Note 7 – Fair Value Measurements and Disclosures

Financial Instruments Carried at Cost

Short-term financial instruments in our condensed consolidated balance, including accounts receivables, accounts payable and accrued expenses, are carried at cost which approximates fair value, due to their short-term nature. The face value of our long-term convertible debt approximates its fair value.

Fair Value Measurements

Our condensed consolidated balance sheets include various financial instruments that are carried at fair value. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;

Level 2, defined as observable inputs other than Level I prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

We have segregated our financial assets and liabilities that are measured at fair value on a recurring basis 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. The inputs used in measuring the fair value of cash and short-term investments are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of our funds.

We account for our derivative financial instruments, consisting solely of certain stock purchase warrants that contain non-standard anti-dilutions provisions and/or cash settlement features, and certain conversion options embedded in our convertible instruments, at fair value using level 3 inputs. We determine the fair value of these derivative liabilities using the Black-Scholes option pricing model when appropriate, and in certain circumstances using binomial lattice models or other accepted valuation practices.

When determining the fair value of our financial assets and liabilities using the Black-Scholes option pricing model, we are required to use various estimates and unobservable inputs, including, among other things, contractual terms of the instruments, expected volatility of our stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value. When determining the fair value of our financial assets and liabilities using binomial lattice models or other accepted valuation practices, we also are required to use various estimates and unobservable inputs, including in addition to those listed above, the probability of certain events.

The following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014:

	As of June 30, 2015
Description	Level 1		Level 2		Level 3		Total

Assets
Investment in money market funds	$	6,407,371	$	-	$	-	$	6,407,371

Total investment in money market funds	$	6,407,371	$	-	$	-	$	6,407,371

Liabilities
Embedded conversion options	$	-	$	-	$	5,112,346	$	5,112,346
Stock purchase warrants		-		-		11,885,468		11,885,468

Total derivative liabilities	$	-	$	-	$	16,997,814	$	16,997,814

	As of December 31, 2014
Description	Level 1		Level 2		Level 3		Total

Assets
Investment in money market funds	$	15,736,350	$	-	$	-	$	15,736,350

Total investment in money market funds	$	15,736,350	$	-	$	-	$	15,736,350

Liabilities
Embedded conversion options	$	-	$	-	$	4,362,225	$	4,362,225
Stock purchase warrants		-		-		25,484,596		25,484,596

Total derivative liabilities	$	-	$	-	$	29,846,821	$	29,846,821

The Level 1 assets measured at fair value in the above table are classified as cash and cash equivalents and the Level 3 liabilities measured at fair value in the above table are classified as derivative liabilities in the accompanying condensed consolidated balance sheets. All gains and losses arising from changes in the fair value of derivative instruments are classified as the changes in the fair value of derivative instruments in the accompanying condensed consolidated statements of operations.

During the quarters ended June 30, 2015 and 2014 we did not have any transfers between Level 1, Level 2, or Level 3 assets or liabilities. The following tables set forth a summary of changes in the fair value of Level 3 liabilities measured at fair value on a recurring basis for the six months ended June 30, 2015 and 2014:

Description	Balance at December 31, 2014		Established in 2015		Effect of Conversion to Common Stock		Reclassed to Additional Paid-In Capital		Change in Fair Value		Balance at June 30, 2015

Derivative liabilities:
Embedded conversion options	$	4,362,225	$	-	$	-	$	-	$	750,121	$	5,112,346
Stock purchase warrants		25,484,596		-		-		-		(13,599,128)		11,885,468

Description	Balance at December 31, 2013		Established in 2014		Effect of Conversion to Common Stock		Reclassed to Additional Paid-In Capital (1)		Change in Fair Value		Balance at June 30, 2014

Derivative liabilities:
Embedded conversion options	$	1,515,540	$	8,825,935	$	(1,932,693)		-	$	(833,503)	$	7,575,279
Stock purchase warrants		1,733,055		29,137,683		-		(1,331,776)		1,535,002		31,073,964

(1) Various warrants were reclassified to additional paid-in capital as a result of the expiration of non-standard anti-dilution clauses contained within the warrants.

We have no financial assets and liabilities measured at fair value on a non-recurring basis.

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Property and equipment, intangible assets and goodwill are measured at fair value on a non-recurring basis (upon impairment). We did not recognize any impairment during the six months ended June 30, 2015. As a result of our decision to discontinue further funding of the ALD-401 development program during the three months ended June 30, 2014, we recognized an impairment charge of approximately $3.7 million to our in-process research and development asset and approximately $1.0 million to our trademarks. We have no non-financial assets and liabilities measured at fair value on a recurring basis.