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Fair Value Measurements
 12 Months Ended
Jun. 30, 2012
Fair Value Measurements
7. Fair Value Measurements

The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

  •  

Level 1—Inputs are quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities.

 

  •  

Level 2—Inputs are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities with insufficient volume or infrequent transaction (less active markets).

 

  •  

Level 3—Inputs are unobservable estimates that are supported by little or no market activity and require the Company to develop its own assumptions about how market participants would price the assets or liabilities.

The Company’s cash equivalents and marketable securities are classified within Level 1 or Level 2 on the basis of valuations using quoted market prices or alternative pricing sources and models utilizing market observable inputs, respectively. Certain of the Company’s corporate debt securities were valued based on quoted prices for the specific securities in an active market and were therefore classified as Level 1. The remaining marketable securities have been valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security, and have been classified as Level 2. The Company’s derivative liabilities are classified as Level 3 and valued using the Black-Scholes model.

The following table summarizes the Company’s assets and liabilities carried at fair value measured on a recurring basis at June 30, 2012 and 2011 by valuation hierarchy:

 

     June 30, 2012  

Description

    Total Carrying
Value		      Quoted prices in
active markets
(Level 1)		      Significant other
observable inputs
(Level 2)		      Significant
unobservable inputs
(Level 3)		  

Assets:

            

Cash equivalents

    $ 4,292       $ 4,042       $ 250       $ —     

Marketable securities:

            

Corporate bonds

      5,950         3,684         2,266         —     

Commercial paper

      3,046         —           3,046         —     

Certificates of Deposit

      950         —           950         —     
  

 

 

     

 

 

     

 

 

     

 

 

  
   $ 14,238       $ 7,726       $ 6,512       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities:

            

Derivative liabilities

    $ —         $ —         $ —         $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  
     June 30, 2011  

Description

    Total Carrying
Value		      Quoted prices in
active markets
(Level 1)		      Significant other
observable inputs
(Level 2)		      Significant
unobservable inputs
(Level 3)		  

Assets:

            

Cash equivalents

    $ 8,678       $ 8,678       $ —         $ —     

Marketable securities:

            

Corporate bonds

      7,312         5,792         1,520         —     

U.S. Government obligations

      1,205         —           1,205         —     

Commercial paper

      2,699         —           2,699         —     
  

 

 

     

 

 

     

 

 

     

 

 

  
   $ 19,894       $ 14,470       $ 5,424       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities:

            

Derivative liabilities

    $ 170       $ —         $ —         $ 170   
  

 

 

     

 

 

     

 

 

     

 

 

  

The Company’s derivative liabilities were classified as Level 3 and valued using the Black-Scholes model. At June 30, 2012 and 2011, the fair values were derived by applying the following assumptions:

 

    June 30,
    2012   2011

Expected term (in years)

   0.05   1.05

Stock volatility

   90%   95%

Risk-free interest rate

   0.03%   0.19%

Expected dividends

   0%   0%

The reconciliation of the Company’s liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:

 

     June 30,  
     2012      2011  

Balance at beginning of year

    $ 170       $ 1,310   

Change in fair value of derivatives—other income

      170         1,140   
  

 

 

     

 

 

  

Balance at end of year

    $ —         $ 170   
  

 

 

     

 

 

  

At December 31, 2011, the Company recorded a $14.8 million intangible asset impairment charge related to its Durasert and BioSilicon technologies (see Note 4). These fair value measurements were determined using a combination of market-based and income-based valuation methodologies, which incorporate unobservable inputs, thereby classifying the fair value as a Level 3 measurement within the fair value hierarchy. The primary input used in the market-based approach was a 15% control premium that the Company estimated would be used by a market participant in valuing these assets. The primary inputs used in the income-based approach included after-tax weighted average cost of capital rates ranging from 10% to 20% that the Company estimated would be used by a market participant.

The following table summarizes the Company’s assets carried at fair value measured on a nonrecurring basis at December 31, 2011 and the losses recorded for the six month period then ended:

 

     December 31, 2011         
     Total Carrying
Value		      Quoted prices in
active markets
(Level 1)		      Significant other
observable inputs
(Level 2)		      Significant
unobservable  inputs
(Level 3)		      Total
Losses		  
     (In thousands)         

Finite-lived intangible assets

    $ 4,596       $ —         $ —         $ 4,596       $ 14,830   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

 

There was no fair value measurement on a non-recurring basis at March 31, 2012 or at June 30, 2012.