Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.19.3
Acquisitions
9 Months Ended
Sep. 30, 2019
Business Combinations [Abstract]  
Acquisitions

NOTE 3 – ACQUISITIONS

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’ 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 final 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

 

 

470,000

 

Trade name

 

 

90,000

 

Non-compete

 

 

15,000

 

Accounts payable

 

 

(91,997

)

Accrued expenses

 

 

(99,711

)

Deferred revenue

 

 

(95,610

)

Deferred income taxes

 

 

(258,301

)

Other accrued liabilities

 

 

(50,985

)

Working capital loan

 

 

(370,096

)

Total fair value excluding goodwill

 

 

546,071

 

Goodwill

 

 

4,295,361

 

Total consideration

 

$

4,841,432

 

 

The preliminary determination of fair value for the identifiable net assets acquired in the acquisition was initially determined by management after consideration of the results of a third-party appraisal.  At the time of acquisition, management assessed the value and recorded goodwill of $3,100,361 and other intangible assets of $1,770,000.

 

Subsequently in April 2019, and within the one year finalization period prescribed by ASC Topic 805, management finalized the valuation of assets and determined that certain assumptions in the initial financial models used for the determination of intangible asset values required modification.  As a result of these modifications, identified intangible assets were reduced from $1,770,000 to $575,000 with the difference of $1,195,000 being allocated to goodwill.  The change in identified intangible assets is as follows:

 

 

 

Preliminary

Valuation

 

 

Revised

Valuation

 

 

Change

 

Customer lists and relationships

 

$

1,470,000

 

 

$

470,000

 

 

$

(1,000,000

)

Trade name

 

 

100,000

 

 

 

90,000

 

 

 

(10,000

)

Non-compete

 

 

200,000

 

 

 

15,000

 

 

 

(185,000

)

 

 

$

1,770,000

 

 

$

575,000

 

 

$

(1,195,000

)

 

If the revised valuation had been used since inception of the acquisition, the amortization expense would have been $177,778 less than what had been recognized through April 2019.

 

Additionally, as a result of a short-fall in the actual overall financial performance of CDI as compared to plan, a recurring need for working capital, and a decrease in the Company’s stock price, the Company performed an interim test of impairment of goodwill as there was indication that the carrying value of the assets may not be recoverable.  To evaluate whether goodwill is impaired, the Company compares the estimated fair value of CDI to CDI’s carrying value, including goodwill.  The Company determined that the carrying value of CDI exceeded its estimated fair value thereby requiring the measurement of the impairment loss.  After consideration of the results of an additional third-party appraisal, it was determined by management that the goodwill associated with CDI was impaired by $1,988,701.  As a result, the Company took a charge to operating expenses which is included in the accompanying consolidated statements of operations.

 

This business combination is considered a tax-free reorganization under Section 368(a) under the Internal Revenue Code.  The Company incurred $245,028 in accounting and legal fees related to the acquisition of CDI.

 

Bressner Technology GmbH

On October 31, 2018, the Company’s wholly-owned German subsidiary, OSS GmbH, acquired 100% of the outstanding stock of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany, from its principal owners for cash consideration of €4,725,000 (US$5,374,582) and stock consideration of 106,463 newly-issued restricted shares of the Company’s common stock. The fair value assigned to the shares of common stock was $228,779, which was based upon the closing price of OSS’ stock on October 31, 2018 of $2.47 less a discount of 13.0% for lack of marketability for a two 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 allocation of the total consideration to the acquired net assets as of the acquisition date for Bressner Technology GmbH is as follows:

 

Cash

 

$

560,932

 

Accounts receivable

 

 

2,238,881

 

Inventory

 

 

3,721,685

 

Prepaid expenses and deposits

 

 

124,491

 

Fixed assets

 

 

346,637

 

Customer relationships

 

 

1,215,798

 

Trade name

 

 

329,515

 

Non-compete - Josef Bressner

 

 

231,797

 

Accounts payable and accrued expenses

 

 

(2,076,450

)

Notes payable

 

 

(2,536,148

)

Deferred tax liability

 

 

(43,499

)

Total fair value excluding goodwill

 

 

4,113,639

 

Goodwill

 

 

1,489,722

 

Total allocated purchase price

 

$

5,603,361

 

 

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. Management estimates that any residual value from the intangible assets listed above will not be significant. On the acquisition date, goodwill of $1,489,722 and other intangible assets of $1,777,110 were recorded. The business combination is considered a tax-free reorganization under Section 368(a) under the Internal Revenue Code.  

 

The Company incurred $419,305 in accounting and legal fees related to the acquisition of Bressner.

 

Definite lived intangible assets related to acquisitions, after revaluation of CDI intangible assets, are as follows, as of September 30, 2019

 

 

 

Expected

Life

 

Remaining

Months

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Customer lists and relationships

 

36 to 60 months

 

25 to 47 months

 

$

2,084,515

 

 

$

(992,556

)

 

$

1,091,959

 

Drawings and Technology

 

36 months

 

0 months

 

 

760,207

 

 

 

(760,207

)

 

 

-

 

Trade name, Trademarks & other

 

24 to 36 months

 

11 to 25 months

 

 

447,274

 

 

 

(179,485

)

 

 

267,789

 

Non-compete

 

36 months

 

25 months

 

 

246,797

 

 

 

(85,827

)

 

 

160,970

 

 

 

 

 

 

 

$

3,538,793

 

 

$

(2,018,076

)

 

$

1,520,717

 

 

Definite lived intangibles assets related to acquisitions are as follows, as of December 31, 2018:

 

 

 

Expected

Life

 

Remaining

Months

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Customer lists and relationships

 

36 to 60 months

 

7 to 56 months

 

$

3,084,515

 

 

$

(492,269

)

 

$

2,592,246

 

Drawings and Technology

 

36 months

 

7 months

 

 

760,207

 

 

 

(622,949

)

 

$

137,258

 

Trade name, Trademarks & other

 

24 to 36 months

 

7 to 34 months

 

 

457,274

 

 

 

(58,218

)

 

 

399,056

 

Non-compete

 

36 months

 

32 to 34 months

 

 

431,797

 

 

 

(35,100

)

 

 

396,697

 

 

 

 

 

 

 

$

4,733,793

 

 

$

(1,208,536

)

 

$

3,525,257

 

 

 

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

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

Total

 

$

174,526

 

 

$

683,935

 

 

$

556,872

 

 

$

63,231

 

 

$

42,154

 

 

$

1,520,717

 

 

Amortization expense recognized during the three month periods ended September 30, 2019 and 2018 was $190,970 and $132,883, respectively and $809,540 and $330,203 for the nine month periods ended September 30, 2019 and 2018, respectively.

The amount of revenue and net income (loss) of CDI included in the Company’s consolidated statements of operations for the three month period ended September 30, 2019 was $626,157 and $(313,044), respectively and $1,820,172 and $(2,785,858) for the nine month period ended September 30, 2019.  The amount of revenue and net loss of CDI included in the Company’s consolidated statements of operations for the three month period ended September 30, 2018 was $187,702 and $(65,753), respectively and $187,702 and $(65,753) for the nine month period ended September 30, 2018, respectively.

The amount of revenue and net loss of Bressner included in the Company’s consolidated statements of operations for the three month period ended September 30, 2019 was $5,203,334 and $158,537, respectively, and $13,715,563 and $(1,642) for the nine month period ended September 30, 2019, respectively.

The following unaudited consolidated pro forma information presents the results of operations for the three and nine month periods ended September 30, 2019 and 2018 as if these two acquisitions occurred on January 1, 2018.

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

14,938,964

 

 

$

14,466,775

 

 

$

39,883,099

 

 

$

37,100,798

 

Net income (loss)

 

$

544,901

 

 

$

1,466,393

 

 

$

(1,994,461

)

 

$

(410,840

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related pro forma net income (loss) per

   share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.11

 

 

$

(0.13

)

 

$

(0.03

)

Diluted

 

$

0.03

 

 

$

0.10

 

 

$

(0.13

)

 

$

(0.03

)