Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2013

Fair Value of Financial Instruments

Fair Value of Financial Instruments

4.  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 or liabilities 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
			June 30, 2013
			(unaudited)
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	June 30,		Markets		Inputs		Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	33,907	$	23,656	$	10,251	$	—
Marketable securities		84,797		—		84,797		—
Marketable securities - restricted (Other Assets)		305		—		305		—
Total assets at fair value	$	119,009	$	23,656	$	95,353	$	—
Liabilities:
Derivative liabilities	$	18,061	$	—	$	—	$	18,061

			Fair Value Measurements at
			December 31, 2012
					Significant
	Total Carrying		Quoted Prices		Other		Significant
	Value at		in Active		Observable		Unobservable
	December 31,		Markets		Inputs		Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	40,302	$	31,561	$	8,741	$	—
Marketable securities		48,206		—		48,206		—
Marketable securities - restricted (Other Assets)		279		—		279		—
Total assets at fair value	$	88,787	$	31,561	$	57,226	$	—
Liabilities:
Derivative liabilities	$	251	$	—	$	—	$	251

The Company’s Level 1 assets include money market funds and U.S. Treasuries and government agency debt securities with quoted prices in active markets.  At June 30, 2013 and December 31, 2012, Level 2 assets include mutual funds in which the SERP assets are invested, commercial paper and corporate bonds and other fixed income securities. Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data into their models to estimate fair value.

Level 3 liabilities include the fair market value of the interest make-whole liability associated with the Notes and the outstanding warrants to purchase Common Stock recorded as derivative liabilities. The fair value of the common stock warrant liability was calculated using a Monte-Carlo simulation on a Black-Scholes model with the following assumptions as of June 30, 2013:

Exercise Price	$4 - $5 per share
Volatility	80%
Stock Price as of June 30, 2013	$6.43 per share
Term	7.2 - 8.5 years
Dividend Yield	0.0%
Risk-Free Rate	2.1% - 2.3%

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 June 30, 2013:

Volatility	45%
Stock Price as of June 30, 2013	$6.43 per share
Credit Spread	1335 bps
Term	4 years
Dividend Yield	0.0%

Significant changes to these assumptions would result in increases/decreases to the fair value of the outstanding 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 June 30, 2013 and December 31, 2012 that are included in the Non-Current Liabilities section of the Consolidated Balance Sheets, in thousands:

	Six Months Ended
	June 30, 2013
	(unaudited)
Balance at December 31, 2012	$	251
Initial value of interest make-whole payment
associated with the convertible notes		9,270
Changes in fair value of derivative liabilities included in earnings		8,540
Balance at June 30, 2013	$	18,061

The carrying value and estimated fair value of the convertible notes was approximately $59.1 million and $115.0 million, respectively, as of June 30, 2013.  The fair value was estimated based on actual trade information as well as quoted process provided by bond traders.

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 June 30, 2013:
Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	85,029	$	5	$	(237)	$	84,797

At December 31, 2012:
Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	48,259	$	1	$	(54)	$	48,206

The Company has not experienced any other-than-temporary losses on its marketable securities and restricted marketable securities.