Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

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 September 30, 2013 and December 31, 2012:

	Level 1		Level 2		Level 3		Total
September 30, 2013
Financial Assets:
Cash and cash equivalents	$	14,483,041	$	—	$	—	$	14,483,041
Total assets	$	14,483,041	$	—	$	—	$	14,483,041
Financial Liabilities:
Warrant derivative liabilities	$	—	$	—	$	510,363	$	510,363
Conversion element of Series B CPS		—		—		1,300,923		1,300,923
Series A CPS derivative liabilities		—		—		424,794		424,794
Total liabilities	$	—	$	—	$	2,236,080	$	2,236,080

	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 nine months ended September 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)		407,668			(274,928	)		90,014			(194,858	)		27,896
Settlements		—			—			—			—			—
Balance at September 30, 2013	$	510,363		$	—		$	1,300,923		$	424,794		$	2,236,080
Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of September 30, 2013	$	(407,669	)	$	—		$	(90,014	)	$	194,858		$	(302,825	)

				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)		(221,390	)		(1,472,985	)		89,444			(572,051	)		(2,176,982	)
Settlements		—			—			—			—			—
Balance at September 30, 2012	$	433,829		$	458,310		$	1,334,545		$	1,563,664		$	3,790,348
Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of September 30, 2012	$	221,390		$	1,472,985		$	(89,444	)	$	572,051		$	2,176,982

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.