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Note 10 - Fair Value Measurements

12 Months Ended

Dec. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

10. Fair Value Measurements

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2012:

						Fair Value Measurements at Reporting Date Using:
Description		Balance as of December 31, 2012				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs(Level 2)				Significant Unobservable Inputs (Level 3)

Liabilities
Convertible notes		$	8,098,000			$	—			$	—			$	8,098,000
Warrant liabilities		$	3,800,000			$	—			$	—			$	3,800,000
Total Liabilities		$	11,898,000			$	—			$	—			$	11,898,000

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2013:

						Fair Value Measurements at Reporting Date Using:
Description		Balance as of December 31, 2013				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs(Level 2)				Significant Unobservable Inputs(Level 3)

Liabilities
Convertible notes		$	4,537,000			$	—			$	—			$	4,537,000
Warrant and option liabilities		$	2,680,000			$	—			$	—			$	2,680,000
Total Liabilities		$	7,217,000			$	—			$	—			$	7,217,000

A summary of changes in the 2011 Convertible Notes, 2012 Convertible Notes, Third Tranche Convertible Notes, 2011 Warrants, 2012 Warrants, Third Tranche Warrants, and the February 2013 Warrants, February 2013 SPA Options, September 2013 Warrants, and September 2013 SPA Options as of December 31, 2012, February 22, 2013, September 18, 2013 and December 31, 2013 is as follows:

		Fair Value of 2011 Convertible Notes				Fair Value of 2011 Warrant Liabilities				Fair Value of 2012 Convertible Notes				Fair Value of 2012 Warrant Liabilities				Fair Value of Third Tranche Convertible Notes				Fair Value of Third Tranche Warrant Liabilities				February 2013 Warrants				February 2013 SPA Option				September 2013 Warrants				September 2013 SPA Options				Total
Balance December 31, 2011		$	5,327,000			$	1,600,000			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	6,927,000
Amortization of debt discount		$	265,000			$	—			$	66,000			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	331,000
Allocation of initial proceeds		$	—			$	—			$	417,000			$	583,000			$	—			$	—			$	—			$	—			$	—			$	—			$	1,000,000
Fair value adjustment		$	918,000			$	400,000			$	1,105,000			$	1,217,000			$	—			$	—			$	—			$	—			$	—			$	—			$	3,640,000
Balance December 31, 2012		$	6,510,000			$	2,000,000			$	1,588,000			$	1,800,000			$	—			$	—			$	—			$	—			$	—			$	—			$	11,898,000
Allocation of initial proceeds		$	—			$	—			$	—			$	—			$	142,000			$	108,000			$	—			$	—			$	—			$	—			$	250,000
Initial fair value adjustment		$	—			$	—			$	—			$	—			$	252,000			$	192,000			$	—			$	—			$	—			$	—			$	444,000

January 16, 2013		$	6,510,000			$	2,000,000			$	1,588,000			$	1,800,000			$	394,000			$	300,000			$	—			$	—			$	—			$	—			$	12,592,000

Amortization of debt discount		$	38,000			$	—			$	55,000			$	—			$	2,000			$	—			$	—			$	—			$	—			$	—			$	95,000
Fair value adjustment		$	(370,000	)		$	—			$	(72,000	)		$	—			$	(8,000	)		$	—			$	—			$	—			$	—			$	—			$	(450,000	)
Carrying value of old debt at modification		$	(6,178,000	)		$	—			$	(1,571,000	)		$	—			$	(388,000	)		$	—			$	—			$	—			$	—			$	—			$	(8,137,000	)
Fair value of new debt at modification		$	6,070,000			$	—			$	1,516,000			$	—			$	386,000			$	—			$	—			$	—			$	—			$	—			$	7,972,000
Modification of warrants		$	—			$	1,916,000			$	—			$	632,000			$	—			$	—			$	—			$	—			$	—			$	—			$	2,548,000
Cancellation/retirement of warrants		$	—			$	—			$	—			$	(800,000	)		$	—			$	(300,000	)		$	—			$	—			$	—			$	—			$	(1,100,000	)
Fair value of instruments at issuance		$	—			$	—			$	—			$	—			$	—			$	—			$	2,759,000			$	1,211,000			$	—			$	—			$	3,970,000

February 22, 2013		$	6,070,000			$	3,916,000			$	1,516,000			$	1,632,000			$	386,000			$	—			$	2,759,000			$	1,211,000			$	—			$	—			$	17,490,000

Fair value adjustment		$	(1,932,000	)		$	(716,000	)		$	(536,000	)		$	(970,000	)		$	(136,000	)		$	—			$	(742,000	)		$	(807,000	)		$	—			$	—			$	(5,839,000	)
Carrying value of old debt at modification		$	(3,450,000	)		$	—			$	(980,000	)		$	—			$	(250,000	)		$	—			$	—			$	—			$	—			$	—			$	(4,680,000	)
Fair value of new debt at modification		$	4,920,000			$	—			$	1,390,000			$	—			$	361,000			$	—			$	—			$	—			$	—			$	—			$	6,671,000
Conversion of debentures and warrants		$	(688,000	)		$	(2,152,000	)		$	—			$	(238,000	)		$	—			$	—			$	—			$	—			$	—			$	—			$	(3,078,000	)
Fair value of instruments at issuance		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	1,807,000			$	1,166,000				2,973,000

September 18, 2013		$	4,920,000			$	1,048,000			$	1,390,000			$	424,000			$	361,000			$	—			$	2,017,000			$	404,000			$	1,807,000			$	1,166,000			$	13,537,000

Conversion of debentures and warrants		$	(122,000	)		$	(265,000	)		$	—			$	—			$	—			$	—			$	—			$	--			$	—			$	—			$	(387,000	)
Fair value adjustment		$	(1,508,000	)		$	(604,000	)		$	(380,000	)		$	(283,000	)		$	(124,000	)		$	—			$	(576,000	)		$	(404,000	)		$	(1,180,000	)		$	(874,000	)		$	(5,933,000	)

December 31, 2013		$	3,290,000			$	179,000			$	1,010,000			$	141,000			$	237,000			$	—			$	1,441,000			$	--			$	627,000			$	292,000			$	7,217,000

The following is a roll forward of the Company’s Level 3 instruments for the year ended December 31, 2013:

		Convertible Notes				Warrants				Total
Balance December 31, 2012			8,098,000				3,800,000				11,898,000
Issuances			142,000				7,051,000				7,193,000
Amortization of debt discount			95,000				--				95,000
Debt extinguishment and modification of warrants			1,826,000				1,448,000				3,274,000
Conversion of debentures and warrants			(810,000	)			(2,655,000	)			(3,465,000	)
Fair value adjustments			(4,814,000	)			(6,964,000	)			(11,778,000	)
December 31, 2013			4,537,000				2,680,000				7,217,000

Valuation – Methodology and Significant Inputs Assumptions

Fair values for the Company’s derivatives and financial instruments are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. The methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities, 2013 SPA Options and Convertible Notes as of the December 31, 2012 balance sheet date, February 22, 2013 Amendment and Waiver Agreement date, September 18, 2013 Amendment and Waiver agreement, and the December 31, 2013 balance sheet date are discussed below. Each of the measurements is considered a Level 3 measurement as a result of at least one significant unobservable input.

2011 Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the 2011 Warrants as of December 31, 2012, February 22, 2013, and December 31, 2013. This model is widely used in estimating value of European options dependent upon a non-paying dividend stock and fixed inputs. This model is subject to the significant assumptions discussed below and requires the following key inputs with respect to the Company and/or instrument:

Input		December 31, 2012				February 22, 2013				December 31, 2013
Stock Price		$	0.15			$	0.14			$	0.04
Exercise Price		$	0.15			$	0.15			$	0.098
Expected Life (in years)			3.15				3.00				2.15
Stock Volatility			100	%			100	%			95	%
Risk-Free Rate			0.39	%			0.40	%			0.21	%
Dividend Rate			0	%			0	%			0	%
Outstanding Shares of Common Stock			32,434,430				59,576,097				160,664,862

2012 Warrants

$0.15 Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was also utilized to estimate the fair value of the $0.15 Warrants as of December 31, 2012, February 22, 2013, and December 31, 2013.

Input		December 31, 2012				February 22, 2013				December 31, 2013
Stock Price		$	0.15			$	0.14			$	0.04
Exercise Price		$	0.15			$	0.15			$	0.098
Expected Life (in years)			4.50				4.38				3.50
Stock Volatility			100	%			100	%			100	%
Risk-Free Rate			0.63	%			0.70	%			1.02	%
Dividend Rate			0	%			0	%			0	%
Outstanding Shares of Common Stock			32,434,430				59,576,097				160,664,862

$0.25 Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was also utilized to estimate the fair value of the $0.25 Warrants as December 31, 2012. These warrants were canceled on February 22, 2013.

Input		December 31, 2012
Stock Price		$	0.15
Exercise Price		$	0.25
Expected Life (in years)			4.50
Stock Volatility			100	%
Risk-Free Rate			0.63	%
Dividend Rate			0	%
Outstanding Shares of Common Stock			32,434,430

Third Tranche Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was also utilized to estimate the fair value of the Third Tranche Warrants as of January 16, 2013. These warrants were canceled on February 22, 2013.

Input		January 16, 2013
Stock Price		$	0.15
Exercise Price		$	0.15
Expected Life (in years)			5
Stock Volatility			110	%
Risk-Free Rate			0.75	%
Dividend Rate			0	%
Outstanding Shares of Common Stock			32,434,430

February 2013 Warrants

A Monte Carlo simulation model was utilized to estimate the fair value of the February 2013 warrants as of February 22, 2013 and December 31, 2013.

Input		February 22, 2013				December 31, 2013
Stock Price		$	0.12			$	0.04
Exercise Price		$	0.20			$	0.08
Expected Life (in years)			5				4.15
Stock Volatility			110	%			100	%
Risk-Free Rate			0.84	%			1.34	%
Number of Steps			100,000				100,000
Outstanding Shares of Common Stock			59,576,097				160,664,862

February 2013 SPA Option

The February 2013 SPA option, upon exercise, allows the investor to purchase one share of common stock and one common stock warrant. The option was valued using multiple valuation models, including a Black-Scholes-Merton option-pricing model, with dilution effects, to estimate the fair value of the option to purchase the common share, and a Monte Carlo simulation to determine the estimated fair value of the warrant that would be issued at the time of exercise. These models were used to estimate the fair value of the option at February 22, 2013 and December 31, 2013.

Input		February 22, 2013
Stock Price		$	0.14
Exercise Price		$	0.15
Expected Life (in years)			0.75
Stock Volatility			110	%
Risk-Free Rate			0.15	%
Dividend Rate			0	%
Outstanding Shares of Common Stock			73,042,764

A Monte Carlo simulation model was also utilized to estimate the fair value of the February 2013 SPA Option as of February 22, 2013.

Input		February 22, 2013
Stock Price (simulated)		$	0.10
Exercise Price		$	0.20
Expected Life (in years)			5.00
Stock Volatility			110	%
Risk-Free Rate			1.158	%
Number of Steps			10,000

September 2013 Warrants

A Monte Carlo simulation model was utilized to estimate the fair value of the September 2013 warrants as of September 18, 2013 and December 31, 2013.

Input		September 18, 2013				December 31, 2013
Stock Price		$	0.071			$	0.04
Exercise Price		$	0.08			$	0.08
Expected Life (in years)			5				4.72
Stock Volatility			110	%			100	%
Risk-Free Rate			1.43	%			1.61	%
Number of Steps			100,000				100,000

September 2013 SPA Option

The September 2013 SPA option, upon exercise, allows the investor to purchase one share of common stock and one common stock warrant. The option was valued using multiple valuation models, including a Black-Scholes-Merton option-pricing model, with dilution effects, to estimate the fair value of the option to purchase the common share, and a Monte Carlo simulation to determine the estimated fair value of the warrant that would be issued at the time of exercise. These models were used to estimate the fair value of the option at September 18, 2013 and December 31, 2013.

Input		September 18, 2013				December 31, 2013
Stock Price		$	0.075			$	0.04
Exercise Price		$	0.06			$	0.06
Expected Life (in years)			0.748				0.463
Stock Volatility			110	%			100	%
Risk-Free Rate			0.07	%			0.10	%
Dividend Rate			0	%			0	%
Outstanding Shares of Common Stock			143,997,066				160,664,862

A Monte Carlo simulation model was also utilized to estimate the fair value of the 2013 SPA Option as of
September 18, 2013 and December 31, 2013.

Input		September 18, 2013				December 31, 2013
Stock Price (simulated)		$	0.075			$	0.04
Exercise Price		$	0.08			$	0.08
Expected Life (in years)			0.7480				0.463
Stock Volatility			110	%			100	%
Risk-Free Rate			0.07	%			0.10	%
Number of Steps			10,000				10,000

2011 Convertible Notes

A binomial lattice model was utilized to estimate the fair value of the Convertible Notes as of December 31, 2012, February 22, 2012, September 18, 2013 and December 31, 2013. The binomial model considers the key features of the Convertible Notes, as noted above, and is subject to the significant assumptions discussed below. First, a discrete simulation of the Company’s stock price, without effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Second, a discrete simulation of the Company’s stock price, with effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Third, based upon the simulated stock price with dilution effect, an analysis of the higher position of a conversion position, redemption position, or holding position (i.e. fair value of the respective future nodes value discounted using the applicable discount rate) was conducted relative to each node until a final fair value of the instrument is conducted at the node representing the measurement date. This model requires the following key inputs with respect to the Company and/or instrument:

Input		December 31, 2012				February 22, 2013				September 18 2013				December 31, 2013
Stock Price		$	0.15			$	0.14			$	0.075			$	0.04
Strike Price		$	0.10			$	0.10			$	0.06			$	0.06
Expected remaining term (in years)			1.15				2.35				1.78				1.50
Stock Volatility			105	%			100	%			100	%			95	%
Risk-Free Rate			0.17	%			0.32	%			0.38	%			0.25	%
Dividend Rate			0	%			0	%			0	%			0	%
Outstanding Shares of Common Stock			32,434,430				59,576,097				143,997,066				160,664,862
Effective discount rate			13.1	%			13.2	%			16.4	%			19.6	%
Probability of forced redemption			20	%			20	%			20	%			20	%

2012 Convertible Notes

A binomial lattice model was also utilized to estimate the fair value of the 2012 Convertible Notes as of December 31, 2012, February 22, 2012 and December 31, 2013. This model requires the following key inputs with respect to the Company and/or instrument:

Input		December 31, 2012				February 22, 2013				September 18 2013				December 31, 2013
Stock Price		$	0.15			$	0.14			$	0.075			$	0.04
Exercise Price		$	0.10			$	0.10			$	0.06			$	0.06
Expected remaining term (in years)			2.50				2.35				1.79				1.50
Stock Volatility			100	%			100	%			100	%			95	%
Risk-Free Rate			0.31	%			0.32	%			0.38	%			0.26	%
Dividend Rate			0	%			0	%			0	%			0	%
Outstanding Shares of Common Stock			32,434,430				59,576,097				143,997,066				160,664,862
Effective discount rate			13.2	%			13.2	%			16.4	%			19.6	%
Probability of forced redemption			20	%			20	%			20	%			20	%

Third Tranche Convertible Notes

A binomial lattice model was also utilized to estimate the fair value of the Tranche Three Convertible Notes as of January 16, 2012, February 22, 2012 and December 31, 2013. This model requires the following key inputs with respect to the Company and/or instrument:

Input		January 16, 2013				February 22, 2013				September 18 2013				December 31, 2013
Stock Price		$	0.15			$	0.14			$	0.075			$	0.04
Exercise Price		$	0.10			$	0.10			$	0.06			$	0.06
Expected remaining term (in years)			3				2.90				2.33				2.04
Stock Volatility			100	%			100	%			100	%			95	%
Risk-Free Rate			0.36	%			0.39	%			0.56	%			0.40	%
Dividend Rate			0	%			0	%			0	%			0	%
Outstanding Shares of Common Stock			32,434,430				59,576,097				143,997,066				160,664,862
Effective discount rate			13.2	%			13.2	%			13.3	%			21.3	%
Probability of forced redemption			20	%			20	%			20	%			20	%

The following are significant assumptions utilized in developing the inputs:

●

The Company’s common stock shares are traded on the OTC Bulletin Board and, accordingly, the stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date;

●

The expected future stock prices of the Company’s stock were modeled to include the effect of dilution upon conversion of the instruments to shares of common stock;

●

Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock) and (ii) the annualized daily volatility of comparable companies’ stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instrument. Historic prices of the Company and comparable companies’ common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates;

●

Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying stock;

●

The risk-free interest rate is based on the U.S. Treasury Yield curve in effect as of the valuation date for the expected term;

●

With respect to the 2011 Convertible Notes, 2012 Convertible Notes and Third Tranche Convertible Notes, the Company is expected to pay all accrued interest due to the Holders on each Interest Payment Date;

●

With respect to the 2011 Convertible Notes, 2012 Convertible Notes and Third Tranche Convertible Notes, based upon management’s expectations for a change of control or fundamental transaction to occur prior to the maturity date of the 2011 Convertible Notes, 2012 Convertible Notes and Third Tranche Convertible Notes, a low probability of a forced redemption;

●

Upon a change of control redemption, the change of control redemption amount shall equal to the sum of:

I. the greater of:

(i)

the outstanding amount of the debt divided by the Conversion Price on the date of the mandatory default amount is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or

(ii)

130% of the outstanding principal amount of the debt, plus 100% of accrued and unpaid interest, and

II.

all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the debt.

Additionally, it is assumed that no amounts are due pursuant to clause (II) above in any period and that the stock price at each respective node represents a reasonable approximation of the VWAP requirements.

The changes in fair value between reporting periods are related to the changes in the price of the Company’s common stock as of the measurement dates, the volatility of the Company’s common stock during the remaining term of the instrument, changes in the conversion price and effective discount rate.

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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