Fair Value Measurements

6 Months Ended

Jun. 30, 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

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 June 30, 2012 and December 31, 2011 are as follows (in thousands):

	June 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market fund deposits	$	7	$	—	$	—	$	7	$	1,506	$	—	$	—	$	1,506
Liabilities:
Contingent consideration	$	—	$	—	$	108	$	108	$	—	$	—	$	5,765	$	5,765

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

Below is the summary of contingent consideration by acquisition (in thousands):

	June 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		—		(5,463	)		—		21,000		—		706			5,463
polyright		737		—		(194	)		108		737		—		42			302
	$	21,737	$	—	$	(5,657	)	$	108	$	22,697	$	281	$	510		$	5,765

As discussed in Note 3 above, under the terms of their respective acquisition agreements, 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 involves 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. As of June 30, 2012, there were significant changes in the range of outcomes for the contingent consideration recognized as of the acquisition date for polyright and idOnDemand and it was determined that there is no future expectation of earn-out payments, except for $0.1 million related to polyright. As a result, the total earn-out liability of $5.8 million was reduced to $0.1 million in accordance with ASC 480. The contingent consideration shown in the table above as of June 30, 2012 and December 31, 2011 includes $0.1 million and $0.1 million, respectively, related to the earn-out liability related to the polyright acquisition, and is included in the other accrued expenses and liabilities in the condensed consolidated balance sheets. The contingent consideration above as of December 31, 2011 included $5.5 million related to the idOnDemand acquisition and is shown as long-term earn-out liability in the condensed consolidated balance sheet. The re-measurement of contingent consideration is reflected as a credit in the condensed consolidated statements of operations. Amounts shown in the table above for RockWest refer to contingent consideration related to the acquisition of RockWest Technology Group in April 2010.

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

As of June 30, 2012 and December 31, 2011, there were no assets or liabilities that are measured and recognized at fair value on a non-recurring basis.