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Fair Value Measurements

12 Months Ended

Dec. 31, 2020

J2 Global complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:


			§			Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

			§			Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, 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 which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices. The fair value of long-term debt is determined using recent quoted market prices or dealer quotes for each of the Company’s instruments, which are Level 1 inputs.

Certain of the Company’s debt securities are classified within Level 2. The Company values these Level 2 investments based on model-driven valuations using significant inputs derived from or corroborated by observable market data.

The fair value of our senior notes was determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings in 2019, which are Level 2 inputs. The fair value of the MUFG Credit Facility approximated its carrying amount due to its variable interest rate, which approximated a market interest rate, and was considered a Level 2 input. The fair value of the Company’s debt instruments was $2.0 billion and $1.8 billion, at December 31, 2020 and December 31, 2019, respectively (see Note 10 - Long-Term Debt).

In addition, the 3.25% Convertible Notes contain terms that may require the Company to pay contingent interest on the 3.25% Convertible Notes which is accounted for as a derivative with fair value adjustments being recorded to interest expense (see Note 10 - Long Term Debt). The fair value of this derivative is determined using a binomial lattice convertible bond pricing model using historical and implied market information, which are Level 2 inputs.

In 2019, the Company entered into a $5.5 million note payable that was short-term in nature and associated with the quarter’s acquisition activity. In the same year, the Company paid down $5.1 million of the outstanding note and in the third quarter of 2020, the balance of the note payable was paid in full.

The Company classifies its contingent consideration liability in connection with acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. For similar reasons, certain of the Company’s available-for-sale debt securities were classified within Level 3. The valuation approaches used to value Level 3 investments considers unobservable inputs in the market such as time to liquidity, volatility, dividend yield and breakpoints. Significant increases or decreases in either of the inputs in isolation would result in a significantly lower or higher fair value measurement.

The following table presents the fair values, valuation techniques, unobservable inputs, and ranges of the Company’s financial liabilities categorized within Level 3. The weighted averages below are a product of the unobservable input and fair value of the contingent consideration arrangement as of December 31, 2020.


	Valuation Technique	Unobservable Input	Range	Weighted Average
Contingent Consideration	Option-Based Model	Risk free rate	1.9%	1.9	%
		Debt spread	0.0% - 33.5%	11.0	%
		Probabilities	5.0% - 100.0%	62.3	%
		Present value factor	3.6% - 3.9%	3.7	%
		Discount rate	28.6%	28.6	%

The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):


December 31, 2020	Level 1		Level 2		Level 3		Fair Value		Carrying Value
Assets:
Cash equivalents:
Money market and other funds	$	10,413	$	—	$	—	$	10,413	$	10,413






Corporate debt securities	—		663		—		663		663
Total assets measured at fair value	$	10,413	$	663	$	—	$	11,076	$	11,076

Liabilities:
Contingent consideration	$	—	$	—	$	9,094	$	9,094	$	9,094
Long-term debt	1,960,527		—		—		1,960,527		1,579,021
Total liabilities measured at fair value	$	1,960,527	$	—	$	9,094	$	1,969,621	$	1,588,115


December 31, 2019	Level 1		Level 2		Level 3		Fair Value		Carrying Value
Assets:
Cash equivalents:
Money market and other funds	$	395,664	$	—	$	—	$	395,664	$	395,664






Corporate debt securities	—		623		22,047		22,670		22,670
Total assets measured at fair value	$	395,664	$	623	$	22,047	$	418,334	$	418,334

Liabilities:
Contingent consideration	$	—	$	—	$	37,887	$	37,887	$	37,887

Long-term debt	—		1,833,062		—		1,833,062		1,448,461
Total liabilities measured at fair value	$	—	$	1,833,062	$	37,887	$	1,870,949	$	1,486,348

At the end of each reporting period, management reviews the inputs to the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. For the year ended December 31, 2020, the Company transferred the fair value of its long-term debt from Level 2 to Level 1. For the year ended December 31, 2019, there were no transfers that occurred between levels.

The following table presents a reconciliation of the Company’s derivative instruments (in thousands):


	Amount		Affected line item in the Statement of Income
Derivative Liabilities:
Level 2:
Balance as of January 1, 2019	$	768

Total fair value adjustments reported in earnings	(768)		Interest expense, net
Balance as of December 31, 2019	$	—

The following tables presents a reconciliation of the Company’s Level 3 financial liabilities related to contingent consideration that are measured at fair value on a recurring basis (in thousands):


	Level 3		Affected line item in the Statement of Income
Balance as of January 1, 2019	$	50,035
Contingent consideration	5,079
Total fair value adjustments reported in earnings	6,318		General and administrative
Contingent consideration payments	(23,545)		Not Applicable
Balance as of December 31, 2019	$	37,887
Contingent consideration	8,932
Total fair value adjustments reported in earnings	(80)		General and administrative
Contingent consideration payments	(37,645)		Not Applicable
Balance as of December 31, 2020	$	9,094

In connection with the acquisition of Humble Bundle, on October 13, 2017, contingent consideration of up to an aggregate of $40.0 million may be payable upon achieving certain future EBITDA thresholds and had a fair value of zero and $20.0 million at December 31, 2020 and December 31, 2019, respectively. Due to the Company’s achievement of certain EBITDA targets for the year ended December 31, 2019 and 2018 and the amended contingent consideration agreement, $20.0 million and $20.0 million was paid during the year ended December 31, 2020 and 2019, respectively.

In connection with the acquisition of Ekahau Inc., on October 10, 2018, contingent consideration of up to an aggregate of $15.0 million may be payable upon achieving certain future revenue thresholds and had a fair value of zero and $9.1 million at December 31, 2020 and December 31, 2019, respectively. Due to the achievement of certain thresholds, $9.1 million was paid during the year ended December 31, 2020.

In connection with the Company’s other acquisition activity, contingent consideration of up to $23.3 million may be payable upon achieving certain future EBITDA, revenue, and/or unique visitor thresholds and had a combined fair value of $9.1 million and $8.8 million at December 31, 2020 and December 31, 2019, respectively. Due to the achievement of certain thresholds, $8.6 million was paid during the year ended December 31, 2020.

During the year ended December 31, 2020, the Company recorded a net decrease in the fair value of the contingent consideration of $0.1 million and reported such decrease in general and administrative expenses.

The following tables presents a reconciliation of the Company’s Level 3 financial assets related to certain available-for-sale debt securities that are measured at fair value on a recurring basis (in thousands):


	Level 3
Balance as of January 1, 2019	$	20,846
Total fair value adjustments reported in other comprehensive income	1,201
Balance as of December 31, 2019	$	22,047
Exchange of available-for-sale corporate debt securities (Note 5)	(22,047)
Balance as of December 31, 2020	$	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial 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 entity 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 risks 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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