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Financial Instruments
9 Months Ended
Sep. 30, 2011
Financial Instruments [Abstract] 
FINANCIAL INSTRUMENTS
3) FINANCIAL INSTRUMENTS
Fair Value Measurements
     Fair value is defined as 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. In order to increase consistency and comparability in fair value measurements, financial instruments are categorized based on a hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Level 2 consists of financial instruments that are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency in the determination of value. The Company accesses publicly available market activity from third-party databases and credit ratings of the issuers of the securities it holds to corroborate the data used in the fair value calculations obtained from its primary pricing source. The Company also takes into account credit rating changes, if any, of the securities or recent marketplace activity.
Level 3: Unobservable inputs that are not corroborated by market data. Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable. We initially recorded the warrant liability at its fair value using the Black-Scholes option-pricing model and revalue it at each reporting date until the warrants are exercised or expire. The fair value of the warrants is subject to significant fluctuation based on changes in our stock price, expected volatility, remaining contractual life and the risk-free interest rate.
     The Company’s cash equivalents and marketable securities are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, or broker dealer quotations and matrix pricing compiled by third party pricing vendors, respectively, which are based on third party pricing sources with reasonable levels of price transparency. The Company’s investments are valued based on a market approach in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, and credit risk.
The following table presents the Company’s financial instruments recorded at fair value in the Condensed Consolidated Balance Sheet, classified according to the three categories described above:
                                 
            Fair Value Measurements at September 30, 2011  
    Carrying Value     (Level 1)     (Level 2)     (Level 3)  
Assets
                               
Cash and cash equivalents
  $ 23,301,000     $ 23,301,000     $ —     $ —  
United States government-backed securities
    576,000       —       576,000       —  
Corporate securities
    540,000       —       540,000       —  
 
                       
 
                               
Total assets at fair value
  $ 24,417,000     $ 23,301,000     $ 1,116,000     $ —  
 
                       
 
                               
Liabilities
                               
Warrant liability
    1,699,000       —       —       1,699,000  
 
                       
 
                               
Total liabilities at fair value
  $ 1,699,000     $ —     $ —     $ 1,699,000  
 
                       
                                 
            Fair Value Measurements at December 31, 2010  
    Carrying Value     (Level 1)     (Level 2)     (Level 3)  
Assets
                               
Cash and cash equivalents
  $ 8,884,000     $ 8,884,000     $ —     $ —  
United States government-backed securities
    9,985,000       —       9,985,000       —  
Corporate securities
    778,000       —       778,000       —  
 
                       
 
                               
Total assets at fair value
  $ 19,647,000     $ 8,884,000     $ 10,763,000     $ —  
 
                       
 
                               
Liabilities
                               
Warrant liability
    1,204,000       —       —       1,204,000  
 
                       
 
                               
Total liabilities at fair value
  $ 1,204,000     $ —     $ —     $ 1,204,000  
 
                       
     The Company reviewed the level classifications of its investments at September 30, 2011 compared to December 31, 2010 and determined that there were no significant transfers between levels in the nine-month period ended September 30, 2011.
     The table below includes a rollforward of the balance sheet amounts for the three and nine-month periods ended September 30, 2011 and 2010 for the warrant liability, which is classified as Level 3. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable parameters to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable components, observable components (that is, components that are actively quoted and can be validated to external sources).
                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
    Three-Months Ended September 30, 2011  
            Total                          
            Unrealized     Purchases,                    
    Fair Value     Gain     Sales,     Transfers              
    at     Recognized in     Issuances,     In and/or     Fair Value at     Change in  
    July 1,     Statement     Settlements,     Out of     September 30,     Unrealized  
    2011     Of Operations     net     Level 3     2011     Gains in 2011  
Warrant Liability
  $ 4,268,000     $ (2,569,000 )   $ —     $ —     $ 1,699,000     $ (2,569,000 )
 
                                   
                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
    Three-Months Ended September 30, 2010  
            Total                          
            Unrealized     Purchases,                    
            Loss     Sales,     Transfers              
    Fair Value at     Recognized in     Issuances,     In and/or     Fair Value at     Change in  
    July 1,     Statement Of     Settlements,     Out of     September 30,     Unrealized  
    2010     Operations     net     Level 3     2010     Losses in 2011  
Warrant Liability
  $ 1,169,000     $ 131,000     $ —     $ —     $ 1,300,000     $ 131,000  
 
                                   
                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
    Nine-Months Ended September 30, 2011  
            Total                          
            Unrealized     Purchases,                    
            Loss     Sales,     Transfers              
    Fair Value at     Recognized in     Issuances,     In and/or     Fair Value at     Change in  
    January 1,     Statement Of     Settlements,     Out of     September 30,     Unrealized  
    2011     Operations     net     Level 3     2011     Losses in 2011  
 
                                   
Warrant Liability
  $ 1,204,000     $ 495,000     $ —     $ —     $ 1,699,000     $ 495,000  
 
                                   
                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
    Nine-Months Ended September 30, 2010  
            Total                          
            Unrealized     Purchases,                    
            Loss     Sales,     Transfers              
    Fair Value at     Recognized in     Issuances,     In and/or     Fair Value at     Change in  
    January 1,     Statement Of     Settlements,     Out of     September 30,     Unrealized  
    2010     Operations     net     Level 3     2010     Losses in 2011  
 
                                   
Warrant Liability
  $ 813,000     $ 487,000     $ —     $ —     $ 1,300,000     $ 487,000  
 
                                   
Marketable Securities
     The Company’s marketable securities consist of the following:
                                 
    September 30, 2011  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
United States government-backed securities
  $ 554,000     $ 22,000     $ —     $ 576,000  
Corporate securities
    529,000       11,000       —       540,000  
 
                       
 
                               
Total marketable securities
  $ 1,083,000     $ 33,000     $ —     $ 1,116,000  
 
                       
                                 
    December 31, 2010  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
United States government-backed securities
  $ 9,954,000     $ 34,000     $ (3,000 )   $ 9,985,000  
Corporate securities
    732,000       46,000       —       778,000  
 
                       
 
                               
Total marketable securities
  $ 10,686,000     $ 80,000     $ (3,000 )   $ 10,763,000  
 
                       
     The Company amortizes or accretes the premiums and discounts paid for the securities into interest income over the period to maturity of the securities. The decrease in net unrealized gains on such securities for the nine-month periods ended September 30, 2011 and 2010 was $44,000 and $111,000, respectively, which has been recorded in accumulated other comprehensive income and is reported as part of shareholders’ equity in the Condensed Consolidated Balance Sheets. Realized losses on sales of marketable securities were $0 for the nine- month periods ended September 30, 2011 and 2010. As of September 30, 2011, current yields range from 4.27% to 6.36% and maturity dates range from October 2011 to January 2013.
Common Stock Warrants
     Upon issuance of the warrants on October 29, 2007, the Company recorded the warrant liability at its initial fair value of $1,950,000. Warrants that are classified as a liability are revalued at each reporting date until the warrants are exercised or expire with changes in the fair value reported in the Company’s Condensed Consolidated Statements of Operations as gain or loss on fair value of warrants. Non-cash gains (losses) for the three and nine-month periods ended September 30, 2011 were $2,569,000 and ($495,000), respectively, compared with ($131,000) and ($487,000), respectively, for the comparable 2010 periods. At September 30, 2011 and December 31, 2010, the aggregate fair value of these warrants was $1,699,000 and $1,204,000, respectively. Assumptions used for the Black-Scholes option-pricing models in determining the fair value as of September 30, 2011 and December 31, 2010 are as follows:
                 
    September 30,     December 31,  
    2011     2010  
Expected volatility
    62.5 %     81 %
Remaining contractual term (years)
    1.6       2.3  
Risk-free interest rate
    0.25 %     0.7 %
Expected dividend yield
    0 %     0 %
Common stock price
  $ 3.70     $ 2.45