Note 2 - Fair Value Measurement

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

2. Fair Value Measurement

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” (“ASC Topic 820”), the Company measures its cash and cash equivalents and investments at fair value on a recurring basis. The Company also measures certain assets and liabilities at fair value on a non-recurring basis when applying acquisition accounting. ASC Topic 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 should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value fair hierarchy, which prioritizes the inputs used in measuring fair value as follows:

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

Level 2 – Observable inputs other than quoted prices included in Level 1 for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3 – Unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. As of September 30, 2020 and December 31, 2019, the Company’s Level 3 financial instruments measured at fair value on the Condensed Consolidated Balance Sheets consisted of convertible debt in iVexSol held at fair value, the contingent consideration liability related to the acquisitions of Astero and CBS and a warrant liability.

For the investment in convertible debt, the significant Level 3 inputs are the expected term of the instrument, the underlying credit worthiness of the issuer and the valuation of various embedded features in the note, which are based on future financings of the issuer. We considered a range of probability-weighted financing or payoff settlements between 5% and 50% with outcomes occurring over a range of 1 to 2 years. The estimated market interest rate of approximately 8.0% was based on an average of indexes of below investment grade debt. The market rate was calibrated to the rate implied in the original issuance in September 2019 and adjusted for changes in market rates quarterly. Certain assumptions used in estimating the fair value of the convertible debt are uncertain by nature. Actual results may differ materially from estimates.

The fair value of the Astero contingent consideration liability was initially valued based on unobservable inputs using a Black-Scholes valuation model. These inputs included the estimated amount and timing of projected future revenue, a discount rate of 17.5%, risk-free rates between 2.30% and 2.43% and revenue volatility of 90%. Significant increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement. Generally, changes used in the assumptions for projected future revenue and revenue volatility would be accompanied by a directionally similar change in the fair value measurement. Conversely, changes in the discount rate would be accompanied by a directionally opposite change in the related fair value measurement. However, due to the contingent consideration having a maximum payout amount, changes in these assumptions would not affect the fair value of the contingent consideration if they increase (decrease) beyond certain amounts. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is re-measured to fair value with changes recorded in the change in fair value of contingent consideration in the Condensed Consolidated Statements of Operations. During the most recent re-measurement of the contingent consideration liability as of September 30, 2020, the Company used a discount rate of 12.5%, risk-free rates between approximately 0.08% and 0.12% and revenue volatility of 64%. This contingent consideration liability is presented in the Condensed Consolidated Balance Sheet at September 30, 2020 and December 31, 2019 in the amount of $80,000 and $1.1 million, respectively. Certain assumptions used in estimating the fair value of the contingent consideration are uncertain by nature. Actual results may differ materially from estimates.

The fair value of the CBS contingent consideration liability was initially valued based on unobservable inputs using a Monte Carlo simulation. These inputs included the estimated amount and timing of projected future revenue, a discount rate of 26.0%, a risk-free rate of approximately 1.74% and revenue volatility of 70%. Significant increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement. Generally, changes used in the assumptions for projected future revenue and revenue volatility would be accompanied by a directionally similar change in the fair value measurement. Conversely, changes in the discount rate would be accompanied by a directionally opposite change in the related fair value measurement. However, due to the contingent consideration having a maximum payout amount, changes in these assumptions would not affect the fair value of the contingent consideration if they increase (decrease) beyond certain amounts. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is re-measured to fair value with changes recorded in the change in fair value of contingent consideration in the Condensed Consolidated Statements of Operations. During the most recent re-measurement of the contingent consideration liability as of September 30, 2020, the Company used a discount rate of 23.0%, a risk-free rate of approximately 0.25% and revenue volatility of 63%. This contingent consideration liability is presented in the Condensed Consolidated Balance Sheet at September 30, 2020 and December 31, 2019 in the amount of $306,000 and $856,000, respectively. Certain assumptions used in estimating the fair value of the contingent consideration are uncertain by nature. Actual results may differ materially from estimates.

For the warrant liability, the significant Level 3 inputs include the estimated term of the warrants and the volatility of the Company’s common stock. For the estimated term of the warrants, we used the actual terms of the warrants, which are all currently less than one year.  For the volatility off the Company’s stock we used historical volatility for the remaining term of each warrant.  These amounts ranged from 64.0% to 84.6%. We did not make any adjustments to the historical volatility. Certain assumptions used in estimating the fair value of the warrants are uncertain by nature. Actual results may differ materially from estimates.

There were no remeasurements to fair value during the nine months ended September 30, 2020 of financial assets and liabilities that are not measured at fair value on a recurring basis.

The following tables set forth the Company’s financial assets measured at fair value on a recurring basis as of  September 30, 2020 and  December 31, 2019, based on the three-tier fair value hierarchy:

(In thousands)

As of September 30, 2020	Level 1		Level 2		Level 3		Total
Assets:
Money market accounts	$	93,984	$	—	$	—	$	93,984
Restricted cash held in escrow		15,000		—		—		15,000
Convertible debt held at fair value		—		—		2,110		2,110
Total		108,984		—		2,110		111,094
Liabilities:
Contingent consideration - business combinations		—		—		386		386
Warrant liability		—		—		1,914		1,914
Total	$	—	$	—	$	2,300	$	2,300

As of December 31, 2019	Level 1		Level 2		Level 3		Total
Assets:
Money market accounts	$	6,448	$	—	$	—	$	6,448
Convertible debt held at fair value		—		—		1,000		1,000
Total		6,448		—		1,000		7,448
Liabilities:
Contingent consideration - business combinations		—		—		1,914		1,914
Warrant liability		—		—		39,602		39,602
Total	$	—	$	—	$	41,516	$	41,516

The fair values of money market funds classified as Level 1 were derived from quoted market prices as active markets for these instruments exist. The fair values of investments, warrant liability and contingent consideration classified as Level 3 were derived from management assumptions. There have been no transfers of assets or liabilities between the fair value measurement levels. The following tables present the changes in investments held at fair value which are measured using Level 3 inputs:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
(In thousands)
Balance, beginning of period	$	1,000	$	—	$	1,000	$	—
Purchases		—		1,000		—		1,000
Change in fair value recognized in net income		1,110		—		1,110		—
Balance, end of period	$	2,110	$	1,000	$	2,110	$	1,000

The following tables present the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020			2019		2020			2019
(In thousands)
Balance, beginning of period	$	388		$	1,492	$	1,914		$	—
Additions		—			—		—			1,492
Change in fair value recognized in net income		(2	)		—		(1,528	)		—
Payments earned, reclassified to accrued liabilities		—			—		—			—
Balance, end of period	$	386		$	1,492	$	386		$	1,492

The following tables present the changes in fair value of warrant liabilities which are measured using Level 3 inputs:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
(In thousands)
Balance, beginning of period	$	963		$	44,194		$	39,602		$	28,516
Exercised warrants		(54	)		(1,295	)		(33,221	)		(1,694	)
Change in fair value recognized in net income		1,005			(1,128	)		(4,467	)		14,949
Balance, end of period	$	1,914		$	41,771		$	1,914		$	41,771