Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2012

Fair Value of Assets and Liabilities [Abstract]

Fair Value of Assets and Liabilities

(4) Fair Value of Assets and Liabilities

The Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect the Company’s estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable Level 3 inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

Effective January 1, 2012, the Company adopted, on a prospective basis, Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820)” (“ASU No. 2011-04”), which updates the existing fair value measurement guidance currently included in the Accounting Standards Codification to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. ASU No. 2011-04 is generally consistent with the Company’s previous fair value measurement policies but includes additional disclosure requirements, particularly for assets and liabilities that require the use of Level 3 inputs to measure fair value. The adoption of ASU No. 2011-04 did not have a material impact on the Company’s financial position or results of operations.

The table below presents the assets and liabilities measured and recorded in the financial statements at fair value on a recurring basis at September 30, 2012 and December 31, 2011 categorized by the level of inputs used in the valuation of each asset and liability.

(In thousands)	Total		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2012
Assets
Money market fund	$	8,284	$	8,284	$	—	$	—
Total assets	$	8,284	$	8,284	$	—	$	—
Liabilities
Warrant liability	$	1,072	$	—	$	—	$	1,072
Total liabilities	$	1,072	$	—	$	—	$	1,072
December 31, 2011
Assets
Money market fund	$	24,532	$	24,532	$	—	$	—
Total assets	$	24,532	$	24,532	$	—	$	—
Liabilities
Warrant liability	$	1,178	$	—	$	—	$	1,178
Total liabilities	$	1,178	$	—	$	—	$	1,178

The Level 1 assets consist of money market funds, which are actively traded daily. Although the Company did not have any Level 2 assets at September 30, 2012 or December 31, 2011, Level 2 assets typically consist of corporate bond investments whose fair value is generally determined from quoted market prices received from pricing services based upon quoted prices from active markets and/or other significant observable market transactions at fair value. Since these prices may not represent actual transactions of identical securities, they are classified as Level 2. Since any investments are classified as available-for-sale securities, any unrealized gains or losses are recorded in accumulated other comprehensive income or loss within stockholders’ (deficit) equity on the balance sheet. The Company did not elect to measure any other financial assets or liabilities at fair value.

In connection with the sale of its Series D preferred stock in November 2011, the Company issued warrants which contained a provision for price protection in the event that the Company issues other equity securities at a price below $1.46 per share of common stock. Because of the potential adjustment to the warrant exercise price that could result from this provision, the warrants do not meet the criteria set forth in Accounting Standards Codification 815-40, “Derivatives and Hedging — Contracts in Entity’s own Stock” to be considered indexed to the Company’s own stock. Accordingly, the Company has recorded the fair value of these warrants as a liability. The Company estimated the fair value of these warrants at the issuance date using the Black-Scholes Model as the result was not significantly different than the use of a lattice or binomial model because the price protection provision is subject to a floor of $1.46 per share and the initial exercise price is $1.63. The Company characterized this warrant liability as a Level 3 liability because its fair value measurement is based, in part, on significant inputs not observed in the market and reflects the Company’s assumptions as to the expected warrant exercise price, the expected volatility of the Company’s common stock, the expected dividend yield, the expected term of the warrant instrument and the expected percentage of warrants to be exercised.

The warrants are revalued at the end of each quarter using the Black-Scholes Model and the change in the fair value of the warrants is recognized in the statement of comprehensive loss as other income (expense). The following assumptions and other inputs were used to compute the fair value of the warrant liability as of September 30, 2012, June 30, 2012 and December 31, 2011:

	September 30, 2012			June 30, 2012			December 31, 2011
Common stock price	$	1.03		$	1.06		$	1.05
Expected warrant exercise price	$	1.46		$	1.46		$	1.46
Remaining term of warrant (years)		4.1			4.4			4.8
Expected volatility		60	%		61	%		58	%
Average risk free interest rate		0.5	%		0.6	%		0.8	%
Expected dividend yield		—			—			—
Expected percentage of warrants to be exercised		100	%		100	%		100	%

The closing price of the Company’s common stock is readily determinable since it is publicly traded. The exercise price of the warrant was initially set at $1.63 and may be adjusted to as low as the $1.46 minimum exercise price per share for diluting effects such as if in specified circumstances the Company sells its common stock at a price below $1.46 per share. The Company used the $1.46 minimum exercise price as an assumption in computing the fair value of the warrant at September 30, 2012, June 30, 2012 and December 31, 2011 because the Company’s common stock was trading below the $1.63 maximum exercise price as of such dates. The estimated remaining term of the warrant is readily determinable from the warrant agreement as it is the remaining contractual term. The expected volatility is based on the actual stock-price volatility over a period equal to the greater of the remaining term of the warrant or three years. The assumed risk-free interest rate is based on the U.S. Treasury security rate with a term equal to the remaining term of the warrant. The assumed dividend yield of zero is based on the fact that the Company has never paid cash dividends to common stockholders and has no present intention to pay cash dividends to common stockholders. The Company assumed that future financings would dilute the warrant holder’s ownership in the Company such that the 19.99% ownership limitation would not prevent the warrant holder from exercising all of the warrants during the term of the warrants.

The Company expects that the closing price and expected volatility of its common stock will be the most significant inputs in determining the fair value of the warrants at the end of each quarter. The Company expects that fluctuations in the other unobservable input assumptions, including the expected warrant exercise price, the expected dividend yield and the expected percentage of warrants to be exercised, will generally have less significant effects on the fair value of the warrants than the closing price of the Company’s common stock and expected volatility at the end of each quarter. For example, the Company expects 100% of the warrants to be exercised based on the assumption that future financings will dilute the warrant holder’s ownership in the Company such that the 19.99% ownership limitation will not prevent the warrant holder from exercising all of the warrants during the term of the warrants. The Company does not expect that this assumption will change over the next few years given the Company’s reliance on equity financings to fund its research and development programs. The Company may change the expected percentage of warrants to be exercised assumption if the warrants remain unexercised and are out of the money with a remaining term of less than six months.

Changes in the warrant liability from December 31, 2011 to September 30, 2012 were as follows:

(In thousands)	Fair Value of Warrant Liability
Balance, December 31, 2011	$	1,178
Increase (decrease) in fair value:
Three months ended March 31, 2012		1,321
Three months ended June 30, 2012		(1,318	)
Three months ended September 30, 2012		(109	)
Nine months ended September 30, 2012		(106	)
Balance, September 30, 2012	$	1,072

The fair value of the warrants decreased from $1,181,000 at June 30, 2012 to $1,072,000 at September 30, 2012 primarily due to decreases in the market price of the Company’s common stock and the remaining term of the warrants resulting in the recognition of $109,000 in non-operating income during the three months ended September 30, 2012. The fair value of the warrants decreased from $1,178,000 at December 31, 2011 to $1,072,000 at September 30, 2012 primarily due to decreases in the market price of the Company’s common stock and the remaining term of the warrants resulting in the recognition of $106,000 of non-operating income during the nine months ended September 30, 2012. The Company expects that the fair value of the warrants will vary significantly in the future resulting in material non-operating charges and credits in some periods.