4. Fair Value Measurements, Marketable Securities and Variable Interest Entities

Fair Value Measurements

Fair value is defined as the price that would be received on sale of an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy under the guidance for fair value measurement are described below:

Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Pricing inputs are based upon quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required. As of June 30, 2017 and 2016, the Company used Level 1 assumptions for its money market funds.

Level 2 — Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of June 30, 2016, the Company used Level 2 assumptions for its revolving loan facility.

Level 3 — Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. As of June 30, 2017 and 2016, the Company did not have any Level 3 financial assets or liabilities.

The Company’s recurring financial assets and liabilities as of June 30, 2017 and 2016 were categorized as follows in the fair value hierarchy (in thousands):

Fair Value Measurements as of June 30, 2017 Using

Quoted Prices in

Significant Other

Active Markets

Observable

for Identical Assets

Inputs

(Level 1)

(Level 2)

Total

Assets:

Money market funds

10,330

—

10,330

	Fair Value Measurements as of June 30, 2016 Using
	Quoted Prices in		Significant Other
	Active Markets		Observable
	for Identical Assets		Inputs
	(Level 1)		(Level 2)		Total
Assets:
Money market funds	$	20,203	$	—	$	20,203
Liabilities:
Revolving loan facility⁽¹⁾	$	—	$	15,000	$	15,000

⁽¹⁾	This liability was carried at historical cost on the Company’s consolidated balance sheet.

The Company measures certain assets, including its cost method investment, at fair value on a nonrecurring basis only if an impairment is recognized. The resulting fair value is considered to be a Level 3 measurement.

Marketable Securities

All liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with maturities greater than three months at the date of purchase are classified as marketable securities. Historically, the Company’s marketable securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss within stockholders’ equity.

The Company held money market funds classified as cash equivalents of $10.3 million as of June 30, 2017 and $20.2 million as of June 30, 2016. Gross unrealized gains and losses were not material as the carrying value approximated estimated fair value due to their short maturities. The Company did not hold any marketable securities as of June 30, 2017 and 2016.

The Company did not realize any material gains or losses from sales of its securities in fiscal years 2017, 2016 and 2015. As of June 30, 2017 and 2016, the Company did not hold securities that had maturity dates greater than one year.

Variable Interest Entities

A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The assessment of whether the Company is the primary beneficiary of the VIE requires significant assumptions and judgments, including the identification of significant activities and an assessment of the Company’s ability to direct those activities. The Company has an equity interest in a privately held entity that is a VIE, of which the Company is not the primary beneficiary. Accordingly, the equity interest is recognized at cost within other assets, noncurrent in the Company’s consolidated balance sheets.

The Company’s policy is to recognize an impairment in the carrying value of its equity interest in the privately held entity when clear identified events or changes in conditions have a material adverse effect on the fair value of the equity interest. Determining the fair value requires management’s judgement based on the specific facts and circumstances. Events and conditions that could lead to an impairment include a prolonged period of decline in the operating performance and financial condition of the privately held entity or adverse changes in the regulatory environment or market conditions in which the privately held entity operates. During the fourth quarter of 2017, the Company became aware of adverse changes in the privately held entity’s expected future operating performance which indicated that its equity interest in the privately held entity of $2.5 million would not be recoverable. Accordingly, the Company recorded an impairment of $2.5 million in other (expense) income, net in the Company’s consolidated statements of operations. As of June 30, 2017, the Company has no remaining exposure to loss related to the Company’s investment in the privately held entity. As of June 30, 2016, the Company had $2.5 million recognized related to its investment in the privately held entity.