Fair Value Measurements

9 Months Ended

Sep. 30, 2015

3. Fair Value Measurements

The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in thousands):

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds⁽¹⁾	$	14,940	$	—	$	—	$	14,940
Total	$	14,940	$	—	$	—	$	14,940
Liabilities:
Contingent consideration ⁽²⁾	$	—	$	—	$	2,532	$	2,532
Total	$	—	$	—	$	2,532	$	2,532

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds ⁽¹⁾	$	14,928	$	—	$	—	$	14,928
Total	$	14,928	$	—	$	—	$	14,928
Liabilities:
Contingent consideration ⁽²⁾	$	—	$	—	$	1,048	$	1,048
Total	$	—	$	—	$	1,048	$	1,048

(1) Included in cash and cash equivalents
(2) Included in other current liabilities

The valuation technique used to measure the fair value of money market funds included using quoted prices in active markets for identical assets or liabilities.

The fair value of contingent consideration was estimated using a Monte Carlo simulation and was based on significant inputs not observable in the market, thus classified as a Level 3 instrument. The inputs include the Company’s stock price, maximum earn-out shares, historical and projected financial results of Eckim, LLC. (“Eckim”), historical volatility of the Company's stock price and risk-free interest rate.

The following table represents the change in the contingent consideration (in thousands):

	Level 3
Balance as of December 31, 2014	$	1,048
Change in fair value		1,484
Balance as of September 30, 2015	$	2,532

The Company recorded a gain of $0.2 million during the three months ended September 30, 2015 and a loss of $1.5 million during the nine months ended September 30, 2015, due to the changes in fair value of the contingent consideration. The change in fair value of the contingent consideration during the third quarter was primarily related to the decrease in the Company’s stock price. The change in fair value of the contingent consideration during the nine months ended September 30, 2015, was primarily driven by the increase in the likelihood of achieving the post-acquisition contractual performance requirements, including revenue and profit milestones, partially offset by a decrease in the Company’s stock price. Gains and losses as a result of the changes in the fair value of the contingent consideration are included as a component of operations in the accompanying condensed consolidated statements of operations.

- 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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