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Acquisition of ISP Optics Corporation
 9 Months Ended
Mar. 31, 2017
Business Combinations [Abstract]  
Acquisition of ISP Optics Corporation

3. Acquisition of ISP Optics Corporation

 

On December 21, 2016 (the “Acquisition Date”), the Company 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”). The Company’s 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.

 

For the purposes of financing the Acquisition, simultaneous with the closing, the Company sold 8,000,000 shares of its Class A common stock, raising net proceeds of approximately $8.7 million. For additional information, please see Note 13 to these Consolidated Financial Statements. The Company also closed a $5 million Term Loan with AvidBank. For additional information, see Note 12, Loans Payable, to these Consolidated Financial Statements.

 

In lieu of cash paid, the Company 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 12, Loans Payable, to these 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 Seller’s Note   6,327,208 
Working capital adjustment   (315,003)
     Total purchase price  $19,054,944 
Sellers Note issued at fair value   (6,327,208)
Preliminary 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 Consolidated Financial Statements.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date. We are in the process of finalizing third-party valuations of certain intangible assets thus, the provisional measurements of intangible assets, goodwill and deferred income tax assets are subject to change. The working capital adjustment was finalized in March 2017.

 

 Cash  $1,243,216 
 Accounts receivable   1,108,980 
 Inventory   1,134,628 
 Other Current assets   153,450 
 Property and equipment   4,546,402 
 Security deposit and other assets   45,359 
 Identifiable intangibles   11,235,000 
   Total identifiable assets acquired  $19,467,035 
      
 Accounts payable   (554,050)
 Accrued expenses and other payables   (133,974)
 Other payables   (238,007)
 Total liabilities assumed  $(926,031)
       Net identifiable assets acquired   18,541,004 
 Goodwill   513,940 
 Net assets acquired  $19,054,944 

 

As part of the preliminary valuation analysis, the Company 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 $5,666,000, $376,000, $2,734,000, $2,438,000 and $21,000, 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 $2,532,824 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 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. As of March 31, 2017, there was an adjustment of $713,812 made to the recognized amounts of goodwill to decrease goodwill to reflect changes in the fair value of the net assets purchased in the Acquisition.

 

The Company recognized approximately $45,000 of Acquisition related costs that were expensed in the current period and approximately $653,000 for the nine months ended March 31, 2017. These costs are included in the consolidated statements of comprehensive income in the line item entitled “Selling, general and administrative.” The Company recognized Acquisition related expenses of approximately $209,000 in fiscal 2016. The Company also recognized approximately $950,000 in expenses associated with the public offering of shares of Class A common stock, the net proceeds of which were used to provide funds to pay for a portion of the purchase price of the Acquisition. These expenses were deducted from the gross proceeds received as a result of the public offering of Class A common stock, as reflected in stockholders’ equity. For additional information on this public offering, see Note 13, Public Offering of Class A Common Stock, in these Consolidated Financial Statements.

 

The amounts of revenue and net income of ISP included in the Company’s consolidated statements of comprehensive income from the Acquisition Date to the period ending March 31, 2017 are as follows:

 

Revenue  $4,096,286 
Net income  $1,014,923 

 

 

The following represents unaudited pro forma consolidated information as if ISP had been included in the consolidated results of the Company for the nine months ending March 31, 2017 and 2016: 

 
   Nine months ended   Nine months ended 
   March 31, 2017   March 31, 2016 
Revenue  $25,491,276   $21,341,435 
Net income  $1,203,355   $1,025,228 

 

These amounts have been calculated after applying the Company’s 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, 2015, together with the consequential tax effects.

 

Prior to the Acquisition, the Company had a preexisting relationship with ISP. The Company ordered anti-reflective coating services from ISP on an arms’ length basis. The Company 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, the Company had amounts payable to ISP of $8,000 for services provided prior to the Acquisition and ISP had payables of $24,500 due to the Company.