Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2012

Fair Value of Financial Instruments

Fair Value of Financial Instruments

7. Fair Value of Financial Instruments

        The carrying amounts of cash and cash equivalents, available-for-sale securities, prepaid expenses, accounts receivable, accounts payable and accrued expenses and other short-term assets and liabilities approximate fair value due to the short-term nature of these instruments. A derivative liability and convertible preferred stock warrants are also carried at fair value.

        Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (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.

        The following tables show assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2012 and the input categories associated with those assets and liabilities:

As of December 31, 2011 (in thousands)	Level 1		Level 2		Level 3
Assets:
Cash equivalents—U.S. treasury securities	$	35,076	$	—	$	—
Liabilities:
Convertible preferred stock warrants		—		—		1,516

As of December 31, 2012 (in thousands)	Level 1		Level 2		Level 3
Assets:
Cash equivalents—money market funds	$	25,668	$	—	$	—
Cash equivalents—certificates of deposit		—		480		—
Cash equivalents—corporate debt securities		—		5,017		—
Investments—certificates of deposit		—		240		—
Investments—commercial paper		—		12,465
Investments—corporate debt securities		—		59,533		—
Liabilities:
Derivative liability		—		—		196

        The Company's investment portfolio consists of investments classified as cash equivalents and available-for-sale securities. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. The Company's cash and cash equivalents are invested in U.S. treasury and various corporate debt securities that approximate their face value. All marketable securities with an original maturity when purchased of greater than three months are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive income (loss). The amortized cost of securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. The fair value of the convertible preferred stock warrants as of December 31, 2011 was determined using the Black-Scholes option valuation model. The fair value of the derivative liability as of December 31, 2012 was determined using a probability-weighted valuation based upon the likelihood of Silver Creek achieving a qualified financing, as described in Note 12.

        The following table provides a roll-forward of the fair value of the liabilities categorized as Level 3 instruments, for the year ended December 31, 2012:

(in thousands)	Convertible preferred stock warrants			Derivative Liability
Balance, December 31, 2011	$	1,516		$	—
Unrealized gain included in other income (expense)		(587	)		—
Reclassification to common stock warrants		(929	)		—
Portion of convertible note allocated to derivative		—			196
Balance, December 31, 2012	$	—		$	196