4. Fair Value Measurements

The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the years ended December 31, 2013 and 2012. The Company had no transfers from Level 3 of the fair value measurement hierarchy during the year ended December 31, 2013 and two transfers from Level 3 of the fair value measurement hierarchy during the year ended December 31, 2012, both occurring as a result of the liabilities being paid or settled during the year.

The fair values of the Company’s assets and liabilities, which are measured at fair value on a recurring basis, were determined using the following inputs (in thousands):



	Total			Quoted Price in Active Market (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2013:
Cash Equivalents, Marketable Securities and Restricted Investments:
Money market funds	$	72,514		$	72,514	$	—	$	—
Certificates of deposit	1,116			1,116		—		—
Corporate notes	103,946			—		103,946		—
Commercial paper	19,973			—		19,973		—
U.S. government treasury securities	52,390			52,390		—		—
Securities of government-sponsored entities	118,250			—		118,250		—
Total cash equivalents, marketable securities and restricted investments	$	368,189		$	126,020	$	242,169	$	—

Contingent Consideration:
Acquisition-related liabilities, current	$	(616	)	$	—	$	—	$	(616	)
Acquisition-related liabilities, non-current	(596		)	—		—		(596		)
Total contingent consideration	$	(1,212	)	$	—	$	—	$	(1,212	)

December 31, 2012:
Cash Equivalents, Marketable Securities and Restricted Investments:
Money market funds	$	89,101		$	89,101	$	—	$	—
Certificates of deposit	998			998		—		—
Corporate notes	42,447			—		42,447		—
Commercial paper	9,997			—		9,997		—
U.S. government treasury securities	56,472			56,472		—		—
Securities of government-sponsored entities	198,326			—		198,326		—
Total cash equivalents, marketable securities and restricted investments	$	397,341		$	146,571	$	250,770	$	—
Contingent Consideration:
Acquisition-related liabilities, non-current	$	(1,074	)	$	—	$	—	$	(1,074	)

The fair and carrying value of the Company’s Senior Convertible Notes is discussed in Note 6. The estimated fair value of our long-term capital lease obligations approximated their carrying values as of December 31, 2013 and 2012.

Contingent Consideration Liability

In connection with the acquisition of Cervitech in May 2009, the Company was required to pay an additional amount not to exceed $33.0 million in the event that the PCM device received FDA approval. The fair value of the contingent consideration was determined using a probability-weighted discounted cash flow model, the significant inputs of which were not observable in the market. The key assumptions in applying this approach were the interest rate, the timing of expected approval and the probability assigned to the milestone being achieved. During the fourth quarter of 2012, the PCM device was approved by the FDA. Accordingly, the contingent consideration liability was accreted to $33.0 million. Changes in fair value were recorded in the statement of operations as sales, marketing and administrative expenses.

In connection with an immaterial acquisition in 2012, the Company is required to pay an amount not to exceed €2.0 million in the event two specified revenue-based milestones are met. The fair value of the contingent consideration was determined using a discounted cash flow model, the significant inputs of which are not observable in the market. The key assumptions in applying this approach are the revenue projections, the interest rate and the probabilities assigned to the milestones being achieved. Based on these assumptions, the estimated fair value of the contingent consideration totaled $1.2 million at December 31, 2013 and is included in accrued liabilities in the December 31, 2013 consolidated balance sheet. Changes in fair value are recorded in the statements of operations as sales, marketing and administrative expenses.

In addition, the Company paid approximately $0.5 million during the year ended December 31, 2012 related to contingent consideration recorded in connection with an immaterial acquisition which occurred in 2010.

The following table sets forth the changes in the estimated fair value of the Company’s liabilities measured on a recurring basis using significant unobservable inputs (Level 3) (in thousands):



	December 31,
	2013		2012
Fair value measurement at beginning of period	$	1,074	$	32,221
Contingent consideration liability recorded upon acquisition	—		1,019
Change in fair value measurement included in operating expenses	138		1,364
Contingent consideration paid or settled	—		(33,530		)
Fair value measurement at end of period	$	1,212	$	1,074

Non-financial assets and liabilities measured on a nonrecurring basis

Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis in accordance with authoritative guidance. These include items such as nonfinancial assets and liabilities initially measured at fair value in a business combination and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. In general, nonfinancial assets including goodwill, intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.

During the fourth quarter of 2012, the Company updated its discounted cash flow valuation model for Impulse Monitoring and based on management's current estimates of revenues and expenses, related cash flows and the discount rate used in the model, the estimated fair value of then the then Impulse Monitoring reporting unit was less than its carrying value. Management's estimates of revenues and related cash flows reflected the impacts of the significant coding changes for IOM services which took effect in 2013 and resulted in reduced reimbursement for IOM services. In accordance with the authoritative guidance, the Company recorded an impairment charge to Impulse Monitoring's goodwill of $8.3 million.

During the fourth quarter of 2012 and 2011, as a result of reductions in management’s estimates of revenues and related cash flows used in the valuation models principally due to an updated view of the competitive and regulatory landscape in the cervical market, the carrying value of the IPR&D and developed technology acquired from Cervitech in 2009 exceeded their estimated fair value. Accordingly, the Company recorded impairment charges totaling approximately $1.4 million and $18.2 million during the years ended December 31, 2012 and 2011, respectively. The fair value of the IPR&D and developed technology acquired was determined using a discounted cash flow model, the significant inputs of which are not observable in the market. The PCM device was approved by the FDA in late 2012.