Fair Value Measurement and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurement and Fair Value of Financial Instruments

10. Fair Value Measurement and Fair Value of Financial Instruments

The Company follows ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) for fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value, which focuses on an exit price, which is 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. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.

The hierarchy established under ASC 820 gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Level 1 – Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. As required by ASC 820, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level 2 – Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

Level 3 – Pricing inputs are unobservable for the investment, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Level 3 includes investments that are supported by little or no market activity.

Assets and liabilities of the Company measured at fair values on a recurring basis as of September 30, 2013 and December 31, 2012 are summarized as follows:

	September 30, 2013			Level 1		Level 2			Level 3
Assets
Cash and cash equivalents	$	2,518,377		$	2,518,377	$	—		$	—
Total Assets	$	2,518,377		$	2,518,377	$	—		$	—
Liabilities
Contingent consideration	$	2,868,734		$	—	$	—		$	2,868,734
Debt discount		(99,682	)		—		(99,682	)		—
Total Liabilities	$	2,769,052		$	—	$	(99,682	)	$	2,868,734

	December 31, 2012			Level 1		Level 2			Level 3
Assets
Cash and cash equivalents	$	3,307,822		$	3,307,822	$	—		$	—
Total Assets	$	3,307,822		$	3,307,822	$	—		$	—
Liabilities
Contingent consideration	$	4,759,257		$	—	$	—		$	4,759,257
Debt discount		(129,587	)		—		(129,587	)		—
Total Liabilities	$	4,629,670		$	—	$	(129,587	)	$	4,759,257

The Company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the Company would be required to make such future payment. Changes to the fair value of contingent consideration are recorded in general and administrative expense. The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the contingent consideration.

	September 30, 2013
Outstanding balance at January 1, 2013	$	4,759,257
Payments		(1,435,548	)
Change in fair value included in earnings		(478,099	)
Accrued interest		23,124
Outstanding balance at September 30, 2013	$	2,868,734

The change in fair value reflects the Company’s updated probability related to the Northeast Energy Partners, LLC (“NEP”) earn-out. See Note 13 for additional details. The carrying amounts and fair values of the Company’s debt obligations are as follows:

	September 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, net of debt discount	$	4,900,318	$	4,900,318	$	6,370,413	$	6,370,413
Debt discount		99,682		99,682		129,587		129,587
Subordinated notes payable		4,000,000		4,000,000		4,000,000		4,000,000
Related party subordinated notes payable		2,000,000		2,000,000		2,000,000		2,000,000
Total debt obligations	$	11,000,000	$	11,000,000	$	12,500,000	$	12,500,000

The carrying amount for fixed rate long-term debt and variable rate long-term debt approximate fair value because the underlying instruments are primarily at current market rates available to the Company for similar borrowings. The interest rate on the Silicon Valley Bank (“SVB”) debt is tied to the prime rate and will fluctuate with changes in that rate. Related party notes payable are classified as short-term on the Company’s accompanying condensed consolidated balance sheets.