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Fair Value Measurement
 12 Months Ended
Dec. 29, 2012
Fair Value Measurement [Abstract]  
Fair Value Measurement

4. Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy 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 are described below:

 

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Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

 

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Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

 

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Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses at December 29, 2012 and December 31, 2011, approximate fair value because of the short maturity of these instruments.

As of December 29, 2012 and December 31, 2011, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

 

                                                         
    FY 2012: December 29, 2012     FY 2011: December 31, 2011  
    Fair Value Measurements     Fair Value Measurements  
    Level 1     Level 2   Level 3     Total     Level 1     Level 2   Level 3     Total  

Assets:

                                                        

Money market funds

   $ 10,839                 $ 10,839     $ 10,133           $ 10,133  

Liabilities:

                                          

Earn-out liability

               $ 652     $ 652                 $ 765     $ 765  

The Company’s Level 1 financial assets are money market funds whose fair values are based on quoted market prices. The Company does not have any Level 2 financial assets or liabilities. The fair value of the earn-out liability arising from the acquisitions of RetinaLabs and Ocunetics is classified within Level 3 of the fair value hierarchy since it is based on significant unobservable inputs. The significant unobservable inputs include projected royalties and discount rates to present value the payments. A significant increase (decrease) in the projected royalty payments in isolation could result in a significantly higher (lower) fair value measurement and a significant increase (decrease) in the discount rate in isolation could result in a significantly lower (higher) fair value measurement. The fair value of the earn-out liability is calculated on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the statement of operations of that period.

The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of December 29, 2012.

 

                         

As of December 29, 2012

   Fair Value
(in thousands)		     Valuation
Technique		   Significant
Unobservable
Input		   Weighted
Average
(range)		  

Earn-out liability

   $ 652     Discounted
cash flow		   Projected royalties

(in thousands)

   $ 1,762  
                      (631 - 1,980 ) 
                Discount rate    

 

 21.84%

(20.85% - 27.00%

   

) 

The following table provides a reconciliation of the beginning and ending balances of the contingent consideration - cash (Level 3 liabilities) (in thousands):

 

         

Balance as of January 1, 2011

   $ 380  

Addition of earn-out related to Ocunetics, Inc. acquisition

     105  

Change in fair value of earn-out liability

     280  
   

 

 

  

Balance as of December 31, 2011

     765  

Payments against earn-out

     (328 ) 

Change in fair value of earn-out liability

     215  
   

 

 

  

Balance as of December 29, 2012

   $ 652  
   

 

 

  

The change in the contingent consideration during fiscal year 2012 was due to the acquisition of Ocunetics and an increase in the fair value of the remaining contingent consideration of a prior acquisition as a result of improving expectations of future cash flows.