Fair Value Measurements

12 Months Ended

Dec. 31, 2016

15. Fair Value Measurements

The Company’s financial instruments consist of accounts receivable, accounts payable, accrued expenses, acquisition-related contingent consideration, acquisition-related consideration payable, notes payable related to acquisition, notes payable to related parties, warrant liability and long-term debt. The carrying values of accounts receivable, accounts payable and accrued expenses are representative of their fair value due to the relatively short-term nature of those instruments. The carrying value of the Company’s long-term debt approximates fair value based on the terms of the debt. The notes payable related to acquisition were recorded on December 31, 2014 at their acquisition date fair values of $14,347. This valuation was determined using Level 3 inputs. The note was fully repaid on July 1, 2016 (see Note 9).

The Company has classified liabilities measured at fair value on a recurring basis at December 31, 2016 and 2015 as follows:


	Fair Value Measurement
	at Reporting Date Using
							Balance as of
	Level 1		Level 2		Level 3		December 31, 2016

Liabilities
Acquisition-related contingent consideration - short-term	$	—	$	—	$	1,493	$	1,493
Acquisition-related contingent consideration - long-term		—		—		1,515		1,515
	$	—	$	—	$	3,008	$	3,008


	Fair Value Measurement
	at Reporting Date Using
							Balance as of
	Level 1		Level 2		Level 3		December 31, 2015
Liabilities
Warrant liability	$	—	$	—	$	5,569	$	5,569
Note payable related to acquisition		—		—		15,620		15,620
Acquisition-related contingent consideration - short-term		—		—		1,886		1,886
Acquisition-related contingent consideration - long-term		—		—		3,355		3,355
	$	—	$	—	$	26,430	$	26,430

The fair value of the preferred stock warrants at December 31, 2015 was estimated using an option pricing model with the following weighted average assumptions: estimated life of 7.99 years, no dividend yield, risk-free interest rate of 2.10%, fair value of underlying instrument of $8.14 per share and volatility of 57.81%. The Company also applied a discount for lack of marketability of 10% to the resulting value from the option pricing model.

The Company developed its own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company’s various classes of preferred stock, stock price volatility, the contractual term of the warrants, risk-free interest rates, and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. The Company accounted for its redeemable convertible preferred stock warrants as liabilities in accordance with the guidance for accounting for certain financial instruments with characteristics of both liabilities and equity, as warrants entitled the holder to purchase preferred stock that is considered contingently redeemable. The warrant liability was recorded on its own line item on the Company’s consolidated balance sheets. The warrant liability was marked-to-market each reporting period with the change in fair value recorded on its own line in the consolidated statements of operations until the warrants were exercised, expired or other facts and circumstances led the warrant liability to be reclassified as an equity instrument. Upon the closing of the IPO, the warrants converted into shares to purchase common stock and the warrant liability was reclassified to additional paid-in capital, a component of stockholders' equity.

The reconciliation of the warrant liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:


Balance at January 1, 2015	$	2,783
Change in fair value		2,786
Balance at December 31, 2015		5,569
Change in fair value		(639)
Conversion upon initial public offering		(4,930)
Balance at December 31, 2016	$	—

Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs, hence these instruments represent Level 3 measurements within the fair value hierarchy. The acquisition-related contingent consideration liability represents the estimated fair value of the additional cash consideration payable that is contingent upon the achievement of certain financial and performance milestones.

During 2015, the Company paid the outstanding balance of the SMPP acquisition-related contingent consideration, which included a cash payment of $300 and 16,237 shares of the Company's common stock. The stock consideration was valued at a total of $94, or $5.82 per share, with the assistance of a third-party valuation specialist. There was no SMPP acquisition-related contingent consideration outstanding at December 31, 2016 and 2015.

During 2015, the Company paid the outstanding balance of the Capstone acquisition-related contingent consideration, which included a cash payment of $577 and 18,418 shares of the Company's common stock. The stock consideration was valued at a total of $107, or $5.82 per share, with the assistance of a third-party valuation specialist. There was no Capstone acquisition-related contingent consideration outstanding at December 31, 2016 and 2015.

During 2015, a $2,059 reduction to the Aggregate Earn-Out Amount of the Medliance acquisition-related contingent consideration was recorded based on estimated lost future revenues from several lost customers which occurred in 2015, using an average of claims per month for those customers and current data and statistics revenue rates. During 2016, the Company made a $1,895 cash payment toward the Medliance acquisition-related contingent consideration. The Company also recorded a $338 reduction to the Aggregate Earn-Out Amount during 2016 based on a decrease in estimated future revenues. The fair value of the Medliance contingent consideration was calculated to be $3,008 and $5,241 at December 31, 2016 and 2015, respectively.

The changes in fair value of the Company’s acquisition-related contingent consideration for the years ended December 31, 2016 and 2015 was as follows:


Balance at January 1, 2015	$	8,378
Fair value of cash consideration paid		(877)
Fair value of equity consideration paid		(201)
Adjustments to fair value measurement		(2,059)
Balance at December 31, 2015		5,241
Fair value of cash consideration paid		(1,895)
Adjustments to fair value measurement		(338)
Balance at December 31, 2016	$	3,008

- 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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