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, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS 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 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 Rowl-Uh-Bowl (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 May 31, 2020 was based upon the closing price of Smoke Cartel's common stock on each respective date. 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 May 31, 2020 was based upon the closing price of Xtraction Services' common stock on each respective date. 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 the 2018 Warrants, 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 May 31, 2020
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Equity investment
$ 2,060    $ —    $ 2,060    $ —   
Liabilities:
Warrant liability
$ 2,009    $ —    $ —    $ 2,009   
 
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 adjustments to the estimated fair value of the Company’s warrant liability with respect to the 2018 Warrants measured 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 As of February 29, 2020 849   
Adjustments to estimated fair value 1,160   
As of May 31, 2020 $ 2,009   

 
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   
Adjustments to estimated fair value (5,965)  
As of May 31, 2019 $ 7,410   
The following table reflects the changes in fair value of the Company’s contingent consideration payable measured 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 As of February 28, 2019 —   
Change in fair value 2,961   
As of May 31, 2019 $ 2,961