FAIR VALUE DISCLOSURES

9 Months Ended

Sep. 30, 2013

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Accounting guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

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

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain assets and liabilities within the fair value hierarchy.

The following tables present our fair value hierarchy for liabilities measured at fair value on a recurring basis (in thousands):



	September 30, 2013
	Total		Level 1		Level 2		Level 3
Derivative – Warrants⁽¹⁾	$	17,555	$	—	$	—	$	17,555
Derivative – Convertible Notes embedded derivative	—		—		—		—
Other obligations - Bode Earn-out⁽³⁾	7,000		—		—		7,000
	$	24,555	$	—	$	—	$	24,555



	December 31, 2012
	Total		Level 1		Level 2		Level 3
Derivative – Warrants⁽¹⁾	$	4,857	$	—	$	—	$	4,857
Derivative – Convertible Notes embedded derivative⁽²⁾	17,173		—		—		17,173
Other obligations - Bode Earn-out⁽³⁾	7,000		—		—		7,000
	$	29,030	$	—	$	—	$	29,030


(1)	Represents the fair value of the Warrants (see Note 10).

(2)

Represents the compound embedded derivative included in our Convertible Notes (see Note 11). The compound embedded derivative includes the value associated with the noteholders’ conversion option, as well as certain rights to receive “make-whole” amounts. The “make-whole” provision(s) provides that, upon certain contingent events, if conversion is elected on the Convertible Notes, we may be obligated to pay such holder an amount in cash, or shares of common stock, to compensate noteholders who have converted early as a result of these contingent events, interest and time value of the conversion option foregone via the conversion.


(3)	Represents the fair value of the Bode Earn-out (see Note 3). The fair value was determined based on expected payouts that will be due to the former owners based on the achievement of certain incremental sales volume milestones, using a contractual discount rate of 7.0%. These payments are capped at a fair value of $7.0 million.

Due to the Conversion Event that occurred during June 2013, we changed the valuation model that we used to value our Convertible Notes embedded derivative liability in the second quarter of 2013 from a lattice model to a Black-Scholes-Merton model. Prior to the second quarter of 2013, the Convertible Notes embedded derivative was valued using a lattice model for instruments with the option to convert into common equity. As of September 30, 2013, the Convertible Notes are no longer convertible into shares of common stock and, as a result, the Convertible Notes no longer contain an embedded derivative.

The liability for the Warrants was valued utilizing a Black-Scholes-Merton model. Inputs into the model were based upon observable market data where possible. Where observable market data did not exist, the Company modeled inputs based upon similar observable inputs. The key inputs in determining our derivative liabilities include our stock price, stock price volatility, risk free interest rates and interest rates for conventional debt of similarly situated companies.

A reconciliation of the changes in Level 3 fair value measurements from December 31, 2012 to September 30, 2013 is provided below (in thousands):



	Warrants		Convertible Notes Embedded Derivative			Bode Earn-out
Balance at December 31, 2012	$	4,857	$	17,173		$	7,000
Total losses included in net loss	5,713		12,733			—
Write-off of derivative on Convertible Notes tendered for 2013 Notes ⁽¹⁾	—		(26,641		)	—
Balance at March 31, 2013	10,570		3,265			7,000
Total losses included in net income	1,518		398			—
Write-off of derivative on Convertible Notes tendered for common stock⁽²⁾	—		(13		)	—
Balance at June 30, 2013	$	12,088	$	3,650		$	7,000
Total losses included in net income	$	5,467	$	—		$	—
Write-off of derivative on Convertible Notes tendered for common stock or remaining at the Conversion Termination Date⁽³⁾	$	—	$	(3,650	)	$	—
Balance at September 30, 2013	$	17,555	$	—		$	7,000


(1)	Represents the pro rata portion of derivative liability associated with tendered Convertible Notes measured at the date of exchange, which is included in the nine months ended September 30, 2013 (loss) gain on extinguishment of debt on the accompanying condensed consolidated statements of operations.


(2)	Represents the pro rata portion of derivative liability associated with tendered Convertible Notes measured at the date of tender, which is included in the nine months ended September 30, 2013 (loss) gain on extinguishment of debt on the accompanying condensed consolidated statements of operations.


(3)	Represents the pro rata portion of derivative liability associated with tendered Convertible Notes measured at the date of tender or remaining at the Conversion Termination Date, which is included in the three and nine months ended September 30, 2013 (loss) gain on extinguishment of debt on the accompanying condensed consolidated statements of operations.

Our other financial instruments consist of cash and cash equivalents, trade receivables, trade payables and long-term debt. We consider the carrying values of cash and cash equivalents, trade receivables and trade payables to be representative of their respective fair values because of their short-term maturities or expected settlement dates. The carrying value of outstanding amounts under our 2012 Credit Agreement approximates fair value due to the floating interest rate. The fair value of our remaining Convertible Notes was approximately $0.1 million, and included no embedded derivative at September 30, 2013, and $68.8 million, including $17.2 million related to the embedded derivative, at December 31, 2012.

- 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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