15.	Fair Value Measurements

Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. We follow a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below:

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

· Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

· Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable in active markets.

The following table provides a summary of the recognized assets and liabilities that we measure at fair value on a recurring basis:

	Balance as of		Basis of Fair Value Measurements
	September 30, 2014		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	3,644,000	$	3,644,000	$	—	$	—

Liabilities:
Warrant liability	$	287,000	$	—	$	—	$	287,000

	Balance as of		Basis of Fair Value Measurements
	December 31, 2013		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	4,644,000	$	4,644,000	$	—	$	—

We use quoted market prices to determine the fair value of our cash equivalents, which consist of money market funds that are classified in Level 1 of the fair value hierarchy.

Refer to note 6 for discussion about determining the fair value of our warrant liability.

Common stock purchase warrants issued in connection with our Letter Agreement with the Lenders do not trade in an active securities market, and as such, we estimated the fair value of these warrants using the option pricing model (see note 6). Some of the significant inputs are observable in active markets, such as common stock market price, volatility, and risk free rate. Because some of the inputs to our valuation model are either not observable quoted prices or are not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability is classified as Level 3 in the fair value hierarchy.

The following table summarizes the change in our Level 3 warrant liability value:

	Three months ended			Nine months ended
Warrant liability	September 30, 2014			September 30, 2014

Beginning balance	$	—		$	—
Fair value of warrants allocated from additional paid in capital		421,000			421,000
Decrease in fair value recognized in operating expenses		(134,000	)		(134,000	)
Ending balance	$	287,000		$	287,000