3. FAIR VALUE

FASB ASC 820, “Fair Value Measurements and Disclosures” (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market for the 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. The valuation under this approach does not entail a significant degree of judgment.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The valuation technique for the Company’s Level 2 assets is based on quoted market prices for similar assets from observable pricing sources at the reporting date.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	—	$	12,074	$	—	$	12,074
U.S. government agencies and securities		6,992		—		—		6,992
Corporate bonds		—		1,500		—		1,500
Commercial paper		—		5,473		—		5,473
Total assets	$	6,992	$	19,047	$	—	$	26,039
Liabilities:
Acquisition-related contingent consideration		—		—		41,176		41,176
Total liabilities	$	—	$	—	$	41,176	$	41,176

There were no changes in the levels or methodology of measurement of financial assets and liabilities during the three and six months ended June 30, 2017.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	—	$	17,085	$	—	$	17,085
Commercial paper		—		5,996		—		5,996
U.S. government agencies and securities		7,000		1,529		—		8,529
Corporate bonds		—		8,276		—		8,276
Total assets	$	7,000	$	32,886	$	—	$	39,886
Liabilities:
Acquisition-related contingent consideration		—		—		41,176		41,176
Total liabilities	$	—	$	—	$	41,176	$	41,176

Acquisition-Related Contingent Consideration. Contingent consideration arrangements obligate the Company to pay former shareholders of an acquired entity if specified future events occur or conditions are met, such as the achievement of certain technological milestones or the achievement of targeted revenue milestones. As of December 31, 2016 and currently, such arrangements relate solely to the Company’s acquisition of nContact Surgical, Inc. The Company measures such liabilities using unobservable inputs, applying the income approach, such as the discounted cash flow technique or the probability-weighted scenario method. Various key assumptions, such as the probability of achievement of the agreed milestones, projected revenues from acquisitions and the discount rate, are used in the determination of fair value of contingent consideration arrangements and are not observable in the market, thus representing a Level 3 measurement within the fair value hierarchy. Subsequent revisions to key assumptions, which impact the estimated fair value of contingent consideration liabilities, are reflected in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Acquisition-related contingent consideration is recorded in other noncurrent liabilities in the Condensed Consolidated Balance Sheets. There were no changes in the underlying estimates or discount rate used to calculate the fair value of contingent consideration for the three and six months ended June 30, 2017.

The following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent consideration as of June 30, 2017:



Beginning Balance – January 1, 2017	$	41,176
Amounts acquired		—
Transfers in (out) of Level 3		—
Changes in fair value included in earnings		—
Ending Balance – June 30, 2017	$	41,176

The following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent consideration as of December 31, 2016:



Beginning Balance – January 1, 2016	$	40,207
Amounts acquired		—
Transfers in (out) of Level 3		—
Changes in fair value included in earnings		969
Ending Balance – December 31, 2016	$	41,176