Note 11 - Fair Value Accounting

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 11. FAIR VALUE ACCOUNTING

The Company accounts for fair value measurements in accordance with ASC 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2	Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value at September 30, 2021
($ in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Pension assets	$	1,780	$	-	$	-	$	1,780
Totals	$	1,780	$	-	$	-	$	1,780
Liabilities:
Derivative liabilities	$	7,486	$	-	$	-	$	7,486
Totals	$	7,486	$	-	$	-	$	7,486

	Fair Value at December 31, 2020
($ in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Pension assets	$	1,881	$	-	$	-	$	1,881
Totals	$	1,881	$	-	$	-	$	1,881
Liabilities:
Derivative liabilities	$	24,128	$	-	$	-	$	24,128
Totals	$	24,128	$	-	$	-	$	24,128

The Company’s German pension plan is funded by insurance contract policies whereby the insurance company guarantees a fixed minimum return. The Company has determined that the pension assets are appropriately classified within Level 3 of the fair value hierarchy because they are valued using actuarial valuation methodologies which approximate cash surrender value that cannot be corroborated with observable market data. All plan assets are managed in a policyholder pool in Germany by outside investment managers. The investment manager is responsible for the investment strategy of the insurance premiums that Company submits and does not hold individual assets per participating employer. The German Federal Financial Supervisory oversees and supervises the insurance contracts.

As of September 30, 2021, the Company had embedded features contained in the Series D Preferred host instrument that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $7,486,000 and $24,128,000 at September 30, 2021 and December 31, 2020, respectively, and are classified as a current liability in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020. The fair value of the Company’s derivative liabilities is classified within Level 3 of the fair value hierarchy because they are valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The Company uses Monte-Carlo simulations in the determination of the fair value of derivative liabilities.

Some of the aforementioned fair value methodologies are affected by the Company’s stock price as well as assumptions regarding the expected stock price volatility over the term of the derivative liabilities in addition to the probability of future events. Significant assumptions used in the fair value methodologies during the nine months ended September 30, 2021 are a risk-free rate of 0.58%, equity volatility of 112.9%, effective life of 3.25 years and a preferred stock dividend rate of 4.0%. These assumptions incorporate management’s estimate of the probability of future financings (Series D Financing) and the timing of potential change of control events. The primary assumptions impacted by Series D Financing were the effective life of 3.25 years and equity volatility.

The Company monitors the activity within each level and any changes with the underlying valuation techniques or inputs utilized to recognize if any transfers between levels are necessary. That determination is made, in part, by working with outside valuation experts for Level 3 instruments and monitoring market related data and other valuation inputs for Level 1 and Level 2 instruments.

The reconciliations of Level 3 pension assets measured at fair value during the three and nine months ended September 30, 2021 and 2020 are presented below:

($ in thousands)	Three months ended September 30, 2021			Three months ended September 30, 2020			Nine months ended September 30, 2021			Nine months ended September 30, 2020
Pension assets:
Fair value at beginning of period	$	1,819		$	1,711		$	1,881		$	1,713
Return on plan assets		21			19			51			49
Company contributions and benefits paid, net		(14	)		(28	)		(31	)		(61	)
Effect of exchange rate changes		(46	)		83			(121	)		84
Fair value at end of period	$	1,780		$	1,785		$	1,780		$	1,785

The reconciliations of Level 3 derivative liabilities measured at fair value for Series D Preferred Stock and for Series C Preferred Stock during the three and nine months ended September 30, 2021 is presented below:

($ in thousands)	Three months ended September 30, 2021			Three months ended September 30, 2020			Nine months ended September 30, 2021			Nine months ended September 30, 2020
Derivative liabilities:
Fair value at beginning of period	$	8,925		$	535		$	24,128		$	369
Derivative liability from issuance of Preferred Series C		-			-			-			-
Decrease in derivative liability from conversions of Preferred Series C		-			-			-			-
Derivative liability from issuance of Preferred Series D		84			-			500			-
Decrease in derivative liability from conversions of Preferred Series D		(181	)		-			(584	)		-
Change in fair value included in earnings		(1,342	)		(535	)		(16,558	)		(369	)
Fair value at end of period	$	7,486		$	-		$	7,486		$	-