Fair Value on Financial Instruments

12 Months Ended

Dec. 31, 2014

Note 3. Fair Value on Financial Instruments

The Company determined the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at 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 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:

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Level 1: Quoted prices in active markets for identical instruments

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Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)

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Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)

Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

To estimate the fair value of Level 2 debt securities as of December 31, 2014, the Company’s primary service relies on inputs from multiple industry-recognized pricing sources to determine the price for each investment. Corporate debt and United States government agency securities are systematically priced by this service as of the close of business each business day. If the primary pricing service does not price a specific asset a secondary pricing service is utilized.

The fair values of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2014 (in thousands):


	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds⁽¹⁾	$	3,912	$	3,912	$	0	$	0
Corporate debt securities⁽²⁾		26,088		0		26,088		0
United States government agency securities⁽²⁾		3,426		0		3,426		0

Total financial assets	$	33,426	$	3,912	$	29,514	$	0

Warrant liability⁽³⁾	$	10,485	$	0	$	0	$	10,485

Total financial liabilities	$	10,485	$	0	$	0	$	10,485

(1)	Included in cash and cash equivalents on the Company’s consolidated balances sheets.

(2)	Included in short-term investments on the Company’s consolidated balance sheets, except for approximately $1.0 million of corporate debt securities that are included in cash and cash equivalents on the Company’s consolidated balance sheets.

(3)	Included in current liabilities on the Company’s consolidated balance sheets.

The fair values of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2013 (in thousands):


	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds⁽¹⁾	$	8,650	$	8,650	$	0	$	0
Corporate debt securities⁽²⁾		23,173		0		23,173		0
United States government agency securities⁽²⁾		5,018		0		5,018		0

Total financial assets	$	36,841	$	8,650	$	28,191	$	0

Warrant liability⁽³⁾	$	20,390	$	0	$	0	$	20,390

Total financial liabilities	$	20,390	$	0	$	0	$	20,390

(1)	Included in cash and cash equivalents on the Company’s consolidated balances sheets.

(2)	Included in short-term investments on the Company’s consolidated balance sheets.

(3)	Included in current liabilities on the Company’s consolidated balance sheets.

A reconciliation of the beginning and ending balances for warrant liability using significant unobservable inputs (Level 3) from December 31, 2012 to December 31, 2014, was as follows (in thousands):


Balance at December 31, 2012	$	5,903
Increase in fair value of warrants		15,099
Settlement of warrants exercised		(612	)

Balance at December 31, 2013		20,390
Decrease in fair value of warrants		(7,708	)
Settlement of warrants exercised		(2,197	)

Balance at December 31, 2014	$	10,485

See Notes 1 and 12 for further information regarding the Company’s valuation techniques and unobservable inputs for the warrant liability using significant unobservable inputs (Level 3).

The Company did not have any transfers among fair value measurement levels during the years ended December 31, 2014 and 2013.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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