14. Fair Value Measurement

In determining the fair value of its assets and liabilities, the Company uses various valuation approaches. The Company employs a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:


Level 1 –		Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access

Level 2 –		Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly

Level 3 –		Valuations based on inputs that are unobservable and significant to the overall fair value measurement

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.

The Company’s fixed income investments are comprised of obligations of U.S. government agencies and corporate marketable securities. These investments have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. At least annually, the Company validates the prices provided by third party pricing services by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. The Company did not adjust or override any fair value measurements provided by the pricing services as of June 30, 2016.

The following fair value hierarchy table presents information about each major category of the Company’s assets measured at fair value on a recurring basis as of June 30, 2016 (in thousands):


	Fair value measurement at reporting date using:
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Money market funds	$	131,939	$	—	$	—	$	131,939
U.S. Government and agency securities		3,629		300		—		3,929
Corporate and other debt securities		—		5,252		—		5,252

Total	$	135,568	$	5,552	$	—	$	141,120

Liabilities:
Contingent consideration – short-term	$	—	$	—	$	5,878	$	5,878
Convertible senior notes		—		124,295		—		124,295

Total	$	—	$	124,295	$	5,878	$	130,173

The Company has no other assets or liabilities for which fair value measurement is either required or has been elected to be applied. The liabilities for contingent consideration are recorded in connection with the BioFlash Partners, LLC (“BioFlash”), Refine Technology, LLC (“Refine”) and Atoll business combinations. The contingent consideration related to BioFlash is valued using management’s estimates of royalties to be paid to the former shareholders of BioFlash based on sales of the acquired assets. The contingent consideration related to Refine is valued using management’s estimates of expected future milestone payments based on forecasted sales and a portion of any receipts that might be received in connection with the resolution, withdrawal or settlement of certain patent disputes with a third party to be paid to Refine. The contingent consideration related to Atoll is valued using management’s estimates of expected future milestone payments based on forecasted sales. These valuations are Level 3 valuations, as the primary inputs are unobservable.

Changes in the fair value of contingent consideration in the six-month period ended June 30, 2016 are primarily attributable to an increase to the expected 2016 Refine milestone payment of $2,629,000, a $4,350,000 milestone payment to Refine and a $130,000 minimum royalty payment made to BioFlash, which were previously accrued. Additionally, the Company recorded contingent consideration of €836,000 (approximately $928,000) related to the Atoll acquisition.

The following table provides a rollforward of the fair value of contingent consideration (in thousands):


Balance at December 31, 2015	$	6,788
Additions		928
Payments		(4,480	)
Changes in fair value		2,642

Balance at June 30, 2016	$	5,878

The following tables provide quantitative information associated with the fair value measurement of the Company’s contingent consideration related to Refine using Level 3 inputs (in thousands):


		Contingent Consideration
		Refine
Fair value as of June 30, 2016		$4,648
Valuation technique		Probability-adjusted discounted cash flow
Remaining period in which milestones can be achieved		2016


	Fixed Earn-out		Maximum Variable Earn-out		Accrued Balance
2016		4,250		1,300		4,648

The significant unobservable inputs used in the fair value measurement of Refine’s contingent consideration are the probabilities of successful achievement of 2016 sales milestones. During the first six months of 2016, the estimated fair value of the 2016 contingent payment was increased by $2,629,000 to $4,648,000 based on revised sales forecasts. Increases or decreases in the Company’s projected sales during 2016 may result in a significantly higher or lower fair value measurement, respectively, and could result in a reversal of the current accrual.

The following tables provide quantitative information associated with the fair value measurement of the Company’s contingent consideration related to Atoll using Level 3 inputs (in thousands):


		Contingent Consideration
		Atoll
Fair value as of June 30, 2016		$928
Valuation technique		Probability-weighted expected return method.
Remaining period in which milestones can be achieved		2016

The significant unobservable inputs used in the fair value measurement of Atoll’s contingent consideration are the probabilities of successful achievement of 2016 sales milestones. The initial valuation of contingent consideration upon the acquisition of Atoll in April 2016 resulted in a fair value of €836,000 (approximately $928,000). Increases or decreases in the Company’s projected sales during 2016 may result in a significantly higher or lower fair value measurement, respectively, and could result in a reversal of the current accrual.

In May 2016, the Company issued $115 million aggregate principal amount of 2.125% convertible senior notes due June 1, 2021 (the “Notes”). Interest is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2016. As of June 30, 2016, the carrying value of the Notes was $93.3 million, net of unamortized discount, and the fair value of the Notes was approximately $124.3 million. The Notes are discussed in more detail in Note 11, “Long Term Debt.”

There were no remeasurements to fair value during the three months ended June 30, 2016 of financial assets and liabilities that are not measured at fair value on a recurring basis.