Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Note 6

- Fair Value Measurements

On January 1, 2008, the Company adopted FASB ASC Topic 820, “Fair Value Measurement and Disclosures”, (“ASC 820”). This topic defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.

	•		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and certain accrued liabilities. The carrying amounts of our cash and cash equivalents (which are comprised primarily of deposit and overnight sweep accounts), accounts receivable, accounts payable, and certain accrued liabilities approximate fair value due to the short maturity of these instruments.

The Company’s liabilities that are measured at fair value on a recurring basis relate to its contingent consideration and royalty obligation resulting from the acquisition of Xoft completed on December 30, 2010. The fair value measurements for these liabilities are valued using Level 3 inputs. The Company recorded a contingent consideration liability of $4.9 million based upon the estimated fair value of the additional earn-out potential for the sellers that is tied to cumulative net revenue of Xoft products from January 1, 2011 through December 31, 2013, payable January, 2014. The Company determines the fair value of the contingent consideration liability based on a probability-weighted approach derived from earn-out criteria estimates and a probability assessment with respect to the likelihood of achieving the various earnout criteria. The measurement is based upon significant inputs not observable in the market. Subsequent changes in the value of this liability will be recorded in the statement of operations.

The Company also recorded a royalty obligation of approximately $900,000 which was estimated based upon an income approach. The measurement is based upon significant inputs not observable in the market. Subsequent changes in the value of this liability will be recorded as interest expense in the statement of operations.

The following table sets forth Company’s liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy.

Fair value measurements using: (000’s) as of December 31, 2010


							Liabilities
							at Fair
	Level 1		Level 2		Level 3		Value
Contingent consideration		—		—	$	5,000	$	5,000
Royalty obligation		—		—		1,372		1,372

Total		—		—	$	6,372	$	6,372

Fair value measurements using: (000’s) as of June 30, 2011


							Liabilities
							at Fair
	Level 1		Level 2		Level 3		Value
Contingent consideration		—		—	$	3,800	$	3,800
Royalty obligation		—		—		971		971

Total		—		—	$	4,771	$	4,771

The changes in the fair value of contingent consideration during the period are as follows:

Six months ended June 30, 2011


Balance as of December 31, 2010	$	5,000
Fair value adjustment		(100	)
Mark to market		(1,100	)

Balance as of June 30, 2011	$	3,800

During the quarter ended June 30, 2011 the Company recorded the $1.1 million reduction in the fair value of the contingent consideration in the statement of operations.

The changes in the fair value of the royalty obligation during the period are as follows:

Six months ended June 30, 2011


Balance as of December 31, 2010	$	1,372
Fair value adjustment		(235	)
Interest expense		79
Royalty payment		(245	)

Balance as of June 30, 2011	$	971

Items Measured in Fair Value on a Nonrecurring Basis

Certain assets, including our goodwill, are measured at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be impaired. We did not record any impairment charges for these assets during the three or six months ended June 30, 2011.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, 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 Company 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 risk is 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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