Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

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Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2012
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments
(5)           Fair Value of Financial Instruments

The carrying value of cash equivalents, receivables, accounts payable and accruals approximate fair value due to the short maturity of these items. The carrying value of the secured debt is at book value which does not bear a market rate of interest. Management believes based on its current financial position that it could not obtain comparable amounts of third party financing, and as such cannot estimate the fair value of the secured debt. None of these instruments are held for trading purposes.

Effective January 1, 2008, we adopted fair value measurement guidance issued by the FASB related to financial assets and liabilities which 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. This guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize 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 and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.

The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) 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.

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 are summarized below:
 
(in thousands)
                              
Description
  
As of
June 30, 2012
    
Level 1
    
Level 2
    
Level 3
    
Total Gains
(Losses)
  
Liabilities:
                              
  Derivative liability-
                              
    warrants
   $ 335     $ -     $ 355     $ -     $ 1,172  
    preferred stock
   $ 16,300     $ -     $ -     $ 16,300     $ (11,870 )
 
(in thousands)
                              
Description
  
As of
December 31, 2011
    
 
Level 1
    
 
Level 2
    
 
Level 3
    
Total Gains
(Losses)
  
Liabilities:
                              
  Derivative liability-
                              
    warrants
   $ 1,507     $ -     $ 1,507     $ -     $ 3,580  
    preferred stock
   $ 4,430     $ -     $ -     $ 4,430     $ 1,410  
 
In order to calculate the Level 3 Derivative liability - preferred stock, we used the Monte Carlo simulation to estimate future stock prices. The use of valuation techniques requires the Company to make various key assumptions for inputs into the model, including assumptions about the expected future volatility of the price of the Company's stock. In estimating the fair value at June 30, 2012 and December 31, 2011, we based our selected volatility on the one-year historic volatility of the Company's stock as we believe this is most representative of the expected volatility in the near future for the Company.