Note 10 - Fair Value Measurement

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Text Block]

NOTE 10:              FAIR VALUE MEASUREMENT

The Company measures the fair value of its assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.

ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

· Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

· Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

· Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

The valuation techniques that may be used to measure fair value are as follows:

A.  Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

B. Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

C. Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

The Company also adopted the provisions of ASC 825, Financial Instruments. ASC 825 allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities under the provisions of this Statement and did not elect the fair value option for any financial assets and liabilities transacted in the three month periods ended March 31, 2013 and March 31, 2012.

The Company’s financial assets or liabilities subject to ASC 820 as of March 31, 2013 include the conversion feature and warrant liability associated with convertible debentures issued during fiscal 2008 and 2009 and the warrants issued during 2011 and 2013 that are associated with notes payable that were issued to our Chief Executive Officer and Director, Cornelis F. Wit.  The conversion feature and warrants were deemed to be derivatives (the “Derivative Instruments”) since a fixed conversion price cannot be determined for either of the Derivative Instruments due to anti-dilution provisions embedded in the offering documents for the convertible debentures.  The derivative instruments were not issued for risk management purposes and as such are not designated as hedging instruments under the provisions of ASC 815 Disclosures about Derivative Instruments and Hedging Activities.  See Note 9 – Convertible Notes Payable.

Following is a description of the valuation methodologies used to determine the fair value of the Company’s financial assets including the general classification of such instruments pursuant to the valuation hierarchy.

A summary of the fair value of liabilities measured at fair value on a recurring  basis follows:

	Fair value at March 31, 2013		Quoted prices in active  markets for identical assets/ liabilities (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Derivatives: (1) (2)
Conversion feature liability	$	4,517,537	$	-0-	$	-0-	$	4,517,537
Warrant liability		8,362,725		-0-		-0-		8,362,725
Total of derivative liabilities	$	12,880,262	$	-0-	$	-0-	$	12,880,262

(1)   The fair value of the derivative instruments was estimated using the Income Approach and the Black Scholes option pricing model with the following assumptions for the three months ended March 31, 2013

(2)    The fair value at the measurement date is equal to their carrying value on the balance sheet

Significant valuation assumptions of derivative instruments at March 31, 2013
Risk free interest rate		0.16%
Dividend yield		0.00%
Expected volatility	228.7%	to	253.9%
Expected life (range in years)
Conversion feature liability	0.71	to	2.76
Warrant liability	0.50	to	3.00

A summary of the fair value of liabilities measured at fair value on a recurring  basis follows:

	Fair value at  December 31, 2012		Quoted prices in active  markets for identical assets/ liabilities (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Derivatives: (1) (2)
Conversion feature liability	$	2,287,323	$	-0-	$	-0-	$	2,287,323
Warrant liability		6,287,598		-0-		-0-		6,287,598
Total of derivative liabilties	$	8,574,921	$	-0-	$	-0-	$	8,574,921

(1)   The fair value of the derivative instruments was estimated using the Black Scholes option pricing model with the following assumptions for the year ended December 31, 2012

(2)    The fair value at the measurement date is equal to their carrying value on the balance sheet

Significant valuation assumptions of derivative instruments at December 31, 2012
Risk free interest rate	0.18%	to	0.36%
Dividend yield		0.00%
Expected volatility	218.2%	to	259.1%
Expected life (range in years)
Conversion feature liability	0.25	to	0.96
Warrant liability	0.66	to	3.25

	Other income for the three months ended
	March 31, 2013			March 31, 2012
The net amount of total gains/(losses) for the period included in earnings attributable to the unrealized gain or loss from changes in derivative liabilities at the reporting date	$	(3,905,199	)	$	(2,644,916	)
Total unrealized gains/(losses) included in earnings	$	(3,905,199	)	$	(2,644,916	)

The tables below set forth a summary of changes in fair value of the Company’s Level 3 financial liabilities at fair value for the periods ended March 31, 2013 and December 31, 2012.  The tables reflect changes for all financial liabilities at fair value categorized as Level 3 as of March 31, 2013 and December 31, 2012.

	Level 3 financial assets and financial liabilities at fair value
	Balance, beginning of year		Net realized gains/(losses)		Net unrealized (gains)/losses relating to instruments still held at the reporting date		Net purchases, issuances and settlements		Net transfers in and/or out of Level 3		Balance, end of period
Period ended March 31, 2013
Derivatives:
Conversion feature liability	$	2,287,323	$	-0-	$	2,230,214	$	-0-	$	-0-	$	4,517,537
Warrant liability		6,287,598		-0-		1,674,985		400,142		-0-		8,362,725
Total of derivative liabilties	$	8,574,921	$	-0-	$	3,905,199	$	400,142	$	-0-	$	12,880,262

	Level 3 financial assets and financial liabilities at fair value
	Balance, beginning of year		Net realized gains/(losses)		Net unrealized (gains)/losses relating to instruments still held at the reporting date		Net purchases, issuances and settlements		Net transfers in and/or out of Level 3		Balance, end of year
Year ended December 31, 2012
Derivatives:
Conversion feature liability	$	758,911	$	-0-	$	1,528,412	$	-0-	$	-0-	$	2,287,323
Warrant liability		1,692,708		-0-		4,594,890		-0-		-0-		6,287,598
Total of derivative liabilties	$	2,451,619	$	-0-	$	6,123,302	$	-0-	$	-0-	$	8,574,921