Convertible Preferred Stock Warrants

9 Months Ended

Sep. 30, 2011

Convertible Preferred Stock Warrants [Abstract]

10. Convertible Preferred Stock Warrants

Warrants Issued in Connection with Equipment Loans

In connection with Equipment Loan #1 dated December 30, 2008, the Company issued warrants to purchase 411,312 shares of the Company’s Series A-1 convertible preferred stock at an exercise price of $0.487 per share. The agreement also required the Company to issue another set of warrants as part of the next round of equity financing to occur. With the issuance of Series B convertible preferred stock on April 16, 2010, the lenders of Equipment Loan #1 received warrants to purchase an additional 30,600 shares of the Company’s Series B convertible preferred stock at an exercise price of $4.902. Each set of warrants is exercisable upon issuance and expires eight years from the issuance date. The issuance date fair value of these warrants was estimated to be $155,000 and has been recorded as a reduction, or discount, to the carrying value of the loan. The discount is being amortized to interest expense over the term of the loan. The warrants were valued on the issuance date using the following assumptions: a risk-free interest rate of 1.14%, expected volatility of 72%, no expected dividend yield and a term of eight years.

In connection with Equipment Loan #2 dated March 25, 2010, the Company issued warrants to purchase 16,998 shares of the Company’s Series B convertible preferred stock at an exercise price of $2.941 per share. The warrants are exercisable upon issuance and expire ten years from the issuance date. The issuance date fair value of these warrants was estimated to be $42,000 and has been recorded as a reduction, or discount, to the carrying value of the loan. The discount is being amortized to interest expense over the term of the loan. The warrants were valued on the issuance date using the following assumptions: a risk-free interest rate of 0.50%, expected volatility of 98.8%, no expected dividend yield and a term of 10 years.

Warrants Issued in Connection with the Business Loan

In connection with the Business Loan dated January 27, 2010, the Company issued warrants to purchase 261,460 shares of the Company’s Series B convertible preferred stock at an exercise price of $2.941 per share. The warrants are exercisable upon issuance and expire seven years from the issuance date. The issuance date fair value of these warrants was estimated to be $623,000 and has been recorded as a reduction, or discount, to the carrying value of the loan. The discount is being amortized to interest expense over the term of the loan. The warrants were valued on the issuance date using the following assumptions: a risk-free interest rate of 0.50%, expected volatility of 98.8%, no expected dividend yield and a term of seven years.

Warrants Issued in Connection with Amendments of Equipment and Business Loan

In connection with the amendment to Equipment Loan #1 and the Company’s Business Loan, the Company agreed to issue warrants to purchase $300,000 of securities issued in a next-round equity financing, if such equity financing of at least $35 million was completed prior to May 15, 2011. If such financing was not completed prior to May 15, 2011, the Company agreed to issue warrants to purchase 61,200 shares of Series B convertible Preferred Stock at an exercise price of $4.902 per share. The Series C convertible preferred stock issued in April 2011 in the aggregate amount of $55.0 million met the next-round equity financing requirement and, as a result, warrants to purchase 61,200 shares of Series C convertible preferred stock at an exercise price of $4.902 per share were issued in connection with the equipment and business loan amendments. Upon execution of the loan amendments, but prior to issuance of the stock warrants, the Company recorded a liability of $300,000 and has been recorded as a reduction, or discount, to the carrying value of the loan. The discount is being amortized to interest expense over the term of the loan.

Convertible Preferred Stock Warrant Liability

Outstanding warrants to purchase shares of the Company’s convertible preferred stock were freestanding warrants that were subject to redemption and were therefore classified as liabilities on the Condensed Consolidated Balance Sheets at fair value. The initial liability recorded was adjusted for changes in fair value at each reporting date with an offsetting entry recorded as a component of other income (expense) in the Condensed Consolidated Statements of Operations. Upon conversion of the underlying convertible preferred stock, the warrants automatically converted into warrants to purchase the number of shares of Class A or Class B common stock into which the underlying preferred stock was convertible using the same exercise provisions, exercise prices and expiration dates as the warrants to purchase convertible preferred stock. Also, upon conversion, the warrants ceased to be subject to redemption and were reclassified to additional paid-in capital in stockholders’ deficit on the Condensed Consolidated Balance Sheets. The Company estimated the fair value of its convertible preferred stock warrants using the Black-Scholes option-pricing model.

Upon the close of the initial public offering on June 29, 2011, (1) warrants to purchase 411,312 shares of Series A-1 convertible preferred stock automatically converted into warrants to purchase an equivalent number of Class B common shares, (2) warrants to purchase 309,398 shares of Series B convertible preferred stock automatically converted into warrants to purchase an equivalent number of Class A common shares, and (3) warrants to purchase 61,200 shares of Series C convertible preferred stock automatically converted into warrants to purchase 25,000 shares of Class A common shares using a conversion price of 80% of the IPO price. The Company performed its final mark-to-market adjustment on the convertible preferred stock warrant liability on June 29, 2011, the date the initial public offering closed and the warrant liabilities became equity instruments. The related convertible preferred stock warrant liability of $10.4 million, of which $9.7 million related to warrants issued in connection with equipment and business loans and $0.7 million related to warrants issued in connection with amendments to equipment and business loans, at June 29, 2011 was reclassified to additional paid-in capital.

Convertible preferred stock warrant liability consisted of the following (see Note 11 — Stockholders’ Equity) (amounts in thousands, except per share data):


	Exercise		Shares as of				Fair Value as of
	Price per		September 30,		December 31,		September 30,		December 31,
Underlying Stock/Description	Share		2011		2010		2011		2010

Series A-1 convertible preferred stock	$	0.487		—		411	$	—	$	1,975
Series B convertible preferred stock	$	4.902		—		31		—		109
Series B convertible preferred stock	$	2.941		—		279		—		1,101


Total				—		721	$	—	$	3,185

The change in convertible preferred stock warrant liability is classified in “Loss from change in fair value of warrant liability” on the condensed consolidated statement of operations. The Company did not record a change for the three months ended September 30, 2011 due to the convertible preferred stock warrant liability being reclassified to additional paid-in-capital. The Company recorded a loss of $159,000 for the three months ended September 30, 2010 and a loss of $6.9 million and $2.4 million for the nine months ended September 30, 2011 and 2010, respectively.