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FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2021
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

8. FAIR VALUE MEASUREMENTS

 

U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value is defined as follows:

 

(i) Level 1 - Observable Inputs:  Quoted prices in active markets for identical investments;

 

(ii) Level 2 - Pricing Models with Significant Observable Inputs:  Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and

 

(iii) Level 3 - Unobservable Inputs:  Significant unobservable inputs, including the entity’s own assumptions in determining the fair value of investments.

 

Whenever possible, the Company is required to use observable market inputs (Level 1 - quoted market prices) when measuring fair value. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy.

Acacia holds the following types of financial instruments at June 30, 2021 and December 31, 2020:

 

Equity securities at fair value. Equity securities includes investments in public company common stock and are recorded at fair value based on the quoted market price of each share on the valuation date. The fair value of these securities are within Level 1 of the valuation hierarchy. Equity investments that do not have regular market pricing, but for which fair value can be determined based on other data values or market prices, are recorded at fair value within Level 2 of the valuation hierarchy.

 

Investments at fair value - common stock. Acacia’s equity investment in Veritone common stock is recorded at fair value based on the quoted market price of Veritone’s common stock on the applicable valuation date (Level 1).

 

Investments at fair value - warrants. Warrants are recorded at fair value, as based on the Black-Scholes option-pricing model (Level 2).

 

Series A Warrants. Series A Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in estimate with regard to the calculation of the volatility assumption used in the Black Scholes option-pricing model. As a result, the Series A Warrants are now measured as Level 3 as opposed to Level 2 as measured previously.

 

Series B Warrants. Series B Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in methodology used to an acceptable Black-Scholes option-pricing model from a Monte Carlo valuation technique used to value the Series B Warrants as of December 31, 2020.

 

Embedded derivative liability. Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019 (Level 3).

 

Financial assets and liabilities measured at fair value on a recurring basis were as follows: 

                    
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets as of June 30, 2021:                
Equity securities at fair value  $80,195   $54,743   $–   $134,938 
Total  $80,195   $54,743   $–   $134,938 
                     
Assets as of December 31, 2020:                    
Equity securities at fair value  $109,103   $–   $–   $109,103 
Investment at fair value - warrants   –    2,752    –    2,752 
Total  $109,103   $2,752   $–   $111,855 
                     
Liabilities as of June 30, 2021:                    
Series A warrants  $–   $–   $18,464   $18,464 
Series B warrants   –    –    230,539    230,539 
Series A embedded derivative liabilities   –    –    41,191    41,191 
Total  $–   $–   $290,194   $290,194 
                     
Liabilities as of December 31, 2020:                    
Series A warrants  $–   $6,640   $–   $6,640 
Series B warrants   –    –    52,341    52,341 
Series A embedded derivative liabilities   –    –    26,728    26,728 
Total  $–   $6,640   $79,069   $85,709 

 

The following table sets forth a summary of the changes in the estimated fair value of the Company’s Level 3 liabilities, which are measured at fair value on a recurring basis: 

                    
   Series A Warrant Liability   Series A Embedded Derivative Liability   Series B Warrant Liability   Total 
   (In thousands)     
Opening balance as of January 1, 2021  $–   $26,728   $52,341   $79,069 
Transfers to Level 3   6,640    –    –    6,640 
Remeasurement to fair value   11,824    14,463    178,198    204,485 
Balance as of June 30, 2021  $18,464   $41,191   $230,539   $290,194