Note 5. Cash Equivalents, Marketable Securities and Fair Value Measurements

The Company classifies any marketable security with a maturity date of 90 days or less at the time of purchase as a cash equivalent. Cash equivalents are carried on the balance sheet at fair market value. The Company’s marketable securities, consisting of U.S. Treasuries, U.S. Government Agency, corporate debt securities, and commercial paper, 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. At September 30, 2018 and March 31, 2018, the Company’s financial instruments consisted primarily of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and contingent consideration. The carrying amounts of accounts receivable and accounts payable are considered reasonable estimates of their fair value, due to the short maturity of these investments.

The Company’s cash equivalents and marketable securities at September 30, 2018 and March 31, 2018 are classified on the balance sheet as follows:

	September 30, 2018		March 31, 2018
	(in $000's)
Cash equivalents	$	17,768	$	22,595
Short-term marketable securities		334,064		319,274
Long-term marketable securities		—		37,502
	$	351,832	$	379,371

The Company’s cash equivalents and marketable securities at September 30, 2018 and March 31, 2018 are invested in the following:

	Amortized		Gross Unrealized		Gross Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(in $000's)
September 30, 2018:
Money market funds	$	17,768	$	—	$	—		$	17,768
Short-term U.S. Treasury mutual fund securities		39,729		—		(63	)		39,666
Short-term government-backed securities		204,018		—		(349	)		203,669
Short-term corporate debt securities		54,477		—		(54	)		54,423
Short-term commercial paper		36,326		—		(20	)		36,306
	$	352,318	$	—	$	(486	)	$	351,832

	Amortized		Gross Unrealized		Gross Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(in $000's)
March 31, 2018:
Money market funds	$	5,845	$	—	$	—		$	5,845
Repurchase agreements		16,750		—		—			16,750
Short-term U.S. Treasury mutual fund securities		18,132		—		(29	)		18,103
Short-term government-backed securities		212,255		3		(538	)		211,720
Short-term corporate debt securities		52,737		—		(161	)		52,576
Short-term commercial paper		36,936		2		(63	)		36,875
Long-term U.S. Treasury mutual fund securities		10,953		—		(16	)		10,937
Long-term government-backed securities		24,798		1		(12	)		24,787
Long-term corporate debt securities		1,777		1		—			1,778
	$	380,183	$	7	$	(819	)	$	379,371

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 consolidated balance sheets, classified according to the three categories described above:

	Level 1		Level 2		Level 3		Total
September 30, 2018:	(in $000's)
Assets
Money market funds	$	17,768	$	—	$	—	$	17,768
Short-term U.S. Treasury mutual fund securities		—		39,666		—		39,666
Short-term government-backed securities		—		203,669		—		203,669
Short-term corporate debt securities		—		54,423		—		54,423
Short-term commercial paper		—		36,306		—		36,306
Liabilities
Contingent consideration		—		—		10,493		10,493

	Level 1		Level 2		Level 3		Total
March 31, 2018:	(in $000's)
Assets
Money market funds	$	5,845	$	—	$	—	$	5,845
Repurchase agreements		—		16,750		—		16,750
Short-term U.S. Treasury mutual fund securities		—		18,103		—		18,103
Short-term government-backed securities		—		211,720		—		211,720
Short-term corporate debt securities		—		52,576		—		52,576
Short-term commercial paper		—		36,875		—		36,875
Long-term U.S. Treasury mutual fund securities		—		10,937		—		10,937
Long-term government-backed securities		—		24,787		—		24,787
Long-term corporate debt securities		—		1,778		—		1,778
Liabilities
Contingent consideration		—		—		10,490		10,490

The Company has determined that the estimated fair value of its money market funds are reported as Level 1 financial assets as they are valued at quoted market prices in active markets.

The Company has determined that the estimated fair value of its investments in U.S. Treasury mutual fund securities, government-backed securities, corporate debt securities, repurchase agreements and commercial paper 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 related to the acquisition of ECP Entwicklungsgesellschaft mbH, (“ECP”) and AIS GmbH Aachen Innovative Solutions, (“AIS’), in July 2014. The Company acquired ECP for $13.0 million in cash, with additional potential payouts totaling $15.0 million based on the achievement of CE Mark approval in the European Union and a revenue-based milestone related to the development of the future Impella ECP^TM expandable catheter pump technology. These potential milestone payments may be made, at the Company’s option, by a combination of cash or ABIOMED common stock. The calculation of contingent consideration payable was determined using a combination of an income approach, based on various revenue and cost assumptions and applying a probability to each outcome and a Monte-Carlo valuation model. For the clinical and regulatory milestone, probabilities were applied to each potential scenario and the resulting values were discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the earn out itself, the related projections, and the overall business. The revenue-based milestone was valued using a Monte-Carlo valuation model, which simulates estimated future revenues during the earn out-period using management's best estimates. Projected revenues are based on the Company’s best estimates of revenues expected to be earned from future Impella ECP technology.

This liability is reported as Level 3 as the estimated fair value of the contingent consideration related to the acquisition of ECP requires significant management judgment or estimation and is calculated using the following valuation methods:

Milestone Payment

Fair Value at September 30, 2018 (in $000's)

Valuation Methodology

Significant Unobservable Input

Weighted Average (range, if applicable)

Clinical and regulatory milestone

7,000

5,767

Probability

weighted income approach

Projected fiscal year of milestone payments

2019 to 2022

Discount rate

3.9% to 4.2%

Probability of occurrence

Probability adjusted level of 40% for the base case scenario and 10% to 40% for various upside and downside scenarios

Revenue-based milestone

8,000

4,726

Monte Carlo simulation model

Projected fiscal year of milestone payments

2024 to 2035

Discount rate

15%

Expected volatility for forecasted revenues

50%

Probability of payment

79%

15,000

10,493

The following table summarizes the change in fair value, as determined by Level 3 inputs, of the contingent consideration for the three and six months ended September 30, 2018 and 2017:

	For the Three Months Ended September 30,				For the Six Months Ended September 30,
		2018		2017		2018		2017
	(in $000's)				(in $000's)
Level 3 liabilities, beginning balance	$	10,331	$	9,418	$	10,490	$	9,153
Additions		—		—		—		—
Payments		—		—		—		—
Change in fair value		162		417		3		682
Level 3 liabilities, ending balance	$	10,493	$	9,835	$	10,493	$	9,835

The change in fair value of the contingent consideration was primarily due to the impact of changes in interest rates, passage of time on the fair value measurement and the status of development of the underlying technology related to the ECP acquisition. Adjustments associated with the change in fair value of contingent consideration are included in research and development expenses in the Company’s consolidated statements of operations. Significant increases or decreases in any of the probabilities of success or changes in expected timelines for achievement of any of these milestones could result in a significantly higher or lower fair value of the liability. The fair value of the contingent consideration at each reporting date is updated by reflecting the changes in fair value in the Company’s consolidated statement of operations. There is no assurance that any of the conditions for the milestone payments will be met.