FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Derivative Liabilities

For purposes of determining whether certain instruments are derivatives for accounting treatment, the Company follows the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock.  The standard applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
 

Liabilities measured at fair value on a recurring basis are summarized as follows:

March 31, 2014	Level 1		Level 2		Level 3		Total
Derivative liability related to fair value of beneficial conversion feature	$	-	$	1,100,000	$	--	$	1,100,000
Derivative liability related to fair value of warrants		-		-		7,334,000		7,334,000
Total	$	-	$	1,100,000	$	7,334,000	$	8,434,000

The following table details the approximate fair value measurements within the fair value hierarchy of the Company’s derivative liabilities using Level 3 inputs:

	Total
Balance at January 1, 2014	$	6,000,000
Additional Warrants issued January 2014		444,000
Change in fair value of derivative liabilities		890,000
Balance at March 31, 2014	$	7,334,000

As of March 31, 2014, the beneficial conversion feature of the Preferred Stock is treated as an embedded derivative liability and changes in the fair value were recognized in earnings.  The Preferred Stock shares are convertible into shares of the Company’s common stock, which did trade in an active securities market, therefore the embedded derivative liability was valued using the following market based inputs:

Closing trade price of Common Stock	$	0.08
Series A Preferred Stock Conversion Price	$	0.03
Intrinsic value of conversion option per share	$	0.05

The Company has no assets that are measured at fair value on a recurring basis.  There were no assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2014.

As of March 31, 2014 the Company’s outstanding warrants are treated as derivative liabilities and changes in the fair value were recognized in earnings.  These common stock purchase warrants did not trade in an active securities market, and as such, the Company estimated the fair value of these warrants using Black-Scholes and the following assumptions:

	March 31, 2014
Annual Dividend Yield	0.0%
Expected Life (Years)	3.75 – 3.84
Risk-Free Interest Rate	1.67%
Expected Volatility	250.9%

Expected volatility was based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods. The Company believed this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company had no reason to believe future volatility over the expected remaining life of these warrants was likely to differ materially from historical volatility.  The expected life was based on the remaining contractual term of the warrants. The risk-free rate was based on the U.S. Treasury rate that corresponded to the expected term of the warrants.