Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

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FAIR VALUE OF FINANCIAL INSTRUMENTS
9 Months Ended
May 31, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value measurements are performed in accordance with the guidance provided by ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.

  

ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

 

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 - Unobservable inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, capital lease obligations and deferred revenue approximate their fair values based on their short-term nature. The carrying amount of the Company’s long-term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities.

 

The estimated fair value of the contingent consideration related to the Company's business combinations is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

 

The Company accounts for its investment in Smoke Cartel at fair value. On September 21, 2018, Smoke Cartel and the Company entered into an agreement to sell the RUB web domain and inventory related to this product line and in exchange, received 1,410 shares of Smoke Cartel common stock (see Note 6 above.) The fair value of its investment as of September 21, 2018 and May 31, 2019 was based upon the closing stock price of Smoke Cartel. The investment was classified as a Level 2 financial instrument.

 

In connection with the Company’s registered direct offering in June 2018, the Company issued warrants to purchase shares of its common stock and recorded embedded conversion features which are accounted for as derivative liabilities (see Note 11 above.) The estimated fair value of the derivatives is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

 

In connection with the Company’s private placement offering in April 2019, the Company entered into a Purchase Agreement, whereby it granted to the Investor participation rights in future financing transactions up to an aggregate of 15% of such transactions (or, except for certain permitted indebtedness, up to an aggregate of 100% of debt issuances). These participation rights are recorded as a derivative liability with estimated fair value determined using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

 

The following tables details the fair value measurements within the fair value hierarchy of the Company’s financial instruments, which includes the Level 2 assets and the Level 3 liabilities:

 

    Fair Value at May 31, 2019  
    Total     Level 1     Level 2     Level 3  
Assets:                                
Equity investment   $ 1,728     $ -     $ 1,728     $ -  
Liabilities:                                
Participation rights derivative liability     811       -       -       811  
Contingent consideration payable     2,961                       2,961  
Warrant liability     7,410       -       -       7,410  
  Total liabilities   $ 11,182     $ -     $ -     $ 11,182  

 

    Fair Value at August 31, 2018  
    Total     Level 1     Level 2     Level 3  
Liabilities:                                
Contingent consideration payable   $ 5,488     $ -     $ -     $ 5,488  
Warrant liability     14,430       -       -       14,430  
Total liabilities   $ 19,918     $ -     $ -     $ 19,918  

 

The following table reflects the activity for the Company’s investment in Smoke Cartel measured at fair value using Level 2 inputs:

 

    Investment in Smoke Cartel  
Balance at August 31, 2018   $ -  
Acquisition of equity investment     1,791  
Adjustments to estimated fair value     (663 )
Balance at May 31, 2019   $ 1,128  

 

The following table reflects the activity for the Company’s warrant derivative liability for the June 2018 registered offering measured at fair value using Level 3 inputs:

 

    Warrant Liability  
Balance at August 31, 2018   $ 14,430  
Adjustments to estimated fair value     (7,020 )
Balance at May 31, 2019   $ 7,410  

 

The following table reflects the activity for the Company’s participation rights derivative liability for the April 2019 private debt offering measured at fair value using Level 3 inputs:

 

    Warrant Liability  
Balance at April 30, 2019   $ 1,100  
Adjustments to estimated fair value     (289 )
Balance at May 31, 2019   $ 811  

  

The following table reflects the activity for the Company’s contingent consideration measured at fair value using Level 3 inputs: 

 

    Total  
As of August 31, 2018   $ 5,488  
 Change in Fair Value     394  
As of November 30, 2018     5,882  
 Change in Fair Value     (5,602 )
 Cash Payment     (140 )
Settled in shares- Hybrid     (140 )
As of February 28, 2019     -  
  Change in Fair Value     2,961  
As of May 31, 2019   $ 2,961  

 

The fair value of contingent consideration is evaluated each reporting period using projected financial information, discount rates, and key inputs. Projected contingent payment amounts are discounted back to the current period using a discount rate. Financial information is based on the Company’s most recent internal operational budgets and forecasts. Changes in projected financial information may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement.