FAIR VALUE OF FINANCIAL INSTRUMENTS

Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:


•	Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.


•	Level 2—Observable inputs other than Level 1 prices, 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. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

The following tables present the Company’s financial instruments that were measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 by level within the fair value hierarchy (in thousands):



	September 30, 2014
	Level 1		Level 2		Level 3		Total
Financial Assets
Cash equivalents	$	20,701	$	6,353	$	—	$	27,054
Marketable securities	1,803		188,073		—		189,876
Total	$	22,504	$	194,426	$	—	$	216,930
Financial Liabilities
Derivative liabilities	$	—	$	—	$	1,660	$	1,660



	December 31, 2013
	Level 1		Level 2		Level 3		Total
Financial Assets
Cash equivalents	$	15,683	$	5,869	$	—	$	21,552
Marketable securities	—		112,544		—		112,544
Total	$	15,683	$	118,413	$	—	$	134,096
Financial Liability
Derivative liability	$	—	$	—	$	5,914	$	5,914
Warrant liability	—		—		688		688
Total	$	—	$	—	$	6,602	$	6,602

The Company had no transactions measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013.

Cash Equivalents and Marketable Securities – Cash equivalents and marketable securities classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers and internal assumptions of the independent pricing services. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing services by comparing them to quotes of identical or similar instruments from other pricing sources. During the three and nine months ended September 30, 2014 and 2013, the Company did not record impairment charges related to its cash equivalents and marketable securities, and the Company did not have any transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy.

Derivative Liabilities – In January 2013, the Company issued 6.00% Convertible Senior Subordinated Notes due 2018 (the "2018 Notes") and, in April 2014, the Company issued 5.00% Convertible Senior Subordinated Notes due 2019 (the “2019 Notes” collectively with the 2018 Notes, the "Notes"). Each of the 2018 Notes and the 2019 Notes contain an early conversion payment feature pursuant to which a holder may convert its Notes into shares of the Company's common stock. With respect to any conversion of 2018 Notes prior to November 1, 2016 or any conversion of 2019 Notes prior to January 1, 2018 (other than conversions in connection with certain fundamental changes), in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment equal to $83.33 per $1,000 principal amount of Notes surrendered for conversion that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of the Company’s common stock. These early conversion payment features have been identified as embedded derivatives and are separated from the host contracts, the Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. The Company has concluded that the embedded derivatives related to the early conversion payment features of the Notes meet these criteria and, as such, must be valued separate and apart from the Notes and recorded at their fair values at each reporting period. At each reporting period, the Company records these embedded derivatives at their fair values, which are included as a component of Convertible Debt on its condensed consolidated balance sheets. The fair values of the embedded derivatives are trued up on a recurring basis as Note holders early convert their Notes and receive the early conversion payment.

The Company used a Monte Carlo simulation model to estimate the fair values of the embedded derivatives related to the early conversion payment features of the Notes. Historically, using the Monte Carlo model, the value of the embedded derivative was based on the assumption that the Notes will be converted early if the conversion value is greater than the holding value. Beginning in the second quarter of 2014, using the Monte Carlo model, the Company valued these embedded derivatives using a “with-and-without method,” where the value of the Notes including the embedded derivatives, is defined as the “with”, and the value of the Notes excluding the embedded derivatives, is defined as the “without.” This method estimates the value of the embedded derivatives by observing the difference between the value of the Notes with the embedded derivatives and the value of the Notes without the embedded derivatives. The Company believes the "with-and-without method" results in a measurement that is more representative of the fair value of the embedded derivatives.

The model requires the following inputs: (i) price of the Company’s common stock; (ii) conversion rate of shares of common stock per $1,000 in principal amount of Notes, subject to adjustment; (iii) conversion price per share of common stock, subject to adjustment; (iv) maturity date of the Notes and early payment feature; (v) estimated credit spread (historically the risk-free interest rate); and (vi) estimated stock volatility.

The following tables set forth the Level 3 inputs to the Monte Carlo simulation models that were used to determine the fair values of the embedded derivatives for the Notes:



Constant Inputs	2018 Notes		2019 Notes
Conversion rate	121.1240		75.7576
Conversion price	$	8.26	$	13.20
Maturity date of the Notes	February 1, 2018		October 1, 2019
Maturity date of early payment feature	November 1, 2016		January 1, 2018



Variable Inputs	September 30, 2014			April 1, 2014			December 31, 2013
	Notes			2019 Notes			2018 Notes
Stock price	$	7.46		$	11.79		$	10.89
Risk-free interest rate	N/A			N/A			1.31		%
Estimated credit spread	890 basis points			960 basis points			N/A
Estimated stock volatility	55		%	53		%	50		%

Changes in certain inputs into the model can have a significant impact on changes in the estimated fair values of the embedded derivatives. The following table sets forth the estimated fair values of the embedded derivatives (in thousands):



	September 30, 2014		April 1, 2014		December 31, 2013
2018 Notes	$	815	N/A		$	5,914
2019 Notes	$	845	$	3,903	N/A

The $5.1 million net decrease in the estimated fair value of the embedded derivative for the 2018 Notes between December 31, 2013 and September 30, 2014 represents an unrealized gain of $4.1 million that has been recorded as gain from change in fair value of derivative liabilities in the condensed consolidated statements of operations for the nine months ended September 30, 2014, and fair value adjustments related to conversions made in the nine months ended September 30, 2014 of $1.0 million. The $3.1 million decrease in the estimated fair value of the embedded derivative for the 2019 Notes between the issuance date of April 1, 2014 and September 30, 2014 represents an unrealized gain that has been recorded as a gain from change in fair value of derivative liabilities in the condensed consolidated statements of operations for the nine months ended September 30, 2014.

Warrant Liability – The valuation of the warrant liability above is discussed in Note 8.

The following table presents the change in fair values of the Company’s Level 3 financial instruments that were measured on a recurring basis using significant unobservable inputs as of September 30, 2014 (in thousands):




Fair value at December 31, 2013	$	6,602
Fair value of derivative liability for 2019 Notes recorded on measurement date	3,903
Change in fair value of derivative liabilities of the Notes recorded as a gain	(7,154		)
Adjustment to fair value of derivative liability related to early conversion of the 2018 Notes	(1,003		)
Change in fair value of warrant liability recorded as a gain	(688		)
Fair value at September 30, 2014	$	1,660

The Company has estimated the fair value of its secured and unsecured debt obligations based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors. As of September 30, 2014 and December 31, 2013 the carrying values of the Company’s secured and unsecured debt obligations, excluding the Notes, approximated their fair values. The Company has estimated the fair value of the Notes to be $225.5 million at September 30, 2014 based upon Level 2 inputs using the market price of the Notes derived from actual trades quoted from Bloomberg, and the fair value of the 2018 Notes to be $117.7 million at December 31, 2013 using a midmarket pricing convention (the midpoint price between bid and ask prices) quoted from Bloomberg.