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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
• | Level 1 — Quoted prices in active markets for identical assets or liabilities;
• | Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
• | Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
Fair Value of Other Financial Instruments The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these accounts. The Payroll Protection Program (“PPP”) loans for Flotek and JP3 also approximate fair value due to maturity in less than two years. Liabilities Measured at Fair Value on a Recurring Basis The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy:
|  |  |  |  |  | Balance at September 30, |  |  |  |  |  |  |  | Balance at December 31,
| Level 1 |  | Level 2 |  | Level 3 | 2020 |  | Level 1 |  | Level 2 |  | Level 3 |  | 2019
Contingent consideration | $ | — |  |  | $ | — |  |  | $ | 1,900 |  | $ | 1,900 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved and the Company accrued a liability of $2.5 million, which was transferred out of Level 3 to a current liability. No other transfers occurred during three and nine month periods ending September 30, 2020. There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value measurements during the period ending December 31, 2019. Assets Measured at Fair Value on a Nonrecurring Basis The Company’s non-financial assets, including property and equipment, and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three months ended March 31, 2020, the Company recorded an impairment of $57.5 million for impairment on long-lived assets. Management inputs used in fair value measurements were classified as Level 3. As noted in Note 3, the Company acquired JP3 in May 2020. The fair values of JP3’s long-lived assets, and intangibles were determined using the income approach. The fair value of the the Company’s inventory was determined using the comparative sales method. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement, other than cash and working capital accounts, which carrying amounts were determined to approximate fair value due to their short-term nature. During the three months ended September 30, 2020, the Company recorded an impairment charge on finite-lived assets of $12.5 million and an impairment charge on goodwill of $11.7 million. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement. Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During the third quarter of 2020, the first stock performance target for the contingent consideration was achieved, resulting in an accrued liability of $2.5 million. The Company also estimated the fair value of the remaining stock performance earn-out provision at September 30, 2020, and increased the estimated fair value of the contingent liability to $1.9 million. The expense for achievement of the first stock performance target and the increase in the fair value of the contingent consideration are recorded in operating expenses in continuing operations for the periods ended September 30, 2020. The following table presents the changes in contingent consideration balances classified as Level 3 balances for the three and nine months ended September 30, 2020 and 2019:
| Three months ended September 30, |  | Nine months ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Balance - beginning of period | $ | 1,200 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Additions / issuances | — |  |  | — |  |  | 1,200 |  |  | — |
Change in fair value | 3,200 |  |  | — |  |  | 3,200 |  |  | — |
Transfer out of Level 3 | (2,500 | ) |  | — |  |  | (2,500 | ) |  | — |
Balance - end of period | $ | 1,900 |  |  | $ | — |  |  | $ | 1,900 |  |  | $ | — |

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- Definition 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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