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 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 (investments) that are measured at fair value and the classification by level of input within the fair value hierarchy:


	Fair Value Measurements as of
	March 31, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	10,476	$	—	$	—	$	10,476
Federal agency securities		—		11,506		—		11,506
Commercial paper		—		—		—		—
Corporate debt securities		—		6,091		—		6,091
Total assets measured at fair value	$	10,476	$	17,597	$	—	$	28,073

Financing derivative		—		—		92		92
Total liabilities measured at fair value	$	—	$	—	$	92	$	92


	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 average remaining maturity of the Company’s Level 2 investments as of March 31, 2015 is less than three months and all of these investments are rated A3/A-/A- or P1/A1/F1, or higher by Moody’s, S&P and Fitch.

In December 2014, the Company recorded a financing derivative liability resulting from an embedded derivative related to the prepayment feature of the loan and security agreement with MidCap Financial. At March 31, 2015, the Company remeasured the financing derivative liability as $92,000 and recorded the loss of $3,000 as other expense. 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 with MidCap Financial. 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 with MidCap Financial was based on management’s judgment. Refer to Note 5 for additional details regarding the loan and security agreement with MidCap Financial.

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 at December 31, 2014	$	89
(Gain) loss on remeasurement of the financing derivative liability		3
Balance at March 31, 2015	$	92

The estimated fair value of the notes payable as of March 31, 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 sheet.