2.	Fair Value Measurements

Definition and Hierarchy

The applicable accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. This guidance requires us to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a non-recurring basis in periods subsequent to initial measurement, in a fair value hierarchy.

The fair value hierarchy is broken down into three levels based on the reliability of inputs and requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required, as well as the assets and liabilities that we value using those levels of inputs:

 

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Level 1 – Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

 

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Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not very active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The fair value of the contingent consideration obligations related to our business acquisitions are valued using Level 3 inputs.

 

Valuation Techniques

Inputs to valuation techniques are observable and unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. When developing fair value estimates for certain financial assets and liabilities, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices, market comparables and discounted cash flow projections. Financial assets include money market funds, U.S. treasury notes or bonds and U.S. government agency bonds.

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Fair Value Measurements of Assets and Liabilities

The following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of July 31, 2015 and January 31, 2015:

 

						Fair Value at July 31, 2015 Using
						Quoted
						Prices in				Significant
						Active				Other				Significant
						Markets for				Observable				Unobservable
		July 31,				Identical Assets				Inputs				Inputs
		2015				(Level 1)				(Level 2)				(Level 3)
		(Amounts in thousands)
Financial assets:
Money market accounts (a)		$	3,627			$	3,627			$	—			$	—
Available for sale marketable securities:
Current marketable securities:
U.S. treasury notes and bonds - conventional			2,006				2,006				—				—
U.S. government agency issues			2,003				—				2,003				—
Non-current marketable securities:
U.S. treasury notes and bonds - conventional			5,770				5,770				—				—
U.S. government agency issues			2,504				—				2,504				—
Total		$	15,910			$	11,403			$	4,507			$	—
Financial liabilities:
Contingent consideration (b)		$	1,487			$	—			$	—			$	1,487

 

						Fair Value at January 31, 2015 Using
						Quoted
						Prices in				Significant
						Active				Other				Significant
						Markets for				Observable				Unobservable
		January 31,				Identical Assets				Inputs				Inputs
		2015				(Level 1)				(Level 2)				(Level 3)
		(Amounts in thousands)
Financial assets:
Money market accounts (a)		$	1,575			$	1,575			$	—			$	—
Available for sale marketable securities:
Current marketable securities:
U.S. treasury notes and bonds - conventional			1,501				1,501				—				—
U.S. government agency issues			6,015				—				6,015				—
Non-current marketable securities:
U.S. treasury notes and bonds - conventional			4,286				4,286
U.S. government agency issues			2,507				—				2,507				—
Total		$	15,884			$	7,362			$	8,522			$	—

 

(a)	Money market funds and U.S. treasury bills are included in cash and cash equivalents on the accompanying consolidated balance sheet and are valued at quoted market prices for identical instruments in active markets.

(b)

The fair value of our contingent consideration arrangement is determined based on management’s evaluation as to the probability of achieving certain defined performance criteria based on the expected future performance of the acquired entity, as well as the fair value of the estimated shares of the Company’s common stock to be issued.

The following table sets forth a reconciliation of liabilities measured at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the six months ended July 31, 2015 (amounts in thousands):

 

		Level 3
		Accrued Contingent
		Consideration
Ending balance at January 31, 2015		$	—
Timeline Labs acquisition			1,508
Change in fair value			(21	)
Ending balance July 31, 2015		$	1,487

Available-For-Sale Securities

We determine the appropriate classification of debt investment securities at the time of purchase and reevaluate such designation as of each balance sheet date. Our investment portfolio consists of money market funds, U.S. treasury notes and bonds, and U.S. government agency notes and bonds as of July 31, 2015 and January 31, 2015. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost, which approximates fair value. Our marketable securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of tax, reported in stockholders’ equity as a component of accumulated other comprehensive loss. The amortization of premiums and accretion of discounts to maturity are computed under the effective interest method and are included in other (expenses) income, net, in our consolidated statements of operations and comprehensive loss. Interest on securities is recorded as earned and is also included in other (expenses) income, net. Any realized gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive loss in other (expenses) income, net. We provide fair value measurement disclosures of available-for-sale securities in accordance with one of three levels of fair value measurement mentioned above.

 

The following is a summary of cash, cash equivalents and available-for-sale securities, including the cost basis, aggregate fair value and gross unrealized gains and losses, for short- and long-term marketable securities portfolio as of July 31, 2015 and January 31, 2015:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Amounts in thousands)
July 31, 2015:
Cash		$	56,933			$	—			$	—			$	56,933
Cash equivalents			3,627				—				—				3,627
Cash and cash equivalents			60,560				—				—				60,560
U.S. treasury notes and bonds - short-term			2,004				2								2,006
U.S. treasury notes and bonds - long-term			5,760				10				—				5,770
U.S, government agency issues - short-term			2,002				1				—				2,003
U.S, government agency issues - long-term			2,489				15								2,504
Total cash, cash equivalents and marketable securities		$	72,815			$	28			$	—			$	72,843
January 31, 2015:
Cash		$	88,444			$	—			$	—			$	88,444
Cash equivalents			1,575				—				—				1,575
Cash and cash equivalents			90,019				—				—				90,019
U.S. treasury notes and bonds - short-term			1,500				1								1,501
U.S. treasury notes and bonds - long-term			4,268				18				—				4,286
U.S, government agency issues - short-term			6,008				7				—				6,015
U.S, government agency issues - long-term			2,490				17								2,507
Total cash, cash equivalents and marketable securities		$	104,285			$	43			$	—			$	104,328

The following is a schedule of the contractual maturities of available-for-sale investments as of July 31, 2015 (amounts in thousands):

 

		Estimated
		Fair Value
Maturity of one year or less		$	4,009
Maturity between one and five years			8,274
Total		$	12,283

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consist primarily of highly liquid investments in money market mutual funds, government sponsored enterprise obligations, treasury bills, commercial paper and other money market securities with remaining maturities at date of purchase of 90 days or less.

Restricted Cash

In December 2014, in conjunction with our acquisition of TLL, LLC (“Timeline Labs”) (see Note 3), we entered into an agreement to fund a $2.5 million escrow from which Timeline Labs could make withdrawals for working capital purposes in advance of the February 2, 2015 acquisition date. The unused portion of $1.1 million as of January 31, 2015, was classified as restricted cash in our consolidated balance sheet. On February 2, 2015 this amount was retained by the Company.

The fair value of cash, cash equivalents, restricted cash and marketable securities at July 31, 2015 and January 31, 2015 was $72.8 million and $105.4 million, respectively.

 

Contingent Consideration

We determined the fair value of the contingent consideration in connection with the acquisition of Timeline Labs on February 2, 2015 using a method that incorporates the Black-Scholes valuation model to establish the value of the shares of our common stock in addition to an evaluation of the probability of achievement. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. As of July 31, 2015, $0.9 million represents our current portion of this obligation and is included in other accrued expenses in our consolidated balances sheet and $0.6 million represents our noncurrent portion and is included in other liabilities, long-term on our consolidated balance sheet. Any change in the fair value of the contingent consideration subsequent to the acquisition date, such as changes in our estimates of the performance goals, will be recognized in earnings in the period the estimated fair value changes. For contingent consideration arrangements which contain an employment requirement, and as a result is considered compensation expense, we will recognize a liability once the requisite service period has been completed.