2. FAIR VALUE MEASUREMENTS

We categorize financial instruments recorded at fair value on our condensed 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 an 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 condensed balance sheets, including the category for such financial instruments.

Cash Equivalents and Marketable Securities

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 March 31, 2015 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
(In thousands)	Cost		Gains		Losses			Fair Value
Included in cash and cash equivalents:
Money market funds	$	7,231	$	—	$	—		$	7,231
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)	5,806		—		(1		)	5,805
Commercial paper (due in less than 1 year)	28,963		33		—			28,996
Corporate notes (due in less than 1 year)	106,305		10		(56		)	106,259
Corporate notes (due in 1 to 2 years)	11,936		2		(4		)	11,934
	$	153,411	$	45	$	(62	)	$	153,394

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
(In thousands)	Cost		Gains		Losses			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 l to 2 years)	12,412		—		(29		)	12,383
	$	127,661	$	16	$	(100	)	$	127,577

Marketable securities with unrealized losses at March 31, 2015 and December 31, 2014 were as follows:

	Less Than 12 Months					12 Months or Greater				Total
			Gross					Gross				Gross
	Estimated		Unrealized			Estimated		Unrealized		Estimated		Unrealized
(In thousands)	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
As of March 31, 2015:
Government-sponsored enterprise securities (due in less than 1 year)	$	400	$	(1	)	$	—	$	—	$	400	$	(1	)
Government-sponsored enterprise securities (due in 1 to 2 years)	5,805		(1		)	—		—		5,805		(1		)
Corporate notes (due in less than 1 year)	80,083		(56		)	—		—		80,083		(56		)
Corporate notes (due in 1 to 2 years)	6,012		(4		)	—		—		6,012		(4		)
	$	92,300	$	(62	)	$	—	$	—	$	92,300	$	(62	)

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 and corporate notes as of March 31, 2015 and December 31, 2014 were due to changes in interest rates. We determined that the gross unrealized losses on our marketable securities as of March 31, 2015 and December 31, 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 amortized 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 condensed 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. 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 the three months ended March 31, 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 March 31, 2015 and indicates the fair value category assigned.

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds(1)	$	7,231	$	—	$	—	$	7,231
Government-sponsored enterprise securities(2)(3)	—		6,205		—		6,205
Commercial paper(2)	—		28,996		—		28,996
Corporate notes(2)(3)	—		118,193		—		118,193
Total	$	7,231	$	153,394	$	—	$	160,625

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		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets / Liabilities		Inputs		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 condensed balance sheets.

(2)

Included in current portion of marketable securities on our condensed balance sheets.

(3)

Included in noncurrent portion of marketable securities on our condensed balance sheets.

(4)

Included in fair value of derivatives on our condensed balance sheets.

Changes in Level 3 Recurring Fair Value Measurements

The table below includes a rollforward of the balance sheet amounts for the three months ended March 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)

Three Months Ended March 31, 2015

Change in

Unrealized Gain

Total

Related to

Unrealized

Transfers

Financial

Fair Value at

Gain

Purchases

In and/or

Fair Value at

Instruments

December 31,

Included in

and

Sales and

Out of

March 31,

Held at

(In thousands)

2014

Earnings(1)

Issuances

Settlements

Level 3

2015

March 31, 2015

Derivative liabilities

(16

)

—

(1)

Reported as unrealized gain on derivatives in our condensed statements of operations.