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 6 – 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 1 – Quoted prices in active markets for identical assets and liabilities;

· Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and

· Level 3 – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Liabilities measured at fair value on a recurring basis are summarized as follows:

	Fair value measurement using inputs				Carrying amount at December 31,
	Level 1	Level 2		Level 3	2012		2011
Financial instruments:
Warrants derivative		$	1,945,000		$	1,945,000	$	3,355,000

The Company estimates the fair value of the warrants derivative using a binomial lattice model using the following assumptions:

	Fair value measurement using inputs
	December 31, 2012			December 31, 2011
Market price of stock:	$	1.54		$	1.27
Exercise price:	$	2.00		$	2.00
Expected term (years):		4			5
Dividend yield	$	--		$	--
Expected volatility:		83.3	%		89.50	%
Risk-free interest rate:		0.54	%		0.83	%

The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the warrants. See further discussion in Note 10.

The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities at December 31, 2012 and 2011 based upon the short-term nature of the assets and liabilities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of notes payable approximate fair value (Level 2).