Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2013

Fair Value of Financial Instruments

Fair Value of Financial Instruments

5. 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. The derivative liability is 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, 2012 and March 31, 2013 and the input categories associated with those assets and liabilities:

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

As of March 31, 2013 (in thousands)	Level 1		Level 2		Level 3
Assets:
Cash equivalents — money market funds	$	13,667	$	—	$	—
Investments — certificates of deposit	—		240		—
Investments — commercial paper	—		14,483		—
Investments — corporate debt securities	—		43,529		—
Liabilities:
Derivative liability	—		—		231

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 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 derivative liability as of December 31, 2012 and March 31, 2013 was determined using a probability-weighted valuation model based upon the likelihood of Silver Creek achieving a qualified financing.

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs:

	Fair Value as of March 31, 2013		Valuation Technique	Unobservable Input	Point Estimate
	(in thousands)
Derivative Liability	$	231	Probability-weighted	Estimated probability of Silver Creek qualified financing(s) prior to December 31, 2013	50	%

The significant unobservable input used in the fair value measurement of the Company’s derivative liability is the probability of Silver Creek’s successful achievement of aggregate financings of at least $4.0 million of gross proceeds prior to December 31, 2013.

The following table provides a roll-forward of the fair value of the derivative liability categorized as Level 3 instruments, for the three months ended March 31, 2013:

(in thousands)	Derivative Liability
Balance, December 31, 2012	$	196
Portion of convertible notes issued in February 2013 allocated to derivative	35
Balance, March 31, 2013	$	231