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Acquisition

12 Months Ended

Dec. 31, 2018

NOTE 6 - ACQUISITION

On July 31, 2017, the Company completed the Keytroller Acquisition pursuant to an asset purchase agreement (the “Purchase Agreement”) by and among the Company, Keytroller, Keytroller, LLC, a Florida limited liability company (n/k/a Sparkey, LLC) (“Sparkey”) and the principals of Sparkey party thereto. Consideration for the Keytroller Acquisition included (i) $7,098,000 in cash paid at closing, (ii) 295,902 shares of our common stock issued at closing with a fair value of $2,000,000 and (iii) up to $3,000,000 of shares of our common stock as potential earn-out payments to be made on the first and second anniversaries of the closing date of the Keytroller Acquisition, computed in accordance with the terms of the Purchase Agreement. The potential earn-out payments were estimated at a fair value of $2,683,000. During the fourth quarter of 2017, the Company paid a post-closing working capital adjustment of $275,000. On September 14, 2018, the Company issued 296,000 shares for the earn-out payment for the for the twelve-month period ending on the first anniversary of the closing date of the Keytroller Acquisition. On September 14, 2018, the Company entered into an amendment to the Purchase Agreement effective as of August 1, 2018, which, among other things, fixed the second anniversary earn-out payment that Sparkey will be entitled to receive at 147,951 shares of the Company’s common stock as an earn-out payment for the twelve-month period ending on the second anniversary of the closing date of the Keytroller Acquisition and removes certain restrictions on the operations of the Company during such twelve-month period. As a result of this amendment, the second anniversary earn-out payment is no longer considered contingent consideration.

The Company incurred acquisition-related expenses of approximately $301,000, which are included in selling, general and administrative expenses for the year ended December 31, 2017.

The purchase method of accounting in accordance with ASC805, Business Combinations, was applied for the Keytroller Acquisition. This requires the total cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisition is attributable to expected product and sales synergies from combining the operations of the acquired business with those of the Company. The Company recorded $2,683,000 of contingent consideration based on the estimated financial performance for the two years following closing. The contingent consideration was discounted at an interest rate of 14.6%, which represents the Company’s weighted-average discount rate. During the year ended December 31, 2017, the Company measured the intangibles acquired in the Keytroller Acquisition at fair value on a non-recurring basis. Contingent consideration related to acquisitions are recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.

The changes in contingent consideration through December 31, 2018 is as follows:

Balance as of December 31, 2017	$	2,777,000
Change in contingent consideration		169,000
Payment of contingent consideration via issuance of shares		(2,000,000	)
Settlement of contingent consideration		(946,000	)
Balance as of December 31, 2018	$	-

The following table summarizes the purchase price allocation based on estimated fair values of the net assets acquired at the acquisition date:

Accounts receivable	$	835,000
Inventory		1,066,000
Other assets		42,000
Intangibles		5,086,000
Goodwill		5,481,000
Less: Current liabilities assumed		(454,000	)
Net assets acquired	$	12,056,000

The goodwill is fully deductible for tax purposes, except the contingent consideration which is deductible only when paid.

The results of operations of Keytroller have been included in the consolidated statement of operations as of the effective date of acquisition. The following revenue and operating income of Keytroller are included in the Company’s consolidated results of operations for the year ended December 31, 2017:

	Year Ended
	December 31, 2017

Revenues	$	3,468,000
Operating income	$	708,000

The following table represents the unaudited combined pro forma revenue and earnings for the years ended December 31, 2016 and 2017: The combined pro forma revenue and earnings for the years ended December 31, 2016 and 2017 were prepared as though the Keytroller Acquisition had occurred as of January 1, 2016. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Keytroller. This summary is not necessarily indicative of what the results of operations would have been had the Keytroller Acquisition occurred during such period, nor does it purport to represent results of operations for any future periods.

	Year Ended						Year Ended
	December 31, 2016						December 31, 2017
	Historical			Pro Forma Combined			Historical			Pro Forma Combined
				(Unaudited)						(Unaudited)
Revenues	$	36,822,000		$	43,446,000		$	40,958,000		$	44,796,000
Operating loss		(6,368,000	)		(5,505,000	)		(4,091,000	)		(3,617,000	)
Net loss per share - basic and diluted	$	(0.49	)	$	(0.35	)	$	(0.26	)	$	(0.24	)