3. FAIR VALUE MEASUREMENTS

6 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 3          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 deferred compensation of $293,000 on our condensed consolidated balance sheets as of March 31, 2020 is the present value of a $300,000 payment due on September 30, 2020 per the Stock Purchase Agreement as part of the acquisition price of IPS. The earn-out consideration portion was adjusted down in the 2020 Quarter from a fair value of $350,000 to $0 due to the low likelihood of reaching the EBITDA targets as outlined in the Stock Purchase Agreement.

The following table presents the placement in the fair value hierarchy and summarizes the changes for the three and six months ended March 31, 2020:

				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, 2019:	$	834,000		$	–	$	–	$	834,000
Payout of deferred cash consideration		(200,000	)						(200,000	)
December 31, 2019:		634,000			–		–		634,000
Decrease in fair value of earn-out consideration		(350,000	)						(350,000	)
Increase in fair value of deferred cash consideration		9,000							9,000
March 31, 2020:	$	293,000		$	–	$	–	$	293,000

The cost method investment of $326,941 on our condensed consolidated balance sheet as of September 30, 2019 is common stock received from a customer as compensation for product design services provided by the Company. The shares represent approximately a less than 2% ownership interest in the customer. Management has determined that the inputs used to value the common stock, at the date of the initial valuation, 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 received 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).

On January 21, 2020, the Company executed a non-negotiable promissory note with the same design segment customer in which we are invested to recover approximately $1.6 million in accounts receivable which had been reserved as bad debt in fiscal 2019. The principal sum of the note is approximately $1,626,000. Beginning on April 1, 2020, monthly interest and principal payments, based on a one-year amortization schedule, were due and payable in arrears on the first day of the month until March 1, 2021. Interest shall accrue at a rate of 8% per annum. To date, we have not received any payments of principal or interest. The note receivable is also reserved and has a net zero balance on the Company’s condensed consolidated balance sheet.

As a result of default of the promissory note and the impact of COVID-19, as well as recent performance of the business in which the Company is invested, including the inability to generate revenue, management has concluded the investment is impaired and has fully reserved for the investment as of March 31, 2020. The impairment charge of approximately $327,000 is included in the general & administrative expenses of the condensed consolidated statement of operations and comprehensive loss.