Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements

Note 3 - Fair Value Measurements

We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.  We report assets and liabilities that are measured at fair value using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.  This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs.  The three levels of inputs used to measure fair value are as follows:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

• Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value.  All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

We have segregated our financial assets and liabilities that are measured at fair value into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.  We have no non-financial assets and liabilities that are measured at fair value.  

The following table sets forth a summary of changes in the fair value of our Level 3 liabilities for the six months ended June 30, 2012: 

Description	Balance as of December 31, 2011		Unrealized Losses		Balance as of June 30,  2012
Derivative liabilities related to warrants	$	1,886,652	$	167,853	$	2,054,505

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the six months ended June 30, 2011: 

Description	Balance as of December 31, 2010		New Liabilities in 2011		Unrealized (Gains)			Balance as of June 30,  2011
Derivative liabilities related to warrants	$	8,362,995	$	668,640	$	(3,176,686	)	$	5,854,949

At June 30, 2012 and 2011, derivative liabilities are comprised of 2,899,991 warrants to purchase common stock accounted for as a derivative. The warrants are considered to be derivative liabilities due to the presence of net settlement features, including cash settlement in certain circumstances, and are recorded at fair value at each balance sheet date.  The fair value of our warrants is determined based on the Black-Scholes option pricing model.  Use of the Black-Scholes option-pricing model requires the use of unobservable inputs such as the expected term, anticipated volatility and expected dividends.  Changes in any of the assumptions related to the unobservable inputs identified above may change the stock purchase warrants’ fair value; increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value. Gains and losses on the fair value adjustments for these derivative instruments are classified in other expenses as the change in fair value of derivative instruments in our condensed consolidated statements of operations.  The $0.2 million change in the market value of derivative instruments during the six-month period ended June 30, 2012 is due primarily to the change in the closing price of our stock, which was $1.27 per share as of December 30, 2011 and $1.39 per share as of June 30, 2012. The $3.2 million change in the market value of derivative instruments during the six-month period ended June 30, 2011 is due primarily to the change in the closing price of our stock, which was $4.23 per share as of December 31, 2010 and $2.94 per share as of June 30, 2011.