Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.10.0.1
Acquisitions
6 Months Ended
Jun. 30, 2018
Business Combinations [Abstract]  
Acquisitions

NOTE 2 – 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.

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. Goodwill was attributed to management’s assessment of projected increases in overall revenues derived from greater brand awareness and certain economies of scale.

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

 

Cash

 

$

68,308

 

Accounts receivable

 

 

356,499

 

Prepaid expenses

 

 

93,800

 

Inventories

 

 

1,208,675

 

Property and equipment

 

 

143,705

 

Customer lists and relationships

 

 

398,717

 

Drawings and technology

 

 

760,207

 

Trademarks and URL's

 

 

25,000

 

Other intangibles

 

 

2,759

 

Deposits and other

 

 

17,202

 

Accounts payable

 

 

(842,843

)

Warranty reserve

 

 

(15,000

)

Deferred tax liability

 

 

(266,620

)

Accrued expenses

 

 

(816,249

)

Other accrued liabilities

 

 

(50,000

)

Line of credit

 

 

(517,335

)

Notes payable, current portion

 

 

(157,572

)

Notes payable, long-term

 

 

(200,000

)

Total fair value excluding goodwill

 

 

209,253

 

Goodwill

 

 

1,547,358

 

Total consideration

 

$

1,756,611

 

 

Fair valuation methods used for the identifiable net assets acquired in the acquisition make use of quoted prices in active markets, discounted cash flows for assessing the value of the customer lists and relationships and the relief from royalty method for determination of drawing and technology values, both using a risk adjusted weighted cost of capital. Management estimates that any residual value from the intangible assets listed above will not be significant.  The weighted-average amortization period of each intangible asset identified above is three years.

On the acquisition date, goodwill of $1,547,358 and other intangible assets of $1,186,683 were recorded. The business combination is considered a tax-free reorganization under Section 368(a) under the Internal Revenue Code; therefore, acquired goodwill and intangibles of $2,734,041 is not tax-deductible. However, Magma had tax-deductible goodwill of $496,275 (with an original basis of $1,294,624) that will continue to be amortized for tax purposes after the acquisition.  In accordance with Topic 350, Intangibles––Goodwill and Other, the Company completed its most recent annual impairment test and determined that the goodwill was not impaired at December 31, 2017.

The amount of revenue and net loss of Magma included in the Company’s consolidated statements of operations for the three month period ended June 30, 2017 was $1,368,696 and $(76,629), respectively and for the six month period ended June 30, 2017 was $2,933,061 and $(65,009), respectively.  Subsequent to December 31, 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 June 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

 

 

$

(496,246

)

 

$

263,961

 

Customer lists and relationships

 

3 years

 

1.0 years

 

 

398,717

 

 

 

(260,274

)

 

 

138,443

 

Trademarks,  URLs and other

 

3 years

 

1.0 years

 

 

27,759

 

 

 

(19,078

)

 

 

8,681

 

 

 

 

 

 

 

$

1,186,683

 

 

$

(775,598

)

 

$

411,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2018 and 2017 was $98,660 and $98,970, respectively, and $197,321 and $198,178, for the six month periods ended June 30, 2018 and 2017, respectively.

 

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

 

 

 

 

 

 

 

2018

 

 

2019

 

 

Total

 

 

 

 

 

 

 

$

197,321

 

 

$

213,764

 

 

$

411,085

 

 

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-six month period pro-rata with the time period and the rendering of WDT customer support services.  Deferred revenue recognized for the three and six month periods ended June 30, 2018 was $28,838 and $57,675, 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 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