Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 13: 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 December 31, 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 December 31, 2012
Derivative liability	$	-	$	-	$	605,516	$	605,516
Warrant liability		-		-		1,730,044		1,730,044
Total	$	-	$	-	$	2,335,560	$	2,335,560

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the fiscal year ended December 30, 2012:

	Warrant Liability			Derivative Liability			Total Liability
Balance, December 31, 2011	$	-		$	-		$	-
Issuance of convertible debt and warrants		2,507,868			2,167,341			4,675,209
Initial value of instruments in excess of face value of debt		(490,204	)		(581,696	)		(1,071,899	)
Change in estimated fair value		(287,620	)		(980,129	)		(1,267,750	)
Balance, December 31, 2012	$	1,730,044		$	605,516		$	2,335,560

Management used the following inputs to value the Derivative and Warrant Liabilities during the fiscal year ended December 31, 2012.

	Derivative Liability		Warrant Liability
Exercise Price		$0.0573-$0.099		$0.0745-$0.1287
Risk Free Rate		0.11% - 0.15%		1.11% - 0.62%
Expected Volatility		98% - 193%		95% - 170%
Expected Dividend Yield		-		-

In addition, in computing the fair value of the derivative and warrant liability at December 31, 2012 for instruments under the Binomial Lattice option-pricing model, management assumed a 75% probability of a down round financing event at various assumed stock prices.  A 10% change in the probability of a down round financing event would change the recorded derivative liability by approximately 6%.  A $0.01 change in the assumed stock price would change the recorded derivative liability by approximately 8%.