16. Fair Value Measurements

The Company’s financial instruments consist of accounts receivable, contract assets, accounts payable, contract liabilities, accrued expenses, acquisition-related contingent consideration, 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 Company has classified liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 as follows:


	Fair Value Measurement
	at Reporting Date Using
							Balance as of
	Level 1		Level 2		Level 3		September 30, 2018
Liabilities
Acquisition-related contingent consideration - short-term	$	—	$	—	$	73,788	$	73,788


	Fair Value Measurement
	at Reporting Date Using
							Balance as of
	Level 1		Level 2		Level 3		December 31, 2017
Liabilities
Acquisition-related contingent consideration - short-term	$	—	$	—	$	1,640	$	1,640
Acquisition-related contingent consideration - long-term		—		—		31,789		31,789
	$	—	$	—	$	33,429	$	33,429

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 and equity consideration payable that is contingent upon the achievement of certain financial and performance milestones.

During 2018, the Company recorded a $6 adjustment to the fair value of the acquisition-related contingent consideration associated with the acquisition of Medliance LLC (“Medliance”) in 2014 and made the final $1,646 cash payment toward the Medliance acquisition-related contingent consideration. As of September 30, 2018, the Medliance contingent consideration was paid in full and no amounts are outstanding.

The SRx acquisition-related contingent consideration, which is liability-classified, was recorded at the estimated fair value at the acquisition date of September 6, 2017. In accordance with ASC 802, Business Combinations, all changes in liability-classified contingent consideration subsequent to the initial acquisition-date measurement are recorded in net income or loss. The contingent consideration payable is based on SRx’s EBITDA, as defined in the Merger Agreement, multiplied by a variable EBITDA multiple, which is based on a formula as set forth in the Merger Agreement. As a result, relatively small changes in SRx’s forecasted results and/or the EBITDA multiple can result in a significant change to the contingent consideration liability, with such changes recorded as adjustments to net income or loss. The Company, with the assistance of a third-party appraiser, utilizes a Monte Carlo simulation to derive estimates of the contingent consideration payments as of the acquisition date and at each subsequent period. During the three months ended September 30, 2018, the Company recorded an $8,319 remeasurement gain for the change in the fair value of the SRx acquisition-related contingent consideration primarily based on a decrease in SRx’s projected EBITDA for the year. During the nine months ended September 30, 2018, the Company recorded a $40,069 charge for the change in the fair value of the SRx acquisition-related contingent consideration primarily based on an increase in the projected EBITDA multiple used in the contingent consideration payment calculation as a result of an increase in the Company’s market capitalization and an increase in SRx’s projected EBITDA for the year. The fair value of the SRx acquisition-related contingent consideration was calculated to be $71,858, of which 50% is payable in stock, subject to certain limitations, as of September 30, 2018 and the final amount of the contingent consideration liability will be fixed as of December 31, 2018.

The Peak PACE acquisition-related contingent consideration, which is liability-classified, was recorded at the estimated fair value at the acquisition date of May 1, 2018. In accordance with ASC 802, Business Combinations, all changes in liability-classified contingent consideration subsequent to the initial acquisition-date measurement are recorded in net income or loss. The contingent consideration payable is based on Peak PACE’s EBITDA, as defined in the asset purchase agreement, multiplied by an EBITDA multiple. The Company, with the assistance of a third-party appraiser, utilizes a Monte Carlo simulation to derive estimates of the contingent consideration payments as of the acquisition date and at each subsequent period. During the three months ended September 30, 2018, the Company recorded a $100 remeasurement gain for the change in the fair value of the Peak PACE acquisition-related contingent consideration based on a slight decrease in the projected EBITDA used in the contingent consideration payment calculation. During the nine months ended September 30, 2018, the Company recorded a $310 charge for the change in the fair value of the Peak PACE acquisition-related contingent consideration primarily based on an increase in the projected EBITDA used in the contingent consideration payment calculation. The fair value of the Peak PACE acquisition-related contingent consideration was calculated to be $1,930 as of September 30, 2018 and the final amount of the contingent consideration liability will be fixed as of December 31, 2018.

The changes in fair value of the Company’s acquisition-related contingent consideration for the nine months ended September 30, 2018 was as follows:


Balance at December 31, 2017	$	33,429
Acquisition date fair value of Peak PACE contingent consideration		1,620
Fair value of cash consideration paid		(1,646)
Adjustments to fair value measurement		40,385
Balance at September 30, 2018	$	73,788