14. Fair Value Measurements

12 Months Ended

Dec. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

14. 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 December 31, 2020 and 2019.

Trading securities - debt. Debt securities includes corporate bonds with fair value that is determined by third party quotations from outside pricing services and/or computerized pricing models, which may be based on transactions, bids or estimates. Acacia classifies the fair value of corporate bonds within Level 2 of the valuation hierarchy.

Trading securities - equity. Equity securities includes investments in public companies 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.

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 2).

Series B Warrants. Series B Warrants are recorded at fair value, using Monte Carlo valuation technique (Level 3).

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
				(In thousands)
Assets as of December 31, 2020:
Trading securities - equity	$	109,103	$	–	$	–
Investment at fair value - warrants (Note 6)		–		2,752		–
Total recurring fair value measurements as of December 31, 2020	$	109,103	$	2,752	$	–
Assets as of December 31, 2019:
Trading securities - debt	$	–	$	93,843	$	–
Trading securities - equity		17,140		–		–
Investment at fair value - warrants (Note 6)		–		757		–
Investment at fair value - common stock (Note 6)		743		–		–
Total recurring fair value measurements as of December 31, 2019	$	17,883	$	94,600	$	–
Liabilities as of December 31, 2020:
Series A warrants	$	–	$	6,640	$	–
Series B warrants		–		–		52,341
Embedded derivative liability		–		–		26,728
Total liabilities as of December 31, 2020	$	–	$	6,640	$	79,069
Liabilities as of December 31, 2019:
Series A warrants	$	–	$	3,568	$	–
Embedded derivative liability		–		–		17,974
Total liabilities as of December 31, 2019	$	–	$	3,568	$	17,974

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 as a on a recurring basis:

	Series A Preferred Stock Embedded Derivative Liability			Series B Warrants Liability
	(In thousands)
Opening balance as of January 1, 2019
Issuance of Series A warrants	$	21,232		$
Remeasurement to fair value		(3,258	)		–
Balance as of December 31, 2019	$	17,974		$	–
Issuance of Series B warrants					4,600
Remeasurement to fair value		8,754			47,741
Balance as of December 31, 2020	$	26,728		$	52,341