The Company’s financial instruments include cash and cash equivalents, available for sale investments, accounts receivable, accounts payable, contingent consideration obligations, derivative instruments, 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 as of				Fair Value Measurements Using Inputs Considered as
		December 31, 2018				Level 1				Level 2				Level 3
Assets
Equity securities (1)		$	44,920			$	44,920			$	-			$	-
Corporate bond securities (2)			25,727				25,727				-				-
Total Assets		$	70,647			$	70,647			$	-			$	-
Liabilities
Contingent Consideration		$	6,000			$	-			$	-			$	6,000
Derivative Instruments - Cash Flow Hedges			5,131				-				5,131				-
Total Liabilities		$	11,131			$	-			$	5,131			$	6,000

 

		Total carrying value as of				Fair Value Measurements Using Inputs Considered as
		June 30, 2018				Level 1				Level 2				Level 3
Assets
Equity securities (1)		$	54,286			$	54,286			$	-			$	-
Corporate bond securities (2)			5,478				5,478				-				-
Total Assets		$	59,764			$	59,764			$	-			$	-
Liabilities
Contingent Consideration		$	-			$	-			$	-			$	-
Derivative Instruments - Cash Flow Hedges			-				-				-				-
Total Liabilities		$	-			$	-			$	-			$	-

 

 

 

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 the Company entered into forward starting swaps designated as cash flow hedges on outstanding debt. The forward starting swaps reduce the variability of cash flow payments for the Company by converting the variable interest rate on the Company’s long-term debt described in Note to that of a fixed interest rate. Accordingly, as part of the forward starting swaps, the Company will exchange, at specified intervals, the difference between floating and fixed interest amounts based on million of notional principal amount. The change in the fair value of the instrument is reported as a component of other comprehensive income and reclassified into interest expense over the corresponding term of the cash flow hedge. The Company did reclassify any amounts out of other comprehensive income into interest expense during the quarter and month period ended The liability related to the derivative instrument was recorded within Other long-term liabilities on the Consolidated Balance Sheet. The instrument was valued using observable market inputs in active markets and therefore classified as a Level liability.

 

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 total.  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 calculations are 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 months ended in thousands):

 

		Quarter Ended				Six Months Ended
		December 31, 2018				December 31, 2018
Fair value at the beginning of period		$	6,800			$	-
Purchase price contingent consideration (Note 4)			(300	)			6,700
Change in fair value of contingent consideration			(500	)			(700	)
Payments			-				-
Fair value at the end of period		$	6,000			$	6,000

 

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 Condensed Consolidated Balance Sheet approximate fair value because of the short-term nature of these items.

 

Long-term debt – The carrying amounts reported in the Condensed Consolidated Balance Sheet for the amount drawn on our line-of-credit facility and borrowed under our term loan approximate fair value because our interest rate is variable and reflects current market rates.