Note 5 - Accrued expenses and other long-term liabilities

Accrued expenses consist of the following (in thousands):


	January 31, 2020		October 31, 2019
Wages payable	$	1,176	$	1,591
Accrued receipts		1,068		1,683
Warranty liability		200		—
Deferred revenue		404		—
Other accrued expenses		463		379

Totals	$	3,311	$	3,653

Accrued receipts represent purchased inventory for which invoices have not been received.

We recognize an accrued warranty liability for the estimated claims to remedy potential deficiencies of quality or performance of our products in the Schrofftech division within the Custom Cabling segment. The product warranties extend over various periods, depending upon the product subject to the warranty. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales, any specifically identified warranty issues and current trends and knowledge. We base our estimates in part on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results, including in the case of a significant product failure. Warranty related expenses have not been material and were not material for the period ended January 31, 2020. Warranty liabilities were $200,000 as of January 31, 2020.

The purchase agreement for the Schrofftech acquisition provides for earn-out payments of up to $2,400,000, which is earned through October 31, 2022 and payable on October 31, 2022. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure. The earn-out was and will continue to be revalued quarterly using a present value approach and any resulting increase or decrease will be recorded into selling and general expenses. Any changes in the amount of the actual results and forecasted scenarios could impact the fair value. Significant judgment is employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out as of the acquisition date. Accordingly, significant variances between actual and forecasted results or changes in the assumptions can materially impact the amount of contingent consideration expense we record in future periods.

The contingent consideration liability represents future earn-out liability that we may be required to pay in conjunction with the acquisition of Schrofftech. We estimate the fair value of the earn-out liability using an option pricing based approach with a risk-neutral framework using Black Scholes related to Schrofftech calculated at net present value (level 3 of the fair value hierarchy).

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2020 (in thousands):


Description		Level 1		Level 2		Level 3
Earn-out liability	$	—	$	—	$	1,215

There were no financial assets or liabilities measured at fair value as of October 31, 2019.

The following table summarizes the Level 3 transactions for the three months ended January 31, 2020:


	Level 3
	January 31, 2020		October 31, 2019
Beginning balance	$	1,249	$	—
Payments		—		—
Change in value		(34)		—
Ending Balance	$	1,215	$	—

As of January 31, 2020, the full amount of the $1.2 million earn-out was classified as other long-term liabilities.