Annual report pursuant to Section 13 and 15(d)

Financial Instruments

v3.22.4
Financial Instruments
 12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
Financial Instruments Financial Instruments
The composition of financial instruments is as follows:
December 31, 2022
Net Unrealized
Cost Gains Losses Fair Value
(in thousands)
Assets
Marketable equity investments $ 20,005  $ —  $ (1,476) $ 18,529 
December 31, 2022 December 31, 2021
(in thousands)
Liabilities
Contingent consideration (Note 3) $ 2,941  $ 2,700 
At December 31, 2022, the Company held marketable equity investments with an aggregate fair value of $18.5 million that were in an unrealized loss position for less than 12 months. The net unrealized loss of $1.5 million as of December 31, 2022 represents stock price fluctuations in the underlying securities held, and was recorded to other income (expense), net in the consolidated statement of operations.
The Company evaluates securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer; including changes in the financial condition of any underlying collateral of the security; any downgrades of the security by analysts or rating agencies; nonpayment of any scheduled interest, or the reduction or elimination of dividends; as well as our intent and ability to hold the security in order to allow for an anticipated recovery in fair value.
The fair value of the Company’s financial instruments is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants and is recorded using a hierarchical disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The levels are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
The Company classifies its financial instruments within Level 1 or Level 2 of the fair value hierarchy on the basis of valuations using quoted market prices or alternate pricing sources and models utilizing market observable inputs, respectively. The marketable equity investments held by the Company have been valued on the basis of quoted market prices and are therefore classified as Level 1.
The contingent consideration liability is associated with the Company’s acquisition of Company X (Note 3) and is classified as a Level 3 financial instrument that is subject to the acquired business’s satisfaction of certain financial and personnel objectives by March 31, 2023, under the Purchase Agreement. The fair value of the contingent consideration is based on (1) applying the Monte Carlo simulation method, with underlying forecast mathematics based on Geometric Brownian motion in a risk-neutral framework, to forecast achievement of the acquired business’ financial objectives under various possible contingent consideration events and (2) a probability based methodology using management’s inputs and assumptions to forecast achievement of the acquired business’ personnel objectives which combined may result in up to $3.0 million in total payments to the acquired business. Key inputs in the valuation include forecasted revenue, revenue volatility, discount rate and
discount term as it relates to the financial objectives and probability of achievement, discount term and discount rate as it relates to the personnel objectives.
Fair Value Measurements at December 31, 2022
Balance at December 31, 2022 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Assets
Marketable equity securities $ 18,529  $ 18,529  $ —  $ — 
Liabilities
Contingent consideration $ 2,941  $ —  $ —  $ 2,941 
Fair Value Measurements at December 31, 2021
Balance at December 31, 2021 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Liabilities
Contingent consideration $ 2,700  $ —  $ —  $ 2,700 
The following summarizes the activity in Level 3 financial instruments:
Year Ended December 31,
2022 2021
(in thousands)
Contingent consideration
Beginning balance $ 2,700  $ 2,700 
Accretion of discount(1)
241  — 
Ending balance $ 2,941  $ 2,700 
____________________
(1) Changes to the balance associated with the estimated fair value of contingent consideration for the year ended December 31, 2022 were primarily due to accretion of the related discount.
There were no transfers between Level 1, Level 2 or Level 3 fair value hierarchy categories of financial instruments in the years ended December 31, 2022, 2021 and 2020.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
Some of the Company’s financial instruments are recorded at amounts that approximate fair value due to their liquid or short-term nature or by election on investments in privately-held entities as described below. Such financial assets and financial liabilities include cash and cash equivalents, restricted cash, net receivables, investments in privately-held entities, certain other assets, accounts payable, accrued price protection liability, accrued expenses, accrued compensation costs, and other current liabilities.
The Company’s long-term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes (Note 8).
Included in other long-term assets are investments in privately held entities of $11.8 million and $5.0 million as of December 31, 2022 and December 31, 2021, respectively. The Company does not have the ability to exercise significant influence or control over such entity and has accounted for the investments as financial instruments. Given that fair values for
such investments are not readily determinable, the Company is electing to measure these investments at cost, less any impairment, and adjust the carrying value to fair value if any observable price changes for similar investments in the same entity are identified.