Fair value of financial instruments

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Abstract]

Fair value of financial instruments

Fair value of financial instruments

The carrying values of the Company’s cash and cash equivalents approximate their fair value due to their short-term nature. As a basis for determining the fair value of its assets and liabilities, the Company established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value 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 requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Liabilities that are measured at fair value on a recurring basis consist of the convertible preferred stock warrant liability.

The Company’s preferred stock warrants were categorized as Level 3 because they were valued based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments. These assumptions are inherently subjective and involve significant management judgment.

The estimated fair value of our current and long-term borrowings based on a market approach was approximately $7.8 million and $8.3 million as of March 31, 2012 and December 31, 2011 respectively and represent Level 2 valuations. When determining the estimated fair value of our debt, we used a commonly accepted valuation methodology and market-based risk measurements, such as credit risk.

The fair values of the Level 3 instruments was as follows:

	March 31, 2012				December 31, 2011
(in thousands)	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Convertible preferred stock warrants	—	—	3,216	3,216	—	—	1,853	1,853

The Company performed a fair value assessment of the preferred stock warrant inputs at the end of each reporting period. The fair value of the preferred stock warrant liability was estimated using an option pricing model that takes into account the contract terms as well as multiple inputs such as the Company's stock price, risk-free interest rates and expected volatility that the Company could not corroborate with market data. For the quarter ending March 31, 2012 the Company used a stock price of $16.00 - $23.40, risk-free interest rates of 0.07% - 0.66%, and expected volatility of 45% - 50%. For the year ending December 31, 2011 the Company used a stock price of $13.32 - $14.16, risk-free interest rates of 0.10% - 06.0%, and expected volatility of 45% - 50%. Any change in fair value is recognized as a component of other income (expense), net, in the consolidated statements of operations.

The following table presents a reconciliation for the preferred stock warrants measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) for the months ended March 31, 2012 and 2011:

	Three months ended March 31,
(in thousands)	2012		2011
Fair value at beginning of period	1,853		1,127
Change in fair value	1,706		467
Exercise of preferred stock warrants	(343	)	—
Fair value at end of period	3,216		1,594