Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.10.0.1
Acquisitions
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Acquisitions

NOTE 3 – ACQUISITIONS

Magma

On July 15, 2016, the Company acquired 100% of the outstanding common shares of Mission Technology Group, Inc. (“Magma”) from Magma’s former stockholder (“Magma Stockholder”) pursuant to a Merger Agreement and Plan of Reorganization (the “Merger Agreement”).  Magma designs, manufactures, and markets industrial grade computer systems and components and is also located in Southern California. The acquisition is expected to increase the Company’s brand awareness and market share and combines the expertise of OSS in the computer hardware industry with Magma's customer base.  

The Company issued 1,263,749 shares of the Company’s common stock to the Magma Stockholder for 100% of Magma shares. The fair value assigned to the shares of common stock was $1,756,611.  

Management estimated the fair value of the consideration issued to the Magma Stockholder and considered factors including recent third-party valuation reports of the Company’s common stock and estimates of discounts for lack of marketability related to the Company’s common stock to the extent not considered in the third-party valuation report.  The allocation of the total consideration to the acquired net assets as of the acquisition date for Magma is disclosed in our annual consolidated financial statements for the year ended December 31, 2017.

The amount of revenue and net income (loss) of Magma included in the Company’s consolidated statements of operations for the three month period ended September 30, 2017 was $1,425,156 and $8,162, respectively and for the nine month period ended September 30, 2017 was $4,358,217 and $(56,847), respectively.  Subsequent to September 30, 2017, the results of operations for Magma are no longer identified on a standalone basis as Magma has been fully integrated into the consolidated operations of the Company.

 

Definite lived intangible assets as of September 30, 2018:

 

 

 

Expected Life

 

Average

Remaining

Life

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Drawings and technology

 

3 years

 

1.0 years

 

$

760,207

 

 

$

(559,597

)

 

$

200,610

 

Customer lists and relationships

 

3 years

 

1.0 years

 

 

398,717

 

 

 

(293,500

)

 

 

105,217

 

Trademarks,  URLs and other

 

3 years

 

1.0 years

 

 

27,759

 

 

 

(21,162

)

 

 

6,597

 

 

 

 

 

 

 

$

1,186,683

 

 

$

(874,259

)

 

$

312,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Definite lived intangible assets as of December 31, 2017:

 

 

 

Expected Life

 

Average

Remaining

Life

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Drawings and technology

 

3 years

 

1.5 years

 

$

760,207

 

 

$

(369,545

)

 

$

390,662

 

Customer lists and relationships

 

3 years

 

1.5 years

 

 

398,717

 

 

 

(193,821

)

 

 

204,896

 

Trademarks,  URLs and other

 

3 years

 

1.5 years

 

 

27,759

 

 

 

(14,912

)

 

 

12,847

 

 

 

 

 

 

 

$

1,186,683

 

 

$

(578,278

)

 

$

608,405

 

 

Amortization expense recognized during the three month periods ended September 30, 2018 and 2017 was $98,660 and $98,767, respectively, and $295,980 and $296,946, for the nine month periods ended September 30, 2018 and 2017, respectively.

 

The amortization expense of the definite lived intangible assets for the years remaining is as follows:

 

 

 

 

 

 

 

2018

 

 

2019

 

 

Total

 

 

 

 

 

 

 

$

98,660

 

 

$

213,764

 

 

$

312,424

 

 

Ion Software and Services

On May 9, 2017, the Company entered into a Technology and Software Source Code License Agreement with Western Digital (WDT) for its Ion flash storage software.  The agreement provides the Company with the Ion source code and rights to develop and market derivative products with the intended purpose of developing and selling Ion flash storage software with the Company’s high-density storage arrays.  Concurrent with this agreement, the Company purchased certain equipment from Western Digital, has the right to hire selected employees and to forgo certain royalty payments on purchases of solid state drives for a designated customer.  

The Company took receipt of the licensed software and equipment in July 2017 and made payment in September 2017.  

Subsequently, on July 1, 2017, the Company entered into a Service Agreement with WDT to service their existing customer base that utilizes Ion flash storage software.  The Services Agreement grants the rights and obligations to OSS to provide Ion software level 1-4 support services (as defined in the agreement) to existing WDT software users for a three year period based upon fixed quarterly payments.

The “Ion” transaction was accounted for using the acquisition method pursuant to ASC Topic 805, Business Combinations. Accordingly, the excess of the total fair value of identifiable assets value over the consideration paid was recognized as a bargain purchase and the resulting gain is being deferred and recognized over a thirty-nine month period pro-rata with the time period and the rendering of WDT customer support services.  Deferred revenue recognized for the three and nine month periods ended September 30, 2018 was $16,479 and $74,154, respectively and is included in revenue in the accompanying consolidated statements of operations.  The Company incurred $65,805 in shipping and storage fees related to the acquisition of this equipment. These costs were included in general and administrative expenses in the consolidated statements of operations in the period incurred.

The determination of fair value for the identifiable net assets acquired in the acquisition was determined by management and considered the results of a third-party appraisal of the fair value of equipment purchased. Prior to July 1, 2017, there were no operations or activities associated with this acquisition.

The amount of revenue and net loss of Ion included in the Company’s consolidated statements of operations for the three month period ended September 30, 2018 and 2017 was $80,569 and $(388,511), and $203,838 and $(69,926), respectively and for the nine month period ended September 30, 2018 and 2017 was $488,244 and $(771,581), and $203,838 and $(69,962), respectively.

The allocation of the total consideration to the acquired net assets as of the acquisition date for Ion is as follows:

 

Equipment at estimated fair value

 

$

297,700

 

Amount paid

 

 

(67,000

)

Gain on acquisition of equipment to be recognized over the three year contract service

   period

 

$

230,700

 

Concept Development, Inc.

On August 31, 2018, the Company acquired 100% of the outstanding common stock of Concept Development, Inc. (“CDI”) from CDI’s former stockholder (“CDI Stockholder”) pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”).  CDI specializes in the design and manufacturing of custom high-performance computing systems for airborne in-flight entertainment systems.  CDI is located in Southern California. The acquisition is expected to increase the Company’s access to the in-flight entertainment market and gain technical expertise in the design and manufacturing of airborne equipment.  

The Company paid cash of $646,759 and issued 1,266,364 shares of the Company’s common stock to the CDI Stockholder for 100% of CDI outstanding common stock. The fair value assigned to the shares of common stock was $4,194,673 which was based upon the closing price of OSS’s stock on August 31, 2018 of $3.63 less a discount of 8.75% for lack of marketability for a one year period.

This transaction was accounted for using the acquisition method pursuant to ASC Topic 805, Business Combinations. Accordingly, goodwill has been measured as the excess of the total consideration over the amounts assigned to the identifiable assets acquired and liabilities assumed.

The preliminary allocation of the total consideration to the acquired net assets as of the acquisition date for CDI is as follows:

 

Cash

$

139,634

 

Accounts receivable

 

489,267

 

Prepaid expenses

 

45,683

 

Inventories

 

205,635

 

Property and equipment

 

45,026

 

Deposits and other

 

12,526

 

Customer lists and relationships

 

1,470,000

 

Trade name

 

100,000

 

Non-compete

 

200,000

 

Accounts payable

 

(91,997

)

Accrued expenses

 

(99,711

)

Deferred revenue

 

(95,610

)

Deferred income taxes

 

(295,065

)

Other accrued liabilities

 

(50,985

)

Working capital loan

 

(370,096

)

Total fair value excluding goodwill

 

1,704,307

 

Goodwill

 

3,137,125

 

Total consideration

$

4,841,432

 

 

The determination of fair value for the identifiable net assets acquired in the acquisition was determined by management and considered the results of a third-party appraisal of the fair value of equipment purchased. Management estimates that any residual value from the intangible assets listed above will not be significant. On the acquisition date, goodwill of $3,137,125 and other intangible assets of $1,770,000 were recorded. The business combination is considered a tax-free reorganization under Section 368(a) under the Internal Revenue Code.

 

As of the date of this report, management is still in the process of determining the final accounting related to the CDI transaction.  Because management’s analysis has not yet been completed, the Company’s determination of the purchase price and the resulting purchase price allocation is preliminary.

 

The Company incurred $198,893 in accounting and legal fees related to the acquisition of CDI.  The amount attributable to the Company has been included in general and administrative expenses in the accompanying consolidated statements of operation for the three and nine month periods ended September 30, 2018.

 

The amount of revenue and net loss of CDI included in the Company’s consolidated statements of operations for the three and nine month and periods ended September 30, 2018 was $187,702 and ($65,753), respectively.  The following unaudited consolidated pro forma information presents the results of operations for the nine month period ended September 30, 2018 and for the year ended December 31, 2017 as if the acquisition occurred on January 1, 2017.

 

 

Nine Months

Ended

September 30,

2018

 

 

Year Ended

December 31,

2017

 

Revenue

$

25,056,963

 

 

$

31,418,213

 

Net (loss) income

$

(866,063

)

 

$

596,637

 

 

 

 

 

 

 

 

 

Acquisition-related pro forma net (loss)

   income per share attributable to common

   stockholders

 

 

 

 

 

 

 

Basic

$

(0.07

)

 

$

0.09

 

Diluted

$

(0.07

)

 

$

0.05

 

 

 

 

Definite lived intangible assets as of September 30, 2018:

 

 

 

Expected Life

 

Remaining

Life

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

 

 

Net

Intangible

Assets

 

Customer lists and

   relationships

 

60 months

 

59 months

 

$

1,470,000

 

 

$

(24,500

)

 

 

 

$

1,445,500

 

Trade name

 

24 months

 

23 months

 

 

100,000

 

 

 

(4,167

)

 

 

 

 

95,833

 

Non-compete

 

36 months

 

35 months

 

 

200,000

 

 

 

(5,556

)

 

 

 

 

194,444

 

 

 

 

 

 

 

$

1,770,000

 

 

$

(34,222

)

 

 

 

$

1,735,778

 

 

 

The amortization expense of the definite lived intangible assets for the years remaining is as follows:

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

$

102,667

 

 

$

410,667

 

 

$

394,000

 

 

$

338,444

 

 

$

294,000

 

 

$

196,000

 

 

$

1,735,778

 

 

Amortization expense recognized during the three month and nine periods ended September 30, 2018 was $34,222.