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Fair Value Measures
 9 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measures

Note 4 — Fair Value Measures

 

Fair Values of Assets and Liabilities

 

In accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:

 

  Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
     
  Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.
     
  Level 3: Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability.

 

Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach, or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

 

At September 30, 2022 and December 31, 2021, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

  

   September 30, 2022   December 31, 2021 
   Fair Value Measurements Using Input
Types		   Fair Value Measurements Using Input
Types		 
(In thousands)  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Assets                                
Mutual funds (included in cash and cash equivalents)  $
—
   $
—
   $
—
   $
—
   $178   $
—
   $
—
   $178 
Municipal bonds   
—
    
—
    
—
    
—
    9,961    
—
    
—
    9,961 
Corporate bonds   381    
—
    
—
    381    34,589    
—
    
—
    34,589 
Total assets  $381   $
—
   $
—
   $381   $44,728   $
—
   $
—
   $44,728 
Liabilities                                        
Contingent consideration  $
—
   $
—
   $643   $643   $
—
   $
—
   $6,137   $6,137 
Warrant liabilities   
—
    
—
    971    971    
—
    —    —    — 
   Total liabilities  $
—
   $
—
   $1,614   $1,614   $
—
   $
—
   $6,137   $6,137 

 

Fair Value of Financial Instruments

 

The Company has certain financial instruments which consist of cash and cash equivalents, marketable securities, warrant liabilities, and contingent consideration. Fair value information for each of these instruments is as follows:

 

  ● Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred revenue liabilities approximate their fair values based on the short-term nature of these instruments.

 

  ● Marketable securities classified as current held-to-maturity securities are recorded at amortized cost, which at September 30, 2022, approximated fair value.

 

  ● The Company’s deferred consideration was recorded in connection with acquisitions during the first quarter of 2022 and fiscal 2021 using an estimated fair value discount at the time of the transaction. As of September 30, 2022 and December 31, 2021, the carrying value of the deferred consideration approximated fair value, respectively.

  

  ● The Company’s Warrant Liabilities are marked-to-market each reporting period with the changes in fair value of warrant liability are recorded to other income (expense), net in the accompanying consolidated statements of operations until the warrants are exercised. The fair value of the warrant liability is estimated using a Black-Scholes option-pricing model. 

 

Marketable Securities

 

As of September 30, 2022, the Company held investments in mutual funds, municipal bonds and corporate bonds. The Company records mutual funds at fair value in the accompanying consolidated balance sheet as part of cash and cash equivalents. The municipal and corporate bonds are considered held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions and market price quotations. The Company considers current assets as those investments which will mature within the next 12 months including, interest receivable on long-term bonds.

 

The composition of the Company’s marketable securities are as follows:

 

(In thousands)   September 30,
2022		     December 31,
2021		  
Current marketable securities            
Municipal bonds   $ —     $ 9,961  
Corporate bonds     381       34,589  
    $ 381     $ 44,550  

 

At September 30, 2022, marketable securities consisted of the following:

 

(In thousands)  Amortized
cost  		   Unrealized
loss  		   Estimated
fair value  		 
Current marketable securities (due within 1 year)               
Corporate bonds  $381   $(10)  $371 
   $381   $(10)  $371 

 

At December 31, 2021, marketable securities consisted of the following:

 

(In thousands)  Amortized
cost		   Unrealized
loss		   Estimated
fair value		 
Current marketable securities (due within 1 year)            
Municipal bonds  $9,961   $(9)  $9,952 
Corporate bonds   34,589    (72)   34,517 
   $44,550   $(81)  $44,469 

 

Contingent Consideration

 

The Company has classified its net liability for contingent earn-out considerations to the sellers relating to one acquisition completed during the first quarter of 2022 and two acquisitions completed during fiscal 2021. The fair value for the contingent consideration associated with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant unobservable inputs, which included the key assumptions to model future revenue, costs of goods sold and operating expense projections. A description of the Company’s acquisitions completed during the first quarter of 2022 and fiscal 2021 are included within Note 8 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.

 

(In thousands)  Nine Months
Ended
September 30,
2022		   Year
Ended
December 31,
2021		 
Contingent consideration – beginning of period  $6,137   $
—
 
Accrued contingent consideration   1,420    4,725 
Accretion of contingent consideration   145    
—
 
Payments made on contingent liabilities   (5,550)   
—
 
Change in estimated fair value   (1,509)   1,412 
Contingent consideration – end of period  $643   $6,137 

 

The Company included contingent consideration within accrued expenses and other current liabilities in its consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.

 

See below for additional information related to each acquisition’s contingent consideration.

 

Contingent Consideration – PurePressure

 

The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that PurePressure’s revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for PurePressure’s first earn-out period. During the third quarter ended September 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with PurePressure’s first earn-out period by approximately $602 thousand. As required by ASC Topic 805 Business Combination (“ASC805”), the change in contingent consideration was recorded as a reduction in operating expenses during the third quarter of 2022.

 

Contingent Consideration – Lab Society

 

The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that Lab Society’s revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for Lab Society’s first earn-out period. During the second quarter ended June 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with Lab Society’s first earn-out period by approximately $1.0 million. As required by ASC805, the change in contingent consideration was recorded as a reduction in operating expenses during the second quarter of 2022.

 

Contingent Consideration – Precision and Cascade

 

The earn-out period for the potential contingent consideration to be earned by the former members of Precision and Cascade concluded on December 31, 2021. The Company, during the second quarter of 2022, increased the amount of the contingent consideration earned by the former members of Precision and Cascade by approximately $121 thousand, to reflect the final contingent consideration amount due. This amount, as required by ASC805, was recorded as an increase in operating expenses during the second quarter of 2022. During the three-month period ended September 30, 2022, the Company made the final payment on the contingent consideration of approximately $5.6 million to the members of Precision and Cascade. Additional information regarding the Company’s final payment to Precision and Cascade may be found in Note 8 – Business Combination, included elsewhere in the notes to the consolidated financial statements.

 

Warrant liabilities

 

The estimated fair value of the Warrant Liabilities on September 30, 2022 is determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in calculating the estimated fair values represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different.

 

The following table summarizes the Company’s assumptions used in the valuation of Warrant Liabilities for the nine months ended September 30, 2022: 

 

Stock price at issuance   $ 0.44  
Option exercise price   $ 1.23-$2.15  
Expected term (Years)     5.50  
Volatility     40.00 % 
Discount rate (Treasury yield)     0.00%-4.06 %

 

The following table sets forth a summary of the changes in the fair value of the Level 3 Warrant Liabilities for the nine months ended September 30, 2022:

 

(In thousands)  Nine Months
Ended
September 30,
2022		 
Warrant liabilities – beginning of period  $
—
 
Initial fair value of warrant liabilities   6,657 
Change in estimated fair value   (5,686)
Warrant liabilities – end of period  $971