FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2012

Fair Value Measurements And Financial Instruments [Abstract]

FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

NOTE 3 FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value 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. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

¨ Level one — Quoted market prices in active markets for identical assets or liabilities;

¨ Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

¨ Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

The Company’s financial instruments include cash equivalents, trade receivables and payables, prepayments and other current assets, other payables and accruals. The carrying value of the Company’s short-term financial instruments approximates their fair value because of their short maturities.

The following table sets forth the financial instruments, measured at fair value, by level within the fair value hierarchy as of December 31, 2012:

			Fair value measurements at reporting date using
Items	As of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Warrant liability	$	354,000	$	-	$	354,000	$	-

The following table sets forth the financial instruments, measured at fair value, by level within the fair value hierarchy as of December 31, 2011:

			Fair value measurements at reporting date using
Items	As of  December 31,  2011		Quoted Prices  in Active Markets  for Identical Assets (Level 1)		Significant  Other  Observable  Inputs  (Level 2)		Significant  Unobservable  Inputs  (Level 3)
Warrant liability	$	615,000	$	-	$	615,000	$	-

Assets and liabilities measured at fair value on a recurring basis using significant observable inputs (Level 2) from January 1, 2010 to December 31, 2012 are summarized as follows:

	Warrant liability (Level 2)
Balance at January 1, 2010	$	14,275,483
Change in fair value included in earnings		1,448,819
Exercise of warrants		(7,041,861	)
Balance at December 31, 2010		8,682,441
Change in fair value included in earnings		(3,062,575	)
Exercise of warrants		(5,004,866	)
Balance at December 31, 2011		615,000
Change in fair value included in earnings		124,000
Exercise of warrants		(385,000	)
Balance at December 31, 2012	$	354,000

There were no assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2012 and 2011.

Derivative Instruments – Warrants

The Company’s warrants have been classified as derivatives in accordance with the guidance provided in FASB ASC 815-40-15-7I, because they are denominated in U.S. dollars, which is different from the Company’s functional currency (Renminbi).

For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of income.

The Company accounted for the exercise of these warrants as extinguishment of debts in accordance with ASC 815-10-40-1, “Derivatives and Hedges – Derecognition” and ASC 470-50-40, “Debt – Modification and Extinguishments – Derecognition”.

For stock-based derivative financial instruments, the Company uses the Black-Scholes option pricing model using the following assumptions to value the derivative instruments at inception and on subsequent valuation dates:

	December 31, 2012			December 31, 2011
Series A and B Warrants
Market price of common stock:	$	4.39		$	4.76
Exercise price:	$	3.50		$	3.50
Remaining contractual life (years):		0.83			1.83
Dividend yield:		–			–
Expected volatility:		51.41	%		39.58	%
Risk-free interest rate:		0.13	%		0.22	%
Fair value – Series A and B Warrants	$	319,000		$	586,000
Underwriter Warrants
Market price of common stock:	$	4.39		$	4.76
Exercise price:	$	4.80		$	4.80
Remaining contractual life (years):		1.68			2.68
Dividend yield:		−			−
Expected volatility:		61.26	%		36.39	%
Risk-free interest rate:		0.21	%		0.32	%
Fair value – Underwriter Warrants	$	35,000		$	29,000
Fair value – Total	$	354,000		$	615,000

In 2010, 921,800 warrants were exercised at $3.50 each in cash and 41,880 warrants were exercised on a cashless basis to purchase 23,728 shares of common stock. The Company accounted for the exercise of these warrants as extinguishment of debts in accordance with ASC 815-10-40-1, “Derivatives and Hedges – Derecognition.” In accordance with ASC 470-50-40, “Debt – Modification and Extinguishments – Derecognition,” an aggregate gain of $186,897 was recognized in 2010, for details please refer to the following table.

Exercise date:	January 14,			March 12,			October 27,			November 26,			December 30,
Market price of common stock:	$	10.26		$	9.4		$	10.92		$	11.96		$	11.26
Exercise warrants:		700,000			6,000			35,880			211,500			10,300
Exercise price:	$	3.50		$	3.50		$	4.80		$	3.50		$	3.50
Remaining contractual life (years):		3.79			3.63			3.85			2.93			2.83
Dividend yield:		–			–			–			–			–
Expected volatility:		41.12	%		41.70	%		42.23	%		46.49	%		46.30	%
Risk-free interest rate:		1.87	%		1.77	%		0.91	%		0.75	%		0.97	%
Fair values:	$	6.9482		$	6.2975		$	6.7131		$	8.5925		$	7.9760
Gain on extinguishment of warrant liabilities	$	131,744		$	3,625		$	21,281		$	28,022		$	2,225

In 2011, 542,300 warrants were exercised at $3.50 each in cash and 187,164 warrants were exercised on a cashless basis to purchase 108,855 shares of common stock. In accordance with ASC 470-50-40, “Debt – Modification and Extinguishments – Derecognition”, an aggregate gain of $88,777 was recognized. For details, please refer to the following table.

Exercise date:	January 14,			March 3,			March 14,			March 17,			April7,			December 21,
Market price of common stock:	$	10.64		$	10.98		$	10.19		$	9.79		$	8.39		$	5.00
Exercise warrants:		549,300			20,000			28,814			74,000			44,850			12,500
Exercise price:	$	3.50		$	3.50		$	4.80		$	3.50		$	4.80		$	3.50
Remaining contractual life (years):		2.79			2.66			3.47			2.62			3.41			1.86
Dividend yield:		–			–			–			–			–			1.19	%
Expected volatility:		46.34	%		48.00	%		44.05	%		48.54	%		44.05	%		39.58	%
Risk-free interest rate:		0.90	%		1.09	%		1.27	%		0.86	%		1.46	%		0.22	%
Fair values:	$	7.2301		$	7.7083		$	6.0599		$	6.5324		$	4.4485		$	1.7342
Gain (loss) on extinguishment of warrant liabilities	$	48,210		$	8,153		$	5,722		$	(1,361	)	$	26,531		$	1,522

In 2012, 125,000 warrants were exercised on a cashless basis to purchase 48,402 shares of common stock. In accordance with ASC 470-50-40, “Debt – Modification and Extinguishments – Derecognition”, an aggregate gain of $73,291 was recognized.  For details, please refer to the following table.

Exercise date:	February 7,
Market price of common stock:	$	6.44
Exercise warrants:		125,000
Exercise price:	$	3.50
Remaining contractual life (years):		1.73
Dividend yield:		-	%
Expected volatility:		39.43	%
Risk-free interest rate:		0.21	%
Fair values:	$	3.08
Gain on extinguishment of warrant liabilities	$	73,291