NOTE 5 - BUSINESS COMBINATION

DCfusion, LLC

On February 28, 2017, EnSync formed and became the controlling owner of DCfusion, partnering with two industry veteran consultants (the “DCfusion Founders”) who are highly regarded leaders in direct current (“DC”) system engineering design and consulting. Each DCfusion Founder became an employee of DCfusion, LLC upon the closing of the DCfusion transaction on February 28, 2017. The transaction was accounted for as a business combination under US GAAP. The primary reason for the business acquisition was to benefit from the DCfusion Founders’ decades of customer applied DC system design and consulting experience, which complements EnSync Energy's application engineering. DCfusion also brings a unique and substantial pipeline of potential projects in vertical markets that rely on the consultative expertise of the DCfusion Founders, and the authoritative voice of policies, programs and standards shaping the DC-centric technical and market landscape.

No cash was required to complete the transaction. DCfusion will operate as a subsidiary of EnSync, Inc., similar to our Holu subsidiary.

Acquisition Related Expenses

Included in the consolidated statement of operations for the year ended June 30, 2017 were transaction expenses totaling approximately $31,700 for advisory and legal costs incurred in connection with the business acquisition of DCfusion.

Holu Energy LLC

On August 17, 2015, Holu, the Company’s 85%-owned subsidiary, entered into an Asset Purchase Agreement under which Holu acquired substantially all of the assets of Tian Shan Renewable Energy LLC (“Tian Shan” or the “Seller”). The transaction was accounted for as a business combination under US GAAP. The primary reason for the business acquisition was to penetrate the Hawaii and Pacific market in general, by acquiring a local team of respected expertise, solid projects and healthy pipeline.

The aggregate purchase consideration has been allocated to the assets acquired, including customer intangible assets, based on their respective fair values. Measurement period adjustments based on new information obtained after the acquisition date have been recorded as a change in goodwill (bargain purchase) as allowed under ASC 805-10, Business Combinations – Overall. The fair values of the assets purchased approximate the unbilled portion of each contract per the original terms of the contracts. The business acquisition resulted in the recognition of $6,284 of goodwill attributable to the anticipated profitability of Tian Shan. Calculation of the goodwill was measured as follows:

Fair value of the consideration transferred	$	327,127
Identifiable net assets acquired		320,843
Goodwill	$	6,284

The fair value of total consideration paid includes (1) $225,829 of cash and (2) $101,297 of contingent consideration. The contingent consideration is comprised of 20% of the value of the unbilled portions of certain purchased assets. Holu will pay immediately to the Seller any amount of the contingent consideration collected in full after the closing date. Holu is not obligated to pay the Seller any amount not collected in full after six months after the date of a project’s completion. All acquired projects are expected to be completed and billed within the next 12 months. As of June 30, 2017, $97,173 of the contingent liability has been settled and the Company expects to pay the entire remaining contingent consideration.

The following table summarizes the fair value of the assets acquired as of the date of acquisition:

Project assets	$	151,522
Customer intangible assets		169,321
Identifiable net assets	$	320,843

In addition to the consideration paid for the assets identified above, the Company settled pre-existing transactions that were accounted for separately in the amount of $171,205. These transactions related to development and consulting services provided to the Company by the Seller prior to the acquisition date. $159,205 of the development fees were initially capitalized within the “Project assets” line of the Company’s consolidated balance sheet and subsequently recognized within “Cost of product revenue” and $12,000 has been recognized in the “Selling, general and administrative” expense line of the Company’s consolidated statements of operations. The development and consulting services were settled with cash based on the original contract prices.

For financial reporting purposes, Holu’s assets and liabilities are consolidated with those of the Company and the minority shareholder’s 15% interest in Holu is included in the Company’s consolidated financial statements as a noncontrolling interest.

Pro-forma results of operations have not been presented because the effects of the acquired operations were not material individually or in the aggregate.

Acquisition Related Expenses

Included in the consolidated statement of operations for the period from August 17, 2015 to June 30, 2016 were transaction expenses totaling approximately $33,700 for advisory and legal costs incurred in connection with the business acquisition of Holu.