6. FAIR VALUE MEASUREMENTS

12 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 6         FAIR VALUE MEASUREMENTS

We perform fair value measurements in accordance with the guidance provided by ASC 820. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

· 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 in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities 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; or

· Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

The short-term deferred cash consideration of $834,000 on our consolidated balance sheet includes a deferred cash component with a present value of $484,000 and an earn-out consideration component with a fair value of $350,000 measured using the Black-Scholes option pricing method, a Level 3 valuation technique. The fair value of the earn-out consideration was deemed to be $350,000 at September 30, 2019 based on the likelihood of IPS reaching the projected EBITDA milestones.

The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for the years ended September 30, 2018 and 2019:

				Fair value measurement at reporting date using
				Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
	Balance			(Level 1)		(Level 2)		(Level 3)
September 30, 2017:	$	–		$	–	$	–	$	–
Fair Value at date of acquisition - January 18, 2018		600,000			–		–		600,000
Decrease in fair value of earn-out consideration		(510,000	)		–		–		(510,000	)
September 30, 2018:	$	90,000		$	–	$	–	$	90,000
Increase in fair value of earn-out consideration		260,000			–		–		260,000
September 30, 2019:	$	350,000		$	–	$	–	$	350,000

The fair value of the earn-out consideration will be measured on a recurring basis at each reporting date. The following table provides the unobservable inputs and assumptions used to measure the earn-out consideration at September 30, 2019:

Description	Valuation technique	Unobservable Inputs	Range
Earn-out consideration	Black-Scholes	Volatility	38%
		Risk free interest rate	1.73%
		Expected term, in years	1.164
		Dividend yield	0.00%

During the year ended September 30, 2019, the Company and a customer entered into an agreement, whereby the Company received common stock in the customer as compensation for product design services provided by the Company. The shares represent approximately a less than 2% ownership interest in the customer. Pursuant to ASC 820, management has estimated the value of the common stock consideration to be $326,941, based on a recent private placement round of common stock issued to third party private investors of the customer for cash, and has recognized revenue and a cost method investment for that amount. Management has determined that the inputs used to value the common stock are observable, either directly or indirectly, and therefore classified as a Level 2 valuation. Pursuant to ASC 820, the transaction price of the cash financing round establishes the fair value of the Common Stock issued as consideration unless one of the following conditions exists:

a. The transaction is between related parties,

b. The transaction takes place under duress or the seller is forced to accept the price in the transaction,

c. The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value, or

d. The market in which the transaction takes place is different from the principal market (or most advantageous market).

The following table presents the placement in the fair value hierarchy and summarizes the establishment of fair value of the cost method investment during the year ended September 30, 2019:

			Fair value measurement at reporting date using
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
	Balance		(Level 1)		(Level 2)		(Level 3)
September 30, 2018:	$	–	$	–	$	–	$	–
Common stock - cost method investment		326,941		–		326,941		–
September 30, 2019:	$	326,941	$	–	$	326,941	$	–

The Company recorded a full provision of outstanding receivables of $1.6 million in Fiscal 2019 for the same customer in which we hold the investment noted above. Management does not believe the investment is impaired as a result of the full provision for outstanding receivables for this customer.