Derivative Instruments

9 Months Ended

Sep. 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 499,000 shares (warrants to purchase 393,947 shares of Common Stock were issued at the Initial Closing and a warrant to purchase 105,053 shares of Common Stock were issued at the Additional Closing which occurred on March 7, 2011) at an initial exercise price of $10.00 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 $3.45. 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). During August 2011, in connection with amending its April 2011 convertible note, these Series B Warrants were repriced to $0.50 therefore, as of September 30, 2011, the exercise price of the Series B Warrants is $0.50 per share and there are 1,467,647 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 249,500 shares (warrants to purchase 196,974 shares of common stock were issued at the Initial Closing and warrants to purchase 52,526 shares of common stock were issued at the Additional Closing which occurred on March 7, 2011) at an initial exercise price of $10.00 per share. The Series C Warrants provide that the holders are initially entitled to purchase an aggregate of 249,500 shares (warrants to purchase 196,974 shares of common stock were issued at the Initial Closing and warrants to purchase 52,526 shares of common stock were issued at the Additional Closing) at an exercise price of $10.00 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. During August 2011, in connection with amending its April 2011 convertible note these Series A and C Warrants were repriced to $0.50, therefore as of September 30, 2011, the exercise price of the Series A Warrants and Series C Warrants is $0.50 per share.

On April 17, 2011, 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 914,375 shares at an initial exercise price of $4.125 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 $3.40. 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. During August 2011, in connection with amending its April 2011 convertible note these Series B Warrants were repriced to $0.50, therefore as September 30, 2011, the exercise price of the Series B Warrants is $0.50 per share and there are 1,109,352 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 481,250 shares. The Series C Warrants provide that the holders are initially entitled to purchase an aggregate of 434,329 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 $10,000 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 $0.50 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 September 30, 2011, the exercise price of the Series A Warrants and Series C Warrants is $0.50 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 September 30, 2011, the Company has recognized the following warrants as derivative instruments:

														Fair
				Outstanding				Exercised		Outstanding		Exercisable		Value at
	Class/			at Dec 31,				or		at Sept 30,		at Sept 30,		Sept 30,
Issue Date	Series	Price		2010		Issued		Canceled		2011		2011		2011
05/07/09**	Class C	$	0.50		88,500		—		—		88,500		88,500	$	27,279
05/07/09**	Class D	$	0.50		41,500		—		—		41,500		41,500	$	12,747
09/08/09	Class G	$	0.50		250,000		—		—		250,000		250,000	$	94,041
04/22/10	Class I	$	0.50		116,336		—		—		116,336		—	$	45,148
12/17/10 *	Series A	$	0.50		196,974		52,526		—		249,500		249,500	$	97,830
12/17/10 *	Series B	$	0.50		393,947		1,073,700		—		1,467,647		1,467,647	$	265,086
12/17/10 *	Series C	$	0.50		196,974		52,526		—		249,500		249,500	$	97,830
04/01/11	Series A	$	0.50		—		481,250		—		481,250		481,250	$	191,975
04/01/11	Series B	$	0.50		—		1,109,352		—		1,109,352		1,109,352	$	245,661
04/01/11	Series C	$	0.50		—		434,329		—		434,329		434,329	$	173,258
														1,250,855

*	Includes warrants issued on March 7, 2011
**	The above table reflects repricing of all warrants to $0.50 in August 2011, except 13,500

Class C and 6.500 Class D warrants which remained at $10.00 and $10.20 respectively.

In August 2011, the Company amended certain provisions of its April 2011 convertible note financing and as a result all of the warrants listed above, with the exception of certain Class C and Class D warrants, were repriced to $0.50. The Company recorded a charge in its statement of operations for the three months ended September 30, 2011 of $919,443 associated with the debt modification.

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

			Outstanding						Outstanding		Exerciseable		Fair Value
			at						at		at		at
			December 31,				Exercised		September 30,		September 30,		September 30,
Issue Date	Price		2010		Issued		or Canceled		2011		2011		2011
December 17, 2010	$	10.00		1,428,398		—		1,428,398		—		—	$	—
March 7, 2011	$	10.00		—		345,159		345,159		—		—	$	—
April 1, 2011	$	4.00		—		11,267,193		—		11,267,193		11,267,193	$	4,438,272

The amount of conversion features issued during 2011 on the April 2011 derivative instrument has increased as the conversion stock price has decreased from the original conversion price of $4.00.

The warrants and conversion features above were revalued at September 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		78%—205	%
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 440,000 shares could be issued and classified the anti-dilution provision as a derivative liability. As of September 30, 2011, the Company revalued the derivative liability to $215,600 based on the closing share price of the stock on that date.

The derivative liability reflected on the consolidated balance sheet at September 30, 2011 totaled $5,904,727 and the derivative gain(loss) for the three and nine month periods ended September 30, 2011 was ($2,297,229) and $6,952,284, respectively.