Fair Value Measurements

12 Months Ended

Dec. 31, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 12: 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, 2013:

	Fair Value Measurements at December 31, 2013 Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Derivative liability	$	-	$	-	$	300,939	$	300,939
Warrant liability		-		-		803,484		803,484
Total	$	-	$	-	$	1,104,423	$	1,104,423

	Fair Value Measurements at December 31, 2012 Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
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 years ended December 31, 2013 and 2012:

	Warrant		Derivative		Total
	Liability		Liability		Liability
Balance December 31, 2011	$	-	$	-	$	-
Liability on issuance of debt and warrants		2,507,868		2,167,341		4,675,209
Elimination of liability on conversion		(490,204)		(581,696)		(1,071,900)
Change in estimated fair value (1)		(287,620)		(980,129)		(1,267,749)
Balance December 31, 2012		1,730,044		605,516		2,335,560
Liability on issuance of debt and warrants		762,111		929,156		1,691,267
Elimination of liability on conversion		-		(107,639)		(107,639)
Change in estimated fair value (1)		(1,688,671)		(1,126,094)		(2,814,765)
Balance December 31, 2013	$	803,484	$	300,939	$	1,104,423

(1) Included in the Statement of Operations on the line “Change in fair value of derivative liabilities.”

Management used the following inputs to value the Derivative and Warrant Liabilities for the year ended December 31, 2013:

	12/31/2013		12/31/2012
	Derivative Liability	Warrant Liability		Derivative Liability	Warrant Liability
Expected term	6 months - 1 year	5 years		6 months	5 years
Exercise price	$0.045 - $0.099	$0.075 - $0.1287		$0.0573- $0.099	$0.0745 - $0.1287
Expected volatility	70% - 244%	175% - 186%		98% -193%	95% - 170%
Expected dividends	None	None		None	None
Risk-free interest rate	.04% - .14%	.77% - 1.75%		.11% - .15%	.62% - 1.11%
Forfeitures	None	None		None	None

In computing the fair value of the derivative and warrant liability at December 31, 2013 for instruments under the Binomial Lattice option-pricing model, management estimated a 40% probability of a down round financing event at a price of $0.036 and a 14% to 75% probability that existing note holders with exchange privileges would exchange their existing debentures and warrants for new debentures and warrants. At December 31, 2012, in computing the fair value of the derivative and warrant liability 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.