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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2022

We record the fair value of assets and liabilities in accordance with ASC 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels, which is determined by the lowest level input that is significant to the fair value measurement in its entirety.

These levels are:

•Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities.

•Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

•Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability at fair value.

Contingent consideration for the acquisition of Bridg

The contingent consideration for the acquisition of Bridg is composed of the First Anniversary Payment and the Second Anniversary Payment. The fair value of contingent consideration in connection with the Bridg acquisition is as follows (in thousands):


	December 31, 2021
	Level 1		Level 2		Level 3		Total
Liabilities:
Current contingent consideration	$	—	$	—	$	182,470	$	182,470
Long-term contingent consideration	—		—		49,825		49,825
Total liabilities	$	—	$	—	$	232,295	$	232,295


	June 30, 2022
	Level 1		Level 2		Level 3		Total
Liabilities:
Current contingent consideration	$	—	$	—	$	164,277	$	164,277

Total liabilities	$	—	$	—	$	164,277	$	164,277

The following table shows a reconciliation of the beginning and ending fair value measurements of our contingent consideration, which we have valued using level 3 inputs:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2022		2021		2022
Beginning balance	$	—	$	167,245	$	—	$	232,295
Increase due to acquisition	230,921		—		230,921		—
Unrealized loss (gain) due to change in fair value	1,480		(2,968)		1,480		$	(68,018)
Ending balance	$	232,401	$	164,277	$	232,401	$	164,277

The fair value of the First Anniversary Payment is equal to 20 times the ARR of the month preceding the anniversary, less $12.5 million. We expect to settle 70% of the First Anniversary Payment using our common stock at an agreed-upon volume-weighted average price of $40.15 per share, and we have revalued this portion of the First Anniversary Payment based on the $22.31 per share closing price of our common stock as reported on the Nasdaq Global Market on June 30, 2022.

In order to determine the fair value of the Second Anniversary Payment, equal to 15 times the ARR of the month preceding the second anniversary, less the First Anniversary ARR, we simulated forecasted revenue using a revenue volatility assumption from comparable market data. We then determined the appropriate discount rate for the assumed cash component and used a Monte Carlo simulation for the assumed stock component. The assumptions used in preparing this model includes estimates such as revenue volatility, revenue discount rate, weighted average cost of capital, and our common stock volatility.

The following table summarizes key assumptions used for estimating the fair value of the contingent consideration:


	June 30, 2022
Revenue volatility	20.0	%
Revenue discount rate	7.1	%
Weighted average cost of capital	16.5	%
Common stock volatility	83.0	%
Portion to be paid in cash	30.0	%

- 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.

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