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FAIR VALUES OF FINANCIAL INSTRUMENTS | 6 Months Ended
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Jun. 30, 2014
Notes to Financial Statements |
Note 3 - FAIR VALUES OF FINANCIAL INSTRUMENTS | The Company measures certain financial liabilities (warrant liability, forward contract liability and derivative liabilities) at fair value on a recurring basis. The Company follows a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows: Level 1 Measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date. Level 2 Measurements are inputs other than quoted prices included in Level 1 that are observable either directly or indirectly. Level 3 Measurements are unobservable inputs. Management believes that the carrying amounts of the Company’s financial instruments, consisting primarily of cash, accounts receivable, accounts payable and accrued expenses approximated their fair values at June 30, 2014 and December 31, 2013, due to their short-term nature. Management also believes that the June 30, 2014 and December 31, 2013 interest rates associated with the notes payable approximates the market interest rates for these types of debt instruments and as such, the carrying amount of the notes payable approximates their fair value. Common Stock Warrant Liability The Company accounts for its common stock warrants under ASC 480, “Distinguishing Liabilities from Equity,” which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and it requires or may require the issuer to settle the obligation by transferring assets, would qualify for classification as a liability. The guidance required the Company’s outstanding warrants from private placements to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as a change in fair value of warranty liability in the Company’s consolidated statements of operations. Specifically, the warrants issued in connection with private placements grant the warrant holder certain anti-dilution protection providing exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Upon exercise or expiration of the warrants, the fair value of the warrant at that time will be reclassified to equity from a liability. The following table is a summary of the warrant liability activity measured at fair value using Level 3 inputs:
|  | Warrant Liability |
Balance at December 31, 2013 |  | $ | 1,060,353 |
Granted |  |  | 167,532 |
Cancelled, forfeited or expired |  |  | (24,120 | )
Change in fair value of common stock warrants |  |  | (444,016 | )
Balance at June 30, 2014 (unaudited) |  | $ | 759,749 |
Forward contracts As part of our 2013 private placement of common stock, the Company also agreed that the 38,462 shares of common stock included in the units are subject to increase and the $0.65 per share value is subject to decrease, in each case based on the level of the Company’s consolidated net revenues derived during our 2013 fiscal year (the “Make-Whole Adjustments”) (see Note 6 Common Stock for further details). The Company separately valued the forward contracts using Level 3 inputs. The fair value of the forward contracts of $115,767 was recorded as a liability and is included in accounts payable and accrued expenses on the Consolidated Balance Sheet as of December 31, 2013. The following table is a summary of the forward contract liability activity measured at fair value using Level 3 inputs:
|  | Forward Contract Liability |
Balance at December 31, 2013 |  | $ | 115,767 |
Granted |  |  | - |
Cancelled, forfeited or expired |  |  | (115,767 | )
Change in fair value |  |  | - |
Balance at June 30, 2014 (unaudited) |  | $ | - |
Derivative Liability The derivative relates to the conversion feature into common stock at an initial rate of 2,000 common shares for each share of Series D Preferred Stock, subject to adjustment for certain anti-dilution protection and provides exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share (see Note 5 Redeemable Convertible Preferred Stock for further details). Management analyzed the terms of the conversion option and concluded that the conversion feature was derivative since it met the definition of a derivative and did not qualify for any of the exceptions. The Company therefore separately valued the derivative contracts using Level 3 inputs. The fair value of the derivatives was recorded as a derivative liability on the Consolidated Balance Sheet as of June 30, 2014 and December 31, 2013. The following table is a summary of the derivative liability activity measured at fair value using Level 3 inputs:
|  | Derivative Liability |
Balance at December 31, 2013 |  | $ | 312,088 |
Granted |  |  | - |
Cancelled, forfeited or expired |  |  |  |
Change in fair value |  |  | (126,691 | )
Balance at June 30, 2014 (unaudited) |  | $ | 185,397 |

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- Definition 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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