Warrant Derivative Liabilities

12 Months Ended

Dec. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Warrant Derivative Liabilities

Note 12 – Warrant Derivative Liabilities

The Warrants, which have anti-dilution protection features, do not meet the conditions to obtain equity classification under ASC 480 “Distinguishing Liabilities From Equity” as there are conditions which may require settlement by transferring assets. These Warrants are required to be carried as derivative liabilities, at fair value, with current changes in fair value reflected in our consolidated statements of operations and comprehensive income. As of December 31, 2013, the Warrants consisted of 1,826,001 warrants (1,720,334 at December 31, 2012) issued under the warrant agreements dated November 2010 in connection with a $60 million term loan facility. The fair value of the Warrants as of December 31, 2013 was $1.07 per warrant ($3.18 per warrant at December 31, 2012).

In the occurrence of a fundamental change, we are required to repurchase the Warrants at the higher of (1) the fair market value of the warrant and (2) a valuation based on a computation of the option value of the Warrant using the Black-Scholes calculation method using the assumptions described in the warrant agreement. A fundamental change is defined as the occurrence of one of the following events: a) a person or group becomes the direct or indirect owner of more than 50 percent of the voting power of the outstanding common stock, b) a merger event or similar transaction in which the majority owners before the transaction fail to own a majority of the voting power of the Company after the transaction, and c) approval of a plan of liquidation or dissolution of the Company or sale of all or substantially all of the Company’s assets.

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such the Monte Carlo model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair value, our income will reflect the volatility in these estimate and assumption changes.

The Monte Carlo model is used on the Warrants to reasonably value the potential future exercise price adjustments triggered by the anti-dilution provisions. This requires Level 3 inputs (see Note 3 – Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements) which are based on our estimates of the probability and timing of potential future financings and fundamental transactions. The assumptions summarized in the following table were used to calculate the fair value of the warrant derivative liability that was outstanding as of any of the balance sheet dates presented on our consolidated balance sheets:

	Fair Value Hierarchy Level
			As of December 31,
			2013			2012
Significant assumptions (or ranges):
Stock price		Level 1 input	$	4.52		$	9.07
Term (years)				1.83			2.83
Volatility		Level 2 input		94	%		70	%
Risk-free rate		Level 1 input		0.34	%		0.33	%
Dividend yield		Level 2 input		0.0	%		0.0	%
Scenario probability (fundamental change event/debt raise/equity raise)		Level 3 input		60%/40%/0	%		0%/80%/20	%

Inherent in the Monte Carlo valuation model are assumptions related to expected stock price volatility, expected life, risk-free interest rate and dividend yield. As part of our overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate, consistently applied, and reliable. We estimate the volatility of our common stock based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which we anticipate to remain at zero.

All our warrant derivative contracts are recorded at fair value and are classified as warrant derivative liability on the consolidated balance sheet. The following table summarizes the effect on our income (loss) associated with changes in the fair values of our warrant derivative financial instruments:

	Year Ended December 31,
	2013		2012
	(in thousands)
Unrealized gain (loss) on warrant derivatives	$	3,517	$	(600	)