Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

Fair Value of Financial Instruments

8.     Fair Value of Financial Instruments

The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based on the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements may be classified based on the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities using the following three levels:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect the Company's estimates of the assumptions that market participants would use in pricing the asset or liability.  The Company develops these inputs based on the best information available, including its own data.

The following table presents information about the Company’s assets and liabilities as of June 30, 2011 and December 31, 2010 that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

	June 30, 2011
In thousands	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	17,035	$	---	$	17,035	$	---
	$	17,035	$	---	$	17,035	$	---
Liabilities:
Warrant liability	$	55,427	$	---	$	---	$	55,427
	$	55,427	$	---	$	---	$	55,427

	December 31, 2010
In thousands	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	17,041	$	---	$	17,041	$	---
	$	17,041	$	---	$	17,041	$	---
Liabilities:
Warrant liability	$	28,815	$	---	$	---	$	28,815
	$	28,815	$	---	$	---	$	28,815

The Company’s warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.  The fair value of the warrants on December 31, 2010 was determined to be $28.8 million using the Black-Scholes option valuation model applying the following assumptions: (i) the market price of the Company’s common stock of $5.10 on that date, (ii) a risk-free rate of 0.34 percent, (iii) an expected term of 1.2 years, (iv) no dividend yield, and (v) a volatility of 54 percent.  As of June 30, 2011, the fair value of the warrants was determined to be $55.4 million using the Black-Scholes option valuation model applying the following assumptions: (i) the market price of the Company’s common stock of $11.33 on that date, (ii) a risk-free rate of 0.14 percent, (iii) an expected term of 0.7 years, (iv) no dividend yield and (v) a volatility of 59.9 percent.  The increase in the fair value of the warrants was primarily due to the increase in the price of the Company’s common stock from December 31, 2010 to June 30, 2011 and was recognized in other income (expense) in the consolidated statements of operations.  The changes in the fair value of the warrant liability for the three and six-month periods ended June 30, 2011 and 2010 were as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
In thousands	2011		2010			2011			2010
Balance, beginning of period	$	32,524	$	17, 443		$	28,815		$	11,363
Revaluation of warrants		22,903		(2,138	)		41,475			3,942
Exercise of warrants		---		(2,080	)		(14,863	)		(2,080	)
Balance, end of period	$	55,427	$	13,225		$	55,427		$	13,225

The carrying amounts of cash, cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature.  The carrying amount of the Company’s bank term note of $13.3 million at June 30, 2011 approximates fair value due to its variable interest rate and other terms.  The Company’s obligation under its executive compensation plan is based in part on the current fair market value of underlying securities, which is therefore stated at its estimated fair value.