Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous market in which we would transact and we consider assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:

• Level 1: Observable inputs such as quoted prices in active markets;

• Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s financial instruments are cash and cash equivalents, accounts payable, and derivative warrant liabilities. The recorded values of cash equivalents and accounts payable approximate their fair values based on their short-term nature. The fair value of derivative warrant liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative warrant liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative warrant liabilities are the only recurring Level 3 fair value measures.

The warrants have non-standard terms as they relate to a fundamental transaction and require a net-cash settlement upon change in control of the Company and therefore are classified as a derivative. These warrants have been recorded at their fair value using the Black-Scholes pricing model and will be recorded at their respective fair value at each subsequent balance sheet date.

A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of June 30, 2014 and December 31, 2013 is as follows:

	June 30, 2014		December 31, 2013
Stock Price	$	3.20	$	6.40
Risk-free Rate (5-year U.S. Treasury Yield)		1.62%		1.75%
Volatility (Annual)		93.46%		93.43%
Time to Maturity (Years)		4.60-4.83		5.33

Derivative warrant liabilities consist of the following:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Warrant Derivative Liabilities
Beginning balance at January 1, 2014	$	3,017,142
Issuance of warrants with derivative liabilities		5,584,865
Changes in estimated fair value		(5,042,780	)
Ending balance at June 30, 2014	$	3,559,227