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Note 4 - Fair Value Measurement and Fair Value of Financial Instruments
 9 Months Ended
Jun. 30, 2022
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

4.   Fair Value Measurement and Fair Value of Financial Instruments

 

The Company’s financial instruments consist principally of accounts receivable, accounts payable, warrant liabilities, contingent consideration and long-term debt arrangements. The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, under U.S. GAAP, companies are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

 

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

 

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

 

The carrying value of the Company’s accounts receivable and accounts payable approximates fair value due to their short-term nature.

 

The Company’s warrant liabilities are measured at fair value at each reporting period with changes in fair value recognized in earnings during the period. The fair value of the Company’s warrant liabilities are valued utilizing Level 3 inputs. Warrant liabilities are valued using a Monte Carlo option-pricing model, which takes into consideration the volatilities of comparable public companies, due to the relatively low trading volume of the Company’s common stock. The Monte Carlo option-pricing model uses certain assumptions, including expected life and annual volatility. The range and weighted average volatilities of comparable public companies utilized was 26.7% - 65.5% and 56.7%, respectively, as of June 30, 2022, and 28.8% - 66.2% and 55.8%, respectively, as of September 30, 2021. The volatility utilized in the Monte Carlo option-pricing model was determined by weighing 60% to Company-specific volatility and 40% to comparable public companies.

 

The significant inputs and assumptions utilized were as follows:

 

  

As of June 30, 2022

  

As of September 30, 2021

 
  

Montage
Capital

  

Series C

Preferred

  

Series D

Preferred

  

Montage

Capital

  

Series C

Preferred

  

Series D Preferred

 

Volatility

  82.7

%

  84.3

%

  88.9

%

  88.7

%

  83.9

%

  85.7

%

Risk-free rate

  3.00

%

  2.90

%

  3.00

%

  0.80

%

  0.50

%

  1.00

%

Stock price

 $1.20  $1.20  $1.20  $4.11  $4.11  $4.11 

 

The Company recognized gains/(losses) of $818 and ($4,161) for the three months ended June 30, 2022 and 2021, respectively, and $3,693 and ($6,020) for the nine months ended June 30, 2022 and 2021, respectively, related to the change in fair value of warrant liabilities. The changes in fair value of warrant liabilities were due to changes in inputs to the Monte Carlo option-pricing model, primarily from changes in the stock price and risk-free rate.

 

The Company’s contingent consideration obligations are from arrangements resulting from acquisitions that involve potential future payment of consideration that is contingent upon the achievement of revenue targets and operational goals. Contingent consideration is recognized at its estimated fair value at the date of acquisition based on the Company’s expected probability of future payment, discounted using a weighted-average cost of capital in accordance with accepted valuation methodologies.

 

The Company reviews and re-assesses the estimated fair value of contingent consideration liabilities at each reporting period and the updated fair value could differ materially from the initial estimates. The Company measures contingent consideration recognized in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified as Level 3 inputs. The Company uses a simulation-based model to estimate the fair value of contingent consideration on the acquisition date and at each reporting period. The simulation model uses certain inputs and assumptions, including revenue projections, an estimate of revenue discount and volatility rate based on comparable public companies’ data, and risk-free rate. Significant increases or decreases to any of these inputs in isolation could result in a significantly higher or lower liability with a higher liability limited to the contractual maximum of the contingent consideration liabilities. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and each reporting period and the amount ultimately paid will be recognized in earnings. The significant inputs and assumptions utilized as of September 30, 2021 were as follows:

 

Revenue discount rate

  3.5

%

Revenue volatility

  11.0

%

Discount rate

  10.5

%

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of June 30, 2022 and September 30, 2021, are as follows:

 

  

As of June 30, 2022

     
  

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

Liabilities:

                

Warrant liabilities:

                

Montage

 $-  $-  $12  $12 

Series A and C

  -   -   223   223 

Series D

  -   -   476   476 

Total warrant liabilities

        711   711 

Contingent consideration obligations

  -   -   2,029   2,029 

Total Liabilities

 $-  $-  $2,740  $2,740 

 

 

  

As of September 30, 2021

     
  

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

Liabilities:

                

Warrant liabilities:

                

Montage

 $-  $-  $13  $13 

Series A and C

  -   -   2,026   2,026 

Series D

  -   -   2,365   2,365 

Total warrant liabilities

        4,404   4,404 

Contingent consideration obligations

  -   -   3,649   3,649 

Total Liabilities

 $-  $-  $8,053  $8,053 

 

The following table provides a rollforward of the fair value, as determined by Level 3 inputs, as follows:

 

  

Contingent

Consideration

Obligations

  

Warrant

Liabilities

 

Balance at beginning of period, October 1, 2021

 $3,649  $4,404 

Additions

  -   - 

Payments or exercises

  (509

)

  - 

Adjustment to fair value

  70   (2,441

)

Balance at end of period, December 31, 2021

 $3,210  $1,963 

Additions

  -   - 

Payments or exercises

  -   - 

Adjustment to fair value

  (543)  (434

)

Balance at end of period, March 31, 2022

 $2,667  $1,529 

Additions

  -   - 

Exercises or payments

  (480

)

  - 

Adjustment to fair value

  (158

)

  (818)

Balance at end of period, June 30, 2022

 $2,029  $711