Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v2.4.0.8
Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2014
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments
(4)            Fair Value of Financial Instruments

The carrying value of cash equivalents, receivables, accounts payable and accruals approximate fair value due to the short maturity of these items.

U.S. GAAP 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 at the measurement date. U.S. GAAP establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

●
Level 1 – Quoted prices in active markets for identical assets or liabilities.
●
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.
●
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.

The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) 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.

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 are summarized below:


(in thousands)
          
 
Description
As of
September 30, 2014
  
Level 1
  
Level 2
  
Level 3
  
Total Gains (Losses)
  
Liabilities:
  Derivative liability-
          
    preferred stock
  
$
13,000
    
$
-
    
$
-
    
$
13,000
    
$
(11,810
)
                                         

(in thousands)
          
 
 
Description
As of
December 31, 2013
  
Level 1
  
Level 2
  
Level 3
  
Total Gains
  
Liabilities:
  Derivative liability-
          
    preferred stock
  
$
1,190
    
$
-
    
$
-
    
$
1,190
    
$
8,010
  

In order to calculate the Level 3 Derivative liability - preferred stock, we used the Monte Carlo simulation to estimate future stock prices. The use of valuation techniques requires the Company to make various key assumptions for inputs into the model, including assumptions about the expected future volatility of the price of the Company's stock. In estimating the fair value at September 30, 2014 and December 31, 2013, we based our selected volatility on the one-year historic volatility of the Company's stock as we believe this is most representative of the expected volatility in the near future for the Company.