Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v3.23.3
Financial Instruments
 9 Months Ended
Sep. 30, 2023
Fair Value Disclosures [Abstract]  
Financial Instruments Financial Instruments
The composition of financial instruments is as follows:
September 30, 2023
Net Unrealized
Cost Gains Losses Fair Value
(in thousands)
Assets
Marketable equity investments $ 20,005  $ —  $ (5,393) $ 14,612 
December 31, 2022
Net Unrealized
Cost Gains Losses Fair Value
Assets (in thousands)
Marketable equity investments $ 20,005  $ —  $ (1,476) $ 18,529 
September 30, 2023 December 31, 2022
Fair Value Fair Value
(in thousands)
Liabilities
Contingent consideration (Note 3)
 $ 2,690  2,941 
At September 30, 2023, the Company held marketable equity investments with an aggregate fair value of $14.6 million that were in an unrealized loss position. The net unrealized loss of $5.4 million as of September 30, 2023 represents stock price fluctuations in the underlying securities held. Unrealized gains and losses on such investments are 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 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 instruments that are categorized 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 is therefore classified as Level 1.
The contingent consideration liability as of September 30, 2023 is associated with the Company’s acquisitions of Company X in December 2021 and Company Y in January 2023 (Note 3) and the contingent consideration liability as of December 31, 2022 is associated with the Company’s acquisition of Company X. The contingent consideration liability is classified as a Level 3 financial instrument. The contingent consideration as it relates to Company X was subject to the acquired business’s satisfaction of certain financial and personnel objectives by March 31, 2023, while the contingent consideration as it relates to Company Y is subject to the acquired business’s satisfaction of certain personnel objectives by June 17, 2024. The financial and personnel objectives of Company X were achieved by March 31, 2023 and contingent consideration for Company X of $2.7 million was paid in April 2023 with the remaining $0.3 million to be paid in December 2023. The fair value of 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, if applicable, 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 included an assumption of total payments up to $3.0 million to Company X and an assumption of total payments up to $2.6 million to Company Y. 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 September 30, 2023
Balance at September 30, 2023 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 $ 14,612  $ 14,612  $ —  $ — 
Liabilities
Contingent consideration $ 2,690  $ —  $ —  $ 2,690 
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 

The following summarizes the activity in Level 3 financial instruments:
Nine Months Ended September 30,
2023 2022
Contingent Consideration
Beginning balance
 $ 2,941  $ 2,700 
Acquisitions(1)
2,200  — 
Payments (2,700) — 
Accretion of discount(1)
249  182 
Ending balance
 $ 2,690  $ 2,882 
_____________________
(1) These changes to the balance associated with the estimated fair value of contingent consideration for the nine months ended September 30, 2023 were due to the addition of contingent consideration associated with the acquisition of Company Y and accretion of discounts on contingent consideration.
For the nine months ended September 30, 2023, there were no transfers between Level 1, Level 2, or Level 3 financial instruments.
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 as of September 30, 2023 and December 31, 2022. 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.