Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.4.0.3
Fair Value Measurements
3 Months Ended
Mar. 31, 2016
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:
Interest rate swap agreements: The fair value of the Company's interest rate derivatives are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements.
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 March 31, 2016 and December 31, 2015:
 
 
March 31, 2016
 
December 31, 2015
Discount rates
 
15.5% - 44.8%
 
15.8% - 60.0%
Volatility rates
 
37.0% - 50.0%
 
37.0% - 53.5%
Risk free rate of return
 
0.4% - 0.6%
 
0.5% - 0.9%

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.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swap valuation in its entirety is classified in Level 2 of the fair value hierarchy.
The following table discloses the liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015:
 
Fair value at March 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
Indatus
$
568

 
$

 
$

 
$
568

Interest rate swap agreements
79

 

 
79

 

 
$
647

 
$

 
$
79

 
$
568

 
Fair value at December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
Indatus
$
814

 
$

 
$

 
$
814

VRX
27

 

 

 
27

 
$
841

 
$

 
$

 
$
841


There were no assets measured at fair value on a recurring basis at March 31, 2016 or December 31, 2015.
The following table summarizes the changes in the fair value of our Level 3 liabilities for the three months ended March 31, 2016 and 2015:
 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Balance at beginning of period
$
841

 
$
4,150

Settlements through cash payments

 
(687
)
Net (gain) loss on change in fair value
(273
)
 
327

Other changes

 
1

Balance at end of period
$
568

 
$
3,791


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.
Assets and liabilities measured at fair value on a non-recurring basis:
During the first quarter of 2015, the Company identified triggering events which required the assessment of impairment for the InstaManager trade name. The fair value of the trade name was determined through an income approach utilizing projected discounted cash flows. This is consistent with the method the Company has employed in prior periods to value other long-lived assets. Impairment of the trade name was determined by comparing its 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 trade name had no value at March 31, 2015. The Company believes that the methods and assumptions used to determine the fair value of the trade name are reasonable. See Note 5 for further discussion of this impairment.
There were no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2016. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2015.
Financial Instruments
The financial assets and liabilities that are not measured at fair value in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, acquisition-related deferred cash obligations, and obligations under the Credit Facility.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses reported in our Condensed Consolidated Balance Sheets approximates fair value due to the short term nature of these instruments. Acquisition-related deferred cash obligations are recorded on the date of acquisition at their estimated fair value, based on the present value of the anticipated future cash flows. The difference between the amount of the deferred cash obligation to be paid and its estimated fair value on the date of acquisition is accreted over the obligation period. As a result, the carrying value of acquisition-related deferred cash obligations approximates their fair value.
Due to their short-term nature and market-indexed interest rates, we concluded that the carrying value of revolving loans under the Credit Facility approximate their fair value. Similarly, we concluded that the carrying value of the Term Loan approximated its fair value at March 31, 2016.