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Fair Value Measurement
 6 Months Ended
Jun. 30, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurement

Note 3. Fair Value Measurement

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, we are required to apply a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value. The three levels of the fair value hierarchy are:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Directly or indirectly observable inputs other than in Level 1, that include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 — Unobservable inputs which are supported by little or no market activity that reflects the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets measured at fair value are classified below based on the three fair value hierarchy tiers described above.

Our cash equivalents are classified as Level 1 because they are valued primarily using quoted market prices.

Our bonds payable, marketable securities, and liability for warrants issued in our 2008 and 2009 financing, are classified as Level 2 as they are valued using alternative pricing sources and models utilizing market observable inputs.

We estimated the fair value of our loan payable using the net present value of the payments discounted at an effective interest rate. We believe the estimates used to measure the fair value of our loan payable constitute Level 3 inputs.

 

Our liability for warrants issued in our 2011 financing is classified as Level 3 as the liability is valued using a Monte Carlo simulation model. Some of the significant inputs used to calculate the fair value of warrant liability include our stock price on the valuation date, expected volatility of our common stock as traded on NASDAQ, and risk-free interest rates that are derived from the yield on U.S. Treasury debt securities, all of which are observable from active markets. However, the use of a Monte Carlo simulation model requires the input of additional subjective assumptions including management’s assumptions regarding the likelihood of a re-pricing of these warrants pursuant to anti-dilution provisions and the progress of our R&D programs and its affect on potential future financings.

The following table presents financial assets and liabilities measured at fair value as of June 30, 2013:

 

     Fair Value Measurement
at Report Date Using		                
     Quoted Prices
in Active Markets
for
Identical Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		      Unobservable
Inputs
(Level 3)		      As of
June 30,
2013		  

Financial assets:

            

Cash equivalents:

            

Money market funds

    $ 521,269       $ —        $ —        $ 521,269   

U.S. Treasury debt obligations

      21,980,557         —          —          21,980,557   

Marketable securities:

            

Debt securities

      —          1,426,061         —          1,426,061   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total financial assets

    $ 22,501,826       $ 1,426,061       $ —        $ 23,927,887   
  

 

 

     

 

 

     

 

 

     

 

 

  

Financial liabilities:

            

Bond obligation

    $ —        $ 231,250       $ —        $ 231,250   

Loan payable net of discounts

      —          —           9,586,188         9,586,188   

Warrant liabilities

      —          42,192         8,235,251         8,277,443   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total financial liabilities

    $ —        $ 273,442       $ 17,821,439       $ 18,094,881   
  

 

 

     

 

 

     

 

 

     

 

 

  

Level 2 Reconciliation

The following table presents a roll forward for financial assets and liabilities measured at fair value using significant other observable inputs (Level 2) for 2013:

 

     Level 2
Beginning
Balance 12/31/12
$		      Net transfers (to)
from
Level 1
$		     Change
included in
earnings
$		     Unrealized
gain
      Settled
$		     Level 2
Ending
Balance 06/30/13
$		  

Marketable securities

      13,900,678         (12,475,042 )      —         425         —         1,426,061   

Bond obligation

      331,250         —         —         —          (100,000 )      231,250   

Warrant liabilities

      107,968         —         (65,776 )      —          —         42,192   
  

 

 

     

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

Total

      14,339,896         (12,475,042 )     (65,776 )      425         (100,000 )     1,699,503   
  

 

 

     

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

Transfers from Level 2 to Level 1 are the net of, (i) maturities of short term marketable debt securities into cash and cash equivalents and (ii) additional purchases of marketable debt securities.

 

Level 3 Reconciliation

The following table presents a roll forward for liabilities measured at fair value using significant unobservable inputs (Level 3) for 2013.

 

    Warrant
Liabilities		  

Balance at December 31, 2012

   $  9,157,397   

Less fair value of warrants exercised

     (418,841 ) 

Add change in fair value of warrants

     (503,305 ) 
 

 

 

  

Balance at June 30, 2013

   $ 8,235,251   
 

 

 

  

 

     Loan payable net of discounts  

Loan proceeds

    $  10,000,000   

Less discount

      (487,576 ) 

Add amortization of discount

      73,764   
  

 

 

  

Balance at June 30, 2013

    $ 9,586,188