Fair Value on Financial Instruments

9 Months Ended

Sep. 30, 2013

Note 2. Fair Value on Financial Instruments

We determine the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritizes the inputs into three broad levels as follows:

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Level 1: Quoted prices in active markets for identical instruments

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Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)

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Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)

To estimate the fair value of Level 2 debt securities as of September 30, 2013 our primary pricing service relies on inputs from multiple industry-recognized pricing sources to determine the price for each investment. Corporate debt and United States government agency securities are systematically priced by this service as of the close of business each business day. If the primary pricing services does not price a specific asset a secondary pricing services are utilized.

The fair values of certain of the Company’s financial assets and liabilities were determined using the following inputs at September 30, 2013 (in thousands):


	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds ⁽¹⁾	$	7,862	$	7,862	$	—	$	—
Corporate debt securities ⁽²⁾		24,948		—		24,948		—
United States government agency securities ⁽²⁾		4,023		—		4,023		—

Total financial assets	$	36,833	$	7,862	$	28,971	$	—


Warrant liability	$	22,706	$	—	$	—	$	22,706

Total financial liabilities	$	22,706	$	—	$	—	$	22,706

(1)	Included in cash and cash equivalents on the Company’s condensed consolidated balance sheets.

(2)	Included in short-term investments on the Company’s condensed consolidated balance sheets.

The fair values of certain of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2012 (in thousands):


	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds ⁽¹⁾	$	10,268	$	10,268	$	—	$	—

Total financial assets	$	10,268	$	10,268	$	—	$	—


Warrant liability	$	5,903	$	—	$	—	$	5,903

Total financial liabilities	$	5,903	$	—	$	—	$	5,903

(1)	Included in cash and cash equivalents on the Company’s condensed consolidated balance sheets.

A reconciliation of the beginning and ending balances for warrant liability using significant unobservable inputs (Level 3) from December 31, 2012, to September 30, 2013, was as follows (in thousands):


Balance at December 31, 2012	$	5,903
Increase in fair value of warrants		16,803
Settlement of warrants exercised		—

Balance at September 30, 2013	$	22,706

See Note 1 and 10 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s valuation techniques and unobservable inputs for warrant liability using significant unobservable inputs (Level 3).

The Company did not have any transfers among fair value measurement levels during the nine months ended September 30, 2013.

- 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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