NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Securities classified as cash and cash equivalents and available-for-sale marketable securities as of September 30, 2013 and December 31, 2012 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

			Gross		Gross
	Amortized		Unrealized		Unrealized
September 30, 2013	Cost		Gains		Losses			Fair Value

Cash and cash equivalents:
Cash	$	28,050	$	—	$	—		$	28,050
Money market funds	36,232		—		—			36,232
Total cash and cash equivalents	64,282		—		—			64,282

Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	13,082		8		(2		)	13,088
U.S. government agency debt securities	3,203		3		—			3,206
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities	4,782		5		(1		)	4,786
Total available-for-sale securities	21,067		16		(3		)	21,080

Total cash, cash equivalents and marketable securities	$	85,349	$	16	$	(3	)	$	85,362

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2012	Cost		Gains		Losses			Fair Value

Cash and cash equivalents:
Cash	$	11,769	$	—	$	—		$	11,769
Money market funds	11,268		—		—			11,268
Corporate debt securities	6,039		—		—			6,039
Total cash and cash equivalents	29,076		—		—			29,076
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	21,662		31		—			21,693
U.S. government agency debt securities	14,027		8		—			14,035
U.S. Treasury securities	2,008		1		—			2,009
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities	7,858		7		(2		)	7,863
U.S. government agency debt securities	3,208		8		—			3,216
Total available-for-sale securities	48,763		55		(2		)	$	48,816

Total cash, cash equivalents and marketable securities	$	77,839	$	55	$	(2	)	$	77,892

The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. The Company places its cash, cash equivalents and marketable securities with U.S. Treasury and government agency securities, and high quality securities of U.S. and international financial and commercial institutions, To date, the Company has not experienced material losses on any of its balances. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive gain (loss) within shareholders’ equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “interest and other income” in the condensed statement of operations.

At September 30, 2013, the Company had 10 securities in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2013 (in thousands):

	Less than 12 months					12 months or greater				Total
			Gross					Gross				Gross
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses

Corporate debt securities	$	4,164	$	(3	)	$	—	$	—	$	4,164	$	(3	)

The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the securities held by the Company. Based on the Company’s review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company’s ability and intent to hold the investments until maturity, there were no material other-than-temporary impairments for these securities at September 30, 2013.

Fair value 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 Company utilizes the following fair value hierarchy based on three levels of inputs:

· 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.

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

September 30, 2013	Level 1		Level 2		Level 3		Total

Assets:
Money market funds	$	36,232	$	—	$	—	$	36,232
Corporate debt securities	—		17,874		—		17,874
Government agency debt securities	—		3,206		—		3,206
Total	$	36,232	$	21,080	$	—	$	57,312

Liabilities:
Contingent consideration- Zipsor					1,539		1,539
Contingent consideration- Lazanda					8,248		8,248
Total	$	—	$	—	$	9,787	$	9,787

The fair value measurement of the contingent consideration obligations arises from the Lazanda and Zipsor acquisitions and relates to the potential future milestone payments and royalties under the respective agreements which are determined using Level 3 inputs. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation arising from both acquisitions to its estimated fair value. Changes in the fair value of the contingent consideration obligations are recorded as a component of operating income in our condensed statement of operations and comprehensive income. For the three and nine months ended September 30, 2013, accretion expense of $0.3 and $0.4 million was included within interest and other expense in the accompanying condensed statement of operations.

The table below provides a summary of the changes in fair value of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2013 (in thousands):

	Balance at		Acquisition		Net accretion		Balance at
	December 31,		July 29,		and fair value		September 30,
	2012		2013		adjustments		2013
Liabilities:
Contingent consideration obligations- Zipsor	$	1,342	$	—	$	197	$	1,539
Contingent consideration obligations- Lazanda	$	—	$	8,004	$	244	$	8,248
Total	$	1,342	$	8,004	$	441	$	9,787