Annual report pursuant to Section 13 and 15(d)

FAIR VALUE MEASUREMENTS

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FAIR VALUE MEASUREMENTS
 12 Months Ended
Dec. 31, 2012
FAIR VALUE MEASUREMENTS [Abstract]  
FAIR VALUE MEASUREMENTS
NOTE 8 - FAIR VALUE MEASUREMENTS
 
We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of the debt approximates fair value since this instrument bears market interest rates.
 
Generally Accepted Accounting Principles define's fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
 
·
Level 1 – Quoted prices in active markets for identical assets or liabilities.
·
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
·
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.
 
The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.
 
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and December 31, 2011 are summarized below:
 
(in thousands)
                              
 
 
Description
  
As of
December 31,
2012
    
 
Level 1
    
 
Level 2
    
 
Level 3
    
Total Gains
(Losses)
  
Liabilities:
Derivative liability-
                              
warrants
   $ 271     $ -     $ 271     $ -     $ 1,236  
preferred stock
   $ 9,200     $ -     $ -     $ 9,200     $ (4,770 )
 
(in thousands)
                                        
 
 
Description
  
As of
December 31, 2011
    
 
Level 1
    
 
Level 2
    
 
Level 3
    
Total Gains
(Losses)
  
Liabilities:
Derivative liability-
                                        
warrants
   $ 1,507     $ -     $ 1,507     $ -     $ 3,580  
preferred stock
   $ 4,430     $ -     $ -     $ 4,430     $ 1,410  
 
In order to calculate the Level 3 Derivative liability - preferred stock, we used the Monte Carlo simulation to estimate future stock prices. The use of valuation techniques requires the Company to make various key assumptions for inputs into the model, including assumptions about the expected future volatility of the price of the Company's stock. In estimating the fair value at December 31, 2012, we based our selected volatility on the one-year historic volatility of the Company's stock as we believe this is most representative of the expected volatility in the near future for the Company.