3.	Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable, and accounts payable, approximate their fair values due to their short maturities. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.

Level 2: Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value (in thousands):

 

		Basis of Fair Value Measurements
		Balance				Quoted Prices in Active Markets for Identical Items (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Balance at December 31, 2012
Cash equivalents — money market funds		$	49,209			$	49,209			$	—			$	—
Cash equivalents — bank deposits			5,037				—				5,037				—
Short-term marketable securities — U.S. government agency securities			100,161				90,138				10,023				—
Contingent consideration liability			161				—				—				161
Balance at December 31, 2013
Cash equivalents — money market funds			28,210				28,210				—				—
Cash equivalents — bank deposits			5,001				—				5,001				—
Short-term marketable securities — U.S. government agency securities			100,299				75,288				25,011				—
Contingent consideration liability			—				—				—				—

Bank deposits and certain U.S. government agency securities are classified within the second level of the fair value hierarchy as the fair value of those assets are determined based upon quoted prices for similar assets.

The Level 3 liability consists of contingent consideration related to the July 19, 2011 acquisition of Xively. The fair value of the contingent consideration was estimated by applying a probability based model, which utilizes significant inputs that are unobservable in the market. Key assumptions include a 13% discount rate and an assumption that the earn-out will be achieved. The current portion of contingent consideration is included in Accrued liabilities. The contingent consideration liability was settled in the quarter ended September 30, 2013. A reconciliation of the beginning and ending Level 3 liability is as follows (in thousands):

 

		Years Ended December 31,
		2012				2013
Balance beginning of period		$	212			$	161
Additions to Level 3			—				—
Payments			(89	)			(178	)
Change in fair value (included within research and development expense)			38				17
Balance end of period		$	161			$	—