Fair Value Measurements

9 Months Ended

Sep. 30, 2014

Note 3 - Fair Value Measurements

We define 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. We report assets and liabilities that are measured at fair value using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

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Level 1 — Quoted prices in active markets for identical assets or liabilities.

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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.

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Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

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.

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

The following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis:

	As of September 30, 2014
	Level 1		Level 2		Level 3		Balance

Assets
Investment in money market funds⁽¹⁾	$	6,429,125	$	-	$	-	$	6,429,125
Total investment in money market funds	$	6,429,125	$	-	$	-	$	6,429,125

Liabilities
Current and non-current portion of derivative instruments related to stock purchase warrants	$	-	$	-	$	851,793	$	851,793
Total derivative instruments related to stock purchase warrants	$	-	$	-	$	851,793	$	851,793

	As of December 31, 2013
	Level 1		Level 2		Level 3		Balance

Assets
Investment in money market funds⁽¹⁾	$	7,928,807	$	-	$	-	$	7,928,807
Total investment in money market funds	$	7,928,807	$	-	$	-	$	7,928,807

Liabilities
Current and non-current portion of derivative instruments related to stock purchase warrants	$	-	$	-	$	1,740,235	$	1,740,235
Total derivative instruments related to stock purchase warrants	$	-	$	-	$	1,740,235	$	1,740,235

⁽¹⁾

Included in cash and cash equivalents on the condensed consolidated balance sheets.

During September 2014, derivative instruments related to stock purchase warrants with 419,218 underlying common shares were exercised. The fair value of the exercised stock purchase warrants was $423,739. In addition, derivative instruments related to stock purchase warrants with 705,354 underlying common shares expired during the three and nine months ended September 30, 2014. During the three and nine months ended September 30, 2014 and 2013, we did not have any transfers between Level 1 and Level 2 assets or liabilities.

The following table sets forth a summary of changes in the fair value of the Company's Level 3 liabilities for the nine months ended September 30, 2014:

						Exercised
	Balance as of		Unrealized			Stock Purchase			Balance as of
	December 31,		(Gains)			Warrants			September 30,
Description	2013		2014			2014			2014
Derivative liabilities related to stock purchase warrants	$	1,740,235	$	(464,703	)	$	(423,739	)	$	851,793

The following table sets forth a summary of changes in the fair value of the Company's Level 3 liabilities for the nine months ended September 30, 2013:

						Exercised
		Balance as of		Unrealized		Stock Purchase		Balance as of
		December 31,		Losses		Warrants		September 30,
Description		2012		2013		2013		2013
Derivative liabilities related to stock purchase warrants	$	1,295,613	$	1,181,575	$	-	$	2,477,188

At September 30, 2014 and December 31, 2013, derivative liabilities are comprised of warrants to purchase 1,775,419 and 2,899,991 shares of common stock, respectively. The warrants are considered to be derivative liabilities due to the presence of net settlement features and/or non-standard anti-dilution provisions, and as a result, are recorded at fair value at each balance sheet date, with changes in fair value recorded in the unaudited condensed consolidated statements of operations. The fair value of our warrants is determined based on the Black-Scholes option pricing model. Use of the Black-Scholes option pricing model requires the use of unobservable inputs such as the expected term, anticipated volatility and expected dividends. Changes in any of the assumptions related to the unobservable inputs identified above may change the stock purchase warrants' fair value; 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. Unrealized gains and losses on the fair value adjustments for these derivative instruments are classified in other income (expense) as the change in fair value of derivative instruments in our unaudited condensed consolidated statements of operations.

Assets Measured at Fair Value on a Nonrecurring Basis

We measure our long-lived assets, including, property and equipment and goodwill, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. (See Note 2-Summary of Significant Accounting Policies). As of September 30, 2014, we had no other assets or liabilities that were measured at fair value on a nonrecurring basis.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References+ Details

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at September 30, 2014

Valuation Technique

Unobservable Inputs

Black-Scholes option pricing model

Expected term

Expected dividends

Anticipated volatility