Derivative Instruments

6 Months Ended

Jun. 30, 2011

Derivative Instruments [Abstract]

DERIVATIVE INSTRUMENTS

NOTE 9 — DERIVATIVE INSTRUMENTS

     On December 17, 2010, pursuant to the terms of the Purchase Agreement, the Company issued to the Buyers warrants to acquire shares of common stock, in the form of three warrants: (i) “Series A Warrants”, (ii) “Series B Warrants”, and (iii) “Series C Warrants” (collectively, the “December Warrants”). The Warrants were issued in two tranches on the dates the Initial Notes and Additional Notes were issued, on a pro rata basis based on the principal amount being issued in the applicable closing based on the aggregate principal amount that could be issued at both closings.

     The Series B Warrants became exercisable on February 28, 2011, the date upon which shareholder approval was obtained in connection with the financing, and expire on November 28, 2011. The Series B Warrants provide that the holders are initially entitled to purchase an aggregate of 4,990,000 shares (warrants to purchase 3,939,473 shares of Common Stock were issued at the Initial Closing and a warrant to purchase 1,050,527 shares of Common Stock were issued at the Additional Closing which occurred on March 7, 2011) at an initial exercise price of $1.00 per share. If the Company makes certain dilutive issuances (with limited exceptions), the exercise price of the Series B Warrants will be lowered to the per share price for the dilutive issuances. In addition, the exercise price of the Series B Warrants will adjust to the average of the Installment Conversion Prices used to repay the Initial Notes. The floor price for the exercise price of the Series B Warrants is $0.345. The number of shares underlying the Series B Warrants will adjust whenever the exercise price adjusts, such that at all times the aggregate exercise price of the Series B Warrants will be $4,990,000 ($3,939,473 for the Series B Warrants issued in the Initial Closing and $1,050,527 for the Series B Warrants issued at the Additional Closing). As of June 30, 2011, the exercise price of the Series B Warrants is $0.345 per share and there are 14,463,768 shares underlying the Series B Warrants.

     The Series A and Series C Warrants became exercisable on February 28, 2011, the date upon which shareholder approval was obtained in connection with the financing, and have a five year term. The Series A Warrants provide that the holders are initially entitled to purchase an aggregate of 2,495,000 shares (warrants to purchase 1,969,737 shares of common stock were issued at the Initial Closing and warrants to purchase 525,263 shares of common stock were issued at the Additional Closing which occurred on March 7, 2011) at an initial exercise price of $1.00 per share. The Series C Warrants provide that the holders are initially entitled to purchase an aggregate of 2,495,000 shares (warrants to purchase 1,969,737 shares of common stock were issued at the Initial Closing and warrants to purchase 525,263 shares of common stock were issued at the Additional Closing) at an exercise price of $1.00 per share; provided that the Series C Warrants may only be exercised by each holder in the same proportion as such holder has already exercised its Series B Warrants.

     If the Company makes certain dilutive issuances (with limited exceptions), the exercise price of the Series A and Series C Warrants will be lowered to the per share price for the dilutive issuances. In addition, the exercise price of the Series A and Series C Warrants will adjust to the average of the Installment Conversion Prices used to repay the Initial Notes. As of June 30, 2011, the exercise price of the Series A Warrants and Series C Warrants is $0.122 per share.

On April 17, 2010, pursuant to the terms of the Purchase Agreement, the Company issued to the Buyer warrants to acquire shares of common stock, in the form of three warrants: (i) “Series A Warrants”, (ii) “Series B Warrants”, and (iii) “Series C Warrants” (collectively, the “April Warrants”).

     The Series B Warrants became exercisable on June 13, 2011, the date upon which shareholder approval was obtained in connection with the financing, and expire on March 13, 2012. The Series B Warrants provide that the holders are initially entitled to purchase an aggregate of 9,143,750 shares at an initial exercise price of $.4125 per share. If the Company makes certain dilutive issuances (with limited exceptions), the exercise price of the Series B Warrants will be lowered to the per share price for the dilutive issuances. In addition, the exercise price of the Series B Warrants will adjust to the average of the Installment Conversion Prices used to repay the Notes. The floor price for the exercise price of the Series B Warrants is $0.34. The number of shares underlying the Series B Warrants will adjust whenever the exercise price adjusts, such that at all times the aggregate exercise price of the Series B Warrants will be $3,771,797. As of the June 30, 2011, the exercise price of the Series B Warrants is $0.34 per share and there are 11,093,521 shares underlying the Series B Warrants.

      To the extent the Company enters into a fundamental transaction (as defined in the Series B Warrants and which include, without limitation, the Company entering into a merger or consolidation with another entity, selling all or substantially all of its assets, or a person acquiring 50% of the Company’s common stock), the Company has agreed to purchase the Series B Warrants from the holders at their Black-Scholes value.

      If the Company’s common stock trades at a price at least 200% above the Series B Warrants exercise price for a period of 10 trading days at any time after the company obtains shareholder approval (as discussed above), the company may force the exercise of the Series B Warrants if the Company meets certain conditions.

      The Series A and Series C Warrants are exercisable six months and one day after issuance and have a five year term commencing on June 13, 2011. The Series A Warrants provide that the holders are initially entitled to purchase an aggregate of 4,812,500 shares. The Series C Warrants provide that the holders are initially entitled to purchase an aggregate of 4,343,285 shares. If on the expiration date of the Series B Warrants, a holder of such warrant has not exercised such warrant for at least 50% of the shares underlying such warrant, the Company has the right to redeem from such holder its Series C Warrant for $1,000 under certain circumstances. On August 9, 2011, as part of the restructuring of the Note described above, the Company agreed to lower the exercise price of the Series A and Series C Warrants to $0.05 per share.

     If the Company makes certain dilutive issuances (with limited exceptions), the exercise price of the Series A and Series C Warrants will be lowered to the per share price for the dilutive issuances. In addition, the exercise price of the Series A and Series C Warrants will adjust to the average of the Installment Conversion Prices used to repay the Initial Notes. As of the June 30, 2011, the exercise price of the Series A Warrants and Series C Warrants is $.40 per share.

     To the extent the Company enters into a fundamental transaction (as defined in the Series A and Series C Warrants and which include, without limitation, the Company entering into a merger or consolidation with another entity, selling all or substantially all of its assets, or a person acquiring 50% of the Company’s common stock), the Company has agreed to purchase the Series A and Series C Warrants from the holder at their Black-Scholes value.

     The exercise price of all the Warrants is subject to adjustment in the case of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The exercisability of the Warrants may be limited if , upon exercise, the holder or any of its affiliates would beneficially own more than 4.9% of the Company’s common stock. The Note may not be converted if the total number of shares that would be issued would exceed 19.99% of the Company’s common stock on the date the Purchase Agreement was executed prior to the Company receiving shareholder approval (as discussed above).

     As of June 30, 2011, the Company has recognized the following warrants as derivative instruments:

				Outstanding at
	Class/			December 31,				Exercised		Outstanding at		Exercisable at		Fair Value at
Issue Date	Series	Price		2010		Issued		or Canceled		June 30, 2011		June 30, 2011		June 30, 2011
May 7, 2009	Class C	$	1.00		885,000		—		—		885,000		885,000	$	13,331
May 7, 2009	Class D	$	1.02		415,000		—		—		415,000		415,000	$	6,204
September 8, 2009	Class G	$	1.25		2,500,000		—		—		2,500,000		2,500,000	$	50,901
April 22, 2010	Class I	$	1.06		1,163,362		—		—		1,163,362		—	$	27,974
December 17, 2010 *	Series A	$	.12		1,969,737		525,263		—		2,495,000		2,495,000	$	108,608
December 17, 2010 *	Series B	$	.34		3,939,474		10,524,294		—		14,463,768		14,463,768	$	2,934
December 17, 2010 *	Series C	$	.12		1,969,737		525,263		—		2,495,000		2,495,000	$	108,608
April 1, 2011	Series A	$	.40		—		4,812,500		—		4,812,500		4,812,500	$	255,337
April 1, 2011	Series B	$	.40		—		11,093,521		—		11,093,521		11,093,521	$	9,275
April 1, 2011	Series C	$	.40		—		4,343,285		—		4,343,285		4,343,285	$	230,442

* Includes warrants issued on March 7, 2011

     The Company also recognized certain conversion features issued in conjunction with debt as derivative instruments:

			Outstanding at
			December 31,				Exercised		Outstanding at		Exercisable at		Fair Value at
Issue Date	Price		2010		Issued		or Canceled		June 30, 2011		June 30, 2011		June 30, 2011
December 17, 2010	$	1.00		14,283,980		—		14,283,980		—		—	$	—
March 7, 2011	$	1.00		—		3,451,589		—		3,451,589		3,451,589	$	87,668
April 1, 2011	$	.40		—		60,661,765		—		60,661,765		60,661765	$	1,703,348

     The warrants and conversion features above were revalued at June 30, 2011 using a binomial lattice pricing model using certain assumptions related to the probability of exercise and the following:

Risk free interest rate		0.10% - 2.55	%
Dividend yield		-0-
Volatility		113.20% -136.20	%
Expected term	3 months to 5 years

     In addition to the above derivative transactions, on November 12, 2010, the Company completed the acquisition of TerraSphere Systems LLC, where it determined that as a result of an anti-dilution provision included in the purchase agreement, certain additional shares may have to be issued. The Company estimated that approximately 3,200,000 shares could be issued and classified the anti-dilution provision as a derivative liability. As of June 30, 2011, the Company revalued the derivative liability to $208,000 based on the closing share price of the stock on that date.

     The derivative liability reflected on the consolidated balance sheet at June 30, 2011 totaled $2,812,630 and the derivative gain for the three and six month periods ended June 30, 2011 was $6,851,730 and $9,249,513, respectively.