Fair Value Measurements

j2 Global complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:



	§	Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

	§	Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	§	Level 3 – Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s money market funds and its marketable equity securities are classified within Level 1. The Company values these Level 1 investments using quoted market prices. The Company’s debt investments, time deposits, and commercial paper, all of which have counterparties with high credit ratings, are classified within Level 2. The Company values these Level 2 investments based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.

The fair value of the Convertible Notes (see Note 8 - Long-Term Debt) is determined using recent quoted market prices or dealer quotes for such securities, which are Level 1 inputs. The fair value of the Senior Notes (see Note 8 - Long-Term Debt) is determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 2 inputs. The fair value of long-term debt was $792.2 million and $790.5 million, at December 31, 2016 and December 31, 2015, respectively.

In addition, the Convertible Notes contain terms that may require the Company to pay contingent interest on the Convertible Notes which is accounted for as a derivative with fair value adjustments being recorded to interest expense. This derivative is fair valued using a binomial lattice convertible bond pricing model using historical and implied market information, which are Level 2 inputs.

The Company classifies its contingent consideration liability in connection with the acquisitions of Ookla and Salesify within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. The fair value of the contingent consideration liability was determined using option based approaches. This methodology was utilized because the distribution of payments is not symmetric and amounts are only payable upon certain earnings before interest, tax, depreciation and amortization (“EBITDA”) thresholds being reached. Such valuation approach included a Monte-Carlo simulation for the contingency since the financial metric driving the payments is path dependent. Significant increases or decreases in either of the inputs noted above in isolation would result in a significantly lower or higher fair value measurement.

The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):



December 31, 2016	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	7,737	$	—	$	—	$	7,737
Time deposits	—		—		—		—
Certificates of Deposit	—		60		—		60
Equity securities	—		—		—		—
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	—		—		—		—
Debt securities issued by states of the United States and political subdivisions of the states	—		—		—		—
Debt securities issued by foreign governments	—		—		—		—
Corporate debt securities	—		—		—		—
Total assets measured at fair value	$	7,737	$	60	$	—	$	7,797

Liabilities:
Contingent consideration	$	—	$	—	$	17,450	$	17,450
Contingent interest derivative	—		958		—		958
Total liabilities measured at fair value	$	—	$	958	$	17,450	$	18,408

December 31, 2015	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	46,867	$	—	$	—	$	46,867
Time deposits	—		3,004		—		3,004
Certificates of Deposit	—		60		—		60
Equity securities	22,654		—		—		22,654
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	—		40,652		—		40,652
Debt securities issued by states of the United States and political subdivisions of the states	—		6,103		—		6,103
Corporate debt securities	—		88,749		—		88,749
Total assets measured at fair value	$	69,521	$	138,568	$	—	$	208,089

Liabilities:
Contingent consideration	$	—	$	—	$	30,600	$	30,600
Contingent interest derivative	—		1,450		—		1,450
Total liabilities measured at fair value	$	—	$	1,450	$	30,600	$	32,050

At the end of each reporting period, management reviews the inputs to measure the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. For the years ended December 31, 2016 and 2015, there were no transfers that have occurred between levels.

The following tables presents a reconciliation of the Company’s Level 3 financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):



	Level 3			Affected line item in the Statement of Income
Balance as of January 1, 2015	$	15,000
Contingent consideration	(600		)	Not Applicable
Total fair value adjustments reported in earnings	16,200
Balance as of December 31, 2015	$	30,600
Contingent consideration	$	—
Total fair value adjustments reported in earnings	4,850			General and administrative
Contingent consideration payments	(18,000		)	Not Applicable
Balance as of December 31, 2016	$	17,450

In connection with the acquisition of Ookla, on December 1, 2014, contingent consideration of up to an aggregate of $40.0 million may be payable upon achieving certain future income thresholds and had a fair value of $17.0 million and $25.0 million at December 31, 2016 and 2015, respectively. Due to the Company achieving certain earnings targets for the year ended December 31, 2016, $20.0 million ($17.0 million of contingent consideration and $3.0 million of compensation) has been reclassified to current liabilities on the consolidated balance sheet and is payable in the first quarter 2017.

In connection with the acquisition of Salesify, on September 17, 2015, contingent consideration of up to an aggregate of $17.0 million may be payable upon achieving certain future income thresholds and had a fair value of $0.6 million and $5.6 million at December 31, 2016 and 2015, respectively, which was recorded as an other long-term liability on the consolidated balance sheet at December 31, 2016.

During the year ended December 31, 2016, the Company recorded a net increase in the fair value of the contingent consideration of $4.9 million and reported such increase in general and administrative expenses.

The following table presents a reconciliation of the Company’s derivative instruments (in thousands):



	Amount			Affected line item in the Statement of Income
Derivative Liabilities:
Level 2:
Balance as of January 1, 2015	$	742
Total fair value adjustments reported in earnings	708			Interest expense, net
Balance as of December 31, 2015	$	1,450
Total fair value adjustments reported in earnings	(492		)	Interest expense, net
Balance as of December 31, 2016	$	958

Losses associated with other-than-temporary impairments are recorded as a component of other income (expenses). Gains and losses not associated with other-than-temporary impairments are recorded as a component of other comprehensive income.