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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2020

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

As of June 30, 2020 and December 31, 2019, the following financial assets and liabilities are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

	June 30,		December 31,
Level 3 Assets	2020		2019
Compound embedded option	$	8,605	$	—

Level 3 Liabilities
Contingent consideration payable, current	$	36,395	$	8,614
Contingent consideration payable, long term		9,117		379
Contingent put option		14,125		7,100
Warrant options		46,978		16,878
Total	$	98,010	$	32,971

The estimated fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis for the six months ended June 30, 2020 and June 30, 2019:

	Level 3
	Assets			Liabilities
	Compound Embedded Option			Contingent Consideration Current⁽¹⁾			Contingent Consideration Long Term⁽²⁾			Contingent Put Option		Warrant Options		Total
Balance—at December 31, 2018	$	—		$	2,754		$	—		$	—	$	12,818	$	15,572
Acquisitions		—			31			—			—		—		31
Changes in fair value included in earnings		—			(926	)		—			—		1,549		623
Balance—at June 30, 2019	$	—		$	1,859		$	—		$	—	$	14,367	$	16,226

Balance—at December 31, 2019	$	—		$	8,614		$	379		$	7,100	$	16,878	$	32,971
Payment of contingent consideration payable		—			(12,250	)		—			—		—		(12,250	)
Foreign currency translation of contingent consideration payment		—			(208	)		—			—		—		(208	)
Acquisitions					34,451			10,543							44,994
Series A-2 compound embedded option		9,361			—			—			—		—		(9,361	)
Issuance of warrant option		—			—			—			—		30,099		30,099
Reclass of long term to short term contingent liabilities		—			180			(180	)		—		—		—
Changes in fair value included in earnings		(756	)		5,608			(1,625	)		7,025		1		11,765
Balance—at June 30, 2020	$	8,605		$	36,395		$	9,117		$	14,125	$	46,978	$	98,010

(1)	Current portion of the contingent consideration is recorded in accounts payable and other accrued liabilities.

(2)	Long term portion of the contingent consideration is recorded in other non-current liabilities.

Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3):

Contingent Consideration Payable—CTEH’s contingent consideration payable fair value was valued using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, risk-free rate and dividend yield. The fair values of the contingent consideration payables for the other acquisitions were calculated based on expected target achievement amounts, which are measured quarterly and then subsequently adjusted to actuals at the target measurement date.

The method used to price these liabilities is considered level 3 due to the subjective nature of the unobservable inputs used to determine the fair value. The input is the expected achievement of earnout thresholds.

Compound Embedded Option—The fair value of the compound embedded option associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock was estimated using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the embedded derivative feature. The difference between the entire instrument with the embedded derivative feature compared to the instrument without the embedded derivative feature is the fair value of the derivative. The unobservable inputs are based on a 100% probability of an IPO event and IPO date. The considerable quantifiable inputs in the compound embedded option were: (i) the future value of the compound embedded option, (ii) the fair value of the Convertible and Redeemable Series A-2 Preferred Stock, (iii) the present value of the total instrument, as well as the present value of the compound embedded feature plus the fair value of the instrument, and (iv) the risk free, discount rates, conversion date and maximum conversion amounts.

Contingent Put Option—The fair value of the contingent put option associated with the issuance of the Redeemable Series A-1 Preferred Stock was estimated using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the individual embedded contingent put option. The difference between the entire instrument with the embedded contingent put option compared to the instrument without the embedded contingent put option is the fair value of the derivative, recorded as the contingent put option liability. The unobservable inputs are based on a 100% probability of an IPO event and IPO date. The considerable quantifiable inputs in the contingent put option liability were: (i) the future value of the put option, (ii) the fair value of the Redeemable Series A-1 Preferred Stock, (iii) the present value of the total instrument, as well as the present value of the contingent put option feature plus the fair value of the instrument, and (iv) the risk free and discount rates. The contingent put option was redeemed in July 2020 (Note 22).

Warrant Options—The fair value of the warrant option associated with the issuance of the Redeemable Series A-1 Preferred Stock was calculated based on the Black-Sholes pricing model using the following assumptions:

	June 30,
	2020			2019
Common stock value (per share)	$	31.60		$	26.90
Expected volatility		43.64	%		49.17	%
Risk-free interest rate		0.66	%		2.00	%
Expected life (years)		10			10

The fair value of the warrant option associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock was calculated based on a Monte Carlo simulation analysis with assumptions for (i) stock price, (ii) volatility based on the median historical volatility of publicly listed comparable companies’ stock price returns, (iii) risk-free rates based on U.S. treasury yields and (iv) dividend yield.

The method used to price these liabilities is considered Level 3 due to the subjective nature of the unobservable inputs (common stock value and expected volatility) used to determine the fair value.

- 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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