Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 6 — Derivative Financial Instruments

Derivative Liabilities

The carrying value of the Compound Embedded Derivative and Warrant Derivative Liabilities are on the balance sheet, with changes in the carrying value being recorded as Derivative Gains (Losses) on the income statement. The components of the compound embedded derivative and warrant derivative liabilities as of June 30, 2011, are:

Our financings giving rise to derivative financial instruments	Indexed Shares		Fair Values
Compound embedded derivatives:
$2,000,000 face value secured convertible notes due January 24, 2012		10,538,583	$	13,257,537
$500,000 face value secured convertible notes due January 24, 2012		800,654		111,291
$2,500,000 face value secured convertible notes due April 24, 2012		1,037,581		149,412
Warrant derivative liabilities:
Hexagon Warrant 1		666,667		400,000
Hexagon Warrant 2		2,500,000		2,157,500
COR Warrant		66,667		16,733
Buffalo Warrant		1,813,539		1,117,140
		17,423,691	$	17,209,613

The following table summarizes the effects on our gain (loss) associated with changes in the fair values of our derivative financial instruments by type of financing for the three and six months ended June 30, 2011:

	Three Months			Six Months
Our financings giving rise to derivative	Ended			Ended
financial instruments and the income effects:	June 30, 2011			June 30, 2011
Compound embedded derivatives:
$2,000,000 face value secured convertible notes due January 24, 2012	$	3,604,196		$	(3,189,355	)
$500,000 face value secured convertible notes due January 24, 2012		315,062			221,248
$2,500,000 face value secured convertible notes due April 24, 2012		310,577			310,577
		4,229,835			(2,657,530	)
Day-one derivative loss:
$2,000,000 face value secured convertible notes		—			(8,068,182	)
$2,500,000 face value secured convertible notes		(1,914,322	)		(1,914,322	)
Warrant derivative liabilities:
Hexagon Warrant 1		259,333			259,333
Hexagon Warrant 2		1,137,500			1,137,500
COR Warrant		25,867			25,867
Buffalo Warrant		(1,117,140	)		(1,117,140	)
Total derivative gain (loss)	$	2,621,073		$	(12,334,474	)

Fair Value Considerations

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

Level 1 valuations:	Quoted prices in active markets for identical assets and liabilities.
Level 2 valuations:	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3 valuations:	Significant inputs to valuation model are unobservable.

We classify assets and liabilities measured at fair value in their entirety based on the lowest level of input that is significant to their fair value measurement. We measure all our derivative financial instruments that are required to be measured at fair value on a recurring basis as of June 30, 2011, at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

	June 30, 2011
	Fair Value Measurements Using:
			Significant
	Quoted Prices		Other		Significant
	in Active		Observable		Unobservable			Assets
	Markets		Inputs		Inputs			(Liabilities)
	(Level 1)		(Level 2)		(Level 3)			at Fair Value
Compound embedded derivative	$	—	$	—	$	(13,518,240	)	$	(13,518,240	)
Derivative warrant liability		—		—		(3,691,373	)		(3,691,373	)
Total	$	—	$	—	$	(17,209,613	)	$	(17,209,613	)

We combined the features embedded in the secured convertible notes into one compound embedded derivative that we fair valued using the income valuation technique using the Monte Carlo valuation model. We believe the Monte Carlo model is the best available technique for this compound derivative because, in addition to providing for inputs such as trading market values, volatilities and risk free rates, the Monte Carlo model also embodies assumptions that provide for credit risk, interest risk and redemption behaviors (i.e. assumptions market participants exchanging debt-type instruments would also consider). The Monte Carlo model simulates multiple outcomes over the period to maturity using multiple assumption inputs also over the period to maturity. The following table sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each significant assumption as of June 30, 2011:

	Merkin Note:			COR Note:			Hexagon Note:
Our financings giving rise to	$2,000,000 Face			$500,000 Face			$2,500,000 Face
derivative financial instruments	Value			Value			Value
Conversion price	$	0.19		$	3.00		$	3.00
Equivalent volatility		92.15	%		92.15	%		102.35	%
Equivalent term (years)		0.413			0.569			0.816
Equivalent credit-risk adjusted yield		20.88	%		20.88	%		20.88	%
Equivalent interest risk adjusted rate		8.49	%		8.49	%		9.20	%

We valued the warrants using a binomial-lattice-based valuation model. We utilized the lattice-based valuation technique because it embodies all of the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the assumptions used in calculating the market price of our common stock. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes. The following table sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each significant assumption as of June 30, 2011:

	Hexagon			Hexagon			COR			Buffalo
	Warrant 1			Warrant 2			Warrant			Warrant
Warrants to purchase common stock:
Strike price	$	3.00		$	3.00		$	3.00		$	3.75
Equivalent volatility		111.02	%		118.01	%		102.36	%		140.20	%
Term (years)		1.82			2.82			0.81			4.98
Equivalent risk-free rate		0. 17	%		0.21	%		0.07	%		0.83	%

The following table sets forth a reconciliation of changes in the fair value of financial liabilities classified as Level 3 in the fair valued hierarchy:

	Derivative Financial Instruments
	2011			2010
Balance as of January 1	$	—		$	—
Total gains or losses (realized or unrealized):
Included in earnings		(2,351,970	)		—
Warrant issuances		(3,996,933	)		—
Debenture issuances		(10,860,710	)		—
Balance as of June 30, 2011	$	(17,209,613	)	$	—