Fair Value Measurement

12 Months Ended

Dec. 31, 2014

Notes to Financial Statements

6. Fair Value Measurement

On November 7, 2012, the Company issued an aggregate of 483,657 shares of common stock at a price of $5.324 per share for aggregate net proceeds of $2.6 million. The Company also issued warrants to the investors in the offering to purchase aggregate of 483,657 shares of common stock.  The warrants were exercisable through November 7, 2017 at an exercise price of $6.53 per share. The warrants contained a provision for net cash settlement at the option of the holder in the event that there is a fundamental transaction (as contractually defined in the warrant agreements) and as a result, were recorded as derivative liabilities on the consolidated balance sheet.

On March 6, 2013, the Company and certain investors that participated in the November 2012 private placement transaction (“Investors”), entered into separate Warrant Exchange Agreements pursuant to which certain of the Investors exchanged common stock purchase warrants acquired in the private placement for shares of the Company’s newly designated Series C Convertible Preferred Stock.  Each share of Series C Convertible Preferred Stock is convertible into one share of the Company’s common stock at the option of the holder, subject to certain limitations on conversions that would result in the Investors acquiring more than 4.99% (or, if such limitation is waived by the holder upon no less than 61 days prior notice, 9.99%) of the outstanding voting stock of the Company.  The Series C Convertible Preferred Stock was established on March 5, 2013 by the filing in the State of Delaware of a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (“Certificate of Designation”). The liquidation preference of the Series C Convertible Preferred Stock is $0.0001 per share.

Pursuant to the Warrant Exchange Agreements, certain Investors received in exchange for their warrants an aggregate of 229,337 shares of the Series C Convertible Preferred Stock, each convertible into one share of Common Stock.  The number of shares of Common Stock underlying the Series C Convertible Preferred Stock is the same number as would have been-issued upon a “cashless exercise” of the exchanged warrants under the terms of the warrants based on the one-day volume weighted average price of the Company’s Common Stock on February 28, 2013, which was $12.6439 per share, as reported by Bloomberg.  As of December 31, 2014, investors have converted 229,336 shares of the Series C Convertible Preferred Stock into 229,336 shares of common stock.

Fair Value of Financial Assets and Liabilities

The following table presents the Company's assets and liabilities that are measured at fair value at December 31, 2014 and 2013 (in thousands):

	Fair value measured at December 31, 2014
	Total carrying value at December 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	2014		(Level 1)		(Level 2)		(Level 3)
Assets
Marketable securities - mutual funds	$	3,500	$	3,500	$	-	$	-
Liabilities
Fair value of warrant liabilities	$	-	$	-	$	-	$	-
	Fair value measured at December 31, 2013
	Total carrying value at December 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
		2013	(Level 1)		(Level 2)		(Level 3)
Liabilities
Fair value of warrant liabilities	$	48	$	-	$	-	$	48

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Principal Accounting Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management.

Level 3 Valuation Techniques

Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “Fair value adjustments for warrant liabilities” in the Company’s consolidated statements of operations.

As of December 31, 2014, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

Liabilities resulting from the Warrants issued in connection with the Company’s November 2012 financing were valued using the Black-Scholes option valuation model and the following assumptions on the following dates (fair value in thousands):

	December 31,		December 31,		March 6,
	2014		2013		2013
Risk-free interest rate		0.02% - 1.10%		0.01% - 0.78%		0.81%
Expected volatility		69.1% - 86.1%		69.1% - 89.4%		147.15%
Expected life (in years)		0.1 - 3.4		0.1 - 3.9		4.7
Expected dividend yield		-		-		-
Number of warrants		58,448		65,263		474,266
Fair value	$	-	$	48	$	5,696

The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility in the Black-Scholes model is based on the standard deviation of the Company’s underlying stock price's daily logarithmic returns. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock, and does not expect to pay dividends on its common stock in the future. The volatility rate was computed based on a comparison of average volatility rates of similar companies.

The fair value of the warrant liabilities is re-measured at the end of every reporting period and upon the exercise and/or modification of warrants.  The change in fair value is reported in the consolidated statement of operations as fair value adjustments for warrant liabilities.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the year ended December 31 (in thousands):

	For the Years Ended
	December 31,
	2014			2013
Beginning balance	$	48		$	3,126
Issuance of new warrants		-			-
Fair value adjustments for warrant liabilities		(48	)		2,618
Reclassification to stockholders' equity		-			(5,696	)
Ending balance	$	-		$	48