Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

4. Fair Value of Financial Instruments

Cash, accounts payable, and accrued liabilities are carried at cost, which approximates fair value given their short-term nature. Marketable securities, cash equivalents and warrants for convertible preferred stock are carried at fair value.

The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities 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 Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets and liabilities (investments and convertible preferred stock warrant liability) that are measured at fair value and the classification by level of input within the fair value hierarchy:

	Fair Value Measurements as of
	June 30, 2012
	Level 1		Level 2		Level 3		Total
(in thousands)
Investments:
Money market funds	$	9,949	$	—	$	—	$	9,949
U.S. treasury notes		506		—		—		506
Commercial paper		—		4,248		—		4,248
Corporate securities		—		4,517		—		4,517
U.S. government-backed securities		—		8,319		—		8,319
Total investments	$	10,455	$	17,084	$	—	$	27,539
Convertible preferred stock warrant liability	$	—	$	—	$	235	$	235
	Fair Value Measurements as of
	December 31, 2011
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	2,973	$	—	$	—	$	2,973
U.S. treasury notes		3,051		—		—		3,051
Corporate securities		—		6,022		—		6,022
U.S. government-backed securities		—		5,436		—		5,436
Total investments	$	6,024	$	11,458	$	—	$	17,482
Convertible preferred stock warrant liability	$	—	$	—	$	117	$	117

The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The fair value of the Company’s commercial paper is based upon the time to maturity and discounted using the three-month treasury bill rate. The average remaining maturity of the Company’s Level 2 investments as of June 30, 2012 is less than six months and all of these investments are rated by S&P and Moody’s at AAA or AA+. As of June 30, 2012, the Company’s corporate securities are fully FDIC-insured under the Temporary Liquidity Guarantee Program (TLGP).

The fair value of the convertible preferred stock warrant liability as of June 30, 2012 was calculated by allocating the total enterprise value to the various securities, including convertible preferred stock warrants, within the Company’s capital structure using the probability-weighted expected return method (PWERM). The change to the PWERM model reflected the continued development of the Company. The fair value of the convertible preferred stock warrant liability through December 31, 2011 was calculated by allocating the total enterprise value to the various securities within the Company’s capital structure using an Option Pricing Model. The estimated total enterprise value was $178.9 million and $106.9 million at June 30, 2012 and December 31, 2011, respectively. The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the Company, as well as the rights of each share class. The PWERM estimates the value of the Company under each of three possible future scenarios: IPO, stay private and liquidation. In the non-IPO scenarios, a large portion of the equity value is allocated to the convertible preferred stock to incorporate the aggregate liquidation preferences. In the IPO scenarios, the equity value is allocated pro rata among the shares of common stock and each series of convertible preferred stock and warrants, which may cause each share class to have a higher relative value per share than under the non-IPO scenario. The value per share under each scenario was then probability weighted and the resulting weighted values per share were summed to determine the fair value per share for each share class. The PWERM valuation used a risk-adjusted discount rate of 14%, a non-marketability discount rate of 23% and an estimated time to a liquidity event of 13-24 months. The expected outcomes were weighted more towards an IPO (60%), with a lower weighting for remaining private (30%), and a lower weighting for a sale (10%). The fair value of the enterprise determined using the IPO and non-IPO scenarios are weighted according to the Company’s estimate of the probability of each scenario.

The following table presents changes in financial instruments measured at fair value using Level 3 inputs:

	Convertible
	Preferred Stock
	Warrant
	Liability
	(in thousands)
Balance at December 31, 2011	$	117
Unrealized loss included in other income (expense), net		118
Balance at June 30, 2012	$	235