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Business Combination

3 Months Ended

Mar. 31, 2022

Note 14 — Business Combination

Acquisition of Lab Society

On February 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, Lab Society NewCo, LLC, a newly-formed wholly-owned subsidiary of the Company (“Merger Sub”), Michael S. Maibach Jr., as the Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”).

The aggregate consideration for the Lab Society Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of Lab Society at closing; (b) 425,611 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned.

The Company withheld 127,682 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement. The Holdback Lab Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger Agreement.

The Merger Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Owners may become entitled to additional consideration with a value of up to $3.5 million based on the eligible net revenues achieved by the Lab Society business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 50% will be payable in cash and the remaining 50% will be payable by issuing shares of Common Stock.

Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled approximately $28 thousand for the three months ended March 31, 2022. All transaction and related costs were expensed as incurred and are included in general and administrative expenses.

The Company has prepared purchase price allocations for the business combination with Lab Society on a preliminary basis. Changes to those allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date). Fair values still under review as of March 31, 2022 include values assigned to identifiable intangible assets and goodwill.

The following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)
Purchase price consideration:
Estimated closing proceeds	$	4,002
Transaction expenses		80
Closing buyer shares		1,904
Holdback buyer shares		816
Earn-out consideration		1,420
Estimated working capital adjustment		(255	)
Fair value of total consideration transferred		7,967
Total purchase price, net of cash acquired	$	7,401

Fair value allocation of purchase price:
Cash and cash equivalents	$	565
Accounts receivable		511
Inventory		2,130
Prepaid expenses and other current receivables		55
Right of use assets, net		304
Property and equipment, net		177
Prepaid and refundable taxes		194
Accounts payable, accrued expenses, and other current liabilities		(1,224	)
Deferred revenue		(963	)
Deferred tax liability		(237	)
Finance lease liabilities, current		(36	)
Finance lease liabilities, noncurrent		(35	)
Operating lease liabilities, current		(112	)
Operating lease liabilities, noncurrent		(192	)
Acquired intangible assets		2,462
Goodwill		4,368
Total purchase price	$	7,967

Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

(In thousands)	Asset Value		Useful Life
Identified intangible assets:
Trade names	$	317	5 years
Acquired developed technology		1,432	8 years
Customer relationships		713	6 years
Total identified intangible assets	$	2,462

The Company’s initial fair value estimates related to the various identified intangible assets of Lab Society were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.

The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed.

The amount of revenue of Lab Society included in the consolidated statement of operations from the acquisition date of February 1, 2022 to March 31, 2022 was $1.5 million.

Acquisition of Precision and Cascade

On September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated as of October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions, a Michigan limited liability company (“Precision”); and each of the equity holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the Company consummated the transactions contemplated by the Purchase Agreement.

Subject to the terms and conditions set forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased (the “Interest Purchase”) from Sinclair, 100% of the equity interests of Cascade Sciences, LLC, a Delaware limited liability company (“Cascade”), such that immediately after the consummation of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and (2) Precision merged (the “Merger”) with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction NewCo, LLC.

The aggregate consideration for the Interest Purchase and the Merger consisted of: (a) the sum of $30 million in cash, plus consideration payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase; (b) the number of shares of Common Stock, subject to adjustment, equal to the quotient of (i) $20.0 million divided by (ii) the volume weighted-average price per share of Common Stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger; and (c) the True-Up Buyer Shares, if any (as defined below), issuable in connection with the Merger.

The Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Sinclair Members may become entitled to additional shares of Common Stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021. However, in no event shall the aggregate purchase price paid by the Company pursuant to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $65.0 million. During the fourth quarter of 2021, the fair value of the contingent earn-out consideration totaled $5.4 million based on Sinclair Members achieving certain revenue targets.

Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled approximately $38 thousand for the three months ended March 31, 2022. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. The purchase price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the measurement period (up to one year from the acquisition date).

The following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)
Purchase price consideration:
Cash paid to Sinclair Members at close	$	23,000
Cash contributed to escrow accounts at close		7,000
Cash paid for excess net working capital		1,430
Stock issued at close		14,535
Fair value of contingent consideration to be achieved		3,953
Fair value of total consideration transferred		49,918
Total purchase price, net of cash acquired	$	48,630

Fair value allocation of purchase price:
Cash and cash equivalents	$	1,288
Accounts receivable		897
Inventory		6,761
Prepaid expenses and other current receivables		1,736
Property and equipment, net		970
Right of use assets, net		730
Capitalized web costs, net		2
Accounts payable and accrued expenses		(9,223	)
Deferred revenue		(5,419	)
Long-term debt		(1,961	)
Operating lease liabilities, current		(392	)
Operating lease liabilities, noncurrent		(362	)
Acquired intangible assets		9,889
Goodwill		45,002
Total purchase price	$	49,918

Identified intangible assets consist of trade names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

(In thousands)	Asset Value		Useful Life
Identified intangible assets:
Trade names	$	1,260	6 to 7 years
Acquired developed technology		3,818	5 years
Non-compete agreements		1,202	5 years
Customer relationships		3,609	7 to 8 years
Total identified intangible assets	$	9,889

The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.

The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed.

Acquisition of PurePressure

On December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company (“PurePressure”) and the members of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members. Concurrently with the execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”).

The aggregate consideration for the Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of PurePressure at closing; (b) 329,179 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned.

The Company withheld 88,878 of the Buyer Shares issuable to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement. The Holdback Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Pure Purchase Agreement.

The Pure Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Members may become entitled to additional consideration with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable by issuing shares of Common Stock (collectively, the “Earn-out Consideration”).

Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled approximately $562 thousand for the three months ended March 31, 2022. All transaction and related costs were expensed as incurred and are included in general and administrative expenses.

The purchase price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date). Fair values still under review as of March 31, 2022 include values assigned to identifiable intangible assets and goodwill.

The following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)
Purchase price consideration:
Estimated closing proceeds	$	3,613
Indebtedness paid		320
Transaction expenses		115
Closing buyer shares		2,211
Holdback buyer shares		654
Earn-out consideration		707
Estimated working capital adjustments		330
Fair value of total consideration transferred		7,950
Total purchase price, net of cash acquired	$	7,647

Fair value allocation of purchase price:
Cash and cash equivalents	$	303
Accounts receivable, net		48
Inventory		1,537
Property and equipment, net		219
Right of use assets, net		191
Prepaid expenses and other current receivables		61
Other non-current assets		16
Accounts payable and accrued expenses		(765	)
Deferred revenue		(762	)
Operating lease liabilities, current		(117	)
Operating lease liabilities, noncurrent		(74	)
Finance lease liabilities, current		(4	)
Finance lease liabilities, noncurrent		(10	)
Notes payable, current		(260	)
Notes payable, noncurrent		(12	)
Acquired intangible assets		3,037
Goodwill		4,542
Total purchase price	$	7,950

Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

(In thousands)	Asset Value		Useful Life
Identified intangible assets:
Trade name	$	227	5 years
Acquired developed technology		1,093	8 years
Customer relationships		1,717	5 years
Total identified intangible assets	$	3,037

Subject to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties, indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement, and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants or obligations under the Pure Purchase Agreement.