Business Combinations

12 Months Ended

Dec. 31, 2021

Business Combinations

Business Combination

3. Business Combination

On October 1, 2021, the Company completed the acquisition of specified assets of IT Authorities, Inc. (ITA) to increase its capabilities and broaden its footprint in the commercial sector. The closing purchase price paid by the Company consisted of $4.75 million in cash and 75,000 fully vested warrants to purchase an equal number of shares of the Company’s common stock at an exercise price of $5.33 per share (“Warrants”) exercisable for a period of four years. In addition, the Company agreed to pay contingent consideration to the seller as follows: (i) up to an additional $250,000 and 75,000 Warrants exercisable for four years depending on the EBITDA of the business in 2021; (ii) up to an additional $1.0 million and 150,000 Warrants exercisable for three years depending on the EBITDA of the business in 2022; (iii) up to an additional $1.0 million and 125,000 Warrants exercisable for three years depending on the EBITDA of the business in 2023; and (iv) up to an additional $1.0 million and 125,000 Warrants exercisable for three years depending on the EBITDA of the Business in 2024. In addition, the Company entered into employment agreements with two of the founders of the seller and in the event of the termination of either employee without cause (or by the employee for good reason), the contingent consideration payable under the purchase agreement will be deemed earned and payable for earn-out periods that have not been completed at the time of termination. The cash portion of the acquisition was funded using cash on hand.

Purchase Consideration

The following table sets forth the fair value of consideration paid in connection with the acquisition of ITA as of October 1, 2021:

Cash consideration	$	4,750,000
Net working capital escrow adjustment
to consideration paid		(61,172	)
Fair value of vested warrants issued at closing date		170,000
Fair value of contingent consideration payable (cash)		1,597,000
Fair value of contingent consideration payable (warrants)		698,000
Fair value of consideration paid	$	7,153,828

Transaction Costs

The Company incurred related due diligence, legal and accounting and transaction costs in connection with acquisition of ITA of approximately $237,000.

Fair Value of Assets Acquired and Liabilities Assumed

The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair value on the acquisition date. The Company used valuation methods including the “monte carlo simulation” method to estimate the fair value of the contingent consideration, the “multi-period excess earnings method” to estimate the fair value of customer relationships and the “relief from royalty” method to estimate the fair value of the acquired tradename. The goodwill recognized was primarily attributed to increased synergies that are expected to be achieved from the integration of ITA and is not expected to be deductible for income tax purposes.

The following table summarizes the allocation of the aggregate purchase consideration to the fair value of the assets and liabilities acquired as of October 1, 2021:

Fair value of identifiable assets acquired
and liabilities assumed:
Trade receivables	$	871,028
Unbilled receivables		145,707
Other current assets		63,262
Customer relationships		2,392,000
Tradename		1,040,000
Accounts payable and accrued expenses		(875,290	)
Deferred revenue		(15,878	)
Total identifiable net assets acquired		3,620,829
Goodwill		3,532,999
Total purchase price	$	7,153,828

Supplemental Unaudited Pro Forma Information

	YEARS ENDED
	DECEMBER 31,
	2021		2020
	(a)		(a)
Revenues	$	94,839,000	$	193,283,000
Net Income		848,000		11,755,000

(a) To reflect on a pro forma basis unaudited consolidated financial information for the years ended December 31, 2021 and 2020 for the Company. The unaudited financial information presented herein were derived from historical internally prepared financial statements with certain adjustments for ITA and WidePoint’s Form 10-K audited financial statements.