Note 3 - Fair Value

3 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

3. Fair Value

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 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 months ended March 31, 2021 and 2020.

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 Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

As prescribed by U.S. GAAP, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures and based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects changes in classifications between levels will be rare.

The carrying values of accounts receivable, other current assets, accounts payable, and certain accrued expenses as of March 31, 2021 and December 31, 2020 approximate their fair values due to the short-term nature of these items. The Company’s notes payable balance also approximates fair value as of March 31, 2021 and December 31, 2020, as the interest rate on the notes payable approximates the rates available to the Company as of this date.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

	March 31, 2021
	(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	$	165,245	$	-	$	-	$	165,245
Restricted cash		1,149		-		-		1,149
Total assets measured at fair value	$	166,394	$	-	$	-	$	166,394
Liabilities measured at fair value
Contingent consideration	$	-	$	-	$	4,193	$	4,193
Total liabilities measured at fair value	$	-	$	-	$	4,193	$	4,193

	December 31, 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	$	16,363	$	-	$	-	$	16,363
Restricted cash		1,166		-		-		1,166
Total assets measured at fair value	$	17,529	$	-	$	-	$	17,529
Liabilities measured at fair value
Contingent consideration	$	-	$	-	$	3,936	$	3,936
Warrant liabilities		-		-		255		255
Total liabilities measured at fair value	$	-	$	-	$	4,191	$	4,191

The Company’s financial liabilities consisted of contingent consideration payable to Sofar related to the Senhance Acquisition in September 2015. 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 $0.3 million for the three months ended March 31, 2021 was primarily due to a lower discount rate, increased volatility, and the passage of time. The increase in fair value of the contingent consideration of $1.1 million for the three months ended March 31, 2020 was primarily due to a change in the Company's long-term forecast. 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,” together with the Series A Warrants, the “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. As of December 31, 2020, 567,660 Series B Warrants were outstanding with an exercise price of $0.35 per share. All outstanding Series B Warrants were exercised in the first quarter 2021.

The change in fair value of the Series B warrants for the three months ended March 31, 2021 and 2020 of an increase of $2.0 million and an increase of $0.2 million, respectively, was included in the Company’s condensed consolidated statements of operations and comprehensive loss. The increase in fair value of the Series B warrants of $2.0 million for the three months ended March 31, 2021 was primarily due to an increase in share price, a lower discount rate, increased volatility, and the passage of time. The change in fair value was the final remeasurement upon exercise of the Series B warrants on February 8, 2021. All Series B warrants have been exercised as of March 31, 2021. The increase in fair value of the Series B warrants prior to their exercise of $0.2 million for the three months ended March 31, 2020 was primarily due to a lower discount rate, decreased volatility, and the passage of time. The following table presents the inputs and valuation methodologies used for the Company’s fair value of the Series B warrants:

	For the three months ended March 31,			December 31,
Series B Warrants	2021			2020
Valuation methodology		Black-Scholes-Merton			Black-Scholes-Merton
Term (years)		1.22			1.32
Risk free rate		0.07	%		0.10	%
Dividends		-			-
Volatility		174	%		150.97	%
Share price	$	4.21		$	0.63

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements for contingent consideration as of March 31, 2021 and December 31, 2020:

			Weighted Average (range, if applicable)
	Valuation	Significant	March 31,				December 31,
	Methodology	Unobservable Input	2021				2020
Contingent consideration	Probability weighted income approach	Milestone dates		2024	to	2029		2024	to	2029
		Discount rate			9.25%			9.5%	to	15.75%

The following table summarizes the change in fair value, as determined by Level 3 inputs for the warrants and the contingent consideration for the three months ended March 31, 2021:

	Fair Value Measurement at Reporting Date (Level 3)
	(in thousands)
	Common stock warrants			Contingent consideration
Balance at December 31, 2020	$	255		$	3,936
Exercise of warrants		(2,236	)		-
Change in fair value		1,981			257
Balance at March 31, 2021	$	-		$	4,193
Current portion	$	-		$	-
Long-term portion		-			4,193
Balance at March 31, 2021	$	-		$	4,193