Note 9 - Fair Value Measurements

12 Months Ended

Jan. 02, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 9-FAIR VALUE MEASUREMENTS

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market and it considers assumptions that market participants would use when pricing the asset or liability.

The accounting guidance for fair value measurement also specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumption of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:

• Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.

• Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

• Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Our cash and cash equivalents balances of $19.6million and $22.0 million, including amounts in money market funds, as of January 2, 2022 and January 3, 2021, respectively.  The carrying value of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities

Investment in Privately-held Non-Affiliate

In the third quarter of 2021, in connection with a revenue contract with a non-affiliated customer, the Company received shares of the customer's common stock. The full transaction price under the revenue contract was cash plus a non-cash consideration consisting of a certain  amount of the customers equity.  The Company considers the non-cash consideration to be an investment in the customer.  The full transaction price is the amount of consideration which the Company expects to receive in the contract in exchange for transferring the promised goods and services to the customer.

Since the non-cash consideration are shares of common stock that are not publicly traded, their fair value is not readily determinable.  The Company considered various valuation methods such as market multiples, guideline public company method, and the Black-Scholes Option Pricing model.   Due to limited data for the valuation, the Company ultimately selected the Black Scholes method using back-solve techniques as that was determined to be the most suitable with the available data.  The Black Scholes Option Pricing model is a valuation approach that can be used to determine the value of common shares for companies in which there are no, or infrequent, transactions involving common shares.

The Company believes that its valuation method for the non-public equity under this arrangement falls under Level 3 in the fair value hierarchy because the value method relies on unobservable market inputs. The fair value of the non-cash consideration is listed below:

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:	Total		(Level I)		(Level 2)		(Level 3)
Investment in privately-held non-affiliate	$	300,000	$	—	$	—	$	300,000
Total assets	$	300,000	$	—	$	—	$	—

In arriving at the estimated value for the non-cash consideration, the Company utilized inputs relying on significant judgment in accordance with the AICPA Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation (2013).  The key assumptions utilized are below:

Discount for lack of marketability:  34% - 41%

Expected Term: 4 - 5 Years

Risk Free Interest Rate: 0.75% - 0.92%

Dividend: 0.00    

Volatility:  63% - 78%

Volatility was estimated by utilizing a selected peer group of companies within the customers’ industry with a valuation date as of  October 2021. 

After initial recognition fair value of the non-cash consideration, the Company elected to utilize the practical expedient under ASC 321 by which entities can elect to measure equity securities without readily determinable fair values at “cost minus impairment,” basis for periods subsequent to the acquisition date. Under the “cost minus impairment” methods, when the investment is determined to be impaired on the basis of a qualitative assessment, or there is an observable price change in an orderly transaction, entities that have made the election in ASC 321 must remeasure such equity securities at fair value in accordance with ASC 820. ASC 321 indicates that the adjustments to the carrying value of an equity security without a readily determinable fair value should reflect the fair value of the security as of the date that the observable transaction for the similar security took place. Subsequent to the valuation date and to January 2, 2021, there were no observable indicators of impairment for the investment in the privately-held, non-affiliate. The investment was not revalued and the Company did not recognize any impairments in fiscal 2021 related to the investment.