Fair Value on Financial Instruments

9 Months Ended

Sep. 30, 2014

Note 2. Fair Value on Financial Instruments

The Company determines 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 prioritized the inputs into three broad levels as follows:

•

Level 1: Quoted prices in active markets for identical instruments

•

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

•

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

Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

To estimate the fair value of Level 2 debt securities as of September 30, 2014, the Company’s 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 service does not price a specific asset, a secondary pricing service is utilized.

The Company’s financial assets and liabilities were recorded at fair value in the condensed consolidated balance sheets at September 30, 2014, as follows (in thousands):


	Total		Level 1		Level 2		Level 3
Money market funds ⁽¹⁾	$	6,185	$	6,185	$	0	$	0
Corporate debt securities ⁽²⁾		21,802		0		21,802		0
United States government agency securities ⁽²⁾		3,429		0		3,429		0

Total financial assets	$	31,416	$	6,185	$	25,231	$	0


Warrant liability ⁽³⁾	$	3,931	$	0	$	0	$	3,931

Total financial liabilities	$	3,931	$	0	$	0	$	3,931

(1)

Included in cash and cash equivalents on the Company’s accompanying unaudited condensed consolidated balance sheets.

(2)

Included in short-term investments on the Company’s accompanying unaudited condensed consolidated balance sheets.

(3)

Included in current liabilities on the Company’s accompanying unaudited condensed consolidated balance sheets.

The Company’s financial assets and liabilities were recorded at fair value in the accompanying unaudited condensed consolidated balance sheets at December 31, 2013, as follows (in thousands):


	Total		Level 1		Level 2		Level 3
Money market funds ⁽¹⁾	$	8,650	$	8,650	$	0	$	0
Corporate debt securities ⁽²⁾		23,173		0		23,173		0
United States government agency securities ⁽²⁾		5,018		0		5,018		0

Total financial assets	$	36,841	$	8,650	$	28,191	$	0


Warrant liability ⁽³⁾	$	20,390	$	0	$	0	$	20,390

Total financial liabilities	$	20,390	$	0	$	0	$	20,390

(1)

Included in cash and cash equivalents on the Company’s accompanying unaudited condensed consolidated balance sheets.

(2)

Included in short-term investments on the Company’s accompanying unaudited condensed consolidated balance sheets.

(3)

Included in current liabilities on the Company’s accompanying unaudited condensed consolidated balance sheets.

A reconciliation of the beginning and ending balances for the warrant liability using significant unobservable inputs (Level 3) from December 31, 2013 to September 30, 2014, was as follows (in thousands):


Balance at December 31, 2013	$	20,390
Decrease in fair value of warrants		(14,263)
Settlement of warrants exercised		(2,196)

Balance at September 30, 2014	$	3,931

See Notes 1 and 10 in the notes to unaudited 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 nine months ended September 30, 2014, or the year ended December 31, 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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