3. FAIR VALUE MEASUREMENTS

9 Months Ended

Jun. 30, 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 consideration of $296,000 on our condensed consolidated balance sheets as of June 30, 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 separate contingent earn-out consideration portion of the IPS purchase price was adjusted down in the second quarter of fiscal 2020 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 in fair value of the aforementioned consideration payments for the three and nine months ended June 30, 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
Increase in fair value of deferred cash consideration		3,000			–		–		3,000
June 30, 2020	$	296,000		$	–	$	–	$	296,000

The cost method investment of $327,000 on our condensed consolidated balance sheet at September 30, 2019 is common stock received from a customer as compensation for product design services provided by the Company. The shares represent less than a 2% ownership in the customer. We estimated the initial fair value of the investment based on a private placement round of common stock issued to third party private investors of the customer at a time close to the valuation date. The Company 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.

On January 21, 2020, the Company executed a non-negotiable promissory note with a principal amount of $1,626,000 with the same design segment customer in which we are invested to recover accounts receivable which had been reserved as bad debt in fiscal 2019. 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 accrues at a rate of 8% per annum. Since no payments were received through June 30, 2020, the note receivable is fully reserved on the Company’s condensed consolidated balance sheet. In August 2020, the Company received $98,000 from this customer, which was applied to past due interest, penalties and principal.

During the three months ended March 31, 2020, as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in which the Company is invested, including its inability to generate revenue, management concluded the investment was also impaired and it is fully reserved on the Company’s condensed consolidated balance sheet at June 30, 2020. The impairment charge of $327,000 was recorded in the second quarter of fiscal 2020 and is included in the general & administrative expenses of the condensed consolidated statement of operations for the nine months ended June 30, 2020 (the “2020 Period”).