Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

5. Fair Value Measurements

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

The Company's balance sheet contains derivative and warrant liabilities that are recorded at fair value on a recurring basis. The three-level valuation hierarchy for disclosure of fair value is as follows:

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

Level 2: uses observable market-based inputs or unobservable inputs that are corroborated by market data.

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

The fair value of the Company’s recorded derivative and warrant liabilities is determined based on unobservable inputs that are not corroborated by market data, which require a Level 3 classification. A modified Black Scholes option valuation model was used to determine the fair value with similar assumptions to those described under “Stock-Based Compensation”. The Company records derivative and warrant liabilities on the consolidated balance sheets at fair value with changes in fair value recorded in the consolidated statements of operations.

The following table presents the balances of liabilities measured at fair value on a recurring basis by level as of September 30, 2012:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
As of September 30, 2012
Derivative liability	$	-	$	-	$	1,455,471	$	1,455,471
Warrant liability		-		-		3,101,257		3,101,257
Total	$	-	$	-	$	4,556,728	$	4,556,728

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the nine months ended September 30, 2012:

	Warrant			Derivative			Total
	Liability			Liability			Liability
Balance, December 31, 2011	$	-		$	-		$	-
Issuance of convertible debt and warrants
resulting in derivative and warrant liabilities		1,888,415			1,573,319			3,461,734
Change in estimated fair value		317,148			452,240			769,388
Balance, March 31, 2012		2,205,563			2,025,559			4,231,122
Change in the estimated fair value		1,085,791			1,803,766			2,889,557
Balance, June 30, 2012		3,291,354			3,829,325			7,120,679
Issuance of convertible debt and warrants
resulting in derivative and warrant liabilities		230,183			160,074			390,257
Change in the estimated fair value		(420,280	)		(786,419	)		(1,206,699	)
Reclassification of derivative liability to
APIC at conversion		-			(1,747,509	)		(1,747,509	)
Balance, September 30, 2012	$	3,101,257		$	1,455,471		$	4,556,728