4. Fair Value Measurements

The fair values of the Company’s assets and liabilities, including cash equivalents, marketable securities, restricted investments, derivatives, and contingent considerations are measured at fair value on a recurring basis, and are determined under the fair value categories as follows (in thousands):

			Quoted Price in		Significant Other		Significant
			Active Market		Observable Inputs		Unobservable
	Total		(Level 1)		(Level 2)		Inputs (Level 3)
December 31, 2016:
Cash Equivalents:
Money market funds	$	72,866	$	72,866	$	—	$	—
Corporate notes		4,551		—		4,551		—
Commercial paper		21,471		—		21,471		—
Securities of government-sponsored entities		5,995		—		5,995		—
Total cash equivalents	$	104,883	$	72,866	$	32,017	$	—

December 31, 2015:
Cash Equivalents, Marketable Securities:
Money market funds	$	68,425	$	68,425	$	—	$	—
Certificates of deposit		19,007		19,007		—		—
Corporate notes		152,319		—		152,319		—
Commercial paper		21,991		—		21,991		—
Securities of government-sponsored entities		115,929		—		115,929		—
Total cash equivalents and marketable securities	$	377,671	$	87,432	$	290,239	$	—

The carrying amounts of certain financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of December 31, 2016 and December 31, 2015 approximate their related fair values due to the short-term maturities of these instruments.

The fair value of certain financial instruments was measured and classified within Level 1of the fair value hierarchy based on quoted prices. Certain financial instruments classified within Level 2 of the fair value hierarchy include the types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

To manage foreign currency exposure risks, the Company uses derivatives for activities in entities that have short-term intercompany receivables and payables denominated in a currency other than the entity’s functional currency. The fair value is based on a quoted market price (Level 1). See Note 3 to the Consolidated Financial Statements included in this Annual Report for further discussion on the hedge transactions.

The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2017 at December 31, 2016 and December 31, 2015 was approximately $102.7 million and $551.4 million, respectively. During the year ended December 31, 2016, the Company repurchased approximately $339.1 million in principal amount outstanding of the 2017 Notes. See Note 6 to the Consolidated Financial Statements included in this Annual Report for further discussion. The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2021 at December 31, 2016 was approximately $827.6 million. The carrying value of the Company’s Senior Convertible Notes is discussed in Note 6 to the Consolidated Financial Statements included in this Annual Report.

Contingent Consideration Liabilities

The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition, and is determined using a discounted cash flow model or probability simulation model. The significant inputs of such models are not observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with the applicable milestone, the interest rate, and the related probabilities and payment structure in the contingent consideration arrangement. Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the Consolidated Statement of Operations. Contingent consideration arrangements assumed by an asset purchase will be measured and accrued when such contingency is resolved.

During the year ended December 31, 2016, the Company initially recorded additional contingent consideration liabilities of $61.2 million in connection with certain acquisitions, including $33.8 million in connection with the acquisition of the LessRay software technology suite and $18.8 million in connection with the acquisition of Ellipse Technologies. At December 31, 2016, the contingent consideration liabilities were $67.5 million, and were recorded in the Consolidated Balance Sheet commensurate with the respective payable terms. See Note 5 to the Consolidated Financial Statements included in this Annual Report for further discussion on contingent consideration liabilities assumed in business combinations.

The Company’s acquisition of Ellipse Technologies included a purchase price of $380.0 million and a potential milestone payment of $30.0 million payable in 2017 related to the achievement of a specific revenue target. During the quarter ended December 31, 2016, the Company received a purchase order from an organization established by certain former stockholders of Ellipse Technologies for the purchase of $4.8 million of products with their stated purpose to be donated for use in spinal deformity procedures for children in underprivileged communities. As the order complied with the Company’s standards and procedures, and the purchaser fully paid for the order in advance of shipment, the Company processed and delivered the order and recognized the revenue associated with the order during the quarter ended December 31, 2016 in accordance with ASC 605, Revenue Recognition. The milestone payment under the merger agreement, which was contingent on meeting a specific revenue target for 2016, would not have been achieved without this order. The milestone payment, in the amount of $30.0 million, will be paid pro-rata to the former stockholders of Ellipse Technologies in accordance with the merger agreement. A number of Company employees, including the CEO of NuVasive Specialized Orthopedics, were employees and stockholders of Ellipse Technologies prior to the acquisition and will receive their pro-rata share of the milestone payment. In assessing the order, the Company considered that (i) the customer is an entity established by certain former stockholders of Ellipse Technologies and (ii) the CEO of NuVasive Specialized Orthopedics, an executive officer of the Company, will receive approximately 3% of the milestone payment. The Company determined that the order did not constitute a related party transaction under ASC 850, Related Parties because none of the Company’s officers or related parties have the ability to control or significantly influence the customer.

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):


	2016			2015
Fair value measurement at January 1	$	—		$	644
Contingent consideration liability recorded upon acquisition		61,242			431
Change in fair value measurement		7,265			—
Changes resulting from foreign currency fluctuations		126			(36	)
Contingent consideration paid or settled		(1,132	)		(1,039	)
Fair value measurement at December 31	$	67,501		$	—

Non-financial assets and liabilities measured on a nonrecurring basis

Certain non-financial assets and liabilities are measured at fair value, usually with Level 3 inputs including the discounted cash flow method or cost method, 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 non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial 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. The carrying values of the Company’s capital lease obligations approximated their estimated fair value as of December 31, 2016 and 2015. The Company has obligations under certain consultancy arrangements based on achievement of specified milestones. There was no accrual as of December 31, 2016 or 2015, related to these obligations.

During the years ended December 31, 2015 and 2014, the Company recognized impairment charges related to leasehold improvement write-offs associated with the lease termination for its New Jersey facility, of approximately $0.9 million and $2.2 million, respectively. The impairments are recorded in business transition costs within the total operating expenses on the Consolidated Statements of Operations. During the year ended December 31, 2014, the Company recorded an impairment charge of $10.7 million related to the developed technology acquired from Cervitech in 2009. See Note 1 to the Consolidated Financial Statements included in this Annual Report for further discussion on impairment analysis and charges related to intangible assets and leasehold improvements.