5. 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 and cash equivalents 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 (marketable securities and the financing derivative) that are measured at fair value and the classification by level of input within the fair value hierarchy:

	Fair Value Measurements as of
	September 30, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	7,396	$	—	$	—	$	7,396
Total assets measured at fair value	$	7,396	$		$	—	$	7,396

Financing derivative	$	—	$	—	$	341	$	341
Total liabilities measured at fair value	$	—	$	—	$	341	$	341

	Fair Value Measurements as of
	December 31, 2014
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	9,663	$	—	$	—	$	9,663
Federal agency securities		—		13,770		—		13,770
Commercial paper		—		1,500		—		1,500
Corporate debt securities		—		14,520		—		14,520
Total assets measured at fair value	$	9,663	$	29,790	$	—	$	39,453

Financing derivative	$	—	$	—	$	89	$	89
Total liabilities measured at fair value	$	—	$	—	$	89	$	89

The Company’s Level 2 investments include U.S. government-backed securities, commercial paper and corporate debt 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 Company did not have any Level 2 investments as of September 30, 2015.

In 2014, the Company recorded a financing derivative liability resulting from an embedded derivative related to the prepayment feature of its loan and security agreement with MidCap Financial SBIC LP, which was entered into by the Company in September 2012 and subsequently amended (the “Loan and Security Agreement”). At September 30, 2015, the Company re-measured the financing derivative liability as $341,000, resulting in a loss of $114,000 and $252,000 for the three and nine month periods ended September 30, 2015. The loss is included in Change in fair value of financing derivative in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss. The fair value of this derivative was determined using Level 3 inputs, or significant unobservable inputs. The value of the financing derivative was determined by comparing the difference between the fair value of the notes payable with and without the financing derivative by calculating the respective present values from future cash flows using a 14% discount rate, adjusted for the probability of the occurrence of an event of default under the Loan and Security Agreement. The 14% discount rate assumption was based on an effective borrowing rate under the current circumstances considering the quoted borrowing rate for the Company and the imputed fair value of any additional financial instruments that may be required to be extended to the lender in order to obtain such debt financing. The probability of the occurrence of an event of default under the Loan and Security Agreement was based on management’s judgment. Refer to Note 6 for additional details regarding the Loan and Security Agreement.

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

	Fair Value Measurements of Level 3 Liabilities
	(in thousands)
Balance as of December 31, 2014	$	89
Loss on re-measurement of the financing derivative liability		3
Balance as of March 31, 2015		92
Loss on re-measurement of the financing derivative liability		135
Balance as of June 30, 2015		227
Loss on re-measurement of the financing derivative liability		114
Balance as of September 30, 2015	$	341

The estimated fair value of the notes payable as of September 30, 2015, based on current market rates for similar borrowings, as measured using Level 3 inputs, approximates the carrying amount as presented on the Condensed Consolidated Balance Sheets.