Marketable Securities and Fair Value Measurements

6 Months Ended

Sep. 30, 2015

Marketable Securities and Fair Value Measurements

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 included in stockholders’ equity.

The Company’s marketable securities at September 30, 2015 and March 31, 2015 are invested in the following:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
	(in $000’s)
September 30, 2015:
US Treasury mutual fund securities	$	19,487	$	—	$	—		$	19,487
Short-term government-backed securities		101,588		14		(2	)		101,600
	$	121,075	$	14	$	(2	)	$	121,087

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
	(in $000’s)
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

Fair Value Hierarchy

Fair value is defined as the price that would be received upon the sale of 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 values are 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 financial instruments recorded at fair value in the condensed consolidated balance sheets, classified according to the three categories described above:

	Level 1		Level 2		Level 3		Total
	(in $000’s)
September 30, 2015:
Assets
U.S. Treasury mutual fund securities	$	—	$	19,487	$	—	$	19,487
Short-term government-backed securities		—		101,600		—		101,600
Liabilities
Contingent consideration		—		—		6,817		6,817

	Level 1		Level 2		Level 3		Total
	(in $000’s)
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

The Company’s 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 the 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 six months ended September 30, 2015:

	For the Six Months Ended September 30,
	2015
	(in $000’s)
Level 3 liabilities, beginning balance	$	6,510
Additions		—
Payments		—
Change in fair value		307
Level 3 liabilities, ending balance	$	6,817

The change in fair value of the contingent consideration of $0.2 million and $0.3 million for the three and six months ended September 30, 2015, respectively, and $0.2 million for each of the three and six months ended September 30, 2014, was due to an increase in fair value caused by 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 condensed 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 September 30, 2015 classified as Level 3:

	Fair Value at
	September 30, 2015			Significant	Weighted Average (range, if
	(in $000’s)		Valuation Methodology	Unobservable Input	applicable)
Contingent consideration	$	6,817	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

The Company periodically makes investments in private medical device companies that focus on heart failure and heart pump technologies. In July 2015, the Company invested $0.8 million for its participation in a preferred stock offering of a private medical technology company. The aggregate carrying amount of the Company’s other investments was $4.4 million and $3.6 million at each of September 30, 2015 and March 31, 2015, respectively, and is classified within other assets in the unaudited condensed consolidated balance sheets. These investments are accounted for using the cost method and are measured at fair value only if there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of these investments.