Note 3 - Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Text Block]

3. Fair Value Measurements

The Company measures and records cash equivalents and warrant liabilities at fair value in the accompanying financial statements. Fair value is defined 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 on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value include: 

·  Level 1 - Observable inputs for identical assets or liabilities such as quoted prices in active markets;

·  Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

·  Level 3 - Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use.

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and December 31, 2011:

	As of December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Investment in money market funds (1)	$	13,009,688	$	-	$	-	$	13,009,688
Total assets	$	13,009,688	$	-	$	-	$	13,009,688
Liabilities:
Accrued warrant liability	$	-	$	-	$	4,105,659	$	4,105,659
Total liabilities	$	-	$	-	$	4,105,659	$	4,105,659

	As of December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Investment in money market funds (1)	$	16,326,888	$	-	$	-	$	16,326,888
Total assets	$	16,326,888	$	-	$	-	$	16,326,888
Liabilities:
Compensatory stock options not yet issued (2)	$	-	$	-	$	378,750	$	378,750
Accrued warrant liability		-		-		7,285,959		7,285,959
Total liabilities	$	-	$	-	$	7,664,709	$	7,664,709

(1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.

(2) Included in accrued expenses in the accompanying consolidated balance sheets.

The Company has certain warrants that could require settlement in cash if a fundamental transaction occurs, as defined in the respective agreements. These agreements specify the amount due to warrant holders is based on the Black-Scholes pricing model. The following are the assumptions used to measure the accrued warrant liability at December 31, 2012 and 2011, which were determined in a manner consistent with that described for grants of options to purchase common stock as set forth in Note 2:

	2012					2011
Stock Price	$			1.33		$			2.86
Exercise Price	$	1.60	-	5.00		$	1.60	-	5.00
Term in years		1.09	-	2.41			1.58	-	2.23
Volatility		82.75	-	95.91	%		66.68	-	71.55	%
Annual rate of quarterly dividends				0	%				0	%
Discount rate- bond equivalent yield		.17	-	.29	%		.20	-	.28	%

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 fair value measurements for the years ended December 31, 2012 and 2011:

	Year Ended December 31, 2012
	Accrued Warrant Liability			Compensatory Stock Options Issued After Year End
Beginning Balance	$	7,285,959		$	378,750
Total (gains) or losses (realized/unrealized) included in earnings (1)(2)		(7,701,981	)		51,823
Issuances		4,521,681			-
Settlements		-			(430,573	)
Balance, December 31, 2012	$	4,105,659		$	-

	Year Ended December 31, 2011
	Accrued Warrant Liability			Compensatory Stock Options Issued After Year End
Beginning Balance	$	25,350,733		$	2,992,180
Total (gains) or losses (realized/unrealized) included in earnings (1)(2)		(19,821,787	)		(17,953	)
Issuances		2,752,441			378,750
Settlements		(995,428	)		(2,974,227	)
Balance, December 31, 2011	$	7,285,959		$	378,750
Amount of total (gains) or losses for the period included in earnings as change in value of warrant liability attributable to the change in unrealized (gains) or losses relating to liabilities recorded at the reporting date:
December 31, 2011	$	(19,790,451	)	$	-
December 31, 2012	$	(7,701,981	)	$	-

(1) Realized & unrealized gains or losses related to the accrued warrant liability were included as change in value of accrued warrant liability.

(2) Realized gains or losses related to compensatory stock options were included in research & development expense and general & administrative expense.

Separate disclosure is required for assets and liabilities measured at fair value on a recurring basis, as documented above, from those measured at fair value on a nonrecurring basis. As of December 31, 2012 and 2011, the Company had no assets or liabilities that were measured at fair value on a nonrecurring basis.

The Company considers the accrued warrant liability to be Level 3 because some of the inputs into the measurements are neither directly or indirectly observable. The accrued warrant liability uses management’s estimate for the expected term, which is based on the safe harbor method as historical exercise information over the term of each security is not readily available. The following table summarizes the unobservable inputs into the fair value measurements:

Description	Fair Value	Valuation Technique	Unobservable Input	Range
Accrued warrant liability	$           4,105,659	Black-Scholes pricing model	Expected term (in years)	1.09	-	2.41
	$           4,105,659

Management believes the value of the accrued warrant liability is more sensitive to a change in the Company’s stock price at the end of the respective reporting period as opposed to a change in the expected term. At December 31, 2012, a 10% increase in the expected term of the Company’s warrants measured using the Black-Scholes pricing model would increase the warrant liability by approximately 3%, while a 10% decrease in the expected term would decrease the warrant liability by approximately 5%. A 10% increase or decrease in the Company’s stock price would result in an increase or decrease in the accrued warrant liability of approximately 18%.

The carrying amounts of the Company’s remaining financial instruments, which include cash, short-term investments, accounts receivable and accounts payable, approximate their fair values due to their short maturities.