Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

3. Fair Value Measurements

A portion of the Company’s cash and cash equivalents are held in money market funds, which are highly liquid instruments with insignificant interest rate risk and original maturities of three months or less.

The Company has established a three-tier fair value hierarchy, categorizing the inputs used to measure fair value. The hierarchy can be described as follows: Level 1- observable inputs such as quoted prices in active markets; Level 2- inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3- unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Cash equivalents consist of money market instruments that have original maturities of 90 days or less. These instruments are valued using quoted prices in active markets and as such are classified in Level 1 of the fair value hierarchy.  The Company had no Level 2 financial instruments as of September 30, 2012 and December 31, 2011.

At September 30, 2012, the Company had outstanding warrants to purchase shares of its common stock, which were issued on March 28, 2012.  The warrants are measured at fair value each reporting period and are classified as liabilities with a fair value of $1.0 million at September 30, 2012.  The warrants are valued using the Black-Scholes Merton option pricing model using valuation assumptions determined by management and are classified as Level 3 in the Company’s fair value hierarchy.  As of September 30, 2012, the Company used the following assumptions when determining the fair value of the common stock warrants:

Expected life (in years)	4.5
Risk-free interest rate	0.54	%
Dividend yield	0	%
Expected volatility	67	%

The Company assessed the sensitivity of the fair value of the warrants with respect to the assumptions above and noted that a change in the price of our common stock of 10% would affect the fair value of the warrants by 16% or $0.2 million.  A change in volatility of 10% would affect the fair value of the warrants by 14% or $0.1 million.

The following table summarizes the changes in fair value for the outstanding common stock warrants for the three and nine months ended September 30, 2012 (in thousands):

		Three Months Ended September 30, 2012	Nine Months Ended September 30, 2012
Beginning balance	$	2,080	-
Total change in fair value		(1,068)	1,012
Balance at September 30, 2012	$	1,012	1,012

The following table represents the fair value hierarchy for assets and liabilities, which are measured at fair value on a recurring basis as of September 30, 2012 (in thousands):

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Money market instruments	$	649	$	-	$	-	$	649
Liabilities:
Common stock warrants	$	-	$	-	$	1,012	$	1,012

At December 31, 2011, the Company held $4.6 million of money market instruments, which were classified as Level 1 in the Company’s fair value hierarchy.

As of September 30, 2012 the Company had outstanding borrowings of $1.4 million on its bank line of credit with Comerica (see Note 6).  The fair value of the amount outstanding approximates the carrying value due to the time to maturity and interest rate.