Fair Value Measurements and Disclosures

3 Months Ended

Mar. 31, 2015

Note 6 – Fair Value Measurements and Disclosures

Financial Instruments Carried at Cost

Short-term financial instruments in our condensed consolidated balance, including accounts receivables, accounts payable and accrued expenses, are carried at cost which approximates fair value, due to their short-term nature. The face value of our long-term convertible debt approximates its fair value.

Fair Value Measurements

Our condensed consolidated balance sheets include various financial instruments that are carried at fair value. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;

Level 2, defined as observable inputs other than Level I prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

We have segregated our financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The inputs used in measuring the fair value of cash and short-term investments are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of our funds.

We account for our derivative financial instruments, consisting solely of certain stock purchase warrants that contain non-standard anti-dilutions provisions and/or cash settlement features, and certain conversion options embedded in our convertible instruments, at fair value using level 3 inputs. We determine the fair value of these derivative liabilities using the Black-Scholes option pricing model when appropriate, and in certain circumstances using binomial lattice models or other accepted valuation practices.

When determining the fair value of our financial assets and liabilities using the Black-Scholes option pricing model, we are required to use various estimates and unobservable inputs, including, among other things, contractual terms of the instruments, expected volatility of our stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value. When determining the fair value of our financial assets and liabilities using binomial lattice models or other accepted valuation practices, we also are required to use various estimates and unobservable inputs, including in addition to those listed above, the probability of certain events.

The following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:

	As of March 31, 2015
Description	Level 1		Level 2		Level 3		Total

Assets
Investment in money market funds	$	11,099,242	$	-	$	-	$	11,099,242


Total investment in money market funds	$	11,099,242	$	-	$	-	$	11,099,242

Liabilities
Embedded conversion options	$	-	$	-	$	5,740,238	$	5,740,238
Stock purchase warrants		-		-		15,740,705		15,740,705


Total derivative liabilities	$	-	$	-	$	21,480,943	$	21,480,943

	As of December 31, 2014
Description	Level 1		Level 2		Level 3		Total

Assets
Investment in money market funds	$	15,736,350	$	-	$	-	$	15,736,350


Total investment in money market funds	$	15,736,350	$	-	$	-	$	15,736,350

Liabilities
Embedded conversion options	$	-	$	-	$	4,362,225	$	4,362,225
Stock purchase warrants		-		-		25,484,596		25,484,596


Total derivative liabilities	$	-	$	-	$	29,846,821	$	29,846,821

The Level 1 assets measured at fair value in the above table are classified as cash and cash equivalents and the Level 3 liabilities measured at fair value in the above table are classified as derivative liabilities in the accompanying condensed consolidated balance sheets. All gains and losses arising from changes in the fair value of derivative instruments are classified as the changes in the fair value of derivative instruments in the accompanying condensed consolidated statements of operations.

During the quarters ended March 31, 2015 and 2014 we did not have any transfers between Level 1, Level 2, or Level 3 assets or liabilities. The following tables set forth a summary of changes in the fair value of Level 3 liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2015 and 2014:

Description	Balance at December 31, 2014		Established in 2015		Effect of Conversion to Common Stock		Change in Fair Value		Balance at March 31, 2015

Derivative liabilities:
Embedded conversion options	$	4,362,225	$	-	$	-	$	1,378,013	$	5,740,238
Stock purchase warrants		25,484,596		-		-		(9,743,891)		15,740,705

Description	Balance at December 31, 2013		Established in 2014		Effect of Conversion to Common Stock		Change in Fair Value		Balance at March 31, 2014

Derivative liabilities:
Embedded conversion options	$	1,515,540	$	3,567,834	$	(1,860,779)	$	(228,735)	$	2,993,860
Stock purchase warrants		1,733,055		7,681,189		-		27,673		9,441,917

We have no financial assets and liabilities measured at fair value on a non-recurring basis.

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Property and equipment, intangible assets and goodwill are measured at fair value on a non-recurring basis (upon impairment). We did not recognize any impairment during the quarters ended March 31, 2015 and 2014. We have no non-financial assets and liabilities measured at fair value on a recurring basis.

- 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.

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