Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements

4. Fair Value Measurements

The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: ASC Topic 820 — Fair Value Measurement and Disclosures (“ASC 820”):

• Level 1 – Quoted prices for identical instruments in active markets;

• Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets; and

• Level 3 – Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.

The Company uses the following classifications to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified:

Cash equivalents include money market fund deposits with maturities of three months or less at the date of acquisition. These financial instruments are classified in Level 1 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities that are measured and recognized at fair value on a recurring basis have been classified under the appropriate level of the fair value hierarchy as of March 31, 2012 and December 31, 2011 are as follows (in thousands):

	March 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market fund deposits	$	1,762	$	—	$	—	$	1,762	$	1,506	$	—	$	—	$	1,506
Liabilities:
Contingent consideration	$	—	$	—	$	6,204	$	6,204	$	—	$	—	$	5,765	$	5,765

Money market fund deposits are included in cash and cash equivalents on the Company’s condensed consolidated balance sheets.

As discussed in Note 3 above, the sellers of polyright and idOnDemand are eligible to receive limited earn-out payments (“contingent consideration”) in the form of shares of common stock subject to certain lock-up periods. The fair value of the contingent consideration is based on achieving certain revenue and profit targets as defined under the applicable acquisition agreement. These contingent payments are probability weighted and are discounted to reflect the restriction on the resale or transfer of such shares. The valuation of the contingent consideration is classified as a Level 3 measurement, because it is based on significant unobservable inputs and involved management judgment and assumptions about achieving revenue and profits targets and discount rates. The unobservable inputs used in the measurement of contingent consideration are highly sensitive to fluctuations and any changes in the inputs or the probability weightage thereof could significantly change the measured value of the contingent considerations at each reporting period. The fair value of the contingent consideration is classified as liability and is remeasured each reporting period in accordance with ASC 480. The contingent consideration above as of March 31, 2012 and December 31, 2011, includes $0.1 million and $0.1 million, respectively, relating to the polyright acquisition, which is included in the other accrued expenses and liabilities in the condensed consolidated balance sheets. As of March 31, 2012, the Company remeasured the total contingent consideration to fair value and recognized $0.4 million as an expense during the three months ended March 31, 2012, which has been included in general and administration in the condensed consolidated statements of operations. Below is the summary of contingent consideration by acquisition (in thousands):

	March 2012								December 2011
	Maximum amount payable		Amount paid		Expense (income) recognized for changes in  fair value		Amount outstanding		Maximum amount payable		Amount paid		Expense (income) recognized for changes in  fair value			Amount outstanding
Contingent consideration:
RockWest	$	—	$	—	$	—	$	—	$	960	$	281	$	(238	)	$	—
idOnDemand		21,000		—		412		5,875		21,000		—		706			5,463
polyright		600		—		17		329		600		—		42			302
	$	21,600	$	—	$	429	$	6,204	$	22,560	$	281	$	510		$	5,765

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

As of March 31, 2012 and December 31, 2011, there were no assets or liabilities that are measured and recognized at fair value on a non-recurring basis.