3. Fair Value of Financial Instruments

The carrying values of cash equivalents, receivables, prepaid expenses, and accounts payable at March 31, 2015 approximated their fair values due to the short-term nature of these items.

The Company’s valuation of financial instruments is based on a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

At December 31, 2014 and March 31, 2015, financial instruments and respective fair values have been classified as follows:

The December 2011 Note (defined and discussed in Note 8), which is classified as a level 2 liability, has a variable interest rate and, accordingly, its carrying value approximates its fair value. At March 31, 2015, the carrying value was $18.7 million. There were no transfers between levels of the fair value hierarchy for any assets or liabilities measured at fair value in the three months ended March 31, 2015.