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Fair Value Measurements
 9 Months Ended
Sep. 30, 2012
Fair Value Measurements

2. Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 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 under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes 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 as follows:

 

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Level 1 - Quoted prices in active markets for identical assets or liabilities;

 

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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; and

 

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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.

 

Recurring Fair Value Measurements

The following table represents the fair value hierarchy for our financial assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

September 30, 2012:

            

Money market funds

    $ 18,862       $ —         $ —         $ 18,862   

U.S. government agency securities

      —           102,174         —           102,174   

Corporate debt securities, secured by U.S. government

      —           24,578         —           24,578   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 18,862       $ 126,752       $ —         $ 145,614   
  

 

 

     

 

 

     

 

 

     

 

 

  

December 31, 2011:

            

Money market funds

    $ 17,171       $ —         $ —         $ 17,171   

U.S. Government agency securities

      —           35,920         —           35,920   

Corporate debt securities, secured by U.S. government

      —           58,580         —           58,580   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 17,171       $ 94,500       $ —         $ 111,671   
  

 

 

     

 

 

     

 

 

     

 

 

  

Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

Marketable securities primarily comprise U.S. government sponsored and corporate debt securities which are measured at fair value using Level 2 inputs. We review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets or have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

When determining if there are any “other-than-temporary” impairments on our investments, we evaluate: (1) whether the investment has been in a continuous unrealized loss position for over 12 months, (2) the duration to maturity of our investments, (3) our intention to hold the investments to maturity and if it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, (4) the credit rating of each investment and (5) the type of investments made. Through September 30, 2012, we have not recognized any “other-than-temporary” losses on our investments. There were no sales of marketable securities during the nine months ended September 30, 2012 and 2011.

Liabilities for Which Fair Value Is Disclosed

In connection with the acquisition of all of the outstanding equity of Symphony Dynamo, Inc. in December 2009, we issued to Symphony Dynamo Holdings LLC a note in the principal amount of $15 million, due December 31, 2012, payable in cash, our common stock or a combination thereof at our discretion. As of September 30, 2012, the carrying value and estimated fair value of the note payable was $14.5 million and this balance was classified as a short term liability. We estimated the fair value of the note using a net present value model with a discount rate of 17%. This approach resulted in the classification of the note as Level 3 in the fair value hierarchy. Imputed interest is recorded as interest expense over the term of the loan using the interest rate method. We recorded interest expense of $0.5 million and $1.6 million for the three and nine months ended September 30, 2012, respectively, and $0.5 million and $1.4 million for the three and nine months ended September 30, 2011, respectively. If we elect to pay all or a portion of the note in shares of our common stock, the number of shares issued will be equal to the portion of the outstanding principal amount of the note to be repaid using our common stock, divided by the average closing price of our common stock for the 30 trading days immediately preceding (but not including) the second trading day before the date of such payment multiplied by 1.15.