6. FAIR VALUE MEASUREMENTS

12 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 6         FAIR VALUE MEASUREMENTS

The deferred consideration of $90,000 at September 30, 2020 represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe. The current and non-current portions of this liability of $45,000 each are shown in the corresponding categories on the consolidated balance sheet at September 30, 2020. The deferred consideration of $834,000 on our consolidated balance sheet at September 30, 2019 was the $484,000 present value of the deferred cash consideration related to the acquisition of IPS and the $350,000 estimated fair value of the contingent earnout consideration related to the acquisition of IPS. The IPS earnout consideration was adjusted down to $0 in Fiscal 2020 due to the low likelihood of IPS reaching the earnings targets outlined in the Stock Purchase Agreement.

The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for Fiscal 2020 and Fiscal 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	$	538,000		$	–	$	–	$	538,000
Increase in fair value of IPS deferred cash consideration		36,000			–		–		36,000
Increase in fair value of IPS earn-out consideration		260,000			–		–		260,000
September 30, 2019		834,000			–		–		834,000
Increase in fair value of IPS deferred cash consideration		16,000			–		–		16,000
Decrease in the fair value of IPS earnout consideration		(350,000	)		–		–		(350,000	)
Payout of IPS deferred cash consideration		(500,000	)		–		–		(500,000	)
Fair value of Kablooe contingent earnout consideration		90,000			–		–		90,000
September 30, 2020	$	90,000		$	–	$	–	$	90,000

The fair value of the Kablooe contingent earn-out consideration will be measured on a recurring basis at each reporting date. The following inputs and assumptions were used in the Black-Scholes valuation model to estimate the fair value of the Kablooe earn-out consideration at September 30, 2020:

Volatility	40%
Risk free interest rate	1%
Expected term, in years	0.5 - 4.5
Dividend yield	0%

During Fiscal 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 less than a 2% ownership interest in the customer. Pursuant to ASC 820, management estimated the initial fair value of the investment to be $327,000, 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. Based on this valuation, the Company recognized revenue and a cost method investment for that amount in Fiscal 2019. Management determined that the inputs used to value the investment 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).

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 consolidated balance sheets. In the fourth quarter of Fiscal 2020, the Company received $134,000 from this customer, of which $61,000 was applied to past due interest and penalties and recorded as interest income, and $73,000 was applied to principal and recorded as a recovery of bad debt expense as a reduction of general and administrative expense.

During Fiscal 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 recorded an impairment charge of $327,000 to fully reserve the investment on the Company’s consolidated balance sheet at September 30, 2020. The impairment charge is included in the general and administrative expenses of the consolidated statement of operations.

The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the cost method investment during Fiscal 2020 and Fiscal 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, 2019	$	327,000		$	–	$	327,000		$	–
Impairment of cost method investment		(327,000	)		–		(327,000	)		–
September 30, 2020	$	–		$	–	$	–		$	–