Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2013

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.

The Company applies Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820)” (ASU No. 2011-04), which updated the previous fair value measurement guidance that had been included in the Accounting Standards Codification (ASC) to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards.

The table below presents the assets and liabilities measured and recorded in the financial statements at fair value on a recurring basis at March 31, 2013 and December 31, 2012 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)
March 31, 2013
Assets
Money market fund	$	6,102	$	6,102	$	—	$	—
Total assets	$	6,102	$	6,102	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—
December 31, 2012
Assets
Money market fund	$	9,990	$	9,990	$	—	$	—
Total assets	$	9,990	$	9,990	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—

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 March 31, 2013 or December 31, 2012, 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 redeemable convertible preferred stock (“Series D preferred stock”) in November 2011, the Company issued warrants which contained provisions for anti-dilution protection in the event that the Company issued other equity securities at a price below $1.46 per common share. Because of the potential adjustment to the warrant exercise price that could result from this anti-dilution protection, the warrants did not meet the criteria set forth in ASC 815-40, “Derivatives and Hedging – Contracts in Entity’s own Stock” to be considered indexed to the Company’s own stock. Accordingly, the Company 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 was subject to a floor of $1.46 per share and the initial exercise price was $1.63. The Company characterized this warrant liability as a Level 3 liability because its fair value measurement was based, in part, on significant inputs not observed in the market and represented 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 Company revalued the warrants at the end of each quarter using the Black-Scholes Model and recognized the change in the fair value of the warrants in the statements of operations and 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 March 31, 2012 and December 31, 2011:

	March 31 2012			December 31, 2011
Common stock price	$	1.73		$	1.05
Expected warrant exercise price	$	1.63		$	1.46
Remaining term of warrant (years)		4.6			4.8
Expected volatility		61	%		58	%
Average risk free interest rate		0.9	%		0.8	%
Expected dividend yield		—			—
Expected percentage of warrants to be exercised		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 was subject to adjustment to a price 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 December 31, 2011 because the Company’s common stock was trading below $1.46. The Company used the $1.63 maximum exercise price as an assumption in computing the fair value of the warrant at March 31, 2012 because the Company’s common stock was trading above $1.63 on March 31, 2012. 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 fair value of the warrant liability increased from $1,178,000 at December 31, 2011 to $2,499,000 at March 31, 2012 primarily due to an increase in the price of the Company’s common stock. The increase in the fair value of the warrant liability resulted in the recognition of a $1,321,000 expense in other income (expense) for the three months ended March 31, 2012.

The sale of shares of Series E convertible preferred stock (“Series E preferred stock”) and related warrants to purchase shares of our common stock (“Series E warrants”) in our November 2012 Series E financing triggered an anti-dilution adjustment, resulting in the exercise price of the Series D warrants being reduced and fixed at the minimum $1.46 per share and the Series D warrants no longer being subject to any anti-dilution adjustments. Since the exercise price of the Series D warrants became fixed, the Series D warrants then met the exception under ASC 815-40 as they were now “indexed to the company’s own stock” and met certain criteria for equity classification. Thus the Series D warrants were marked to fair value through earnings as of November 9, 2012 and then reclassified to stockholders equity at that time. Consequently, the Company did not record any non-operating income or expense related to the Series D warrants during the three months ended March 31, 2013.