Fair Value Measurements

12 Months Ended

Dec. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. Fair Value Measurements

The Company measures and records cash equivalents and warrant liabilities at fair value in the accompanying financial statements. Fair value is defined 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 on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value include:

• Level 1 – Observable inputs for identical assets or liabilities such as quoted prices in active markets;

• Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

• Level 3 – Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use.

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and December 31, 2012:

	As of December 31, 2013
	Level 1		Level 2		Level 3		Total
Liabilities:
Accrued warrant liability	$	—	$	—	$	1,241,311	$	1,241,311
Compensatory stock options not yet issued (1)		—		—		309,450		309,450
Total liabilities	$	—	$	—	$	1,550,761	$	1,550,761
	As of December 31, 2012
	Level 1		Level 2		Level 3		Total
Liabilities:
Accrued warrant liability	$	—	$	—	$	4,105,659	$	4,105,659
Total liabilities	$	—	$	—	$	4,105,659	$	4,105,659

(1) Included in accrued expenses in the accompanying consolidated balance sheets.

The Company has certain warrants that could require settlement in cash if a fundamental transaction occurs, as defined in the respective agreements. These agreements specify the amount due to warrant holders is based on the Black-Scholes pricing model. The following are the assumptions used to measure the accrued warrant liability at December 31, 2013 and 2012, which were determined in a manner consistent with that described for grants of options to purchase common stock as set forth in Note 2, “Summary of Significant Accounting Policies”:

	December 31, 2013			December 31, 2012
Stock Price	$	1.17		$	1.33
Exercise Price	$	1.60 - 5.00		$	1.60 - 5.00
Term in years		0.59 - 1.91			1.09 - 2.41
Volatility		42.52 - 76.03	%		82.75 - 95.91	%
Annual rate of quarterly dividends		0	%		0	%
Discount rate- bond equivalent yield		.08 - .36	%		.17 - .29	%

The following are the assumptions used to measure the compensatory stock options not yet issued at December 31, 2013:

	December 31, 2013
Stock price	$	0.72
Term in years		5
Volatility		75.68	%
Annual rate of quarterly dividends		0	%
Discount rate – bond equivalent yield		1.52	%

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 fair value measurements for the year ended December 31, 2013 and 2012:

	Year Ended December 31, 2013
	Accrued Warrant Liability			Compensatory Stock Options Issued After Year End
Beginning Balance	$	4,105,659		$	—
Total (gains) or losses, realized and unrealized, included in earnings (1)(2)		(2,864,348	)		—
Estimates and other changes in fair value		—			309,450
Balance, December 31, 2013	$	1,241,311		$	309,450
	Year Ended December 31, 2012
	Accrued Warrant Liability			Compensatory Stock Options Issued After Year End
Beginning Balance	$	7,285,959		$	378,750
Total (gains) or losses, realized and unrealized, included in earnings (1)(2)		(7,701,981	)		51,823
Issuances		4,521,681			—
Settlements		—			(430,573	)
Balance, December 31, 2012	$	4,105,659		$	—

(1) Unrealized gains or losses related to the accrued warrant liability were included as change in value of accrued warrant liability. There were no realized gains or losses for the years ended December 31, 2013 and 2012.

(2) Expenses recorded for compensatory stock options not yet issued are included in research and development expense and general and administrative expense.

Separate disclosure is required for assets and liabilities measured at fair value on a recurring basis, as documented above, from those measured at fair value on a nonrecurring basis. As of December 31, 2013 and 2012, the Company had no assets or liabilities that were measured at fair value on a nonrecurring basis.

The Company considers the accrued warrant liability and compensatory stock options not yet issued to be Level 3 because some of the inputs into the measurements are neither directly or indirectly observable. Both the accrued warrant liability and compensatory stock options not yet issued use management’s estimate for the expected term, which is based on the safe harbor method as historical exercise information over the term of each security is not readily available. Additionally, the number of compensatory options awarded involves an estimate of management’s performance in relation to the targets set forth in the Company’s annual Executive Compensation Plan. The following table summarizes the unobservable inputs into the fair value measurements:

	December 31, 2013
Description	Fair Value		Valuation Technique	Unobservable Input	Range
Compensatory stock options not yet issued	$	309,450	Black-scholes pricing model	Expected term		5
				Quantity of options		696,000
Accrued warrant liability		1,241,311	Black-scholes pricing model	Expected term		0.59 - 1.91
	$	1,550,761

Management believes the value of the accrued warrant liability and compensatory stock options are more sensitive to changes in the Company’s stock price at the end of the respective reporting period as opposed to changes in the expected term. At December 31, 2013, a 10% increase in the expected term of the Company’s warrants measured using the Black-Scholes pricing model would increase the warrant liability by approximately 22%, while a 10% decrease in the expected term would decrease the warrant liability by approximately 16%. A 10% increase in the Company’s stock price would result in an increase in the accrued warrant liability of approximately 32%, while a 10% decrease in the stock price would decrease the warrant liability by approximately 26%. At December 31, 2013, a 10% increase or decrease in the expected term of the Company’s compensatory stock options not yet issued would increase or decrease the amount accrued by approximately 6%, while a 10% increase or decrease in the stock price would increase or decrease the amount accrued by approximately 10%.

The carrying amounts of the Company’s remaining financial instruments, which include cash, short-term investments, accounts receivable and accounts payable, approximate their fair values due to their short maturities.