Note 3 - Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Text Block]

3.  Fair Value of Financial Instruments

The Company measures and records 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 liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:

	As of March 31, 2013
	Level 1		Level 2		Level 3		Total
Liabilities:
Compensatory stock options not yet issued (1)	$	-	$	-	$	63,641	$	63,641
Accrued warrant liability		-		-		7,553,382		7,553,382
Total liabilities	$	-	$	-	$	7,617,023	$	7,617,023

	As of December 31, 2012
	Level 1		Level 2		Level 3		Total
Liabilities:
Accrued warrant liability	$	-	$	-	$	4,105,659	$	4,105,659
Total liabilities	$	-	$	-	$	4,105,659	$	4,105,659

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

The Company uses the Black-Scholes model to measure the accrued warrant liability and its accrual for compensatory stock options not yet issued. The following are the assumptions used to measure the accrued warrant liability at March 31, 2013 and December 31, 2012, which were determined in a manner consistent with that described for grants of options to purchase common stock as set forth in Note 2:

	March 31, 2013			December 31, 2012
Stock Price	$1.96			$1.33
Exercise Price	$1.60	-	5.00	$1.60	-	5.00
Term in years	0.96	-	2.28	1.09	-	2.41
Volatility	85.16	-	92.85%	82.75	-	95.91%
Annual rate of quarterly dividends	0%			0%
Discount rate- bond equivalent yield	0.13	-	0.28%	0.17	-	0.29%

The following are the assumptions used to measure the compensatory stock options not yet issued at March 31, 2013:

	March 31, 2013
Stock price	$	1.96
Term in years		5
Volatility		82.31	%
Annual rate of quarterly dividends		0.0	%
Discount rate - bond equivalent yield		0.77	%

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 fair value measurements for the three months ended March 31, 2013 and 2012: 

	Accrued Warrant Liability			Compensatory Stock Options Not Yet Issued
Balance, December 31, 2012	$	4,105,659		$	-
Total (gains) or losses, realized and unrealized, included in earnings (1)(2)		3,447,723			-
Estimates and other changes in fair value		-			63,641
Settlements		-			-
Balance, March 31, 2013	$	7,553,382		$	63,641
Balance, December 31, 2011	$	7,285,959		$	378,750
Total (gains) or losses, realized and unrealized, included in earnings (1)(2)		(1,719,756	)		51,823
Estimates and other changes in fair value		-			85,000
Settlements		-			(430,573	)
Balance, March 31, 2012	$	5,566,203		$	85,000
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:
March 31, 2013	$	3,447,723		$	-
March 31, 2012	$	(1,719,756	)	$	-

(1) Realized and 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 and 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 March 31, 2013 and December 31, 2012, the Company had no assets or liabilities that were measured at fair value on a nonrecurring basis.

The Company considers the accrued warrant liability and compensatory stock options not yet issued to be Level 3 because some of the inputs into the measurements are neither directly or indirectly observable. Both the accrued warrant liability and compensatory stock options not yet issued use 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. Additionally, the number of compensatory options awarded involves an estimate of management’s performance in relation to the targets set forth in the Company's Executive Compensation Plan. The following table summarizes the unobservable inputs into the fair value measurements:

	March 31, 2013
Description	Fair Value		Valuation Technique	Unobservable Input	Range
Compensatory stock options not yet issued	$	63,641	Black-scholes pricing model	Expected term - Years			5
				Quantity of options			200,000
Accrued warrant liability		7,553,382	Black-scholes pricing model	Expected term - Years	.96	-	2.28
	$	7,617,023

Management believes the value of both the accrued warrant liability and compensatory stock options 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 one of the unobservable inputs described above.

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