Fair Value Measurements

3 Months Ended

Dec. 31, 2016

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.

The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs include 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 inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 may also include certain investment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that the determination of fair value requires significant judgment or estimation.

Fair value is applied to financial assets such as our marketable securities, which are classified and accounted for as available-for-sale and to financial liabilities for contingent consideration. These items are stated at fair value at each reporting period using the above guidance.

7. FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):



	Total carrying value at		Fair Value Measurements Using Inputs Considered as
	December 31, 2016		Level 1		Level 2		Level 3
Assets:
Money market	$	44,633	$	44,633	$	—	$	—
Corporate bonds	33,929		—		33,929		—
Commercial paper	13,988		—		13,988		—
Certificates of deposit	7,297		—		7,297		—
Total assets measured at fair value	$	99,847	$	44,633	$	55,214	$	—
Liabilities:
Contingent consideration on acquired business	10,660		$	—	$	—	$	10,660
Total liabilities measured at fair value	$	10,660	$	—	$	—	$	10,660



	Total carrying value at		Fair Value Measurements Using Inputs Considered as
	September 30, 2016		Level 1		Level 2		Level 3
Assets:
Money market	$	44,319	$	44,319	$	—	$	—
Corporate bonds	28,767		—		28,767		—
Commercial paper	23,943		—		23,943		—
Certificates of deposit	7,309		—		7,309		—
Government municipal bonds	1,904		—		1,904		—
Total assets measured at fair value	$	106,242	$	44,319	$	61,923	$	—
Liabilities:
Contingent consideration on acquired business	$	9,960	$	—	$	—	$	9,960
Total liabilities measured at fair value	$	9,960	$	—	$	—	$	9,960

Our money market funds, which have been determined to be cash equivalents, are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets. We value our Level 2 assets using inputs that are based on market indices of similar assets within an active market. There were no transfers into or out of our Level 2 financial assets during the three months ended December 31, 2016.

The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities or contingent consideration, currently and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our investment portfolio. We may also incur changes to our contingent consideration liability as discussed below.

As discussed in Note 2, we are required to make contingent payments for our acquisitions. In connection with the Bluenica acquisition, we are required to make contingent payments over a period of up to four years, subject to Digi Cold Chain Solutions achieving specified revenue thresholds. The fair value of the liability for contingent payments recognized upon acquisition was $10.4 million. In connection with the FreshTemp acquistion, we are required to make a contingent payment after June 30, 2018, for revenue related to specific customer contracts signed by June 30, 2017. The fair value of the liability recognized upon acquisition was $1.3 million. The fair values of both of these contingent payments was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in this calculation included the discount rate and various probability factors. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period as a charge or credit to general and administrative expense within the Condensed Consolidated Statements of Operations.

7. FAIR VALUE MEASUREMENTS (CONTINUED)

The following table presents a reconciliation of the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2016 and 2015 (in thousands):



	Three months ended December 31,
	2016			2015
Fair value at October 1	$	9,960		$	—
Purchase price contingent consideration	1,300			10,400
Contingent consideration payments	(518		)	—
Change in fair value of contingent consideration	(82		)	—
Fair value at December 31	$	10,660		$	10,400

The change in fair value of contingent consideration for the acquisition of Bluenica and FreshTemp is included in general and administrative expense and reflects our estimate of the probability of achieving the relevant targets and is discounted based on our estimated discount rate. We have estimated the fair value of the contingent consideration based on the probability of achieving the specified revenue thresholds at 75.8% to 98.0% for Bluenica and between 25% and 100% for FreshTemp. A significant increase (decrease) in our estimates of achieving the relevant targets could materially increase (decrease) the fair value of the contingent consideration liability.

- 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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