Fair Value

3 Months Ended

Mar. 31, 2023

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 Liabilities”) in 2022. During the three months ended March 31, 2023, the Company terminated this note through an induced conversion and extinguished the conversion option liability associated with the Prior Crom Note. As part of this transaction, the Company entered into another note with Crom and issued common stock, a convertible note, and warrants in this SPA. The Company evaluated the conversion option in the convertible note and the warrants to determine proper accounting treatment and determined them to be Derivative Liabilities. The Derivative Liabilities identified have been accounted for utilizing ASC 815 “Derivatives and Hedging.” The Company has incurred a liability for the estimated fair value of Derivative Liabilities. The estimated fair value of the Derivative Liabilities has been calculated using a 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 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 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 March 31, 2023
	Level 1		Level 2		Level 3		Total
Crom Derivative Liabilities	$	—	$	—	$	421,000	$	421,000
Prior Crom Note warrant liability	$	—	$	—	$	539,000	$	539,000
Contingent earnout	$	—	$	—	$	794,000	$	794,000
Total	$	—	$	—	$	1,754,000	$	1,754,000


	Fair Value Measurements at December 31, 2022
	Level 1		Level 2		Level 3		Total
Crom Derivative Liabilities	$	-	$	-	$	824,000	$	824,000
Contingent earnout	$	-	$	-	$	812,000	$	812,000
Total	$	-	$	-	$	1,636,000	$	1,636,000

The Company’s derivative liabilities as of March 31, 2023 and December 31, 2022 associated with the Derivative Liabilities are as follows.


	March 31, 2023		December 31, 2022		Inception
Fair value of conversion option of Prior Crom note	$	—	$	191,000	$	314,000
Fair value of 656,250 warrants on April 4, 2022	539,000		633,000		378,000
Fair value of conversion option of Crom Cortana Fund LLC convertible note	162,000		—		162,000
Fair value of 700,000 warrants on February 13, 2023	259,000		—		259,000
	$	960,000	$	824,000

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:


	3/31/2023
Expected term – conversion option	1 year
Expected term - warrants	5 years
Stock price as of measurement date	$	1.12
Equity volatility - unadjusted	131.90		%
Volatility haircut	5.00		%
Selected volatility – post haircut	124.20		%
Senior unsecured synthetic credit rating	CCC+
OAS differential between CCC+ and B- bonds	1047bps
Risk-free interest rate	4.90		%

- 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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