Note 4 - Fair Value

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

4. Fair Value

The carrying values of accounts receivable, accounts payable, and certain accrued expenses as of June 30, 2020 and December 31, 2019, approximate their fair values due to the short-term nature of these items.

The Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities include cash and cash equivalents, restricted cash, contingent consideration and warrant liabilities. ASC 820-10 (“Fair Value Measurement Disclosure”) requires the valuation using a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are:

● Level 1, defined as quoted prices in active markets for identical assets or liabilities;

● Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and

● Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

The determination of where an asset or liability falls in the hierarchy requires significant judgment; however, the Company expects changes in classifications between levels will be rare. The Company did not have any transfers of assets and liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy during the three and six months ended June 30, 2020 and the year ended December 31, 2019.

For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

	June 30, 2020
	(in thousands)
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets measured at fair value
Cash and cash equivalents	$	15,603	$	-	$	-	$	15,603
Restricted cash		627		-		-		627
Total assets measured at fair value	$	16,230	$	-	$	-	$	16,230
Liaiblities measured at fair value
Contingent consideration	$	-	$	-	$	2,278	$	2,278
Warrant liabilities		-		-		187		187
Total liabilities measured at fair value	$	-	$	-	$	2,465	$	2,465

	December 31, 2019
	(in thousands)
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets measured at fair value
Cash and cash equivalents	$	9,598	$	-	$	-	$	9,598
Restricted cash		969		-		-		969
Total assets measured at fair value	$	10,567	$	-	$	-	$	10,567
Liaiblities measured at fair value
Contingent consideration	$	-	$	-	$	1,084	$	1,084
Warrant liabilities		-		-		2,388		2,388
Total liabilities measured at fair value	$	-	$	-	$	3,472	$	3,472

The Company’s financial liabilities consisted of contingent consideration potentially payable to Sofar related to the Senhance Acquisition in September 2015 (see Note 3). This liability is reported as Level 3 as estimated fair value of the contingent consideration related to the acquisition requires significant management judgment or estimation and is calculated using the income approach, using various revenue and cost assumptions and applying a probability to each outcome. The increase in fair value of the contingent consideration of $0.2 million and $1.3 million for the three and six months ended June 30, 2020, respectively, was primarily due to a change in the Company's long-term forecast as well as the passage of time. The increase in fair value of the contingent consideration of $1.0 million and $2.0 million for the three and six months ended June 30, 2019, respectively, was primarily due to the passage of time.  Adjustments associated with the change in fair value of contingent consideration are included in the Company’s condensed consolidated statements of operations and comprehensive loss. The Company uses a probability-weighted income approach for estimating the fair value of the contingent consideration. The significant unobservable inputs used in this approach include estimates of amounts and timing of stated milestones and the discount rate.

On April 28, 2017, the Company sold 24.9 million units (the “Units”), each consisting of approximately 0.077 shares of the Company’s common stock, a Series A warrant to purchase approximately 0.077 shares of common stock with an exercise price of $13.00 per share (the “Series A Warrants”), and a Series B warrant to purchase approximately 0.058 shares of common stock with an exercise price of $13.00 per share (the “Series B Warrants”), at an offering price of $1.00 per Unit. All of the Series A Warrants were exercised prior to the expiration date of October 31, 2017. The exercise price of the Series B Warrants were subsequently adjusted as a result of the Company’s reverse stock split at a ratio of one for thirteen shares effective December 11, 2019 and certain contractual price adjustment provisions (see Note 9). Each Series B Warrant may be exercised at any time beginning on the date of issuance and from time to time thereafter through and including the fifth anniversary of the issuance date. The Series B Warrants are classified as liabilities due to net cash settlement features.

The change in fair value of all outstanding Series B Warrants for the three months ended June 30, 2020 and 2019 was an increase of $0.1 million and a decrease of $2.5 million, respectively, and is included in the Company’s condensed consolidated statements of operations and comprehensive loss. The change in fair value of all outstanding Series B Warrants for the six months ended June 30, 2020 and 2019 was an increase of $0.3 million and a decrease of $2.4 million, respectively, and is included in the Company’s condensed consolidated statements of operations and comprehensive loss.

The Company uses a monte carlo simulation model for estimating the fair value of the Series B Warrants. The significant unobservable inputs used in the monte carlo model include estimates of the risk-free interest rate, volatility of the Company’s common stock, and the probability of a 2020 financing.

The following table summarizes the change in fair value, as determined by Level 3 inputs for the warrants and the contingent consideration for the six months ended June 30, 2020:

	Fair Value Measurement at Reporting Date (Level 3)
	(in thousands)
	Common stock warrants			Contingent consideration
Balance at December 31, 2019	$	2,388		$	1,084
Exchange of warrants		(2,470	)		-
Change in fair value		269			1,268
Payment of contingent consideration		-			(74	)
Balance at June 30, 2020	$	187		$	2,278
Current portion	$	-		$	-
Long-term portion		187			2,278
Balance at June 30, 2020	$	187		$	2,278