XML 28 R18.htm IDEA: XBRL DOCUMENT

Fair Value of Financial Instruments

6 Months Ended

12 Months Ended

Jun. 30, 2013

Dec. 31, 2012

NOTE 9. Fair Value of Financial Instruments

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The three hierarchy levels are defined as follows:

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012:

	Level 1			Level 2			Level 3			Total
June 30, 2013
Financial Assets:
Cash and cash equivalents		$	3,035,998		$	—		$	—		$	3,035,998

Total assets		$	3,035,998		$	—		$	—		$	3,035,998

Financial Liabilities:
Warrant derivative liabilities		$	—		$	—		$	701,857		$	701,857

Conversion element of promissory notes			—			—			439			439

Conversion element of Series B CPS			—			—			1,213,727			1,213,727

Series A CPS derivative liabilities			—			—			770,641			770,641

Total liabilities		$	—		$	—		$	2,686,664		$	2,686,664

	Level 1			Level 2			Level 3			Total
December 31, 2012
Financial Assets:
Cash and cash equivalents		$	6,328,753		$	—		$	—		$	6,328,753

Total assets		$	6,328,753		$	—		$	—		$	6,328,753

Financial Liabilities:
Warrant derivative liabilities		$	—		$	—		$	102,695		$	102,695

Conversion element of promissory notes			—			—			274,928			274,928

Conversion element of Series B CPS			—			—			1,210,909			1,210,909

Series A CPS derivative liabilities			—			—			619,652			619,652

Total liabilities		$	—		$	—		$	2,208,184		$	2,208,184

The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2013 and 2012:

				Conversion
					Element of			Conversion
	Warrant				Promissory			Element of			Series A CPS
	Derivatives				Notes			Series B CPS			Derivatives			Total

Balance at January 1, 2013	$	102,695			$	274,928		$	1,210,909		$	619,652		$	2,208,184
Issuances		—				—			—			—			—
Revaluation (gains) losses included in other income and (expenses)		599,162				(274,489	)		2,818			150,989			478,480
Settlements		—				—			—			—			—
Balance at June 30, 2013	$	701,857			$	439		$	1,213,727		$	770,641		$	2,686,664

Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of June 30, 2013	$	(599,163	)		$	274,489		$	(2,818	)	$	(150,989	)	$	(478,481	)

				Conversion
					Element of			Conversion
	Warrant				Promissory			Element of			Series A CPS
	Derivatives				Notes			Series B CPS			Derivatives			Total

Balance at January 1, 2012	$	655,219			$	1,931,295		$	1,245,101		$	2,135,715		$	5,967,330
Issuances		—				—			—			—			—
Revaluation (gains) losses included in other income and (expenses)		(325,805	)			(1,529,374	)		82,668			(789,680	)		(2,562,191	)
Settlements		—				—			—			—			—
Balance at June 30, 2012	$	329,414			$	401,921		$	1,327,769		$	1,346,035		$	3,405,139

Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of June 30, 2012	$	325,805			$	1,529,374		$	(82,668	)	$	789,680		$	2,562,191

Assumptions used in evaluating the warrant derivative liabilities, the conversion element of the promissory notes, the conversion element of the Series B CPS and the Series A CPS derivative liabilities are discussed in Notes 8, 4, 5 and 5, respectively. The principal assumptions used, and their impact on valuations, are as follows:

Risk-Free Interest Rate. This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.

Expected Remaining Term. This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, and historical experience. For the convertible promissory notes, the Company considers a blend of expected remaining terms prior to partial conversion into Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term. An increase in the expected remaining term will increase the fair value and the associated derivative liability.

Expected Volatility. This is a measure of the amount by which the Company’s common stock price has fluctuated or is expected to fluctuate. To the extent that the Company’s common stock has not been traded for as long as the expected remaining term of the instrument, the Company uses a weighted average of the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. To the extent that the Company’s common stock has been traded for longer than the expected remaining term of the instrument, equal weighting is applied to this weighted average and to the Company’s own historic volatility over the same term to determine expected volatility. An increase in the expected volatility will increase the fair value and the associated derivative liability.

Dividend Yield. The Company has not made any dividend payments and does not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.

NOTE 10. Fair Value of Financial Instruments

The three hierarchy levels are defined as follows:

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2012 and 2011:

	Level 1		Level 2		Level 3		Total
December 31, 2012
Financial Assets:
Cash and cash equivalents	$	6,328,753	$	—	$	—	$	6,328,753

Total assets	$	6,328,753	$	—	$	—	$	6,328,753

Financial Liabilities:
Warrant derivative liabilities	$	—	$	—	$	102,695	$	102,695

Conversion element of promissory notes		—		—		274,928		274,928

Conversion element of Series B CPS		—		—		1,210,909		1,210,909

Series A CPS derivative liabilities		—		—		619,652		619,652

Total liabilities	$	—	$	—	$	2,208,184	$	2,208,184

	Level 1		Level 2		Level 3		Total
December 31, 2011
Financial Assets:
Cash and cash equivalents	$	15,117,172	$	—	$	—	$	15,117,172

Total assets	$	15,117,172	$	—	$	—	$	15,117,172

Financial Liabilities:
Warrant derivative liabilities	$	—	$	—	$	655,219	$	655,219

Conversion element of promissory notes		—		—		1,931,295		1,931,295

Conversion element of Series B CPS		—		—		1,245,101		1,245,101

Series A CPS derivative liabilities		—		—		2,135,715		2,135,715

Total liabilities	$	—	$	—	$	5,967,330	$	5,967,330

The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:

				Conversion
				Element of			Conversion
	Warrant			Promissory			Element of			Series A CPS
	Derivatives			Notes			Series B CPS			Derivatives			Total

Balance at January 1, 2012	$	655,219		$	1,931,295		$	1,245,101		$	2,135,715		$	5,967,330
Issuances		—			—			—			—			—
Revaluation (gains) losses included in other income and expenses		(552,524	)		(1,656,367	)		(34,192	)		(1,516,063	)		(3,759,146	)
Settlements		—			—			—			—			—
Balance at December 31, 2012	$	102,695		$	274,928		$	1,210,909		$	619,652		$	2,208,184

Total gains (losses) included in other income and expenses attributable to liabilities still held as of December 31, 2012	$	552,524		$	1,656,367		$	34,192		$	1,516,063		$	3,759,146

				Conversion
				Element of			Conversion
	Warrant			Promissory			Element of			Series A CPS
	Derivatives			Notes			Series B CPS			Derivatives			Total

Balance at January 1, 2011	$	2,240,962		$	—		$	194,088		$	—		$	2,435,050
Issuances		—			11,495,163			—			2,198,828			13,693,991
Revaluation (gains) losses included in other income and expenses		(1,269,940	)		(8,989,945	)		1,051,013			(63,113	)		(9,271,985	)
Settlements		(315,803	)		(573,923	)		—			—			(889,726	)
Balance at December 31, 2011	$	655,219		$	1,931,295		$	1,245,101		$	2,135,715		$	5,967,330

Total gains (losses) included in other income and expenses attributable to liabilities still held as of December 31, 2011	$	1,324,165		$	8,989,945		$	(1,051,013	)	$	63,113		$	9,326,210

Assumptions used in evaluating the warrant derivative liabilities, the conversion element of the promissory notes, the conversion element of the Series B CPS and the Series A CPS derivative liabilities are discussed in Notes 9, 5, 6 and 6, respectively. The principal assumptions used, and their impact on valuations, are as follows:

Risk-Free Interest Rate. This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.

Expected Remaining Term. This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, and historical experience. For the convertible promissory notes, the Company considers a blend of expected remaining terms prior to partial conversion into Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term. An increase in the expected remaining term will increase the fair value and the associated derivative liability.

Expected Volatility. This is a measure of the amount by which the Company’s common stock price has fluctuated or is expected to fluctuate. To the extent that Company’s common stock has not been traded for as long as the expected remaining term of the instrument, the Company uses a weighted-average of the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. To the extent that the Company’s common stock has been traded for longer than the expected remaining term of the instrument, equal weighting is applied to this weighted average and to the Company's own historic volatility over the same term to determine expected volatility. An increase in the expected volatility will increase the fair value and the associated derivative liability.

Dividend Yield. The Company has not made any dividend payments and does not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References+ Details