Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

3. Fair Value of Financial Instruments

Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of June 30, 2011 and 2010, cash and cash equivalents were comprised of cash in checking accounts.

In conjunction with the May 2010 Financing, the Company issued redeemable convertible preferred stock with certain embedded derivative features, as well as warrants to purchase various types of convertible preferred stock and units. These instruments are accounted for as derivative liabilities (see Note 5).

The Company used Level 3 inputs for its valuation methodology for the embedded derivative liabilities and warrant derivative liabilities. The estimated fair values were determined using a binomial option pricing model based on various assumptions (see Note 5). The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to fair value of derivative liabilities.

At June 30, 2011, the estimated fair values of the liabilities measured on a recurring basis are as follows (in thousands):

	Fair Value Measurements at June 30, 2011
	Balance at		Quoted Prices in		Significant Other		Significant
	June 30,		Active Markets		Observable Inputs		Unobservable Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
Embedded derivative liabilities	$	4,333	$	—	$	—	$	4,333
Warrant derivative liabilities		2,344		—		—		2,344
Total	$	6,677	$	—	$	—	$	6,677

The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for the six months ended June 30, 2011 (in thousands):

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Embedded Derivative			Warrant Derivative
	Liabilities			Liabilities			Total
Beginning balance at December 31, 2010	$	5,170		$	932		$	6,102
Adjustments to estimated fair value		159			5,870			6,029
Forfeited accrued dividends payable in Series C-11 Preferred		(72	)		—			(72	)
Ending balance at March 31, 2011		5,257			6,802			12,059
Adjustments to estimated fair value		(924	)		(4,458	)		(5,382	)
Ending balance at June 30, 2011	$	4,333		$	2,344		$	6,677

During the six months ended June 30, 2011, the estimated fair value of derivative liabilities increased by a net amount of $647,000, which was recorded as other expense in the Statement of Operations.