Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2015

Fair estimated value of warrants

Fair Value of Financial Instruments

Fair value measurements are performed in accordance with the guidance provided by ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 defines fair value as the price that would be received from selling an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.

ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: 

Level 1 – Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, capital lease obligations and deferred revenue approximate their fair values based on their short-term nature. The carrying amount of the Company’s long term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities.

The estimated fair value of the contingent consideration related to the Company's business combinations is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

In connection with the 2015 and 2014 Private Placements, we issued warrants to purchase shares of our common stock which are accounted for as derivative liabilities (see Note 6 above.) The estimated fair value of the warrants is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

We used Level 3 inputs for the valuation methodology of the derivative liabilities. Our derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of the derivative liabilities.

The following table details the fair value measurement within the three levels of the value hierarchy of the Company’s financial instruments, which includes the Level 3 liabilities (in thousands):

	Fair Value at December 31, 2015
	Total		Level 1		Level 2		Level 3
Liabilities:
Contingent acquisition debt, current portion	$	264	$	-	$	-	$	264
Contingent acquisition debt, less current portion		7,174		-		-		7,174
Warrant derivative liability		4,716		-		-		4,716
Total liabilities	$	12,154	$	-	$	-	$	12,154

	Fair Value at December 31, 2014
	Total		Level 1		Level 2		Level 3
Liabilities:
Contingent acquisition debt, current portion	$	2,765	$	-	$	-	$	2,765
Contingent acquisition debt, less current portion		7,707		-		-		7,707
Warrant derivative liability		3,712		-		-		3,712
Total liabilities	$	14,184	$	-	$	-	$	14,184

The following table reflects the activity for the Company’s warrant derivative liability associated with our 2015 and 2014 Private Placements convertible notes payable measured at fair value using Level 3 inputs (in thousands):

	Warrant Derivative Liability
Balance at December 31, 2013	$	-
Issuance		3,697
Adjustments to estimated fair value		15
Balance at December 31, 2014		3,712
Issuance		1,491
Adjustments to estimated fair value		39
Warrant liability reclassified to equity		(526	)
Balance at December 31, 2015	$	4,716

The following table reflects the activity for the Company’s contingent acquisition liabilities measured at fair value using Level 3 inputs (in thousands):

	Contingent Consideration
Balance at December 31, 2013	$	7,080
Level 3 liabilities acquired		5,912
Level 3 liabilities settled		(2,488	)
Adjustments to liabilities included in earnings		179
Expenses allocated to profit sharing agreement		(211	)
Balance at December 31, 2014		10,472
Level 3 liabilities acquired		1,353
Level 3 liabilities settled		(3,338	)
Adjustments to liabilities included in earnings		(446	)
Expenses allocated to profit sharing agreement		(528	)
Adjustment to purchase price allocation		(75	)
Balance at December 31, 2015	$	7,438

The fair value of the contingent acquisition liabilities are evaluated each reporting period using projected revenues, discount rates, and projected timing of revenues. Projected contingent payment amounts are discounted back to the current period using a discount rate. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. In some cases, there is no maximum amount of contingent consideration that can be earned by the sellers. Increases in projected revenues will result in higher fair value measurements. Increases in discount rates and the time to payment will result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. During the years ended December 31, 2015 and 2014, the net adjustment to the fair value of the contingent acquisition debt was a decrease of $446,000 and an increase of $179,000, respectively.

The weighted-average of the discount rates used was 17.6% and 15.4% as of December 31, 2015 and 2014, respectively. The projected year of payment ranges from 2016 to 2030.