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Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value MeasurementsJ2 Global complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:


			§			Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

			§			Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

			§			Level 3 – Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices.

Certain of the Company’s debt securities are classified within Level 2. The Company values these Level 2 investments based on model-driven valuations using significant inputs derived from or corroborated by observable market data.

The fair value of our senior notes is determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 2 inputs. The fair value of the Credit Facility approximates its carrying amount due to its variable interest rate, which approximates a market interest rate, and is considered a Level 2 input. The fair value of long-term debt at March 31, 2020 and December 31, 2019 was $1.6 billion and $1.8 billion, respectively (see Note 8 - Long-Term Debt).

In 2019, the Company entered into a $5.5 million note payable that was short-term in nature and associated with the quarter’s acquisition activity. In the same year, the Company paid down $5.1 million of the outstanding note. As of March 31, 2020, the carrying value of the note payable approximates fair value and is classified within Level 2.

The Company classifies its contingent consideration liability in connection with acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. For similar reasons, certain of the Company’s available-for-sale debt securities are classified within Level 3. The valuation approaches used to value the Level 3 investments consider unobservable inputs in the market such as time to liquidity, volatility, dividend yield, and breakpoints. Significant increases or decreases in either of the inputs in isolation would result in a significantly lower or higher fair value measurement.

The following table presents the fair values, valuation techniques, unobservable inputs, and ranges of the Company’s financial liabilities categorized within Level 3.


	Valuation Technique	Unobservable Input	Range		Weighted Average
Contingent Consideration	Option-Based Model	Risk free rate	1.9% - 2.9%		1.9	%
		Debt spread	0.0% - 136.0%		53.7	%
		Probabilities	5.0% - 100.0%		65.3	%
		Present value factor	3.6% - 4.8%		3.6	%
		Discount rate	2.9% - 42.0%		31.2	%
	Monte Carlo Simulation	Risk free rate⁽¹⁾	1.5	%
		Discount rate⁽¹⁾	10.7	%
		Market volatility	26.5% - 57.1%		41.8	%
		Counter party risk rate⁽¹⁾	1.5	%

⁽¹⁾The input is a defined rate and, as a result, is not presented as a range or weighted average.

The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):


March 31, 2020	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	377,695	$	—	$	—	$	377,695









Corporate debt securities	—		633		—		633
Total assets measured at fair value	$	377,695	$	633	$	—	$	378,328

Liabilities:
Contingent consideration	$	—	$	—	$	8,864	$	8,864
Total liabilities measured at fair value	$	—	$	—	$	8,864	$	8,864

December 31, 2019	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	395,664	$	—	$	—	$	395,664








Corporate debt securities	—		623		22,047		22,670
Total assets measured at fair value	$	395,664	$	623	$	22,047	$	418,334

Liabilities:
Contingent consideration	$	—	$	—	$	37,887	$	37,887
Total liabilities measured at fair value	$	—	$	—	$	37,887	$	37,887

The following table presents a reconciliation of the Company’s Level 3 financial liabilities related to contingent consideration that are measured at fair value on a recurring basis (in thousands):


	Level 3		Affected line item in the Statement of Operations
Balance as of January 1, 2020	$	37,887
Contingent consideration	5,035
Total fair value adjustments reported in earnings	(240)		General and administrative
Contingent consideration payments	(33,818)		Not applicable
Balance as of March 31, 2020	$	8,864

In connection with the acquisition of Humble Bundle, on October 13, 2017, contingent consideration of up to an aggregate of $40.0 million may be payable upon achieving certain future EBITDA thresholds and had a fair value of $0.1 million and $20.0 million at March 31, 2020 and December 31, 2019, respectively. Due to the Company’s achievement of certain EBITDA targets for the years ended December 31, 2019 and 2018 and the amended contingent consideration agreement, $19.9 million was paid in the first quarter of 2020 and $20.0 million in fiscal 2019. An additional $0.1 million remains payable and is classified as a current liability on the condensed consolidated balance sheet.

In connection with the acquisition of Ekahau Inc., on October 10, 2018, the Company achieved certain revenue thresholds and, as a result, contingent consideration of $9.1 million was paid in the first quarter of 2020. There are no further payments pending related to this acquisition.

In connection with the Company’s other acquisition activity, contingent consideration of up to $19.5 million may be payable upon achieving certain future EBITDA, revenue, and/or unique visitor thresholds and had a combined fair value of $8.8 million and $8.8 million at March 31, 2020 and December 31, 2019, respectively. Due to the achievement of certain thresholds, $4.8 million was paid in the first three months of 2020.

During the three months ended March 31, 2020, the Company recorded an decrease in the fair value of the contingent consideration of $0.2 million and reported such decrease in general and administrative expenses.

- 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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