Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.21.2
Fair Value Measurements
9 Months Ended
Sep. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
Assets and liabilities measured at fair value are classified into the following categories:
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect an entity’s own estimates of assumptions that market participants would use in pricing the asset or liability.
As of September 30, 2021, the following warrants for the purchase of Qumu's common stock were outstanding and exercisable:
Description Number of underlying warrant shares Warrant exercise price
(per share)
Warrant expiration date
Warrant issued in conjunction with October 2016 debt financing ("Hale warrant") 238,583  $ 2.80  October 21, 2026
Warrant issued to sales partner, iStudy Co., Ltd. ("iStudy warrant") 100,000  $ 2.43  August 31, 2028
Total warrants outstanding 338,583 
The warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the respective dates of issuance and is revalued on each subsequent balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded in other income (expense) of the consolidated statement of operations as "Decrease (increase) in fair value of warrant liability." The Company recorded non-cash income of $94,000 and non-cash
expense of $332,000 for the three months ended September 30, 2021 and 2020, respectively, and non-cash income of $1.5 million and non-cash expense of $730,000 for the nine months ended September 30, 2021 and 2020, respectively, resulting from the change in fair value of the warrant liability.
On May 1, 2020, the Company canceled the ESW warrant in exchange for a note payable (see Note 3–"Commitments and Contingencies") which contained an embedded derivative liability that is measured on a recurring basis at fair value. The Company recognized non-cash income of $37,000 for the nine months ended September 30, 2021 resulting from the change in fair value of the derivative liability. The derivative liability was derecognized on April 1, 2021 upon expiration of the contingent payment obligation without the contingency being triggered.
The Company’s liabilities measured at fair value on a recurring basis and the fair value hierarchy utilized to determine such fair values were as follows at September 30, 2021 and December 31, 2020 (in thousands):
    Fair Value Measurements Using
  Total Fair
Value at
September 30, 2021
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:        
Warrant liability - Hale $ 729  $ —  $ —  $ 729 
Warrant liability - iStudy 152  —  —  152 
Warrant liability $ 881  $ —  $ —  $ 881 
Derivative liability —  —  —  — 
Total $ 881  $ —  $ —  $ 881 

    Fair Value Measurements Using
  Total Fair
Value at
December 31, 2020
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:        
Warrant liability - Hale $ 2,245  $ —  $ —  $ 2,245 
Warrant liability - iStudy 665  —  —  665 
Warrant liability $ 2,910  $ —  $ —  $ 2,910 
Derivative liability 37  —  —  37 
Total $ 2,947  $ —  $ —  $ 2,947 
The Company's evaluation of the probability and timing of a change in control represents an unobservable input (Level 3) that shortens or lengthens the expected term input of the option pricing model for all warrants, and generally correspondingly increases or decreases, respectively, the discounted value of the minimum cash payment component of the Hale warrant. Consequently, as of September 30, 2021 and December 31, 2020, the liability related to each warrant was classified as a Level 3 warrant liability.
The Company's evaluation of the probability and timing of a change in control represents an unobservable input (Level 3) that increases or decreases the likelihood of triggering the note payable agreement's Fundamental Transaction contingency, resulting in Level 3 classification of the derivative liability.
The following table represents the significant unobservable input used in the fair value measurement of Level 3 warrant liability instruments:
  September 30, 2021
Probability-weighted timing of change in control 4.8 years
The following table summarizes the changes in fair value measurements for the nine months ended September 30, 2021:
Warrant liability Derivative liability Total
Balance at December 31, 2020 $ 2,910  $ 37  $ 2,947 
Reduction in warrant liability for partial exercise of Hale warrant (560) —  (560)
Change in fair value (1,469) (37) (1,506)
Balance at September 30, 2021 $ 881  $ —  $ 881