Acquisition of ISP Optics Corporation

3 Months Ended

Sep. 30, 2017

Business Combinations [Abstract]

Acquisition of ISP Optics Corporation

3. Acquisition of ISP Optics Corporation

On December 21, 2016 (the “Acquisition Date”), we acquired 100% of the issued and outstanding shares of common stock of ISP (the “Acquisition”) pursuant to the Stock Purchase Agreement, dated as of August 3, 2016 (the “Purchase Agreement”). Our consolidated financial statements reflect the financial results of ISP’s operations beginning on the Acquisition Date.

Part of our growth strategy is to identify appropriate opportunities that would enhance our profitable growth through acquisition. As we developed our molded infrared capability and learned more about the infrared market, we became aware of larger business opportunities in this market that might be available with a broader range of product capability. We believed acquiring ISP would provide an excellent complementary fit with our business that would meet our requirement of profitable growth in a market space we are investing in, and saw the Acquisition as an opportunity to accelerate our growth, and expand our capabilities and our global reach.

We financed a portion of the Acquisition through a public offering of 8,000,000 shares of our Class A common stock, raising net proceeds of approximately $8.7 million. The public offering closed simultaneously with the closing of the Acquisition. For additional information, please see Note 15, Public Offering of Class A Common Stock, to these unaudited Consolidated Financial Statements. We also closed a $5 million Term Loan with AvidBank. For additional information, see Note 13, Loans Payable, to these unaudited Consolidated Financial Statements. 

In lieu of cash paid, we also financed a portion of the Acquisition through the issuance of the Sellers Note in the aggregate principal amount of $6 million to the Sellers. For additional information, see Note 13, Loans Payable, to these unaudited Consolidated Financial Statements.

The Acquisition Date fair value of the consideration transferred totaled approximately $19.1 million, which consisted of the following:

Cash Purchase Price	$	12,000,000
Cash acquired		1,243,216
Tax payable assumed debt		(200,477	)
Fair value of Sellers’ Note		6,327,208
Working capital adjustment		(315,003	)
Total purchase price	$	19,054,944
Sellers Note issued at fair value		(6,327,208	)
Premininary working capital adjustment		(760,822	)
Adjustment to beginning cash		(163,878	)
Adjustment to beginning assumed debt		(25,700	)
Cash paid at Acquisition Date	$	11,777,336

Subsequently in March 2017, a portion of the working capital adjustment, in the amount of $292,816, was applied to the Sellers Note as a payment, thereby decreasing the outstanding principal amount due under the Sellers Note, as reflected in these unaudited Consolidated Financial Statements.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date:

Cash	$	1,243,216
Accounts receivable		1,108,980
Inventory		1,134,628
Other Current assets		153,450
Property and equipment		4,666,634
Security deposit and other assets		45,359
Identifiable intangibles		11,069,000
Total identifiable assets acquired	$	19,421,267
Accounts payable		(554,050	)
Accrued expenses and other payables		(133,974	)
Other payables		(146,324	)
Deferred tax liability		(5,386,880	)
Total liabilities assumed	$	(6,221,228	)
Net identifiable assets acquired		13,200,039
Goodwill		5,854,905
Net assets acquired	$	19,054,944

As part of the valuation analysis, we identified intangible assets, including customer relationships, customer backlog, trade secrets, trademarks and non-compete agreements. The customer relationships, customer backlog, trade secrets, trademarks and non-compete agreements were determined to have estimated values of $3,590,000, $366,000, $3,272,000, $3,814,000 and $27,000, respectively, and estimated useful lives of 15, 2, 8, 8, and 3 years, respectively. The estimated fair value of identifiable intangible assets is determined primarily using the “income approach”, which requires a forecast of all future cash flows. This also reflects a $2,744,262 adjustment to increase the basis of the acquired property, plant and equipment to reflect fair value of the assets at the Acquisition Date. The estimated useful lives range from 3 years to 7 years. Depreciation and amortization of intangible assets and property, plant and equipment is calculated on a straight-line basis. This also reflects a $153,132 adjustment to increase the basis of the acquired inventory to reflect fair value of the inventory and a $230,407 adjustment to decrease the basis of the acquired deferred revenue to reflect the fair value of the deferred revenue at the Acquisition Date. The tax effects of these fair value adjustments resulted in a net deferred tax liability of approximately $5.4 million.

The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of ISP. None of the goodwill is expected to be deductible for income tax purposes.

Our unaudited Consolidated Financial Statements reflect the financial results of ISP’s operations for the three months ended September 30, 2017. The following represents unaudited pro forma consolidated information as if ISP had been included in our consolidated results for the three months ending September 30, 2016:

	Three months ended September 30, 2016
Revenue	$	7,839,799
Net income	$	368,521

These amounts have been calculated after applying our accounting policies and adjusting the results for Acquisition expenses and to reflect the additional interest expense and depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on July 1, 2016, together with the consequential tax effects. For the three months ended September 30, 2016, pro forma net income reflects adjustments of approximately $329,000 for amortization of intangibles and approximately $107,000 in additional interest, and excludes approximately $484,000 in Acquisition expenses and approximately $93,000 of non-recurring fees incurred by ISP.

Prior to the Acquisition, we had a preexisting relationship with ISP. We ordered anti-reflective coating services from ISP on an arms’ length basis. We had also partnered with ISP to develop and sell molded optics as part of a multiple lens assembly sold to a third party and had provided certain standard molded optics for resale through ISP’s catalog. At the Acquisition Date, we had amounts payable to ISP of $8,000 for services provided prior to the Acquisition and ISP had payables of $24,500 due to us.