Fair Value Measurements, Cash Equivalents and Marketable Securities

Financial instruments consist of cash equivalents, marketable securities, prepaid expenses and other current assets, accounts payable, accrued expenses and debt. Cash equivalents and marketable securities are stated at fair value. Prepaid expenses and other current assets, accounts payable and accrued expenses are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date.

Fair value is defined as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:

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

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices 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’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows:



	September 30, 2018
	Fair Value		Level 1		Level 2		Level 3

	(unaudited)
	(in thousands)
Financial Assets:
Money market funds	$	360	$	360	$	—	$	—
Total cash equivalents	360		360		—		—

Corporate bonds	48,365		—		48,365		—
U.S. government debt securities	104,044		—		104,044		—
U.S. government agency bonds	4,976		—		4,976		—
Total short-term marketable securities	157,385		—		157,385		—

U.S. government debt securities	2,963		—		2,963		—
Total long-term marketable securities	2,963		—		2,963		—
Total	$	160,708	$	360	$	160,348	$	—



	December 31, 2017
	Fair Value		Level 1		Level 2		Level 3

	(in thousands)
Financial Assets:
Money market funds	$	33,485	$	33,485	$	—	$	—
Total cash equivalents	33,485		33,485		—		—

Corporate bonds	48,075		—		48,075		—
U.S. government debt securities	100,965		—		100,965		—
Total short-term marketable securities	149,040		—		149,040		—

Corporate bonds	6,698		—		6,698		—
U.S. government debt securities	66,556		—		66,556		—
Total long-term marketable securities	73,254		—		73,254		—
Total	$	255,779	$	33,485	$	222,294	$	—

The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. Corporate bonds, U.S. government debt securities and U.S. government agency bonds are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

The significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration liability include the estimated amount and timing of projected cash flows, and the risk-adjusted discount rate used to present value the cash flows. The use of different inputs in the valuation of the contingent consideration liability could result in materially different fair value estimates.

There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.

The Company’s term loan and royalty obligations are measured at fair value on a non-recurring basis. The fair value of the term loan and royalty obligations is estimated based upon the achievement of certain revenue targets over the life of the contract. The fair value of the liability was determined using valuation methodologies such as the discounted cash-flow model, with significant Level 3 inputs that included discount rate, projected revenues and projected royalty payments. The carrying value of the Company’s term loan and royalty obligations approximate its fair value as the stated interest rate approximates market rates. As further disclosed in Note 7, the Company paid off the outstanding principal balance and interest on its term loan and exercised its buyout option of the associated royalty obligation prior to its maturity in June 2017, and recognized loss on debt extinguishment of $5.1 million in the accompanying condensed consolidated statements of operations.

Cash Equivalents and Marketable Securities

The following tables summarizes the Company’s cash equivalents and marketable securities’ amortized costs, gross unrealized gains, gross unrealized losses and estimated fair values by significant investment category:



	September 30, 2018
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value

	(unaudited)
	(in thousands)
Money market fund	$	360	$	—	$	—		$	360
Corporate bond	48,434		1		(70		)	48,365
U.S. government debt securities	107,434		—		(427		)	107,007
U.S. government agency bonds	$	4,984	$	—	$	(8	)	$	4,976
Total	$	161,212	$	1	$	(505	)	$	160,708



	December 31, 2017
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value

	(in thousands)
Money market fund	$	33,485	$	—	$	—		$	33,485
Corporate bond	54,879		—		(106		)	54,773
U.S. government debt securities	167,947		—		(426		)	167,521
Total	$	256,311	$	—	$	(532	)	$	255,779

There have been no material realized gains or losses on marketable securities for the periods presented. None of the Company’s investments in marketable securities has been in an unrealized loss position for more than one year. The Company determined that it did have the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of any other-than-temporary impairment in the three or nine months ended September 30, 2018 and 2017. The Company’s long-term marketable securities have a weighted average maturities of 1.0 years as of September 30, 2018.