The Company’s financial instruments include cash and cash equivalents, available for sale investments, accounts receivable, accounts payable, contingent consideration obligations, and long-term debt.

 

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.

 

The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into levels. Level inputs are quoted prices in active markets for identical assets or liabilities. Level inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least significant model assumption or input is unobservable. Level also include certain investment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that the determination of fair value requires significant judgment or estimation.

The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):

 

		Total carrying value a s of				Fair Value Measurements Using Inputs Considered as
		September 30, 2018				Level 1				Level 2				Level 3
Assets
Equity securities (1)		$	52,084			$	52,084			$	-			$	-
Certificates of Deposit (2)			16,963				16,963				-				-
Total Assets		$	69,047			$	69,047			$	-			$	-
Liabilities
Contingent Consideration		$	6,800			$	-			$	-			$	6,800

 

		Total carrying value a s of				Fair Value Measurements Using Inputs Considered as
		June 30, 201 8				Level 1				Level 2				Level 3
Assets
Equity securities (1)		$	54,286			$	54,286			$	-			$	-
Certificates of Deposit (2)			5,478				5,478				-				-
Total Assets		$	59,764			$	59,764			$	-			$	-
Liabilities
Contingent Consideration		$	-			$	-			$	-			$	-

 

 

Our available for sale securities are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level assets.

 

In connection with the ExosomeDx and Quad acquisitions the Company is required to make contingent consideration payments of up to million and million, respectively. The contingent consideration payments are subject to ExosomeDx achieving certain EBITA thresholds and Quad meeting certain product development milestones and revenue thresholds. The preliminary fair value of the liabilities for the contingent payments recognized upon the acquisition as part of the purchase accounting opening balance sheet totaled million ( million for ExosomeDx and million for Quad).  The preliminary fair value of the development milestone payments was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in these calculations were probability of success, duration of the earn-out, and discount rate.   The preliminary fair value for the EBITA and revenue milestone payments was determined using a Monte Carlo simulation based model discounted to present value.  Assumptions used in these calculation units sold, expected revenue, expected expenses, discount rate and various probability factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability is considered to be a Level financial liability that is re-measured each reporting period. The change in fair value of contingent consideration for these acquisitions is included in general and administrative expense.

 

The following table presents a reconciliation of the liability measured at fair value on a recurring basis using significant unobservable inputs (Level ) for the quarter ended in thousands):

 

		Quarter Ended
		September 30, 2018
Fair value at the beginning of period		$	-
Purchase price contingent consideration (Note 4)			7,000
Change in fair value of contingent consideration			(200	)
Payments			-
Fair value at the end of period		$	6,800

The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities or contingent consideration, currently and in the future. If market conditions deteriorate, we incur impairment charges for securities in our investment portfolio. We also incur changes to our contingent consideration liability as discussed below.

 

– The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value.

 

Cash and cash equivalents, certificates of deposit, accounts receivable, and accounts payable – The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.

 

Long-term debt – The carrying amounts reported in the consolidated balance sheets for the amount drawn on our line-of-credit facility approximates fair value because our interest rate is variable and reflects current market rates.