8. Fair value of financial instruments

As of September 30, 2014, and December 31, 2013, the Company measured its financial assets and liabilities under the amended ASC Topic 820, Fair Value Measurements and Disclosures of the Accounting Standards Codification, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. It also establishes a three-level valuation hierarchy for disclosures of fair value measurement as follows:

Level 1 — quoted prices in active markets for identical assets or liabilities;

Level 2 — other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and

Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

Private placement warrants liability

As of September 30, 2014, and December 31, 2013, the Company’s liability for Private Placement Warrants was measured at fair value under ASC Topic 820. The Company’s liability for the Private Placement Warrants is measured at fair value based on unobservable inputs, and thus is considered a Level 3 financial instrument. The Company analyzes financial instruments with features of both liabilities and equity under ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging.

As of September 30, 2014, and December 31, 2013, the Company estimated the fair value of its liability for Private Placement Warrants with a publicly traded stock pricing approach using the Black-Scholes option pricing model. The inputs of the Black-Scholes option pricing model included the following:


	September 30, 2014			December 31, 2013
Market value of the Company’s common stock	$	69.00		$	75.10
Exercise price	$	13.00		$	13.00
Risk-free interest rate		0.39	%		0.51	%
Estimated price volatility		42.50	%		42.50	%
Contractual term		1.58 years			2.33 years
Dividend yield		—			—

The market value of the Company’s common stock was based on its closing price on September 30, 2014, and December 31, 2013, the date of each valuation. The volatility factors noted above represented the upper end of the range of implied volatility of publicly traded call options of benchmark companies. If all other assumptions were held constant, the recorded liability of the Private Placement Warrants would increase or decrease by approximately $2.0 million due to a 10% change in the value of these warrants based on the Black-Scholes option pricing model.

The following table summarizes the change in the estimated fair value of the Company’s Level 3 Private Placement Warrants liability in the nine months ended September 30, 2014:


Balance at December 31, 2013	$	24,525
Fair value of private placement warrants exercised		(7,320	)
Change in the value of private placement warrants		(1,190	)

Balance at September 30, 2014	$	16,015

For the three and nine months ended September 30, 2014, the Company recognized income of $858,000 and $1,190,000, respectively, due to a decrease in the estimated fair value of the Company’s liability for Private Placement Warrants. For the three and nine months ended September 30, 2013, the Company recognized expense of $12,605,000 and $21,658,000, respectively, due to an increase in the estimated fair value of the Company’s liability for Private Placement Warrants. This (income) expense was recorded as “Private placement warrant (income) expense” in the Company’s unaudited condensed consolidated statements of operations for the respective periods.

Contingent consideration liability

As described in Note 2, “Acquisition of Professional Power Products, Inc.” a portion of the purchase price for the acquisition of 3PI is in the form of contingent consideration payable in shares of the Company’s common stock. As of September 30, 2014, the Company’s potential contingent consideration liability payment relating to its acquisition of 3PI was measured at fair value under ASC Topic 820. The Company analyzes financial instruments with features of both liabilities and equity under ASC 480, Distinguishing Liabilities from Equity and ASC 815,Derivatives and Hedging. The Company’s liability for the contingent consideration is measured at fair value based on unobservable inputs, and thus is considered a Level 3 financial instrument. The fair value of the liability determined by this analysis was primarily driven by the Company’s expectations of achieving the performance measures required by the Stock Purchase Agreement, the resulting shares expected to be issued, and the share price of the Company’s common stock. The expected performance metrics and resulting shares expected to be issued are estimated based on a Monte Carlo simulation model considering actual and forecasted results over the measurement period.

As of September 30, 2014, the primary inputs of the Monte Carlo simulation model included the following:


	September 30, 2014
Market value of the Company’s common stock	$	69.00
Estimated EBITDA volatility		42.50	%

The market value of the Company’s common stock was based on its closing price on September 30, 2014, the date of the valuation. The volatility factor was primarily derived from the implied volatility of publicly traded call options of benchmark companies, with consideration of the implied enterprise value volatility, the relationship to EBITDA, and other pertinent factors. If all other assumptions were held constant, a five percentage point change in the volatility factor would result in an immaterial impact on the change in the fair value of the contingent consideration liability from the prior measurement date.

As of September 30, 2014, the Company had approximately $58,000 recorded as the estimated fair value of the Company’s Level 3 contingent consideration liability. This balance is included in “Other accrued liabilities” in the September 30, 2014 condensed consolidated balance sheet. For the three and nine months ended September 30, 2014, the Company recognized income of $3,208,000 and $3,782,000, respectively, due to a decrease in the estimated fair value of the Company’s Contingent consideration liability. This valuation adjustment was recorded as “Contingent consideration” in the Company’s unaudited condensed consolidated statements of operations for the respective periods.

Financial liabilities measured at fair value

The following table summarizes fair value measurements by level as of September 30, 2014, for the Company’s level 3 financial liabilities measured at fair value on a recurring basis:


	Level 1		Level 2		Level 3
Private placement warrants liability		—		—	$	16,015
Contingent consideration liability		—		—	$	58

The following table summarizes fair value measurement by level as of December 31, 2013, for the Company’s level 3 financial liability measured at fair value on a recurring basis:


	Level 1		Level 2		Level 3
Private placement warrants liability		—		—	$	24,525

Financial assets and liabilities not measured at fair value

As of September 30, 2014, and December 31, 2013, the Company’s revolving line of credit and term debt, including accrued interest, recorded on the unaudited condensed consolidated balance sheets were carried at cost. The carrying value of the revolving line of credit and term debt approximate fair value because the interest rates fluctuate with market interest rates or the fixed rates approximate current rates offered to the Company for debt with similar terms and maturities, and the Company’s credit profile has not changed significantly since the origination of these financial liabilities. Under ASC Topic 825, Financial Instruments, these financial liabilities are defined as Level 2 in the three-level valuation hierarchy, as the inputs to their valuation are market observable.