Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v3.22.1
Fair Value of Financial Instruments
 3 Months Ended
Mar. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The carrying amounts for certain of our financial instruments, including cash, accounts receivable, accounts payable and certain accrued expenses and other assets and liabilities, approximate fair value due to the short-term nature of these instruments.

As of March 31, 2022, we had equity securities, an interest rate swap contract and contingent consideration that are required to be measured at fair value on a recurring basis.

Our equity securities that are required to be measured at fair value on a recurring basis consist of investments in XS Financial Inc. and High Tide Inc. We have determined that our ownership does not provide us with significant influence over the operations of these entities. Accordingly, we account for our investment in these entities as equity securities, and we record changes in the fair value of these investments in "other income (expense), net" in our condensed consolidated statements of operations and comprehensive loss.

Our financial instruments measured at fair value on a recurring basis were as follows at the dates indicated:

Condensed Consolidated
Balance Sheet Caption		 Fair Value at March 31, 2022
(in thousands) Level 1 Level 2 Level 3 Total
Assets:
Equity securities Other assets $ 1,617  $ —  $ —  $ 1,617 
Interest rate swap contract Other assets —  70  —  70 
Total Assets $ 1,617  $ 70  $ —  $ 1,687 
Liabilities:
Contingent consideration - current Accrued expenses and other current liabilities $ —  $ —  $ 2,812  $ 2,812 
Contingent consideration - long-term Other long-term liabilities —  —  554  554 
Total Liabilities $ —  $ —  $ 3,366  $ 3,366 
Condensed Consolidated
Balance Sheet Caption		 Fair Value at December 31, 2021
(in thousands) Level 1 Level 2 Level 3 Total
Assets:
Equity securities Other assets $ 1,919  $ —  $ —  $ 1,919 
Total Assets $ 1,919  $ —  $ —  $ 1,919 
Liabilities:
Interest rate swap contract Other liabilities $ —  $ 288  $ —  $ 288 
Contingent consideration - current Accrued expenses and other current liabilities —  —  5,641  5,641 
Contingent consideration - long-term Other long-term liabilities —  —  1,216  1,216 
Total Liabilities $ —  $ 288  $ 6,857  $ 7,145 

The estimated fair values of our financial instruments have been determined using available market information and what we believe to be appropriate valuation methodologies. There were no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy during the three months ended March 31, 2022 and 2021, respectively.

Derivative Instrument and Hedging Activity

On July 11, 2019, we entered into an interest rate swap contract to manage our risk associated with the interest rate fluctuations on the Company's floating rate Real Estate Note described in Note 6. The counterparty to this instrument is a reputable financial institution. The interest rate swap contract is entered into for periods consistent with the related underlying exposure and does not constitute a position independent of this exposure. Our interest rate swap contract was designated as a cash flow hedge at the inception date, and is reflected at its fair value in our condensed consolidated balance sheets.
The fair value of our interest rate swap liability is determined based on the present value of expected future cash flows. Since our interest rate swap value is based on the LIBOR forward curve and credit default swap rates, which are observable at commonly quoted intervals for the full term of the swap, it is considered a Level 2 measurement. Details of the outstanding swap contract as of March 31, 2022 are as follows:
Swap Maturity Notional Value
(in thousands)		 Pay Fixed Rate Receive Floating Rate Floating Rate
Reset Terms
October 1, 2025 $ 7,911  2.0775  % One-Month LIBOR Monthly

We performed an initial qualitative assessment of hedge effectiveness using the hypothetical derivative method in the period in which the hedging transaction was entered, as the critical terms of the hypothetical derivative and the hedging instrument were the same. On a quarterly basis, we perform a qualitative analysis for quarterly prospective and retrospective assessments of hedge effectiveness. The unrealized loss on the derivative instrument is included within "Other comprehensive income (loss)" in our condensed consolidated statement of operations and comprehensive loss. There was no measure of hedge ineffectiveness and no reclassifications from other comprehensive loss into interest expense for the three months ended March 31, 2022 and 2021.

Contingent Consideration

Each period we revalue our contingent consideration obligations associated with business acquisitions to their fair value. The estimate of the fair value of contingent consideration is determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs not observable in the market, such as the risk-free rate, risk-adjusted discount rate, the volatility of the underlying financial metrics and projected financial forecast of the acquired business over the earn-out period, and therefore represents a Level 3 measurement. Significant increases or decreases in these inputs could result in a significantly lower or higher fair value measurement of the contingent consideration liability. Changes in the fair value of contingent consideration are included within "Other income (expense), net" in our condensed consolidated statements of operations and comprehensive loss.
A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:
(in thousands) Three months ended
March 31, 2022
Balance at December 31, 2021 $ 6,857 
Eyce 2021 Contingent Payment settlement in Class A common stock (875)
DaVinci 2021 Contingent Payment settlement in Class A common stock (2,611)
Gain from fair value adjustments included in results of operations (5)
Balance March 31, 2022 $ 3,366 

(in thousands) Three months ended
March 31, 2021
Balance at December 31, 2020 $ — 
Contingent consideration issued for Eyce acquisition 1,218 
Balance at March 31, 2021 $ 1,218 

Equity Securities Without a Readily Determinable Fair Value

Our investment in equity securities without readily determinable fair value consist of ownership interests in Airgraft Inc., Sun Grown Packaging, LLC ("Sun Grown") and Vapor Dosing Technologies, Inc. ("VIVA"). We determined that our ownership interests do not provide us with significant influence over the operations of these investments. Accordingly, we account for our investments in these entities as equity securities. Airgraft Inc., Sun Grown, and VIVA are private entities and their equity securities do not have a readily determinable fair value. We elected to measure these equity securities under the measurement alternative election at cost minus impairment, if any, with adjustments through earnings for observable price changes in orderly transactions for the identical or similar investment of the same issuer. We acquired our investments in Sun Grown and VIVA as part of our merger with KushCo, which we completed in August 2021. We did not identify any fair value adjustments related to these equity securities during the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022 and December 31, 2021, the carrying value of our investment in equity securities without a readily determinable fair value was approximately $2.5 million, respectively, included within "Other assets" in our condensed consolidated balance sheets. The carrying value included a fair value adjustment of $1.5 million based on an observable price change recognized during the year ended December 31, 2019.