6. Fair Value Measurements

A three-tier fair value hierarchy is utilized to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

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Level 1 Inputs - unadjusted quoted prices in active markets for identical assets or liabilities;

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Level 2 Inputs - quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and

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Level 3 Inputs - unobservable inputs reflecting the Company’s own assumptions in measuring the asset or liability at fair value.

The following table presents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis (in thousands):

June 30, 2018	Level 1		Level 2		Level 3		Total
Assets
Investments:
Marketable securities	$	1,459	$	—	$	—	$	1,459
Total assets measured at fair value	$	1,459	$	—	$	—	$	1,459
Liabilities
Acquisition-related contingent consideration obligations	$	—	$	—	$	12,749	$	—
Total liabilities measured at fair value	$	—	$	—	$	12,749	$	—

June 30, 2017	Level 1		Level 2		Level 3		Total
Assets
Investments:
Money market funds	$	4,291	$	—	$	—	$	4,291
Investment in non-marketable equity		—		—		3,000		3,000
Total assets measured at fair value	$	4,291	$	—	$	3,000	$	7,291

Level 1 investments:

The Company holds investments in equity securities acquired from the sale of an investment in non-marketable equity securities during the first quarter of fiscal 2018, which is classified as available-for-sale marketable securities at Level 1 as the investments have readily determinable fair value (see below, Level 3 investments). An unrealized holding gain on the investments was $0.5 million as of June 30, 2018 which will be reclassified from accumulated other comprehensive loss to accumulated deficit on July 1, 2018 upon an adoption of ASU 2016-01 (see Note 2).

Level 2 investments:

The Company includes U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, and state, municipal and provincial obligations for which quoted prices are available as Level 2. There were no transfers of assets or liabilities between Level 1 and Level 2 for the periods presented.

The fair value of the borrowings under the Credit Agreement is estimated based on valuations provided by alternative pricing sources supported by observable inputs which is considered Level 2. Due to the short duration until maturity of the Credit Agreement, the fair value approximates the face amount of the Company’s indebtedness of $200.0 million and $93.7 million as of June 30, 2018 and 2017, respectively. Such differences are immaterial for all periods presented.

Level 3 investments:

Certain of the Company’s assets, including intangible assets and goodwill are measured at fair value on a non-recurring basis if impairment is indicated.

As of June 30, 2017, the Company reflected its non-marketable equity investment as Level 3 in the fair value hierarchy as it is based on unobservable inputs that market participants would use in pricing this asset due to the absence of recent comparable market transactions and inherent lack of liquidity. During fiscal 2015, the Company purchased a $3.0 million equity interest in a company that operated in the enterprise software platform industry. The Company did not enter into any other transactions with the investee during fiscal 2017 or the first quarter of fiscal 2018. During the three months ended September 30, 2017, the investee was acquired by a third party. The Company received $6.8 million as consideration for its equity interest in the investee, including $5.4 million in cash and 65,937 shares of the third party’s publicly-traded common stock (the “Acquirer’s common stock”) with a market value of $1.4 million. During the first quarter of fiscal 2018, the Company received $5.8 million of the consideration, consisting of $4.9 million in cash and 41,685 shares with a market value of $0.9 million. The remainder of the consideration consisting of $0.5 million of cash and $0.5 million of 23,252 shares of the Acquirers common stock will remain in escrow for a period of 18 months from the date of sales for general representations and warranties. A gain of $3.8 million related to this sale was recorded in “Other income (expense), net” in the accompanying consolidated statement of operations for the year ended June 30, 2018.

During the fourth quarter of fiscal 2018, the Company sold 18,700 shares of the Acquirer’s common stock and recorded a gain of $0.2 million. The remaining 22,985 shares held by the Company and 23,252 shares to be released from escrow within one year are considered Level 1 investments as these have a readily determinable fair value and quoted prices in active markets.

During the year ended June 30, 2018, the Company recorded a liability for contingent consideration related to its acquisition of the CF Business (see Note 4 for additional information related to the acquisition). The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period. Changes in the value of the contingent consideration obligations would be recorded in general and administrative expenses in the accompanying consolidated statements of operations.

The change in the acquisition-related contingent consideration obligations is as follows (in thousands):

	Year Ended
	June 30, 2018
Beginning balance	$	—
Initial fair value measurements		47,030
Payments		(671	)
Resolution of contingency		(36,980	)
Accretion on discount		3,134
Change in fair value		236
Ending balance	$	12,749

There were no transfers of assets or liabilities between Level 2 and Level 3 during the year ended June 30, 2018 or 2017. There were no impairments recorded for the year ended June 30, 2018 or 2017.