3. Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes among the following:

Level 1‑Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2‑Valuations based on 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 and models for which all significant inputs are observable, either directly or indirectly.

Level 3‑Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Cash, Cash Equivalents and Marketable Securities

The following table presents fair value of the Company’s cash, cash equivalents, and marketable securities as of March 31, 2018 and December 31, 2017 (in thousands):


	March 31, 2018
	Adjusted		Unrealized		Unrealized				Cash and Cash		Restricted		Marketable
	Cost		Gains		Loss		Fair Value		Equivalents		Cash		Securities
Cash	$	7,052	$	—	$	—	$	7,052	$	5,639	$	1,413	$	—
Level 1 (1):
Money market funds		12,507		—		—		12,507		12,507		—		—
U.S. treasury securities		1,994		—		(2)		1,992		—		—		1,992
Subtotal		14,501		—		(2)		14,499		12,507		—		1,992
Level 2 (2):
U.S. government agency securities		41,497		—		(44)		41,453		—		—		41,453
Total	$	63,050	$	—	$	(46)	$	63,004	$	18,146	$	1,413	$	43,445


	December 31, 2017
	Adjusted		Unrealized		Unrealized				Cash and Cash		Restricted		Marketable
	Cost		Gains		Losses		Fair Value		Equivalents		Cash		Securities
Cash	$	6,783	$	—	$	—	$	6,783	$	5,370	$	1,413	$	—
Level 1 (1):
Money market funds		11,187		—		—		11,187		11,187		—		—
U.S. treasury securities		1,991		—		—		1,991		—		—		1,991
Subtotal		13,178		—		—		13,178		11,187		—		1,991
Level 2 (2):
U.S. government agency securities		47,594		—		(42)		47,552		—		—		47,552
Total	$	67,555	$	—	$	(42)	$	67,513	$	16,557	$	1,413	$	49,543

(1)

The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or liabilities.

(2)

The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

The Company classifies investments available to fund current operations as current assets on its balance sheets. As of March 31, 2018, the Company did not hold any investment securities exceeding a one-year maturity.

Unrealized gains and losses on marketable securities are recorded as a separate component of accumulated other comprehensive income (loss) included in stockholders’ equity. Realized gains (losses) are included in interest income (expense) in the statement of operations and comprehensive income (loss) on a specific identification basis. The Company did not record any realized gains or losses during the three months ended March 31, 2018 and 2017. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between Level 2 and Level 3 during the three months ended March 31, 2018 or the year ended December 31, 2017.