Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2012

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 September 30, 2012 and 2011, 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 6).

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 6). The Company’s derivative liabilities are adjusted to reflect their 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 September 30, 2012 and December 31, 2011, the estimated fair values of the liabilities measured on a recurring basis are as follows (in thousands):

	Fair Value Measurements at September 30, 2012
	Balance at September  30, 2012		Quoted Prices in Active  Markets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Embedded derivative liabilities	$	3,900	$	—	$	—	$	3,900
Warrant derivative liabilities		8,817		—		—		8,817
Total	$	12,717	$	—	$	—	$	12,717

	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

The following tables present the activity for liabilities measured at estimated fair value using unobservable inputs for the nine months ended September 30, 2012 and 2011 (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Levels 3)
	Embedded  Derivative Liabilities		Warrant  Derivative Liabilities			Total
Beginning balance at December 31, 2011	$	3,680	$	11,590		$	15,270
Adjustment to estimated fair value		77		(2,773	)		(2,696	)
Accrued dividends payable in Series C-1 2 Preferred		143		—			143
Ending balance at September 30, 2012	$	3,900	$	8,817		$	12,717

During the three and nine months ended September 30, 2012, the net decrease in the estimated fair value of derivative liabilities of $1,227,000 and $2,696,000 was recorded as non-cash other income in the Condensed Statements of Comprehensive Income (Loss).

	Fair Value Measurements Using Significant Unobservable Inputs (Levels 3)
	Embedded  Derivative Liabilities			Warrant Derivative Liabilities			Total
Beginning balance at December 31, 2010	$	5,170		$	932		$	6,102
Adjustment to estimated fair value		(1,620	)		(1,726	)		(3,346	)
Decrease of the embedded derivative liabilities for preferred shares converted into common stock		(315	)		—			(315	)
Forfeited accrued dividends payable in Series C-1 2 Preferred		(72	)		—			(72	)
Accrued dividends payable in Series C-1 1 Preferred		3			—			3
Ending balance at September 30, 2011	$	3,166		$	(794	)	$	2,372

During the three and nine months ended September 30, 2011, the net decrease in the estimated fair value of derivative liabilities of $3,993,000 and $3,346,000, was recorded as non-cash other income in the Condensed Statements of Comprehensive Income (Loss).