NOTE 7—FINANCIAL INSTRUMENTS

Fair value measurements

Authoritative accounting guidance for fair value measurements provides a framework for measuring fair value and related disclosures. The guidance applies to all financial assets and financial liabilities that are measured on a recurring basis. The guidance requires fair value measurement to be classified and disclosed in one of the following three categories:

Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities. The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market. As of June 30, 2020, the Level 1 category included money market funds of $29.0 million, which were included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

Level 2: Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of available-for-sale securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers. As of June 30, 2020, the Level 2 category included short-term investments $13.6 million and long-term investments of $4.9 million, which were comprised of certificates of deposit, government and agency securities.

Level 3: Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. As of June 30, 2020, the Company’s Level 3 financial instruments measured at fair value on the Condensed Consolidated Balance Sheets consisted of the contingent consideration liability related to the acquisition of MikaMonu. The fair value of the contingent consideration liability was initially determined as of the acquisition date using unobservable inputs. These inputs included the estimated amount and timing of future cash flows, the probability of success (achievement of the various contingent events) and a risk-adjusted discount rate of approximately 14.8% used to adjust the probability-weighted cash flows to their present value. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is re-measured to fair value with changes recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. During the most recent re-measurement of the contingent consideration liability as of March 31, 2020, the Company used a risk-adjusted discount rate of approximately 14.5% to adjust the probability-weighted cash flows to their present value using probabilities ranging from 0% to 10% for the remaining contingent events. The contingent consideration liability is included in contingent consideration, non-current on the Consolidated Balance Sheet at June 30, 2020 and March 31, 2020 in the amount of $3.9 million and $3.9 million, respectively.

The fair value of financial assets measured on a recurring basis is as follows (in thousands):


			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical Assets		Observable		Unobservable
			and Liabilities		Inputs		Inputs
	June 30, 2020		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	28,998	$	28,998	$	—	$	—
Marketable securities		18,459		—		18,459		—
Total	$	47,457	$	28,998	$	18,459	$	—

Liabilities:
Contingent consideration	$	3,922	$	—	$	—	$	3,922


			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical Assets		Observable		Unobservable
			and Liabilities		Inputs		Inputs
	March 31, 2020		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	14,117	$	14,117	$	—	$	—
Marketable securities		19,178		—		19,178		—
Total	$	33,295	$	14,117	$	19,178	$	—

Liabilities:
Contingent consideration	$	3,898	$	—	$	—	$	3,898

The following table sets forth the changes in fair value of contingent consideration for the three months ended June 30, 2020 and June 30, 2019:


	Three Months Ended June 30,
	2020		2019
	(In thousands)
Contingent consideration, beginning of period	$	3,898	$	4,206
Change due to accretion		24		29
Contingent consideration, end of period	$	3,922	$	4,235

Short-term and long-term investments

All of the Company’s short-term and long-term investments are classified as available-for-sale. Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations. Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets. The Company had money market funds of $29.0 million and $14.1 million at June 30, 2020 and March 31, 2020, respectively, included in cash and cash equivalents on the Condensed Consolidated Balance Sheets. The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when declines are determined to be other-than-temporary.

The following table summarizes the Company’s available-for-sale investments:


	June 30, 2020
			Gross		Gross
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
Short-term investments:
Certificates of deposit	$	10,745	$	66		—	$	10,811
Supranational obligations		1,267		13				1,280
Agency bonds		1,495		10		—		1,505
Total short-term investments	$	13,507	$	89	$	—	$	13,596
Long-term investments:
Certificates of deposit	$	2,750	$	46	$	—	$	2,796
Agency bonds		2,025		42		—		2,067
Total long-term investments	$	4,775	$	88	$	—	$	4,863


	March 31, 2020
			Gross		Gross
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
Short-term investments:
Certificates of deposit	$	12,000	$	52	$	(1)	$	12,051
Agency bonds		2,989		21		—		3,010
Total short-term investments	$	14,989	$	73	$	(1)	$	15,061
Long-term investments:
Certificates of deposit	$	745	$	18	$	—	$	763
Agency bonds		2,029		42		—		2,071
Supranational obligations		1,270		13		—		1,283
Total long-term investments	$	4,044	$	73	$	—	$	4,117

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position as of March 31, 2020. There were no gross unrealized losses on the Company’s investments as of June 30, 2020.


	March 31, 2020
	Less Than 12 Months				12 Months or Greater				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Loss		Value		Loss		Value		Loss
	(In thousands)
Certificates of deposit	$	2,498	$	(2)	$	—	$	—	$	2,498	$	(2)
	$	2,498	$	(2)	$	—	$	—	$	2,498	$	(2)

The Company’s investment portfolio consists of both corporate and governmental securities that have a maximum maturity of three years. All unrealized gains and losses are due to changes in interest rates and bond yields. Subject to normal credit risks, the Company has the ability to realize the full value of all these investments upon maturity.

The deferred tax liability related to unrecognized gains and losses on short-term and long-term investments was $(39,000) and $(30,000) at June 30, 2020 and March 31, 2020, respectively.

As of June 30, 2020, contractual maturities of the Company’s available-for-sale investments were as follows:


			Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	13,507	$	13,596
Maturing in one to three years		4,775		4,863
	$	18,282	$	18,459

The Company classifies its short-term investments as “available-for-sale” as they are intended to be available for use in current operations.