Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

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FAIR VALUE OF FINANCIAL INSTRUMENTS
6 Months Ended
Feb. 29, 2020
FAIR VALUE OF FINANCIAL INSTRUMENTS  
FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 10 - 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 820”).  ASC 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 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, equity investments, accounts receivable, accounts payable and accrued liabilities and capital lease obligations 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 Company accounts for its investment in Smoke Cartel, Inc. (“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.  The fair value of the Company’s investment as of August 31, 2019 and February 29, 2020 was based upon the closing stock price of Smoke Cartel. The investment was classified as a Level 2 financial instrument.

The Company accounts for its investment in Xtraction Services at fair value. The fair value of the Company’s investment at February 29, 2020 was based upon the closing stock price of Xtraction Services. The investment was classified as a Level 1 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, which are accounted for as a warrant liability (see Note 9 above.) The estimated fair value of the liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

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 following table details the fair value measurement 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 February 29,  2020

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Equity investment

 

$

2,028

 

$

1,923

 

$

105

 

$

 —

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Warrant liability

 

$

849

 

$

 —

 

$

 —

 

$

849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at August 31,  2019

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Equity investment

 

$

592

 

$

 —

 

$

592

 

$

 —

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Warrant liability

 

$

5,444

 

$

 —

 

$

 —

 

$

5,444

 

 

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

 

 

 

 

 

 

    

Warrant Liability

As of August 31, 2019

 

$

5,444

Adjustments to estimated fair value

 

 

(3,204)

As of November 30, 2019

 

$

2,240

Adjustments to estimated fair value

 

 

(1,391)

As of February 29, 2020

 

$

849

 

 

 

 

 

 

    

Warrant Liability

As of August 31, 2018

 

$

14,430

Adjustments to estimated fair value

 

 

216

As of November 30, 2018

 

$

14,646

Adjustments to estimated fair value

 

 

(1,271)

As of February 28, 2019

 

$

13,375

 

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

 

 

 

 

 

 

    

Contingent

 

 

Consideration

 

 

Payable

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 payments

 

 

(140)

Settled in shares- Hybrid

 

 

(140)

As of February 28, 2019

 

$

 —