Quarterly report pursuant to Section 13 or 15(d)

Fair Value

v2.4.0.8
Fair Value
9 Months Ended
Sep. 30, 2014
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]
Note 4 - Fair Value
 
The Company determines the estimated fair value of amounts presented in these condensed consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available as of September 30, 2014 and 2013, plus December 31, 2013 and 2012, and, as of those dates, the carrying value of all amounts approximates fair value.
 
The Company has categorized its assets and liabilities at fair value based upon the following fair value hierarchy:
 
Level 1 - Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
 
Level 2 - Inputs use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
 
Level 3 - Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
 
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.
 
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
 
The following table summarizes the valuation of the Company’s derivatives by the above fair value hierarchy levels as of September 30, 2014 and December 31, 2013 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
 
 
In Active
 
Significant
 
 
 
 
 
 
 
Markets for
 
Other
 
Significant
 
 
 
 
 
Identical
 
Observable
 
Unobservable
 
 
 
 
 
Liabilities
 
Inputs
 
Inputs
 
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
Warrant liability
 
$
2,303,561
 
$
-
 
$
-
 
$
2,303,561
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - September 30, 2014
 
$
2,303,561
 
$
-
 
$
-
 
$
2,303,561
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant liability
 
$
231,200
 
$
-
 
$
-
 
$
231,200
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2013
 
$
231,200
 
$
-
 
$
-
 
$
231,200
 
 
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities shown in the above table consist of warrants with “down-round protection”, as the Company is unable to determine if it will have sufficient authorized common stock to settle such arrangements. Earlier in 2013, the Company’s Level 3 liabilities consisted of conversion options with “down-round protection”.
 
Assumptions utilized in the valuation of Level 3 liabilities are described as follows:
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
 
 
September 30
 
September 30,
 
 
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk-free interest rate
 
 
1.43% - 1.68
%
 
0.05% - 0.08
%
 
1.43% - 1.73
%
 
0.02% - 0.08
%
 
Expected term (years)
 
 
4.08 - 4.84
 
 
0.00
 
 
4.08 - 5.00
 
 
0.00 - 0.50
 
 
Expected volatility
 
 
164
%
 
65
%
 
164% - 168
%
 
65% - 99
%
 
Expected dividends
 
 
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
 
 
  
The expected term used is the contractual life of the instrument being valued. Since the Company’s stock has not been publicly traded for a sufficiently long period of time, the Company is utilizing an expected volatility based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
  
During the nine months ended September 30, 2014, a warrant to purchase 400,000 shares of common stock was exercised. The warrant had an exercise date fair value of $144,439 which was credited to equity. 
 
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all Level 3 liabilities measured at fair value on a recurring basis using unobservable inputs during the nine months ended September 30, 2014 and 2013:
 
 
 
2014
 
2013
 
 
 
 
 
 
 
Balance - January 1,
 
$
231,200
 
$
38,300
 
 
 
 
 
 
 
 
 
Change in fair value of derivative liability
 
 
(12,400)
 
 
(64,500)
 
 
 
 
 
 
 
 
 
Value of warrants exercised
 
 
(144,439)
 
 
-
 
 
 
 
 
 
 
 
 
Issuance of derivative liability
 
 
2,229,200
 
 
434,200
 
 
 
 
 
 
 
 
 
Balance - September 30,
 
$
2,303,561
 
$
408,000
 
  
The Company’s significant financial instruments such as cash, accounts payable and accrued expenses were deemed to approximate fair value due to their short term nature.