Fair Value Measurements

9 Months Ended

Sep. 30, 2014

Fair Value Measurements.

Fair Value Measurements

12. Fair Value Measurements

The Company complies with the provisions of FASB ASC Topic No. 820, Fair Value Measurements and Disclosures (ASC 820), in measuring fair value and in disclosing fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. Fair value, as defined in ASC 820, is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements also reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.

ASC 820 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost) and utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1— Level 1 inputs are unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value. An active market is a market in which transactions occur for the item to be fair valued with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1. Level 2 inputs are observable either directly or indirectly. These inputs include: (a) Quoted prices for similar assets or liabilities in active markets; (b) Quoted prices for identical or similar assets or liabilities in markets that are not active, such as when there are few transactions for the asset or liability, the prices are not current, price quotations vary substantially over time or in which little information is released publicly; (c) Inputs other than quoted prices that are observable for the asset or liability; and (d) Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 — Level 3 inputs are unobservable inputs for an asset or liability. These inputs should be used to determine fair value only when observable inputs are not available. Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally generated data and assumptions being used to price the asset or liability.

When determining the fair value measurements for assets or liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets. Nevertheless, certain assets are not actively traded in observable markets and the Company must use alternative valuation techniques to derive a fair value measurement.

The following tables summarize the basis used to measure certain financial instruments at fair value on a recurring basis in the consolidated balance sheets:

 Basis of Fair Value Measurements

			Quoted Prices in Active		Significant		Significant
			Markets for Identical		Other Observable		Other Unobservable
			Items		Inputs		Inputs
Balance at March 31, 2015	Total		(Level 1)		(Level 2)		(Level 3)
Common stock warrant liability	$	7,649,618	$	—	$	—	$	7,649,618

			Quoted Prices in Active		Significant		Significant
			Markets for Identical		Other Observable		Other Unobservable
			Items		Inputs		Inputs
Balance at December 31, 2014	Total		(Level 1)		(Level 2)		(Level 3)
Common stock warrant liability	$	9,418,413	$	—	$	—	$	9,418,413

The following summarizes the valuation technique for financial instruments measured and recorded at fair value:

Common stock warrant liability (Level 3):  For our common stock warrants, fair value is based on the Black-Scholes pricing model which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The Company used the following assumptions for its common stock warrants:

	At March 31, 2015	At December 31, 2014
Risk-free interest rate	0.25%-1.27%	0.21%-1.35%
Volatility	107.98%-129.6%	119.16%-136.62%
Expected average term	1.17-3.80	1.42-4.04

There was no expected dividend yield for the warrants granted. If factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Generally, as the market price of our common stock increases, the fair value of the warrant increases, and conversely, as the market price of our common stock decreases, the fair value of the warrant decreases. Also, a significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in a significantly higher fair value measurement; and a significant decrease in volatility would result in a significantly lower fair value measurement.

The following tables show reconciliations of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (i.e. Level 3):

	Fair Value
	Measurement Using
	Significant
	Unobservable Inputs
Common stock warrant liability	Three months ended March 31, 2015			Three months ended March 31, 2014
Beginning of period - January 1, 2015	$	9,418,413		$	28,829,849
Change in fair value of common stock warrants	(1,768,795		)	68,433,468
Issuance of common stock warrants	—			11,773,240
Exercise of common stock warrants	—			(83,294,149		)
Fair value of common stock warrant liability at March 31, 2015	$	7,649,618		$	25,742,408