Annual report pursuant to Section 13 and 15(d)

Financial Instruments

v3.20.4
Financial Instruments
12 Months Ended
Dec. 31, 2020
Fair Value Disclosures [Abstract]  
Financial Instruments Financial Instruments
The composition of financial instruments were as follows:
December 31, 2020 December 31, 2019
(in thousands)
Liabilities
Contingent consideration (Note 3) $ —  $ — 
Interest rate swap $ —  $ 37 
The fair values of the Company’s financial instrument 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 instrument within Level 2 of the fair value hierarchy on the basis of models utilizing market observable inputs. The interest rate swap has been valued on the basis of valuations provided by third-party pricing services, as derived from standard valuation or pricing models. Market-based observable inputs for the interest rate swap include one month LIBOR-based yield curves over the term of the swap. The Company reviews third-party pricing provider models, key inputs and assumptions and understands the pricing processes at its third-party providers in determining the overall reasonableness of the fair value of its Level 2 financial instruments. The Company also considers the risk of nonperformance by assessing the swap counterparty's credit risk in the estimate of fair value of the interest rate swap. Through the expiration of the swap in October 2020, the Company has not made any adjustments to the valuations obtained from its third party pricing providers. 
The contingent consideration liability is associated with the Company’s acquisition of NanoSemi (Note 3) and is classified as a Level 3 financial instrument. The fair value of contingent consideration is based on applying the Monte Carlo simulation method to forecast achievement under various contingent consideration events which may result in up to $35.0 million in payments subject to the acquired business’s satisfying certain financial objectives from July 1, 2020 through December 31, 2022, under the Merger Agreement. Key inputs in the valuation include forecasted revenue, of which the financial objectives are not expected to be met, revenue volatility and discount rate. Underlying forecast mathematics were based on Geometric Brownian Motion in a risk-neutral framework and discounted back to the applicable period in which the accumulative thresholds were achieved at discount rates commensurate with the risk and expected payout term of the contingent consideration.

The following are the financial instruments that are measured on a recurring basis. The contingent consideration liability, a Level 3 financial instrument, was $0 as of December 31, 2020. The interest rate swap, which expired in October 2020 and was a Level 2 financial instrument, was a liability of $0.04 million as of December 31, 2019.

The following table summarizes activity for the interest rate swap:
Fair Value at December 31,
2020 2019
(in thousands)
Interest rate swap
Beginning balance $ (37) $ 1,623 
Unrealized gain (loss) recognized in other comprehensive income (loss) 122  (1,660)
Gain recognized in earnings (85) — 
Ending balance $ —  $ (37)
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, 2020 and 2019.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis

Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents, restricted cash, net receivables, 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).