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Table of Contents
3. Fair Value Measurements
Cash equivalents and short-term and long-
term marketable securities, consisting of money market funds, U.S. government and government
agency debt securities, municipal securities and corporate debt securities, are carried at fair value, which is defined as an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable and willing
market participants.
Contingent consideration represents the estimated fair value of the additional variable consideration payable in connection with our
acquisition of Spooky Cool Labs LLC that is contingent upon the achievement of certain performance milestones. The amount payable is
contingent upon the achievement of certain performance milestones for each of the twelve month periods ended June 30, 2014 and June 30,
2015. Under the terms of the agreement, the maximum amount that could be earned and payable by us is $100 million. As of December 31,
2014, based on our updated assessment of Spooky Cool’
s expected performance, the maximum amount currently achievable and payable by us is
$60 million.
We initially estimated the acquisition date fair value of the contingent consideration payable using probability-weighted discounted cash
flow models, and applied a discount rate that appropriately captured a market participant’s view of the risk associated with the obligations. We
update this analysis each quarter based on our updated cash flow projections, discount rates and probability assumptions. The significant
unobservable inputs used in the fair value measurement of the acquisition-related contingent consideration payable are forecasted future cash
flows and the timing of those cash flows. Significant changes in actual and forecasted future cash flows may result in significant charges or
benefits to our future operating expenses. During the periods ending December 31, 2014 and 2013 we recorded the change in estimated fair
value of the contingent consideration liability as an expense of approximately $32.7 million and $1.0 million, respectively within research and
development expense in our consolidated statements of operations.
Fair value is a market-based measurement that should be determined based on assumptions that knowledgeable and willing market
participants would use in pricing an asset or liability. The valuation techniques used to measure the fair value of the Company’
s debt instruments
and all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model
driven valuations using significant inputs derived from or corroborated by observable market data. We use a three-tier value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Includes inputs, other than Level 1 inputs, that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
The composition of our financial assets and liabilities among the three Levels of the fair value hierarchy are as follows (in thousands):
89
December 31, 2014
Level 1
Level 2
Level 3
Total
Assets:
Money market funds
$
41,595
$
—
$
—
$
41,595
U.S. government and government agency debt securities
—
404,982
—
404,982
Corporate debt securities
—
611,624
—
611,624
Total
$
41,595
$
1,016,606
$
—
$
1,058,201
Liabilities
Contingent consideration
$
—
$
—
$
44,420
$
44,420
(1)