Business Combination

12 Months Ended

Dec. 31, 2012

Business Combination, Description [Abstract]

Business Combination

4. Business Combination

On May 23, 2011, the Company executed an Asset Purchase Agreement (“APA”) to acquire substantially all of the assets and specified liabilities of AMS Inc. The purchase price was a number of shares of authorized but unissued shares of common stock of the Company, representing 5% of the outstanding common stock on a fully diluted basis on the closing date.  Additionally, in conjunction with the closing of the APA, the Company’s note receivable with AMS Inc. in the amount of $1,650,000 was terminated and AMS Inc. was released of all obligations under the terms of the notes.

The Company assessed the fair value of the tangible and intangible assets that were acquired from AMS Inc., for the purpose of purchase price allocation. The Company’s management determined fair value with assistance from its outside consultants and used fair value methodologies in accordance with generally accepted accounting principles to arrive at the fair value of both tangible and intangible assets. The fair value of the assets were significantly higher than the purchase price for the assets of AMS Inc., which were the primary factors resulting in the recording of a gain on the purchase.

In regard to tangible assets, the Company considered the fact that the fair value of the acquired assets greatly exceeded their nominal carrying value and concluded that the carrying value of the assets was not indicative of the fair value of these assets. The primary factor leading to this conclusion was the current price of equipment of similar type and condition, which became the basis for the values assigned to the assets acquired. Additionally, these tangible assets have been properly maintained and are expected to have a useful life of another 10 years. While the carrying value at the time of acquisition was nearly $0, the fair value was determined to be approximately $1.9 million. These assets will be a significant contributor to manufacturing the Company’s product for many years in the future. The valuation of the intangible assets was based on methodologies that relied upon forward looking forecasts that considered all known information at that time, the most significant assumption being the revenue growth of the Company, primarily in the magnetic sensor business.

AMS Inc. past financial losses were a result of the declining legacy tape head business. During 2010 production began on magnetic sensors and sales from this product have grown each quarter since. Future revenue growth, and therefore, AMS profitability, is based in part on this new market area. These assumptions were taken into consideration in the approximately $1.9 million valuation of intangible assets for the purchase accounting associated with the AMS Inc. acquisition.

The allocation of the purchase price and the purchase price accounting is based on the fair value of the acquired assets and liabilities measured as of May 23, 2011 in accordance with ASC Topic 805, Business Combinations as follows:

Fair value of shares of common stock issued to AMS	$	385,000
Advances to AMS including interest (obligation to repay released at closing of merger)		1,707,326
Total consideration	$	2,092,326
Estimated Allocation of Purchase Price:
Cash and cash equivalents	$	180,436
Accounts receivable		332,568
Inventories		414,038
Prepaid expenses and other		54,285
Equipment		1,923,650
Intangible assets		1,881,000
Accounts payable		(538,628	)
Accrued expenses		(100,433	)
Deferred rent and other		(402,067	)
Gain on bargain purchase		(1,652,523	)
	$	2,092,326

The gain related to the acquisition of AMS Inc. assets and liabilities in the amount $1,652,523 was recorded in other income in the statement of operations for the year ended December 31, 2011.

The fair value of the shares issued in the AMS acquisition was based on the enterprise value of AMS.  Using an income approach the Company first determined the fair value of AMS as a whole and then attributed 5% of this value as the estimated fair value of the shares issued to AMS Inc. In connection with the acquisition of AMS Inc, the Company incurred acquisition related costs totaling approximately $68,400 which were expensed as incurred. Included in expenses for the year ended December 31, 2011, were acquisition related expenses amounting to approximately $28,000.

The following presents the pro forma net loss for the twelve months ended December 31, 2011 for the Company’s acquisition of AMS Inc. assuming the acquisition occurred as of January 1, 2011. The pro forma results are unaudited and are derived from the historical financial results of the acquired business for the periods presented and are not necessarily indicative of the results that would have occurred had the acquisition been consummated on January 1, 2011.

For the year ended December 31,	2011
Revenue	$	6,767,665
Net loss	$	(2,982,297	)

Customer relationships are amortized based on patterns in which the economic benefits of customer relationships are expected to be utilized. Other finite-lived identifiable assets are amortized on a straight-line basis. The following are the intangible assets acquired and their respective amortizable lives as follows:

					Carrying		Carrying
	Fair Value		Estimated		Value as of		Value as of
	as of May 23, 2011		Useful life (years)		December 31, 2011		December 31, 2012
Customer Relationships		1,143,400		9		1,066,220		939,176
Tradename		132,200		14		126,464		117,021
Technology		605,400		9		531,844		410,764
Total	$	1,881,000			$	1,724,528	$	1,466,961

Total amortization expense for the year ended December 31, 2012 and 2011 was $257,567 and $ 156,472 respectively.

Estimated amortization expense for the next five years is as follows:

2013	$	257,567
2014		257,567
2015		257,567
2016		184,011
2017		136,488
Thereafter		373,761
Total	$	1,466,961