Fair value of financial instruments

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair value of financial instruments

Fair value of financial instruments

The carrying values of the Company’s cash and cash equivalents and short-term investments approximate their fair value due to their short-term nature. As a basis for determining the fair value of its assets and liabilities, the Company established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For the nine months ended September 30, 2012 there have been no transfers between Level 1 and Level 2 fair value instruments and no transfers in or out of Level 3.

The Company's cash and money market funds, which include bank deposits, are classified within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. The Company's other cash equivalents and short-term investments are also classified within Level 1 of the fair value hierarchy because the fair values used by the professional pricing service have been confirmed with quoted prices in active markets.

The Company’s preferred stock warrants were classified within Level 3 of the fair value hierarchy because they were valued based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments. These assumptions are inherently subjective and involve significant management judgment.

The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of September 30, 2012 and December 31, 2011, are summarized as follows (in thousands):

	September 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	21,509	$	—	$	—	$	21,509	$	—	$	—	$	—	$	—
Certificates of deposits	996		—		—		996		—		—		—		—
Commercial paper	62,362		—		—		62,362		—		—		—		—
U.S. government and agency securities	9,997		—		—		9,997		—		—		—		—
Total assets measured at fair value	$	94,864	$	—	$	—	$	94,864	$	—	$	—	$	—	$	—
Liabilities
Convertible preferred stock warrants	$	—	$	—	$	—	$	—	$	—	$	—	$	1,853	$	1,853
Total liabilities measured at fair value	$	—	$	—	$	—	$	—	$	—	$	—	$	1,853	$	1,853

The Company performed a fair value assessment of the preferred stock warrant inputs at the end of each reporting period. The fair value of the preferred stock warrant liability was estimated using an option pricing model that takes into account the contract terms as well as multiple inputs such as the Company's stock price, risk-free interest rates and expected volatility that the Company could not corroborate with market data. These warrants to purchase preferred stock were converted into warrants to purchase shares of common stock at the applicable conversion rate for the related common stock upon the closing of the Company's IPO on April 2, 2012. The warrants were revalued and converted upon the closing of the IPO, and as such, as of September 30, 2012 the convertible preferred stock warrant liability is zero.

For the period from January 1, 2012 through April 2, 2012, the Company valued these preferred stock warrants using a stock price of $16.00 - $23.40, risk-free interest rates of 0.07% - 0.66%, and expected volatility of 45% - 50%. For the year ending December 31, 2011 the Company used a stock price of $13.32 - $14.16, risk-free interest rates of 0.10% - 6.0%, and expected volatility of 45% - 50%. Any change in fair value is recognized as a component of other income (expense), net, in the consolidated statements of operations.

The following table presents a reconciliation of the preferred stock warrants measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) for the three months and nine months ended September 30, 2012 and 2011, respectively:

	Three months ended September 30,					Nine months ended September 30,
(in thousands)	2012		2011			2012			2011
Fair value at beginning of period	$	—	$	2,073		$	1,853		$	1,127
Change in fair value	—		(286		)	1,631			915
Exercise of preferred stock warrants	—		—			(343		)	(255		)
Conversion of preferred stock warrants to common stock warrants	—		—			(3,141		)	—
Fair value at end of period	$	—	$	1,787		$	—		$	1,787

The estimated fair value of the Company's current and long-term borrowings based on a market approach was approximately $8.3 million as of December 31, 2011 and represented a Level 2 valuation. The Company did not have any current or long-term borrowings as of September 30, 2012. When determining the estimated fair value of the Company's debt, the Company used a commonly accepted valuation methodology and market-based risk measurements, such as credit risk.