Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value Measurements

Fair Value Measurements

14.     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, which includes the Company’s convertible senior subordinated notes and finance leases. The carrying values of accounts receivable, contract assets, accounts payable, contract liabilities, and accrued expenses are representative of their fair value due to the relatively short-term nature of those instruments. See below for additional information on the Company’s convertible senior subordinated notes.

The Company has classified liabilities measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019 as follows:

	Fair Value Measurement
	at Reporting Date Using
							Balance as of
	Level 1		Level 2		Level 3		March 31, 2020
Liabilities
Acquisition-related contingent consideration - long-term	$	—	$	—	$	11,500	$	11,500

	Fair Value Measurement
	at Reporting Date Using
							Balance as of
	Level 1		Level 2		Level 3		December 31, 2019
Liabilities
Acquisition-related contingent consideration - long-term	$	—	$	—	$	10,800	$	10,800

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. In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, all changes in liability-classified contingent consideration subsequent to the initial acquisition-date measurement are recorded in net income or loss.

In connection with the acquisition of the Cognify business, additional consideration may be payable by the Company based on a multiple of the excess of certain PACE solutions’ 2021 revenues and Adjusted EBITDA over their 2018 revenues and Adjusted EBITDA, as defined in the stock purchase agreement. The Cognify acquisition-related contingent consideration, which is liability-classified, was recorded at the estimated fair value at the acquisition date of October 19, 2018. The Company, with the assistance of a third-party appraiser, utilized 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 March 31, 2020 and 2019, the Company recorded a $700 and $900 charge, respectively, for the change in the fair value of Cognify acquisition-related contingent consideration primarily due to a decreased

discount period to the final measurement date. The fair value of the Cognify acquisition-related contingent consideration was calculated to be $11,500 and $10,800 as of March 31, 2020 and December 31, 2019, respectively. The final amount of the contingent consideration liability will be fixed as of December 31, 2021. The maximum contingent consideration amount that could be earned under the stock purchase agreement is $14,000.

The changes in fair value of the Company’s acquisition-related contingent consideration for the three months ended March 31, 2020 were as follows:

Balance at December 31, 2019	$	10,800
Adjustments to fair value measurement		700
Balance at March 31, 2020	$	11,500

The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of March 31, 2020:

	Face Value		Carrying Value		Fair Value
1.75% Convertible Senior Subordinated Notes due 2026 (the "2026 Notes")	$	325,000	$	229,442	$	322,667

The fair value of the 2026 Notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a Level 2 measurement. As discussed in Note 10, the 2026 Notes are carried at their aggregate face value of $325,000, less any unaccreted debt discount and unamortized debt issuance costs.