FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2013

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
	Level 1	Level 2		Level 3	December 31, 2013		December 31, 2012
Financial instruments:
Warrant derivative		$	950,000		$	950,000	$	1,945,000
PIK Note derivative		$	2,250,000		$	2,250,000		--

The recorded value of certain financial assets and liabilities, which consist primarily of cash and cash equivalents, receivables, other current assets, and accounts payable and accrued expenses approximate the fair value at December 31, 2013 and 2012 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, and the remaining short term period outstanding, the carrying value of notes payable approximates fair value.  Further, due to the recent placement of the PIK Notes, fair value of the Notes approximates $10,500,000 at December 31, 2013 (level 2). For the Company's warrant and PIK note derivative liabilities, fair value was estimated using a Binomial Lattice Model and monte carlo model using the following assumptions:

Warrant derivative liability	Fair Value Measurements
	Using Inputs
	December 31, 2013			December 31, 2012
Market price and estimated fair value of stock	$	1.10		$	1.54
Exercise price	$	1.93		$	2.00
Term (years)		3			4
Dividend yield	$	--		$	--
Expected volatility		76.90	%		83.3	%
Risk-free interest rate		0.78	%		0.54	%

PIK Note derivative liability	Fair Value Measurements
	Using Inputs
	December 31, 2013			December 31, 2012
Market price and estimated fair value of stock	$	1.10			--
Exercise price	$	1.40			--
Term (years)		9.58			--
Dividend yield	$	--			--
Expected volatility		76.90	%		--
Risk-free interest rate		2.96	%		--