Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2011

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

2. 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 December 31, 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 4).

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 4). 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 December 31, 2011 and 2010, the estimated fair values of the liabilities measured on a recurring basis are as follows (in thousands):

	Fair Value Measurements at December 31, 2011
	Balance at December 31, 2011		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Embedded derivative liabilities	$	3,680	$	—	$	—	$	3,680
Warrant derivative liabilities		11,590		—		—		11,590
Total	$	15,270	$	—	$	—	$	15,270
	Fair Value Measurements at December 31, 2010
	Balance at December 31, 2010		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Embedded derivative liabilities	$	5,170	$	—	$	—	$	5,170
Warrant derivative liabilities		932		—		—		932
Total	$	6,102	$	—	$	—	$	6,102

The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for the years ended December 31, 2011 and 2010 (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Embedded Derivative Liabilities			Warrant Derivative Liabilities			Total
Balance at December 31, 2009	$	—		$	—		$	—
Issuances		5,524			5,494			11,018
Adjustments to estimated fair value		(785	)		(4,562	)		(5,347	)
Dividends paid in Series C-1 Preferred Stock		359			—			359
Accrued dividends payable in Series C-1 Preferred Stock		72			—			72
Balance at December 31, 2010		5,170			932			6,102
Adjustments to estimated fair value		(1,150	)		10,658			9,508
Decrease of the embedded derivative liabilities for preferred shares converted into common stock		(361	)		—			(361	)
Reversal of previously accrued dividends		(72	)					(72	)
Dividends paid in Series C-1 1 Preferred Stock		41						41
Accrued dividends payable in Series C-1 1 Preferred Stock		52			—			52
Balance at December 31, 2011	$	3,680		$	11,590		$	15,270

At the closing of the May 2010 Financing, the amount by which the fair value of the 2010 derivative liability issuances exceeded the proceeds from the May 2010 Financing of $5,015,000 was recorded to other expense. During the year ended December 31, 2011, the estimated fair value of derivative liabilities increased by $9,508,000, which was recorded as non-cash other expense. During the year ended December 31, 2010, the estimated fair value of derivative liabilities decreased by $5,347,000, which was recorded as non-cash other income, resulting in net other income of $332,000 for the year ended December 31, 2010.