Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2015

3. Fair Value of Financial Instruments

The fair value of an asset or liability should represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal or most advantageous market for the asset or liability. Accordingly, fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant rather than from a reporting entity’s perspective.

The Company reports assets and liabilities that are measured at fair value using a three level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value, in thousands:

	Fair Value Measurements at
	September 30, 2015
	(unaudited)
					Significant
	Total Fair		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	September 30,		Markets		Inputs		Inputs
	2015		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	26,294	$	26,294	$	—	$	—
Marketable securities	31,408		—		31,408		—
Long term marketable securities	43,967		—		43,967		—
Marketable securities - restricted (SERP)	267		267		—		—

Total assets at fair value	$	101,936	$	26,561	$	75,375	$	—


Liabilities:

Derivative liabilities	$	1,156	$	—	$	—	$	1,156

	Fair Value Measurements at
	December 31, 2014
					Significant
	Total Fair		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	December 31,		Markets		Inputs		Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	36,396	$	36,396	$	—	$	—
Marketable securities	37,940		—		37,940		—
Long term marketable securities	19,816		—		19,816		—
Marketable securities - restricted (SERP)	305		—		305		—

Total assets at fair value	$	94,457	$	36,396	$	58,061	$	—


Liabilities:
Derivative liabilities	$	6,564	$	—	$	—	$	6,564

The fair value of the restricted marketable securities is included within other non-current assets in the consolidated balance sheets.

The Company’s Level 1 assets include money market funds and U.S. Treasury and government agency debt securities with quoted prices in active markets.

Level 2 assets include the SERP (Supplemental Executive Retirement Plan) assets, commercial paper and investment grade corporate bonds and other fixed income securities.

Level 3 liabilities include the estimated fair value of the interest make-whole liability associated with the Company’s 7.5% Convertible Senior Secured Notes due 2019 (the Notes) and outstanding warrants to purchase common stock, which are recorded as derivative liabilities. During the three months ended September 30, 2015, all of the outstanding warrants to purchase common stock were exercised. As of September 30, 2015 there remain no warrants outstanding.

The fair value of the interest make-whole liability of the Notes was calculated using a binomial-lattice model with the following key assumptions as of September 30, 2015, unaudited:

Volatility		45%
Stock Price as of September 30, 2015		$14.03 per share
Credit Spread		1851 bps
Term		1.6 years
Dividend Yield		0.0%

Significant changes to these assumptions could result in increases/decreases to the fair value of the derivative liabilities.

Changes in the fair value of the warrants and the interest make-whole liability are recognized as a component of Other Income (Expense) in the Consolidated Statements of Operations. The following table presents information about the Company’s Level 3 liabilities as of December 31, 2014 and September 30, 2015 that are included in the Non-Current Liabilities section of the Consolidated Balance Sheets, in thousands:

	Nine Months ended
	September 30,
	2015
	(unaudited)

Balance at December 31, 2014	$	6,564

Changes in fair value of derivative liabilities included in earnings	(66		)
Reduction due to conversion of debt to equity	(4,690		)
Cashless exercise of common stock warrants	(652		)


Balance at September 30, 2015	$	1,156

The carrying value, face value and estimated fair value of the Notes was approximately $8.1 million, $9.7 million and $27.3 million, respectively, as of September 30, 2015. The fair value was estimated based on actual trade information as well as quoted prices provided by bond traders, which would be characterized within Level 2 of the fair value hierarchy. This fair value amount gives recognition to the value of the interest make-whole liability and the value of the conversion option. These items have been accounted for as derivative liabilities and additional paid-in-capital, respectively.

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

Unrestricted marketable securities held by the Company were as follows, in thousands:

At September 30, 2015 (unaudited):

Available for Sale		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Corporate debt securities		$	75,482		$	23		$	(130	)	$	75,375

At December 31, 2014:

Available for Sale		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Corporate debt securities		$	57,910		$	4		$	(158	)	$	57,756

The contractual maturities of the unrestricted available for sale marketable securities held by the Company were as follows, in thousands:

	September 30,
	2015
	(unaudited)
Less Than 1 Year	$	31,408
1-5 years	43,967
Greater Than 5 Years	—

Total	$	75,375

The Company has not experienced any other-than-temporary losses on its marketable securities and restricted marketable securities. The cost of securities sold is calculated using the specific identification method.

- 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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