Note 19 - Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value, Measurement Inputs, Disclosure [Text Block]

NOTE S – FAIR VALUE MEASUREMENTS

U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability to a third party with the same credit standing (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In many cases, the exit price and the transaction (or entry) price will be the same at initial recognition. However, in certain cases, the transaction price may not represent fair value. Given our financial condition described in Note A, it is not practicable to estimate the fair value of our subordinated debt (payable to the Levys) at September 30, 2012 and December 31, 2011. We believe that the carrying amounts of cash and cash equivalents, our accounts receivable and accounts payable approximate fair value due to their short-term nature. We believe that our capital lease obligation accrues interest at a rate which approximates prevailing market rates for instruments with similar characteristics and, therefore, approximates fair value.

Fair value is a market-based measurement determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant, not based solely upon the perspective of the reporting entity. When quoted prices are not used to determine fair value, consideration is given to three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. Entities are required to determine the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs. Inputs to fair valuation techniques are prioritized, allowing for the use of unobservable inputs to the extent that observable inputs are not available. The applicable guidance establishes a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.

Liabilities measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy is summarized as follows:

Embedded conversion feature	Significant Unobservable Inputs (Level 3) Total Fair Value
September 30, 2012	$	19,460,000
December 31, 2011	$	12,470,000

The Company has categorized its liabilities measured at fair value into the three-level fair value hierarchy, as defined above, based upon the priority of inputs to respective valuation techniques. Liabilities included within level 3 of the fair value hierarchy presented in the preceding table consist of an embedded conversion feature which requires adjustments to fair value on a recurring basis.  The valuation methodology uses a combination of observable and unobservable inputs in calculating fair value.  The fair value of the conversion feature was determined based on a probability-weighted scenario analysis that includes a Monte Carlo pricing model.  Significant observable inputs include the market price of our common stock, volatility, remaining term, risk-free interest rate, credit spread and dividend yield (zero in all periods).Significant unobservable inputs include the probability of triggering a reset feature on the embedded derivative which would result in a reduction in the conversion price.  The fair value of the embedded conversion feature as of September 30, 2012 assumes that the reset feature is not triggered during the term of the instrument.   The following is a summary of the significant assumptions:

	September 30, 2012			December 31, 2011
Expected volatility		140.0	%		83.5	%
Probability of trigger of reset provision		--	%		20	%
Remaining term (in years)		1.0			1.2
Risk-free rate		0.2	%		0.2	%
Credit spread		25.8	%		28.3	%
Stock price	$	0.10		$	0.53

If the assumptions related to the probability of the reset feature being triggered were modified, it could result in a material change to the carrying value of the embedded conversion feature.  An increase in the probability of the reset feature being triggered of 10% would result in an increase to the fair value of the embedded conversion feature of $1,500,000 and $540,000 as of September 30, 2012 and December 31, 2011, respectively.

The changes in level 3 liabilities measured at fair value on a recurring basis during the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Balance Beginning of Period		Issuance		(Gain) or Loss Recognized in Earnings from Change in Fair Value		Balance End of Period
For the nine months ended September 30, 2012
Embedded conversion feature	$	12,470,000	$	5,120,000	$	1,870,000	$	19,460,000
For the nine months ended September 30, 2011
Embedded conversion feature	$	22,860,000	$	--	$	12,120,000	$	34,980,000

For the periods ended September 30, 2012 and 2011, $1,870,000 and $12,120,000, respectively, is reflected as a loss on change in fair value of the embedded conversion feature in the accompanying statements of operations.   At September 30, 2012 and December 31, 2011, there was a liability in the accompanying balance sheets representing the fair value of the embedded conversion feature in the amount of $19,460,000 and $12,470,000, respectively.