FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2015

NOTE 7: FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

The following table provides the financial assets and liabilities carried at fair value, in thousands, measured on a recurring basis as of September 30, 2015 and December 31, 2014 using the fair value hierarchy prescribed by U.S. GAAP. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs. Level 3 includes fair values estimated using significant non-observable inputs. An asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

			Fair Value Measurements
	Carrying		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

September 30, 2015:
Liabilities:
Interest rate swap	$	4,537	$	—	$	4,537	$	—


December 31, 2014:
Assets:
Interest rate cap	$	1	$	—	$	1	$	—


Liabilities:
Interest rate swap	$	2,451	$	—	$	2,451	$	—
Acquisition-related contingent consideration	1,116		—		—		1,116

Total Liabilities	$	3,567	$	—	$	2,451	$	1,116

Interest rate swap

The fair value of our interest rate swap was determined via the income and market approaches utilizing certain observable inputs including the forward and spot curves for the underlying 1 month LIBOR over the remaining term of the agreement. Based on these characteristics these derivative instruments are classified as Level 2. The fair values of the derivative instruments are subject to material changes based upon changes in the forward curve for 1 month LIBOR and the volatility thereof.

Acquisition-related contingent consideration

Minus 10

In connection with our April 2014 acquisition of Minus 10, we established a contingent consideration liability considered to be a Level 3 liability. The fair value of the Minus 10 contingent consideration was based on management’s estimate of projected revenues and profit contributions over the measurement period (from April 2014 to December 2020) and an applied discount rate of 25% which was reflective of the inherent risk attributable to this new product line given its status as an early-stage venture. Such unobservable inputs include financial forecasts prepared by management which include estimates of future cash flows, projected revenues and profit contributions, and discount rates. As of the date of acquisition we estimated the original fair value of the contingent consideration to be approximately $0.9 million. During the second quarter of 2015, we remeasured the fair value of the contingent consideration using actual operating results and our revised forecasted operating results for Minus 10 for the remainder of the measurement period. As a result of this remeasurement, the fair value of the contingent consideration was reduced to zero, resulting in a non-cash gain of $1.2 million that is included in “Fair value adjustment to contingent consideration” in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2015. In August 2015, we sold our 100% equity interest in Minus 10 for an amount immaterial to the Condensed Consolidated Financial Statements. There are no further payments remaining under this contingent consideration obligation.

De Novo Legal LLC

In December 2011, Epiq acquired De Novo Legal LLC and its affiliated companies (“De Novo Legal”). In connection with the acquisition, certain contingent consideration was payable to the De Novo sellers relative to the January 1, 2013 to December 31, 2013 measurement period (the “Earn-out period”). In the first quarter of 2014, the sellers disputed our calculation of the earn-out amount and alleged that the performance measure was higher, thereby triggering the next tier of contingent consideration. Epiq and the sellers participated in a dispute resolution process as specified under the acquisition agreement and in April 2014 agreed to settle this matter for a cash payment to the sellers of $1.5 million which was paid to the sellers in April 2014. As a result, we recorded a total adjustment of $1.5 million to the contingent consideration obligation during the three months ended March 31, 2014, of which $1.1 million is included in “Fair value adjustment to contingent consideration” and $0.4 million is included in “Selling, general and administrative expense” in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2014. There are no further payments remaining under the contingent consideration obligation with respect to De Novo Legal.

The following table represents the change in the acquisition-related contingent consideration obligation during the nine months ended September 30, 2015 and 2014 (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	2015			2014
Beginning balance January 1	$	1,116		$	2,580
Present value accretion	103			59
Payments	(37		)	(3,728		)
Fair value related adjustments	(1,182		)	2,139

Ending balance September 30	$	—		$	1,050

Nonrecurring Fair Value Measurements

During the nine months ended September 30, 2015, we recorded $1.2 million of non-cash impairment charge related to Minus 10 goodwill and intangible assets. See Note 3 to the Condensed Consolidated Financial Statements for additional information related to the non-cash impairment charge.

Other Fair Value Disclosures

The carrying amounts of cash and cash equivalents, short-term investments, receivables, accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these financial instruments. As of September 30, 2015 and December 31, 2014, the amounts outstanding under both our credit facility and notes payable approximated fair value due to the borrowing rates currently available to us for debt with similar terms and are classified as Level 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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