Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Note 3 - Fair Value Measurements

The carrying amounts of our short term financial instruments, which primarily include cash and cash equivalents, accounts receivable (billed and unbilled), and accounts payable approximate their fair values due to their short term maturities. 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 Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis:

	As of September 30, 2015
	Level 1		Level 2		Level 3		Balance

Assets
Investment in money market funds⁽¹⁾	$	6,430,038	$	-	$	-	$	6,430,038
Total investment in money market funds	$	6,430,038	$	-	$	-	$	6,430,038

Liabilities
Current portion of derivative instruments related to stock purchase warrants	$	-	$	-	$	2,355	$	2,355
Non-current portion of derivative instruments related to stock purchase warrants		-		-		227,898		227,898
Total derivative instruments related to stock purchase warrants	$	-	$	-	$	230,253	$	230,253

	As of December 31, 2014
	Level 1		Level 2		Level 3		Balance

Assets
Investment in money market funds⁽¹⁾	$	6,429,104	$	-	$	-	$	6,429,104
Total investment in money market funds	$	6,429,104	$	-	$	-	$	6,429,104

Liabilities
Current portion of derivative instruments related to stock purchase warrants	$	-	$	-	$	178,509	$	178,509
Non-current portion of derivative instruments related to stock purchase warrants		-		-		629,170		629,170
Total derivative instruments related to stock purchase warrants	$	-	$	-	$	807,679	$	807,679

⁽¹⁾

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

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, 2015 and 2014:

							Exercised Stock
	Balance as of		Unrealized				Purchase	Balance as of
	December 31,		(Gains)				Warrants	September 30,
Description	2014		2015				2015	2015
Derivative liabilities related to stock purchase warrants	$	807,679	$	(577,426	)	$	-	$	230,253

	Balance as of		Unrealized				Exercised 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

At September 30, 2015 and 2014, derivative liabilities are comprised of warrants to purchase 1,775,419 shares of common stock. 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 accompanying 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 the accompanying unaudited condensed consolidated statements of operations.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company measures its 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. During the three months ended September 30, 2015, the Company recorded an impairment charge for property and equipment in the amount of $36,981. These assets were written down to their fair value of $0 in conjunction with the sublease of the Company's leased office space (see Note 4 - Commitments and Contingencies - Leases). As of September 30, 2015, the Company 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, 2015

Valuation Technique

Unobservable Inputs

Black-Scholes option pricing model

Expected term

Expected dividends

Anticipated volatility