Note 4. Marketable Securities and Fair Value Measurements

Marketable Securities

The Company’s marketable securities are classified as available-for-sale securities and, accordingly, are recorded at fair value. The difference between amortized cost and fair value is reported as a component of other comprehensive (loss) income.

The Company’s marketable securities at March 31, 2015 and 2014 are classified on the balance sheet as follows (in thousands):


	March 31,
	2015		2014
	(in $000’s)
Short-term marketable securities (within one year to maturity)	$	109,557	$	55,663
Long-term marketable securities (one to five years to maturity)		13,996		41,761

	$	123,553	$	97,424

The Company’s marketable securities at March 31, 2015 and 2014 are invested in the following (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
	(in $000’s)
At March 31, 2015:
US Treasury mutual fund securities	$	19,487	$	—	$	—		$	19,487
Short-term government-backed securities		90,070		9		(9	)		90,070
Long-term government-backed securities		13,999		2		(5	)		13,996

	$	123,556	$	11	$	(14	)	$	123,553


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
	(in $000’s)
At March 31, 2014:
US Treasury mutual fund securities	$	31,487	$	—	$	—		$	31,487
Short-term government-backed securities		24,174		6		(4	)		24,176
Long-term government-backed securities		41,779		8		(26	)		41,761

	$	97,440	$	14	$	(30	)	$	97,424

Fair Value Hierarchy

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. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 is comprised of unobservable inputs that are supported by little or no market activity. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

The following table presents the Company’s fair value hierarchy for its financial instruments measured at fair value as of March 31, 2015 and 2014:


	Level 1		Level 2		Level 3		Total
	(in $000’s)
At March 31, 2015:
Assets
U.S. Treasury mutual fund securities	$	—	$	19,487	$	—	$	19,487
Short-term government-backed securities		—		90,070		—		90,070
Long-term government-backed securities		—		13,996		—		13,996
Liabilities
Contingent consideration		—		—		6,510		6,510

	Level 1		Level 2		Level 3		Total
	(in$000’s)
At March 31, 2014:
U.S. Treasury mutual fund securities	$	—	$	31,487	$	—	$	31,487
Short-term government-backed securities		—		24,176		—		24,176
Long-term government-backed securities		—		41,761		—		41,761

The Company has determined that the estimated fair value of its investments in U.S. Treasury mutual fund securities, short-term government-backed securities and long-term government-backed securities are reported as Level 2 financial assets as they are not exchange-traded instruments.

The Company’s financial liabilities consisted of contingent consideration potentially payable to former ECP shareholders related to the acquisition of ECP in July 2014. This liability is reported as Level 3 as estimated fair value of the contingent consideration related to the acquisition of the ECP requires significant management judgment or estimation and is calculated using the income approach, using various revenue and cost assumptions and applying a probability to each outcome.

The following table summarizes the change in fair value, as determined by Level 3 inputs, of the contingent consideration for the year ended March 31, 2015:


	March 31, 2015
	(in $000’s)
Beginning balance	$	—
Additions		6,000
Payments		—
Change in fair value		510

Ending balance	$	6,510

The change in fair value of the contingent consideration of $0.5 million for the year ended March 31, 2015 was primarily due to an increase in fair value due to the effect of the passage of time on the fair value measurement of milestones related to the ECP acquisition. Adjustments associated with the change in fair value of contingent consideration are included in research and development expenses on the Company’s consolidated statements of operations.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements as of July 1, 2014 and March 31, 2015 classified in Level 3:


	Valuation Methodology	Significant Unobservable Input	Weighted Average (range, if applicable)
Contingent consideration	Probability weighted income approach	Milestone dates	2018 to 2021
		Discount rate	8% to 12%
		Probability of occurrence	Probability adjusted level of 40% for the base case scenario and 5% to 25% for various upside and downside scenarios

Other Investments

In May 2013 and September 2014, the Company invested $0.8 million and $0.7 million in preferred stock of a private medical technology company. There are no additional outstanding funding commitments associated with this investment.

In November 2014, the Company invested $0.5 million in a 0% interest promissory note to a separate private medical technology company that is convertible into preferred stock of the company based upon a qualified financing as defined in the agreement governing the investment. The promissory note was converted into preferred stock on May 19, 2015. There are no additional outstanding funding commitments associated with this investment.

In January 2015, the Company invested $0.6 million in a 5% interest promissory note to another private medical technology company. This promissory note and accrued interest is convertible into preferred stock of the company upon a qualified financing as defined in the agreement governing the investment. The Company could also be required to invest an additional $0.4 million in the form of a promissory note if certain milestones are met.

In March 2015, the Company invested $1.0 million in preferred stock of a private medical technology company. There are no additional outstanding funding commitments associated with this investment.

The Company’s other investments are accounted for using the cost method and are measured at fair value on a nonrecurring basis only if there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of these investments. The aggregate carrying amount of these investments was $3.6 million and $0.8 million at March 31, 2015 and March 31, 2014, respectively, and is classified within other assets in the consolidated balance sheets.