7.	Fair Value

The Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities include available for sale securities classified as cash equivalents and contingent consideration. ASC 820-10 (“Fair Value Measurement Disclosure”) requires the valuation using a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

As prescribed by U.S. GAAP, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures and based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects changes in classifications between levels will be rare.

The carrying values of accounts receivable, inventories, interest receivable, accounts payable, and certain accrued expenses at September 30, 2015 and December 31, 2014, approximate their fair values due to the short-term nature of these items. The Company’s notes payable balance also approximates fair value as of September 30, 2015 and December 31, 2014.

The following are the major categories of assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):


	September 30, 2015 (In thousands) (unaudited)
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total September 30, 2015

Assets measured at fair value
Cash and Cash Equivalents	$	52,893	$	—	$	—	$	52,893

Total Assets measured at fair value	$	52,893	$	—	$	—	$	52,893

Liabilities measured at fair value
Contingent consideration	$	—	$	—	$	24,300	$	24,300

Total liabilities measured at fair value	$	—	$	—	$	24,300	$	24,300


	December 31, 2014 (In thousands)
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total December 31, 2014
Assets measured at fair value
Cash and Cash Equivalents	$	34,766	$	—	$	—	$	34,766
Restricted Cash		250		—		—		250

Total Assets measured at fair value	$	35,016	$	—	$	—	$	35,016

The Company’s financial liabilities consisted of contingent consideration potentially payable to SOFAR related to the ALF-X acquisition in September 2015 (Note 5). This liability is reported as Level 3 as estimated fair value of the contingent consideration related to the acquisition 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. There was no change in the fair value of the contingent consideration from September 21, 2015, the date of the ALF-X Acquisition, to September 30, 2015.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements classified in Level 3 as of September 30, 2015:


	Fair Value at September 30, 2015 (In thousands)			Significant Unobservable Input	Weighted Average (range, if applicable)
Contingent consideration	$	24,300	Probability weighted income approach	Milestone dates	2016 to 2017
				Discount rate Probability of occurrence	7.5% to 9.0% 100%

The following table summarizes the change in fair value, as determined by Level 3 inputs, of the contingent consideration for the nine months ended September 30, 2015:


	September 30, 2015
	(In thousands)
	(unaudited)
Beginning balance	$	—
Additions		24,300
Change in fair value		—

Ending balance	$	24,300