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Fair Value Measurements
 6 Months Ended
Jun. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
5.
Fair Value Measurements
The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.
Assets and liabilities measured at fair value on a recurring basis included the following as of June 30, 2019 (in thousands):
                                 
 
Using
   
   
 
Quoted Prices
in Active
Markets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Fair
Value as of
June 30, 2019
 
Cash equivalents:
   
     
     
     
 
Money market funds
  $
 9,538
     $
—  
     $
—  
    $
 9,538
  
Long-term investments:
   
     
     
     
 
Failed Auction Security
   
—  
      
—  
      
2,565
      
2,565
  
Liabilities:
   
     
     
     
 
Contingent consideration obligations
   
—  
     
—  
      
(306
 )    
(306
 )
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2018 (in thousands):
                                 
 
Using
   
   
 
Quoted Prices
in Active
Markets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Fair
Value as of
December 31, 2018
 
Cash equivalents:
   
     
     
     
 
Money market funds
  $
 9,433
     $
—  
     $
—  
     $
 9,433
  
Long-term investments:
   
     
     
     
 
Failed Auction Security
   
—  
      
—  
      
2,526
      
2,526
  
Liabilities:
   
     
     
     
 
Contingent consideration obligations
   
—  
      
—  
      
(408
 )    
(408
 )
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2019, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Company’s investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of this security as of June 30, 2019. The major assumptions used in preparing the DCF model were similar to those described in Note 5 – Fair Value Measurements in the Notes to the Consolidated Financial Statements contained in the Company’s 2018 Form
 10-K.
Quantitative information about Level 3 fair value measurements as of June 30, 2019 is as follows (dollars in thousands):
                         
 
Fair Value
   
Valuation
Technique
 
Unobservable
Input
 
Weighted
Average
 
Failed Auction Security
  $
2,565
   
Discounted cash flow
 
Cumulative probability of earning the maximum rate until maturity
   
  0.08
 %
   
   
 
Cumulative probability of principal return prior to maturity
   
94.34
 %
   
   
 
Cumulative probability of default
   
  5.58
 %
   
   
 
Liquidity risk premium
   
  5.00
 %
   
   
 
Recovery rate in default
   
40.00
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the six months ended June 30, 2019 was as follows (in thousands):
         
Balance at the beginning of the period
  $
2,526
  
Credit gain on
available-for-sale
securities included in Other income (expense), net
    
2
  
Gain included in Other comprehensive income
   
37
  
         
Balance at the end of the period
  $
2,565
  
         
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company has classified its contingent consideration obligations as Level 3 because the fair value for these liabilities was determined using unobservable inputs. The liabilities were based on estimated sales of legacy products over the period of royalty payments at the royalty rate, discounted using the Company’s estimated cost of capital.
The change in the estimated fair value calculated for the liabilities valued on a recurring basis utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the six months ended June 30, 2019 was as follows (in thousands):
         
Balance at the beginning of the period
  $
 408
  
Payments
   
(102
 )
         
Balance at the end of the period
  $
 306
  
         
 
 
 
 
 
 
 
 
 
 
 
 
 
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2019.