2. FAIR VALUE MEASUREMENTS

We categorize financial instruments recorded at fair value on our balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

		Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
		Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life.
		Level 3—Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Below is a description of the valuation methodologies used for financial instruments measured at fair value on our balance sheets, including the category for such financial instruments.

Cash Equivalents and Marketable Securities Available-for-Sale

Certificates of deposit and money market funds are categorized as Level 1 within the fair value hierarchy as their fair values are based on quoted prices available in active markets. U.S. government-sponsored enterprise securities, commercial paper and corporate notes are categorized as Level 2 within the fair value hierarchy as their fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Cash equivalents, restricted cash and marketable securities by security type at December 31, 2015 were as follows:

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Included in cash and cash equivalents:
Money market funds	$	4,577	$	—	$	—		$	4,577
Government-sponsored enterprise securities		1,999		—		—			1,999
Commercial paper		7,599		—		—			7,599
Corporate notes		5,002		—		(1	)		5,001

	$	19,177	$	—	$	(1	)	$	19,176


Restricted cash:
Certificate of deposit	$	267	$	—	$	—		$	267


Marketable securities:
Government-sponsored enterprise securities (due in 1 to 2 years)	$	10,007	$	—	$	(57	)	$	9,950
Commercial paper (due in less than 1 year)		27,661		49		(2	)		27,708
Corporate notes (due in less than 1 year)		64,892		1		(77	)		64,816
Corporate notes (due in 1 to 2 years)		22,837		—		(126	)		22,711

	$	125,397	$	50	$	(262	)	$	125,185

Cash equivalents, restricted cash and marketable securities by security type at December 31, 2014 were as follows:

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Included in cash and cash equivalents:
Money market funds	$	40,342	$	—	$	—		$	40,342


Restricted cash:
Certificate of deposit	$	266	$	—	$	—		$	266


Marketable securities:
Government-sponsored enterprise securities (due in less than 1 year)	$	401	$	—	$	(1	)	$	400
Government-sponsored enterprise securities (due in 1 to 2 years)		6,556		—		(7	)		6,549
Commercial paper (due in less than 1 year)		10,985		14		—			10,999
Corporate notes (due in less than 1 year)		97,307		2		(63	)		97,246
Corporate notes (due in 1 to 2 years)		12,412		—		(29	)		12,383

	$	127,661	$	16	$	(100	)	$	127,577

Cash equivalents and marketable securities with unrealized losses at December 31, 2015 and 2014 were as follows:

	Less Than 12 Months					12 Months or Greater					Total
(In thousands)	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
As of December 31, 2015:
Government-sponsored enterprise securities (due in 1 to 2 years)	$	9,950	$	(57	)	$	—	$	—		$	9,950	$	(57	)
Commercial paper (due in less than 1 year)		7,834		(2	)		—		—			7,834		(2	)
Corporate notes (due in less than 1 year)		61,006		(71	)		6,301		(7	)		67,307		(78	)
Corporate notes (due in 1 to 2 years)		22,711		(126	)		—		—			22,711		(126	)

	$	101,501	$	(256	)	$	6,301	$	(7	)	$	107,802	$	(263	)


As of December 31, 2014:
Government-sponsored enterprise securities (due in less than 1 year)	$	400	$	(1	)	$	—	$	—		$	400	$	(1	)
Government-sponsored enterprise securities (due in 1 to 2 years)		5,549		(7	)		—		—			5,549		(7	)
Corporate notes (due in less than 1 year)		92,989		(63	)		—		—			92,989		(63	)
Corporate notes (due in 1 to 2 years)		12,383		(29	)		—		—			12,383		(29	)

	$	111,321	$	(100	)	$	—	$	—		$	111,321	$	(100	)

The gross unrealized losses related to government-sponsored enterprise securities, commercial paper and corporate notes as of December 31, 2015 and 2014 were due to changes in interest rates. We determined that the gross unrealized losses on our cash equivalents and marketable securities as of December 31, 2015 and 2014 were temporary in nature. We review our investments quarterly to identify and evaluate whether any investments have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which the fair value has been less than the cost basis and whether we intend to sell the security or whether it is more likely than not that we would be required to sell the security before recovery of the amortized cost basis. We currently do not intend to sell these securities before recovery of their amortized cost basis.

Derivatives

Non-employee options are normally traded less actively, have trade activity that is one way, and/or are traded in less-developed markets and are therefore valued based upon models with significant unobservable market parameters, resulting in Level 3 categorization.

Options held by non-employees whose performance obligations are complete are classified as derivative liabilities on our balance sheets. These options are marked to fair value at each reporting period, and upon the exercise of these options, the instruments are marked to fair value and reclassified from derivative liabilities to stockholders' equity. As of December 31, 2014, non-employee options to purchase 284,600 shares of our common stock at an exercise price of $6.39 per share with a fair value of $16,000 were outstanding and classified as derivative liabilities. The fair value of these non-employee options as of December 31, 2014 was calculated using the Black Scholes option-pricing model with a dividend yield of zero percent, expected volatility of 89.50%, risk-free interest rate of 0.04% and expected term of three months. On March 31, 2015, these non-employee options expired unexercised. Accordingly, we have not reclassified any derivative liabilities to stockholders' equity for any non-employee option exercises during 2015.

Fair Value on a Recurring Basis

The following table presents information about our financial instruments that are measured at fair value on a recurring basis as of December 31, 2015 and indicates the fair value category assigned.

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds(1)	$	4,577	$	—	$	—	$	4,577
Government-sponsored enterprise securities(1)(3)		—		11,949		—		11,949
Commercial paper(1)(2)		—		35,307		—		35,307
Corporate notes(1)(2)(3)		—		92,528		—		92,528

Total	$	4,577	$	139,784	$	—	$	144,361

The following table presents information about our financial instruments that are measured at fair value on a recurring basis as of December 31, 2014 and indicates the fair value category assigned.

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets / Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds(1)	$	40,342	$	—	$	—	$	40,342
Government-sponsored enterprise securities(2)(3)		—		6,949		—		6,949
Commercial paper(2)		—		10,999		—		10,999
Corporate notes(2)(3)		—		109,629		—		109,629

Total	$	40,342	$	127,577	$	—	$	167,919


Liabilities
Derivatives(4)	$	—	$	—	$	16	$	16


(1)	Included in cash and cash equivalents on our balance sheets.
(2)	Included in current portion of marketable securities on our balance sheets.
(3)	Included in noncurrent portion of marketable securities on our balance sheets.
(4)	Included in fair value of derivatives on our balance sheets.

Changes in Level 3 Recurring Fair Value Measurements

The table below includes a rollforward of the balance sheet amounts for the year ended December 31, 2015, including the change in fair value, for financial instruments in the Level 3 category. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable parameters to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly, the gain in the table below includes changes in fair value due in part to observable factors that are part of the methodology. As of March 31, 2015, all non-employee options classified as derivative liabilities within the Level 3 fair value category expired unexercised.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Year Ended December 31, 2015
(In thousands)	Fair Value at December 31, 2014		Total Unrealized Gain Included in Earnings(1)			Purchases, Sales, Issuances, Settlements		Transfers In and/or Out of Level 3		Fair Value at December 31, 2015		Change in Unrealized Gain Related to Financial Instruments Held at December 31, 2015
Derivative liabilities	$	16	$	(16	)	$	—	$	—	$	—	$	—


(1)	Reported as unrealized gain on derivatives on our statements of operations.

Credit Risk

We currently place our cash, restricted cash, cash equivalents and marketable securities with four financial institutions in the United States. Generally, these deposits may be redeemed upon demand and therefore, bear minimal risk. Deposits with banks may exceed the amount of insurance provided on such deposits. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents and marketable securities. Cash equivalents and marketable securities currently consist of money market funds, U.S. government-sponsored enterprise securities, commercial paper and corporate notes. Our investment policy, approved by the audit committee of our board of directors, limits the amount we may invest in any one type of investment issuer, thereby reducing credit risk concentrations.