| Fair Value | 3. FAIR VALUE
FASB ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820") defines 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 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 standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
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Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The valuation under this approach does not entail a significant degree of judgment. |
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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The valuation technique for the Company's Level 2 assets is based on quoted market prices for similar assets from observable pricing sources at the reporting date. |
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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. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. The fair value of the Company's Level 3 investments are estimated on the grant date using the Black-Scholes model and they are revalued at the end of each reporting period using the Black-Scholes model. |
In accordance with ASC 820, the following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011:
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Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
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Significant Other
Observable Inputs
(Level 2) |
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Significant Other
Unobservable
Inputs (Level 3) |
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Total |
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Assets: |
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Money market funds |
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$ |
— |
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$ |
1,528,116 |
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$ |
— |
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$ |
1,528,116 |
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Commercial paper |
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— |
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3,498,249 |
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— |
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3,498,249 |
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U.S. government agencies and securities |
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6,764,700 |
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— |
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— |
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6,764,700 |
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Corporate bonds |
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— |
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1,524,387 |
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— |
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1,524,387 |
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Total assets |
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$ |
6,764,700 |
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$ |
6,550,752 |
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$ |
— |
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$ |
13,315,452 |
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Liabilities: |
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Derivative instruments |
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$ |
— |
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$ |
— |
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$ |
225,332 |
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$ |
225,332 |
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Total liabilities |
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$ |
— |
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$ |
— |
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$ |
225,332 |
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$ |
225,332 |
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In accordance with ASC 820, the following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:
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Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
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Significant Other
Observable Inputs
(Level 2) |
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Significant Other
Unobservable
Inputs (Level 3) |
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Total |
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Assets: |
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Money market funds |
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$ |
— |
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$ |
1,222,618 |
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$ |
— |
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$ |
1,222,618 |
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Commercial paper |
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— |
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2,399,038 |
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— |
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2,399,038 |
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U.S. government agencies and securities |
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5,836,594 |
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— |
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— |
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5,836,594 |
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Corporate bonds |
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704,207 |
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— |
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— |
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704,207 |
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Total assets |
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$ |
6,540,801 |
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$ |
3,621,656 |
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$ |
— |
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$ |
10,162,457 |
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Liabilities: |
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Derivative instruments |
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$ |
— |
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$ |
— |
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$ |
268,478 |
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$ |
268,478 |
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Total liabilities |
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$ |
— |
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$ |
— |
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$ |
268,478 |
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$ |
268,478 |
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The fair value of the Level 3 liabilities is estimated using the Black-Scholes model including the following assumptions:
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As of September 30, 2011 |
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As of December 31, 2010 |
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Risk free interest rate |
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0.16%–1.05% |
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0.12%–1.86% |
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Expected life of option (years) |
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1.22–5.36 |
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0.16–4.71 |
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Expected volatility of stock |
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70.00% |
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65.00% |
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Dividend yield |
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0.00% |
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0.00% |
The Company has historically issued stock options to non-employee consultants as a form of compensation for services provided to the Company. Once these non-employee options have vested, the awards no longer fall within the scope of ASC 505-50. Because the options require settlement by the Company's delivery of registered shares and because the tax withholding provisions in the awards allow the options to be partially net-cash settled, these vested options are no longer eligible for equity classification and are, thus, accounted for as derivative liabilities under FASB ASC 815 ("Derivatives and Hedging") until the awards are ultimately either exercised or forfeited. Accordingly, the vested non-employee options are classified as liabilities and remeasured at fair value through earnings at each reporting period. In calculating the fair value of the options, they are estimated on the grant date using the Black-Scholes model subject to change in stock price utilizing assumptions of risk-free interest rate, contractual life of option, expected volatility, weighted average volatility and dividend yield. Due to the lack of certain observable market quotes, the Company utilizes valuation models that rely on some Level 3 inputs. Specifically, before December 31, 2010, the Company's estimate of volatility was weighted 75% and 25% between the Company's implied volatility and the implied volatility of a group of comparable companies, respectively. Beginning January 1, 2011, the Company's estimate of volatility is based solely on the Company's trading history. In accordance with ASC 820, the following table represents the company's Level 3 fair value measurements using significant other unobservable inputs for derivative instruments as of September 30, 2011:
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Beginning Balance–January 1, 2011 |
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$ |
268,478 |
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Total gains (realized/unrealized) included in earnings |
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(60,684 |
) |
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Purchases |
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— |
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Issuances |
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17,538 |
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Settlements |
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— |
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Ending Balance–September 30, 2011 |
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$ |
225,332 |
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Gains included in earnings (or changes in net assets attributable to the change in unrealized gains relating to assets held at reporting date) |
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$ |
60,684 |
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In accordance with ASC 820, the following table represents the company's Level 3 fair value measurements using significant other unobservable inputs for derivative instruments as of December 31, 2010:
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Beginning Balance–January 1, 2010 |
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$ |
180,288 |
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Total losses (realized/unrealized) included in earnings |
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164,959 |
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Purchases, issuances and settlements |
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(76,769 |
) |
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Ending Balance–December 31, 2010 |
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$ |
268,478 |
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Losses included in earnings (or changes in net assets attributable to the change in unrealized losses relating to assets held at reporting date) |
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$ |
(164,959 |
) |
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