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Note 3 - Fair Value

9 Months Ended

Sep. 30, 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, investments, 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 and nine months ended September 30, 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, prepaid expense, other current assets, accounts payable, and certain accrued expenses as of September 30, 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 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 September 30, 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):

			September 30, 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⁽¹⁾			$	59,779			$	-			$	-			$	59,779
Restricted cash				1,153				-				-			$	1,153
Short-term investments				-				57,972				-			$	57,972
Long-term investments				-				30,142				-			$	30,142
Total assets measured at fair value			$	60,932			$	88,114			$	-			$	149,046
Liabilities measured at fair value
Contingent consideration			$	-			$	-			$	4,949			$	4,949
Total liabilities measured at fair value			$	-			$	-			$	4,949			$	4,949

⁽¹⁾Includes investments that are readily convertible to cash with original maturities of 90 days or less.

		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 and $1.0 million for the three and nine months ended September 30, 2021, respectively was primarily due to the passage of time partially offset by a higher discount rate, decreased volatility, and changes in the Euro-to-USD exchange rates. The increase in fair value of the contingent consideration of $0.5 million and $1.8 million for the three and nine months ended September 30, 2020, 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, volatility, 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 final remeasurement upon exercise of the Series B warrants was on February 8, 2021 and all Series B warrants have been exercised as of September 30, 2021. The change in fair value of the Series B warrants for the nine months ended September 30, 2021 and 2020 was an increase of $2.0 million and an increase of $0.2 million, respectively and 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 nine months ended September 30, 2021 was primarily due to an increase in share price, a lower discount rate, increased volatility, and the passage of time. No change in fair value was recorded for the three months ended September 30, 2021. The change in fair value of the Series B warrants for the three months ended September 30, 2020 was an decrease of $0.1 million. The following table presents the inputs and valuation methodologies used for the Company’s fair value of the Series B warrants:

		December 31,
Series B Warrants		2020

Valuation methodology		Black-Scholes-Merton
Term (years)			1.32
Risk free rate			0.10	%
Dividends			-
Volatility			150.97	%
Share price		$	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 September 30, 2021 and December 31, 2020:

Weighted Average (range, if applicable)

Valuation

Significant

September 30,

December 31,

Methodology

Unobservable Input

2021

2020

Contingent consideration

Probability weighted income approach

Milestone dates

2025

to

2029

2024

to

2029

Discount rate

9.5%

9.5%

Volatility

70%

71.0%

The following table summarizes the change in fair value, as determined by Level 3 inputs for the warrants and the contingent consideration for the nine months ended September 30, 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				1,013
Balance at September 30, 2021		$	-			$	4,949

Current portion		$	-			$	-
Long-term portion			-				4,949
Balance at September 30, 2021		$	-			$	4,949

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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