(4) Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

(4) Fair Value Measurements

The Company measures its cash equivalents, marketable securities and derivative instruments at fair value. Fair value is an exit price, representing the amount that would be received on the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.

Fair Value Hierarchy 

The methodology for measuring fair value specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). As a result, observable and unobservable inputs have created the following fair value hierarchy:

· Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities. The Level 1 category includes money market funds, which at September 30, 2013 and December 31, 2012 totaled $12.6 million and $4.3 million, respectively, which are included within cash and cash equivalents in the condensed consolidated balance sheets.

· Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly. The Level 2 category includes government securities and corporate debt securities, which at September 30, 2013 and December 31, 2012 totaled $5.8 million and $10.5 million, respectively, which are included within cash and cash equivalents and marketable securities in the condensed consolidated balance sheets.

· Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. As of September 30, 2013, the Level 3 category included derivatives, which totaled $0.2 million and are included in other long-term liabilities in the condensed consolidated balance sheets. There were no Level 3 derivatives at December 31, 2012. The Company did not hold any cash, cash equivalents or marketable securities categorized as Level 3 as of September 30, 2013 or December 31, 2012.

Measurement of Fair Value

The Company measures its cash equivalents, marketable securities and derivatives at fair value. Fair value is an exit price, representing the amount that would be received on the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.

Items Measured at Fair Value on a Recurring Basis

  The following table presents the Company’s assets that are measured at fair value on a recurring basis at September 30, 2013:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in		Significant
		Active Markets for	Significant other	Unobservable
		Identical Assets	Inputs	Inputs
	Total	(Level 1)	(Level 2)	(Level 3)
Cash equivalents:
Money market funds	$          12,610,504	$          12,610,504	$                           -	$                           -
Total cash equivalents	12,610,504	12,610,504	-	-
Marketable securities:
Corporate debt and government securities	5,764,839	-	5,764,839	-
Total marketable securities	5,764,839	-	5,764,839	-
Derivative liabilities:
Derivative Instruments	170,337	-	-	170,337
Total derivative liabilities	170,337	-	-	170,337
Total assets measured at fair value	$          18,545,680	$          12,610,504	$            5,764,839	$               170,337

The following table presents the Company’s assets that are measured at fair value on a recurring basis at December 31, 2012:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in		Significant
		Active Markets for	Significant other	Unobservable
		Identical Assets	Inputs	Inputs
	Total	(Level 1)	(Level 2)	(Level 3)
Cash equivalents:
Money market funds	$            4,285,309	$            4,285,309	$                           -	$                           -
Total cash equivalents	4,285,309	4,285,309	-	-
Marketable securities:
Corporate debt and government securities	10,530,942	-	10,530,942	-
Total marketable securities	10,530,942	-	10,530,942	-
Total assets measured at fair value	$          14,816,251	$            4,285,309	$          10,530,942	$                           -

The fair value of the Company’s investments in corporate debt and government securities have been determined utilizing third party pricing services and verified by management. The pricing services use inputs to determine fair value which are derived from observable market sources including reportable trades, benchmark curves, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events. These investments are included in Level 2 of the fair value hierarchy.

The fair value of the Company’s derivatives were valued using the Black-Scholes pricing model adjusted for probability assumptions, with all significant inputs, except for the probability and volatility assumptions, derived from or corroborated by observable market data such as stock price and interest rates. The probability and volatility assumptions are both significant to the fair value measurement and unobservable. These derivatives are included in Level 3 of the fair value hierarchy.