Note 5 - Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 5.  Fair Value Measurements

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

• Level 1—Quoted prices in active markets for identical assets or liabilities;

• Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:

	September 30, 2022
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	980,112	$	-	$	-	$	980,112

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	1,600,663	$	-	$	-	$	1,660,663
Other liabilities:
Fair value of contingent consideration	$	-	$	-	$	930,000	$	930,000

See Note 6 below for an explanation of the decrease in fair value of contingent consideration related to the acquisition of Gray Matters, Inc.

The following table is a roll-forward of the Level 3 fair value measurements.

Fair value of contingent consideration:
December 31, 2021	$	930,000
Change in fair value		12,609
March 31, 2022		942,609
Change in fair value		(942,609	)
June 30, 2022		-
Change in fair value		-
September 30, 2022	$	-

There were no unrealized gains or losses included in income for the three or nine months ended September 30, 2022.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table is a summary of gains and losses on assets measured at fair value on a nonrecurring basis:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Impairment of goodwill	$	2,254,624	$	-	$	2,254,624	$	-

During the third quarter of 2022, our Gray Matters reporting unit, which is the same as our Blockchain SCM operating segment, experienced delays in receiving approval from its government customer of certain milestone achievements specified in our contract with that customer. This delay, in turn, resulted in a decline in the reporting unit’s estimated future cash flows. Accordingly, we performed an interim goodwill impairment test as of September 30, 2022, prior to our annual impairment test.

As a result of the interim goodwill impairment test, the estimated fair value of the Gray Matters reporting unit was determined to be lower than its carrying value. In the third quarter of 2022, we recorded a non-cash pre-tax and after-tax charge of $2,254,624 to impair the carrying value of this reporting unit’s goodwill under the caption, “Goodwill impairment” in the accompanying condensed consolidated statement of operations and comprehensive (loss) income. There were no tax benefits associated with the goodwill impairment charge, since the Gray Matters goodwill is not deductible for tax purposes. The fair value of the reporting unit was determined using an income approach based on a discounted cash flow (“DCF”) model which requires a complex series of judgments about future events and uncertainties and relies heavily on estimates of expected cash flows and like an appropriate discount rate and terminal growth rate. Any changes in key assumptions, including failure to grow the revenue and improve the profitability of GMI, or other unanticipated events and circumstances, may affect such estimates. Fair value assessments of the reporting unit are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information. The discount rate and terminal growth rate used in our 2022 third quarter interim impairment test for the Gray Matters reporting unit were 22.5% and 3.0%, respectively.