Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 2014

The Company follows FASB Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) for the Company’s financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and are re-measured and reported at fair value at least annually using a fair value hierarchy that is broken down into three levels. Level inputs are as defined as follows:

Level 1 — quoted prices in active markets for identical assets or liabilities.

Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

The Company categorized its cash equivalents as Level 1 fair value measurements. As further discussed in Note 7 below, certain of the Company’s marketable securities are subject to restrictions on sale and an option for the issuer to repurchase those shares from the Company as of September 30, 2014. The fair value of these marketable securities is therefore considered to be a Level 2 fair value measurement. The valuation for Level 1 financial instruments was determined based on a “market approach” using quoted prices in active markets for identical assets. Valuations of these assets do not require a significant degree of judgment. The valuation for the 260,000 marketable securities categorized as Level 2 was based on applying a discount for lack of marketability to the quoted market price of the issuer’s unrestricted securities. The valuation for the 250,000 marketable securities categorized as Level 2 was based on the price that MusclePharm paid for these shares in October 2014. The Company categorized its warrants potentially settleable in cash and its options issued to Teva Pharmaceuticals, Inc. as Level 3 fair value measurements. The warrants potentially settleable in cash are measured at fair value on a recurring basis and are being marked to fair value at each reporting date until they are completely settled or meet the requirements to be accounted for as component of stockholders’ equity. The warrants are valued using the Black-Scholes option-pricing model, using assumptions consistent with our application of ASC 718.

Description	September 30, 2014		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	3,006	$	3,006	$	-	$	-
Marketable securities		5,543		-		5,543		-
Total assets	$	8,549	$	3,006	$	5,543	$	-

Liabilities:
Warrants potentially settleable in cash	$	7,242	$	-	$	-	$	7,242
Total liabilities	$	7,242	$	-	$	-	$	7,242

Description	December 31, 2013		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	1,034	$	1,034	$	-	$	-
Total assets	$	1,034	$	1,034	$	-	$	-

Liabilities:
Derivative liability	$	23	$	-	$	-	$	23
Total liabilities	$	23	$	-	$	-	$	23

The company has not transferred any financial instruments into or out of Level 3 classification during the nine months ended September 30, 2014. A reconciliation of the beginning and ending Level 3 liabilities for the nine months ended September 30, 2014 is as follows:

	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
Balance, January 1, 2014	$	23
Change in fair value of Teva option		(23	)
Estimated fair value of warrants assumed in merger on January 2, 2014		10,475
Estimated fair value of warrants issued in January common stock sale		3,696
Change in fair value of warrants for the period ended September 30, 2014		(6,929	)
Balance at September 30, 2014	$	7,242

- 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.

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