Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2013

7. Fair Value of Financial Instruments

The FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured and reported on a fair value basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The fair value of certain of the Company’s financial instruments, including Cash and cash equivalents and Accounts payable, approximates the carrying value due to the relatively short maturity of such instruments. The fair value of derivative instruments is determined by management with the assistance of an independent third party valuation specialist. The warrant liability is a derivative instrument and is classified as Level 3. The Company used the Monte-Carlo Simulation model to estimate the fair value of the warrants. Significant assumptions used at March 31, 2013 for the 2010 warrants include a weighted average term of 2.0 years, a 5% probability that the warrant exercise price would be reset, volatility range of 58.0% to 59.1% and a risk free interest rate of 0.25%. Significant assumptions used at June 30, 2013 for the 2010 warrants include a weighted average term of 1.7 years, a 5% probability that the warrant exercise price would be reset, volatility range of 55.7% to 56.5% and a risk free interest rate of 0.36%. Significant assumptions used at September 30, 2013 for the 2010 warrants include a weighted average term of 1.5 years, a 5% probability that the warrant exercise price would be reset, volatility range of 59.0% to 59.4% and a risk free interest rate of 0.33%. Significant assumptions used at March 31, 2013 for the 2011 warrants include a weighted average term of 2.8 years, a 5% probability that the warrant exercise price would be reset, volatility range of 58.0% to 59.1% and a risk free interest rate of 0.25%. Significant assumptions used at June 30, 2013 for the 2011 warrants include a weighted average term of 2.5 years, a 5% probability that the warrant exercise price would be reset, volatility of 59.1% and a risk free interest rate of 0.66%. Significant assumptions used at September 30, 2013 for the 2011 warrants include a weighted average term of 2.3 years, a 5% probability that the warrant exercise price would be reset, volatility of 58.6% and a risk free interest rate range of 0.33% to 0.63%. Significant assumptions used at March 31, 2013 for the 2013 warrants include a weighted average term of 4.9 years, a 5% probability that the warrant exercise price would be reset, volatility range of 58.0% to 66.7% and a risk free interest rate range of 0.25% to 0.77%. Significant assumptions used at June 30, 2013 for the 2013 warrants include a weighted average term of 4.7 years, a 5% probability that the warrant exercise price would be reset, volatility of 64.6% and a risk free interest rate of 1.41%. Significant assumptions used at September 30, 2013 for the 2013 warrants include a weighted average term of 4.4 years, a 5% probability that the warrant exercise price would be reset, volatility of 64.3% and a risk free interest rate of 1.39%.

The warrant liability measured at fair value on a recurring basis is as follows:


	Total		Level 1		Level 2		Level 3
Derivative instruments:
Warrant liability at September 30, 2013	$	3,514,622	$	—	$	—	$	3,514,622
Warrant liability at December 31, 2012	$	1,299,570	$	—	$	—	$	1,299,570

A reconciliation of the warranty liability measured at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) from January 1, 2013 to September 30, 2013 follows:


Balance at January 1, 2013	$	1,299,570
Issuance of warrants		1,297,950
Net loss included in earnings		917,102
Exercise of warrants		—

Balance at September 30, 2013	$	3,514,622

- 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