Fair value of financial instruments

12 Months Ended

Dec. 31, 2013

6. Fair value of financial instruments

As of December 31, 2013 and 2012, the Company measured its financial assets and liabilities under the amended ASC 820, Fair Value Measurements and Disclosures of the Accounting Standards Codification, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. It also establishes a three-level valuation hierarchy for disclosures of fair value measurement as follows:

Level 1 — quoted prices in active markets for identical assets or liabilities;

Level 2 — other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and

Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

Private placement warrants liability

As of December 31, 2013 and 2012, the Company’s Private Placement Warrants were measured at fair value under ASC 820. The Company’s liability for the Private Placement Warrants is measured at fair value based on unobservable inputs, and thus is considered a Level 3 financial instrument. The Company analyzes financial instruments with features of both liabilities and equity under ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging.

As of December 31, 2013 and 2012, the Company estimated the fair value of its Private Placement Warrants with a publicly traded stock pricing approach using the Black-Scholes option pricing model. The inputs of the Black-Scholes option pricing model as of December 31, were as follows:


	2013			2012
Market value of the Company’s common stock	$	75.10		$	16.18
Exercise price	$	13.00		$	13.00
Risk-free interest rate		0.51	%		0.42	%
Estimated price volatility		42.50	%		45.00	%
Marketability discount		—			15.00	%
Contractual term		2.33 years			3.33 years
Dividend yield		—			—

The market value of the Company’s common stock was based on its closing price on December 31, 2013 and 2012, the date of each valuation. The volatility factors noted above represented the upper end of the range of implied volatility of publicly traded call options of benchmark companies. During 2013, there was a significant increase in the Company’s stock price and daily average trading volume and additional Private Placement Warrants were exercised. Additionally, as described further under Note 12, “Stockholders’ equity,” the Company completed an underwritten public offering of its common stock, which significantly increased the Company’s public float. In consideration of these factors, the Company no longer believes the Private Placement Warrants to be burdened by a lack of marketability. Accordingly, the warrant valuation as of December 31, 2013, was not discounted. As of December 31, 2012, the warrant valuation was discounted by 15%, reflecting the fact that the Private Placement Warrants were not directly traded and, at the time, were burdened by a lack of marketability. If all other assumptions were held constant, the recorded liability of the Private Placement Warrants would increase or decrease by approximately $2.5 million due to a 10% change in the enterprise value of the Company based on the Black-Scholes option pricing model.

The following table summarizes fair value measurements by level as of December 31, 2013, for the Company’s level 3 financial liability measured at fair value on a recurring basis:


	Level 1	Level 2	Level 3
Private placement warrants liability			$	24,525

The following table summarizes fair value measurements by level as of December 31, 2012, for the Company’s level 3 financial liability measured at fair value on a recurring basis:


	Level 1	Level 2	Level 3
Private placement warrants liability			$	3,666

The following table summarizes the change in the estimated fair value of the Company’s Level 3 financial instrument as of December 31:


	2013			2012
Balance at beginning of year	$	3,666		$	3,270
Fair value of private placement warrants exercised		(7,172	)		(52	)
Increase in the value of private placement warrants		28,031			448

Balance at end of year	$	24,525		$	3,666

For the year ended December 31, 2013, 2012 and 2011, the Company recognized expenses of $28,031,000, $448,000 and $382,000, respectively, due to an increase in the estimated fair value of the Company’s Private Placement Warrants. These expenses were recorded as “Private placement warrant expense” on the Company’s consolidated statements of operations for the respective periods.

Financial assets and liabilities not measured at fair value

As of December 31, 2013 and 2012, the Company’s revolving line of credit, including accrued interest, recorded on the consolidated balance sheets were carried at cost. The carrying value of the revolving line of credit approximates fair value because the interest rates fluctuate with market interest rates or the fixed rates approximate current rates offered to the Company for debt with similar terms and maturities, and the Company’s credit profile has not changed significantly since the origination of these financial liabilities. Under ASC 825, Financial Instruments, these financial liabilities are defined as Level 2 in the three-level valuation hierarchy, as the inputs to their valuation are market observable.

- 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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