Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

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Fair Value Measurements
9 Months Ended
Sep. 30, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The Company records certain financial liabilities at fair value on a recurring basis. The Company determines fair values based on the price it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.
The prescribed fair value hierarchy and related valuation methodologies are as follows:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 - Inputs are derived from valuation techniques in which one or more of the significant inputs or value drivers are unobservable.
The categorization of an asset or liability within the fair value hierarchy is based on the inputs described above and does not necessarily correspond to the Company’s perceived risk of that asset or liability. Moreover, the methods used by the Company may produce a fair value calculation that is not indicative of the net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments and non-financial assets and liabilities could result in a different fair value measurement at the reporting date.
Assets and liabilities measured at fair value on a recurring basis:
Contingent consideration obligations
Contingent consideration obligations consist of potential obligations related to our acquisition activity. The amount to be paid under these obligations is contingent upon the achievement of stipulated operational or financial targets by the business subsequent to acquisition. The fair value of contingent consideration obligations is estimated using a probability weighted discount model which considers the achievement of the conditions upon which the respective contingent obligation is dependent. The probability of achieving the specified conditions is assessed by applying a Monte Carlo weighted-average model. Inputs into the valuation model include a discount rate specific to the acquired entity, a measure of the estimated volatility and the risk free rate of return.
Significant unobservable inputs used in the contingent consideration fair value measurements included the following at September 30, 2015 and December 31, 2014:
 
 
September 30, 2015
 
December 31, 2014
Discount rates
 
15.8% - 60.3%
 
22.5% - 64.0%
Volatility rates
 
36.0% - 54.0%
 
45.0% - 48.0%
Risk free rate of return
 
0.2% - 0.6%
 
0.1% - 0.2%

In addition to the inputs described above, the fair value estimates consider the projected future operating or financial results for the factor upon which the respective contingent obligation is dependent. The fair value estimates are generally sensitive to changes in these projections. We develop the projected future operating results based on an analysis of historical results, market conditions and the expected impact of anticipated changes in our overall business and/or product strategies.
The following table discloses the liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:
 
Fair value at September 30, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
InstaManager
$
66

 
$

 
$

 
$
66

Indatus
801

 

 

 
801

VRX
307

 

 

 
307

 
$
1,174

 
$

 
$

 
$
1,174

 
Fair value at December 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
Active Building
$
1,566

 
$

 
$

 
$
1,566

MyBuilding
248

 

 

 
248

InstaManager
2,335

 

 

 
2,335

     VMM
1

 

 

 
1

 
$
4,150

 
$

 
$

 
$
4,150


There were no assets measured at fair value on a recurring basis at September 30, 2015 or December 31, 2014.
The following table summarizes the changes in the fair value of our Level 3 liabilities for the nine months ended September 30, 2015 and 2014:
 
Nine Months Ended September 30,
 
2015
 
2014
 
(in thousands)
Balance at beginning of period
$
4,150

 
$
1,827

Initial contingent consideration
1,415

 
2,939

Settlements through cash payments
(1,179
)
 
(229
)
Net (gains) losses on change in fair value
(3,212
)
 
173

Balance at end of period
$
1,174

 
$
4,710


Gains and losses resulting from changes in the fair value of the above liabilities are included in "General and administrative" expense in the accompanying Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2015 and 2014, the Company recognized net unrealized gains (losses) of $3.3 million and $(0.2) million, respectively.
Assets and liabilities measured at fair value on a non-recurring basis:
During the nine months ended September 30, 2015, the Company identified triggering events which required the assessment of impairment for certain trade names related to prior acquisitions. The fair value of the trade names was determined through an income approach utilizing projected discounted cash flows. This method is consistent with the method the Company has employed in prior periods to value other long-lived assets. Impairments of the trade names were determined by comparing the estimated fair value to the related carrying value. The inputs utilized in the discounted cash flow analysis are classified as Level 3 inputs within the fair value hierarchy. Significant unobservable inputs used in deriving the fair value included the royalty rate applied to the projected revenue stream and the discount rate used to determine the present value of the estimated future cash flows. Through the application of this approach, we concluded the aggregate fair value of the trade names was $5.1 million. The Company believes that the methods and assumptions used to determine the fair value of the trade names were reasonable. See Note 5 for further discussion of these impairments.
Significant unobservable inputs used in fair value measurement of the trade names included the following for the nine months ended September 30, 2015:
 
 
 
 
Nine Months Ended September 30, 2015
Discount rate
 
 
 
15.0%
Royalty Rate
 
 
 
5.4%