FINANCIAL INSTRUMENTS

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the FASB established a three-level hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of fair value measurements are:


•	Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.


•	Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.


•	Level 3—Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. The fair value of the Company’s convertible senior notes at June 30, 2018 are calculated utilizing market quotations from an over-the-counter trading market for these instruments (Level 2). The carrying amount and fair value of the Company’s convertible senior notes are as follows (in thousands):



Financial Liabilities Carried at Historical Cost	Carrying Value		Fair Value Measurements Using
June 30, 2018	Carrying Value		Level 1		Level 2		Level 3
2.375% convertible senior notes due 2022 ⁽¹⁾	$	283,258	$	—	$	322,351	$	—
3.25% convertible senior notes due 2019 ⁽²⁾	$	330	$	—	$	446	$	—

(1) The closing price of the Company’s common stock was $32.05 per share at June 30, 2018 compared to a conversion price of $66.89 per share. Currently, the conversion price is above the stock price. The maximum conversion premium that can be due on the 2022 Notes is approximately 5.2 million shares of the Company’s common stock, which assumes no increases in the conversion rate for certain corporate events.

(2) The closing price of the Company’s common stock was $32.05 per share at June 30, 2018 compared to a conversion price of $24.82 per share which, if converted, would result in a conversion premium of less than ten thousand shares of the Company’s common stock or $0.1 million of cash. The maximum conversion premium that can be due on the 2019 Notes is approximately ten thousand shares of the Company’s common stock, which assumes no increases in the conversion rate for certain corporate events.

Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporate bonds with maturities greater than three months, but less than one year. Long-term investments consist of asset-backed securities collateralized by credit card receivables and corporate bonds with maturities greater than one year. Net unrealized gains and losses from the Company’s short-term and long-term investments are reported in other comprehensive income (loss). At June 30, 2018, all of the Company’s short-term and long-term investments are classified as available for sale investments and are determined to be Level 2 instruments, which are measured at fair value using standard industry models with observable inputs. The fair value of the commercial paper is measured based on a standard industry model that uses the three-month U.S. Treasury bill rate as an observable input. The fair value of the asset-backed securities and corporate bonds is principally measured or corroborated by trade data for identical issues in which related trading activity is not sufficiently frequent to be considered a Level 1 input or that of comparable securities. At June 30, 2018, all short-term and long-term investments were rated A or better by Standard & Poor’s.

The following summarizes the Company’s investments at June 30, 2018 and December 31, 2017 (in thousands):



June 30, 2018 Debt Securities	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value (Level 2)
Short-term:
Asset-backed securities	$	47,341	$	—	$	(152	)	$	47,189
Commercial paper	72,447		8		(3		)	72,452
Corporate bonds	135,206		—		(397		)	134,809
Subtotal	254,994		8		(552		)	254,450
Long-term:
Corporate bonds	1,602		—		(1		)	1,601
Subtotal	1,602		—		(1		)	1,601
Total	$	256,596	$	8	$	(553	)	$	256,051



December 31, 2017 Debt Securities	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value (Level 2)
Short-term:
Asset-backed securities	$	28,338	$	—	$	(37	)	$	28,301
Commercial paper	48,999		—		(23		)	48,976
Corporate bonds	180,119		—		(175		)	179,944
Subtotal	257,456		—		(235		)	257,221
Long-term:
Asset-backed securities	23,836		—		(79		)	23,757
Corporate bonds	36,430		—		(140		)	36,290
Subtotal	60,266		—		(219		)	60,047
Total	$	317,722	$	—	$	(454	)	$	317,268

Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets and liabilities acquired in a business combination, and long-lived assets, which would be recognized at fair value if deemed to be impaired or if reclassified as assets held for sale. The fair value in these instances would be determined using Level 3 inputs.

TELA Bio, Inc.

In October 2017, the Company made a cash investment of $15.0 million in Series B Preferred Stock of TELA Bio Inc., or TELA Bio, a privately-held surgical reconstruction company that markets its proprietary OviTex^TM portfolio of products for ventral hernia repair and abdominal wall reconstruction. In conjunction with the investment in TELA Bio, the Company acquired an option to purchase an additional $10.0 million of Series B Preferred Stock under the same terms and conditions as existed on the initial purchase date. The purchase option expires on September 15, 2018. If the Company does not exercise its purchase option, the Company may be required to invest up to $10.0 million in Series B Preferred Stock under certain conditions. This contingent purchase obligation expires on October 31, 2018.

The investment in TELA Bio, the purchase option and the contingent purchase obligation were recorded at fair value based on integrated valuation pricing models. These models included both unobservable and observable market inputs including option purchase price, volatility and projected liquidity date. The equity investment in the Series B Preferred Stock was recorded at $14.1 million and the purchase option was recorded in prepaid expenses and other current assets at $0.9 million. The fair value of the contingent purchase obligation was determined to be de minimis.

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, long-term investments and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. Such amounts may exceed federally-insured limits.

As of June 30, 2018, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 31%, 28% and 24%, respectively. At December 31, 2017, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 35%, 30% and 27%, respectively. For additional information regarding the Company’s wholesalers, see Note 2, Summary of Significant Accounting Policies. Revenues are primarily derived from major wholesalers and pharmaceutical companies that generally have significant cash resources. The Company performs ongoing credit evaluations of its customers as warranted and generally does not require collateral. Allowances for doubtful accounts receivable are maintained based on historical payment patterns, aging of accounts receivable and the Company’s actual write-off history. As of June 30, 2018 and December 31, 2017, no allowances for doubtful accounts were deemed necessary by the Company on its accounts receivable.