Fair Value

9 Months Ended

Sep. 30, 2022

NOTE 12:

Fair Value

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:

Level 1 – defined as observable inputs, such as quoted market prices in active markets.

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.

Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and cash equivalents, accounts receivable, accounts payable, contingent consideration and derivative liabilities. The estimated fair value of cash and cash equivalents, accounts receivable and accounts payable approximates their carrying value.

The Company issued common stock, a convertible note and warrants in a SPA with Crom (“Derivative Instruments”). The Company evaluated the conversion option in the convertible note and the warrants to determine proper accounting treatment and determined them to be Derivative Instruments. The Derivative Instruments identified have been accounted for utilizing ASC 815

“Derivatives and Hedging.”

The Company has incurred a liability for the estimated fair value of Derivative Instruments. The estimated fair value of the Derivative Instruments has been calculated using binomial pricing model with key input variables by an independent third party, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense).

The contingent earnout included in total consideration for the SSI acquisition, included in current liabilities on the Condensed Consolidated Balance Sheets, is measured at fair value on a recurring basis using the present value approach, which incorporates factors such as revenue growth and forecasted adjusted EBITDA to estimate expected value. Changes in fair value of the contingent earnout are recorded as gains or losses on revaluation in other income (expense) on the Condensed Consolidated Statements of Operations.

The Company determined that the significant inputs used to value the derivative liabilities and the contingent earnout fall within Level 3 of the fair value hierarchy. As a result, the Company has determined that the valuation of its derivative liabilities and contingent earnout are classified in Level 3 of the fair value hierarchy as shown in the table below:

	Fair Value Measurements at September 30, 2022
	Level 1		Level 2		Level 3		Total
Crom Derivative Liabilities	$	-	$	-	$	789,000	$	789,000
Contingent Earnout	$	-	$	-	$	1,121,000	$	1,121,000
Total	$	-	$	-	$	1,910,000	$	1,910,000

	Fair Value Measurements at December 31, 2021
	Level 1		Level 2		Level 3		Total
Crom Derivative Liabilities	$	-	$	-	$	-	$	-
Contingent Earnout	$	-	$	-	$	257,000	$	257,000
Total	$	-	$	-	$	257,000	$	257,000

The Company’s derivative liabilities as of September 30, 2022 and December 31, 2021 associated with the Derivative Instruments are as follows.

	September 30, 2022 (unaudited)			December 31, 2021		Inception
Fair value of conversion option of Crom Cortana Fund LLC convertible note	$	(345,000	)	$	-	$	(314,000	)
Fair value of 656,250 warrants on April 4, 2022		(444,000	)		-		(378,000	)
	$	(789,000	)	$	-		(692,000	)

During the nine months ended September 30, 2022 and 2021, the Company recognized changes in the fair value of the derivative liabilities of $(97,000) and $0, respectively

Activity related to the derivative liabilities for the nine months ended September 30, 2022 is as follows:

Beginning balance as of December 31, 2021	$	-
Issuances of convertible note/warrants – derivative liabilities		(692,000	)
Warrants exchanged for common stock		-
Change in fair value of warrant derivative liabilities		(97,000	)
Ending balance as of September 30, 2022	$	(789,000	)

Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each Derivative Instrument is estimated using a binomial valuation model. The following assumptions were used for the periods as follows:

	September 30, 2022			Inception – April 4, 2022
Expected term – conversion option		0.51 years			1 year
Expected term - warrants		4.51 years			5 years
Stock price as of Measurement Date	$	4.30		$	3.80
Equity volatility - unadjusted		284.80	%		278.80	%
Volatility haircut		5.00	%		5.00	%
Selected volatility – post haircut		115.0	%		112.60	%
Senior unsecured synthetic credit rating		CCC +			CCC +
B- market yield		7.90	%		4.50	%
OAS differential between CCC+ and B- bonds		458	bps		383	bps
Risk adjusted rate		12.50	%		8.30	%
Risk-free interest rate		3.90	%		1.70	%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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