Note 3 - Business Combination

9 Months Ended

May 31, 2022

Notes to Financial Statements

Business Combination Disclosure [Text Block]

3.         BUSINESS COMBINATION

On September 21, 2021, the Company announced that it acquired the remaining 50% ownership interest in its Indian joint venture, Harita-NTI Limited (Zerust India), for $6,250,000 in cash, effective as of September 1, 2021, the date the Company obtained control. Prior to September 1, 2021, the Company owned 50% of the outstanding capital stock of Zerust India. The Company had historically accounted for this investment under the equity method of accounting. This purchase was funded with cash on hand and borrowings under the Company’s revolving line of credit. The Company undertook the acquisition to enhance its Zerust business in India.

The purchase price of $6,250,000 was funded with cash on hand and borrowings under the Company’s revolving line of credit, which was increased in connection with the transaction to $5,000,000.

Because the Company increased its ownership interest in Zerust India to 100%, the acquisition of Zerust India has been accounted for in accordance with Accounting Standards Codification (ASC) 805, Business Combinations, by using the acquisition method of accounting. Effective September 1, 2021, Zerust India became a consolidated subsidiary within the Company’s financial statements.

The following table summarizes the purchase price allocation that includes the fair values of the separately identifiable assets acquired and liabilities assumed as of September 1, 2021:

Cash and cash equivalents		$	1,187,997
Trade account receivable			1,954,769
Inventories			886,650
Prepaid expenses and other			396,545
Property, plant and equipment			219,077
Operating lease, right of use asset			355,000
Customer relationships			6,347,000
Goodwill			4,782,376
Current liabilities			(1,370,314	)
Deferred tax liability			(1,904,100	)
Operating lease liability			(355,000	)
	Net assets acquired	$	12,500,000
Less:
	Fair value of previously held equity method investment		(1,637,362	)
	Cumulative foreign currency translation		(661,088	)
	Gain recognized on acquisition		(3,951,550	)
			(6,250,000	)
Cash paid for acquisition		$	6,250,000

The excess of the fair value of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The fair values of assets acquired and liabilities assumed may be subject to change as additional information is received.

The fair value of the intangible asset associated with customer relationships was estimated using a discounted cash flow method with the application of the multi-period excess earnings method. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable to only the subject intangible asset after deducting contributory asset charges.

The rate used to discount the estimated future net cash flows to their present values for the intangible assets was based upon a weighted average cost of capital calculation. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the assets acquired from Zerust India. The weighted average discount rate used to determine the fair value of the customer relationships was 15.3%.

The amortization period for the intangible assets is 15 years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such asset. Goodwill associated with the acquisition was primarily attributable to the expansion opportunity of the Company’s Zerust business in India.

Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquisition at its acquisition date fair value and recognize the resulting gain or loss in earnings. As such, since the Company acquired the remaining 50% ownership interest of Zerust India effective September 1, 2021, the Company recognized a gain of $3,951,550 during the nine months ended May 31, 2022. This gain is included in “Remeasurement gain on acquisition of equity method investee” on the Company’s consolidated statements of operations for the nine months ended May 31, 2022.

The Company has included the financial results of Zerust India in the consolidated financial statements from September 1, 2021. Net revenue and net income related to Zerust India since the date of acquisition totaled $7,260,964 and $664,775, respectively. The transaction costs associated with the acquisition were approximately $0 and $115,000, respectively, and are recorded in general and administrative expense as incurred during the three and nine months ended May 31, 2022.

Unaudited consolidated pro forma information assuming the acquisition had occurred on September 1, 2020 for the three and nine months ended May 31, 2021 would have an increase in net sales $2,405,098 and $6,697,005, respectively. Unaudited pro forma net income, assuming the acquisition had occurred on September 1, 2020, for the three and nine months ended May 31, 2021 was not considered material to the Company’s consolidated net income. The unaudited consolidated pro forma combined financial information does not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest period presented or of results that may be obtained in the future. In addition, they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.