	-	$	29,903,000
Liabilities reclassified		5,753,000		693,000
Change in value of reclassified liabilities		-		(491,000	)
Liabilities reclassified to equity		-		(30,105,000	)
Ending balance	$	5,753,000	$	-

The Company concluded that certain conversion features and warrant agreements included down-round provisions and were not indexed to the Company’s stock (and are therefore recorded as derivative liabilities). The Company recognizes the derivative liabilities at their respective fair values using a binomial model adjusted for the probability of issuance using a Monte Carlo simulation. Changes in the fair value are recorded in “Derivative valuation gain (loss)” in the condensed consolidated statements of operations. Key assumptions for determining fair values during the period presented included expected terms ranging from between 6 and 18 months, volatility ranging from between 95% and 190% and risk-free interest rate of 0.18%.

The Company's embedded derivative liability was measured using significant unobservable (Level 3) inputs. The following table represents the Company’s embedded derivative liability activity for the three months ended March 31, 2011 and 2012:

	2011			2012
Beginning balance	$	839,000		$	601,000
Reclassification to stockholders' equity upon conversion and expiration of derivative		(168,000	)		-
Net change in fair value of embedded derivative liabilities		161,000			(348,000	)
Ending balance	$	832,000		$	253,000