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Note 3 - Acquisition of Interest in Contrail (As Amended) | 6 Months Ended
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Sep. 30, 2016
Notes to Financial Statements |
Business Combination Disclosure [Text Block] |
2. | Acquisition of Interests in Delphax (As Amended )
Pursuant to a Securities Purchase Agreement dated as of October 2, 2015 ( the “Securities Purchase Agreement”) among the Company, Delphax Technologies Inc. (“Delphax”) and its subsidiary, Delphax Technologies Canada Limited (“Delphax Canada”), on November 24, 2015 ( the “Delphax Closing Date”), the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the “Senior Subordinated Note”) issued by Delphax Canada for a combination of cash and the surrender of outstanding principal of $500,000 and accrued and unpaid interest under, and cancellation of, a 90 -Day Senior Subordinated Note purchased at face value by the Company from Delphax Canada on October 2, 2015 pursuant to the Securities Purchase Agreement and (ii) for $1,050,000 in cash a total of 43,000 shares of Delphax ’s Series B Preferred Stock (the “Series B Preferred Stock”) and a Stock Purchase Warrant (the “Warrant”) to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events). Principal under the Senior Subordinated Note is due on October 24, 2020 and bears interest at an annual rate of 8.5%. Interest is to be paid in kind until, in the absence of specified events, November 24, 2017. Thereafter, interest is to be paid in cash. Interest in kind is to be paid monthly, while interest payable in cash is to be paid quarterly. The Senior Subordinated Note is guaranteed by Delphax and is secured by security interests granted by Delphax and Delphax Canada in their respective inventories, equipment, accounts receivable, cash, deposit accounts, contract rights and other specified property, as well as a pledge by Delphax of the outstanding capital stock of its subsidiaries, including Delphax Canada. Pursuant to the terms of a subordination agreement (the “Subordination Agreement”) entered into on October 2, 2015 by Delphax, Delphax Canada, the Company and the senior lender (the “Senior Lender”) that provides a revolving credit facility under an agreement with Delphax and Delphax Canada (the “Senior Credit Agreement”), the Company ’s rights with respect to payment under and enforcement of the Senior Subordinated Note and enforcement of its security interests are subordinated to the rights of the Senior Lender under the Senior Credit Agreement. Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments, and has no liquidation preference over shares of common stock of Delphax. No dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock of Delphax. Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax ’s employee stock option plans at the Closing Date, the number of shares of common stock underlying the Series B Preferred Stock purchased by the Company represent approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company and approximately 31% of the outstanding shares assuming conversion of the Series B Preferred Stock and the issuance of all the shares of Delphax common stock reserved for issuance under Delphax’s employee stock option plans. Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to the Company under the Senior Subordinated Note or the Company continues to hold a specified number of the Shares and interests in the Warrant sufficient to permit it to acquire up to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant (or holds shares of Series B Preferred Stock acquired in connection with the exercise of the Warrant equal to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant), then
| ● | holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and exercise rights of removal and replacement with respect to) three -sevenths of the board of directors of Delphax, and after June 1, 2016 the holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and to exercise rights of removal and replacement with respect to) four -sevenths of the members of the board of directors of Delphax; and
| ● | without the written consent or waiver of the Company, Delphax may not enter into specified corporate transactions.
Pursuant to the provision described above, beginning on November 24, 2015, three designees of the Company were elected to the board of directors of Delphax, which had a total of seven members following their election. As of September 30, 2016, three designees of the Company continued to serve on the board of directors of Delphax, which had a total of six members, as the Company had not exercised its right to require its designee to be elected as the seventh director. The Warrant expires on November 24, 2021. In the event that Delphax were to declare a cash dividend on its common stock, the Warrant provides that the holder of the Warrant would participate in the dividend as if the Warrant had been exercised in full and the shares of Series B Preferred Stock acquired upon exercise had been fully converted into Delphax common stock. The Warrant provides that, prior to any exercise of the Warrant, the holder of the Warrant must first make a good faith written tender offer to existing holders of Delphax common stock to purchase an aggregate amount of common stock equal to the number of shares of common stock issuable upon conversion of the Series B Preferred Stock that would be purchased upon such exercise of the Warrant. The Warrant requires that the per share purchase price to be offered in such tender offer would be equal to the then-current exercise price of the Warrant divided by the then-current conversion rate of the Series B Preferred Stock. To the extent that shares of common stock are purchased by the holder in the tender offer, the amount of shares of Series B Preferred Stock purchasable under the Warrant held by such holder is to be ratably reduced. The Warrant is to provide that it may be exercised for cash, by surrender of principal and interest under the Senior Subordinated Note equal to 0.95 times the aggregate exercise price or by surrender of a portion of the Warrant having a value equal to the aggregate exercise price based on the difference between the Warrant exercise price per share and an average market value, measured over a 20 -trading day period, of Delphax common stock that would be acquired upon conversion of one share of Series B Preferred Stock. As a result of the above transactions, the Company determined that it had obtained control over Delphax and we have consolidated Delphax in our consolidated financial statements beginning on November 24, 2015. The following table summarizes the p rovisional fair values of Delphax assets and liabilities as of the Delphax Closing Date:
|  | November 24, 2015 |
ASSETS |  |  |  |
Cash and cash equivalents |  | $ | 586,061 |
Accounts receivable |  |  | 1,740,210 |
Inventories |  |  | 3,972,802 |
Other current assets |  |  | 693,590 |
Property and equipment |  |  | 722,714 |
Intangible assets - trade name |  |  | 120,000 |
Intangible assets - patents |  |  | 1,090,000 |
Goodwill |  |  | 375,408 |
Total assets |  | $ | 9,300,785 |
LIABILITIES |  |  |  |
Accounts payable |  | $ | 1,663,199 |
Accrued expenses |  |  | 1,949,522 |
Income tax payable |  |  | 11,312 |
Debt |  |  | 3,313,317 |
Other long-term liabilities |  |  | 650,500 |
Total liabilities |  | $ | 7,587,850 |
Net Assets |  | $ | 1,712,935 |
The Company determined that it was reasonable to use the price which it paid for its equity interests as the basis for estimating the total fair value of Delphax ’s equity as of November 24, 2015 acquisition date. The effect of the Company’s equity and debt investments of $1,050,000 and $2,500,000, respectively, are not reflected in the above table. As such, the amounts presented reflect the provisional fair values of Delphax’s assets and liabilities immediately prior to the Company’s investments. The net assets amount presented above is the estimated acquisition date fair value of the non-controlling interests in Delphax. Delphax ’s debt immediately prior to the acquisition included approximately $508,000 due under the 90 -Day Senior Subordinated Note. The Company ’s initial accounting for its acquisition of interests in Delphax is currently incomplete with respect to the fair value determination of an acquired asset retirement obligation. Therefore, as permitted by the applicable accounting guidance, the above amounts are provisional. As further discussed in Note 11, the Company recognized significant expenses in the June 30, 2016 quarter associated with Delphax employee benefit costs and write-downs of Delphax inventories, long-lived tangible and intangible assets, and goodwill. The Company concluded that the charges were necessary to reflect changes in market conditions and business outlook during the June 30, 2016 quarter and were not associated with conditions that existed as of the Delphax Closing Date. As such, these adjustments were not accounted for as “measurement period” adjustments in the accompanying condensed consolidated financial statements.
Contrail Aviation Inc. [Member] |
Notes to Financial Statements |
Business Combination Disclosure [Text Block] |
3. | Acq uisition of Interests in Contrail (As Amended)
On July 18, 2016 ( the "Contrail Closing Date"), pursuant to an asset purchase agreement (the “Asset Purchase Agreement”) between Contrail Aviation Support, LLC (“Contrail Aviation”), a subsidiary of the Company, Contrail Aviation Support, Inc. (the “Seller” or “Contrail”) and Joseph Kuhn, the sole shareholder of the Seller, Contrail Aviation completed the purchase of all of the assets owned, used or usable by the Seller, other than cash, equity in the Seller ’s IC-DISC subsidiary and certain other specified excluded assets. Pursuant to the Asset Purchase Agreement, Contrail Aviation also assumed certain liabilities of the Seller. Prior to this acquisition, the Seller, based in Verona, Wisconsin, engaged in the business of acquiring surplus commercial jet engines and components and supplying surplus and aftermarket commercial jet engine components. In connection with the acquisition, Contrail Aviation offered employment to all of the Seller’s employees and Mr. Kuhn was appointed Chief Executive Officer of Contrail Aviation. Following the acquisition, Contrail Aviation comprises a newly formed business segment of the Company — the commercial jet engine segment. The acquisition consideration consisted of (i) $4,033,368 in cash, $300,000 of which is being held in an escrow account to secure indemnification payments to Contrail Aviation under the Asset Purchase Agreement, (ii) equity membership units in Contrail Aviation representing 21% of the total equity membership units in Contrail Aviation, and (iii) and contingent additional deferred consideration payments which are more fully described below. The cash consideration was subject to an adjustment based on the Seller ’s Net Working Capital (as defined in the Asset Purchase Agreement) as of the Contrail Closing Date. The balance sheet of Contrail Aviation as of September 30, 2016 reflects a receivable due from Mr. Kuhn for this Contrail Closing Date working capital adjustment. Pursuant to the Asset Purchase Agreement, Contrail Aviation agreed to pay as contingent additional deferred consideration up to a maximum of $1,500,000 per year and $3,000,000 in the aggregate (collectively, the “Earnout Payments” and each, an “Earnout Payment”), calculated as follows: (i) if Contrail Aviation generates EBITDA (as defined in the Asset Purchase Agreement) in any Earnout Period (as defined below) less than $1,500,000, no Earnout Payment will be payable with respect to such Earnout Period; (ii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $1,500,000, but less than $2,000,000, the Earnout Payment for each such Earnout Period will be an amount equal to the product of ( x ) the EBITDA generated with respect to such Earnout Period minus $1,500,000, and (y) two ( 2 ); (iii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $2,000,000, but less than $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,000,000; (iv) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,500,000; and (v) if, following the fifth Earnout Period, Contrail Aviation has generated EBITDA equal to or in excess of $15,000,000 in the aggregate during all Earnout Periods, but the Seller has received or is owed less than $3,000,000 in aggregate Earnout Payments pursuant to clauses (i) through (iv), above, Contrail Aviation will make an additional Earnout Payment to the Seller in an amount equal to the difference between $3,000,000 and the aggregate Earnout Payments already received or payable pursuant to clauses (i) through (iv), above. As used in the Asset Purchase Agreement, “Earnout Period” means each of the first five twelve -full-calendar-month periods following the closing of the acquisition. On the Contrail Closing Date, Contrail Aviation and the Seller entered into an Operating Agreement (the “Operating Agreement”) providing for the governance of and the terms of membership interests in Contrail Aviation and including put and call options (“Put/Call Option”) permitting, at any time after the fifth anniversary of the Contrail Closing Date, Contrail Aviation at its election to purchase from the Seller, and permitting the Seller at its election to require Contrail Aviation to purchase from the Seller, all of the Seller ’s equity membership interests in Contrail Aviation at price to be agreed upon, or failing such an agreement to be determined pursuant to third -party appraisals in a process specified in the Operating Agreement. The following table summarizes the p rovisional fair values of assets acquired and liabilities assumed by Contrail Aviation as of the Contrail Closing Date:
|  | July 18, 2016 |
ASSETS |  |  |  |
Accounts receivable |  | $ | 1,357,499 |
Inventories |  |  | 2,118,475 |
Prepaid expenses |  |  | 30,121 |
Property and equipment |  |  | 33,095 |
Intangible assets - non-compete |  |  | 69,700 |
Intangible assets - tradename |  |  | 322,000 |
Intangible assets - certification |  |  | 47,000 |
Intangible assets - customer relationship |  |  | 451,000 |
Goodwill |  |  | 3,986,865 |
Total assets |  | $ | 8,415,755 |
LIABILITIES |  |  |  |
Accounts payable |  | $ | 366,575 |
Accrued expenses |  |  | 43,652 |
Earnout liability |  |  | 2,900,000 |
Total liabilities |  | $ | 3,310,227 |
Net Assets |  | $ | 5,105,528 |
The Company ’s purchase accounting reflects the estimated net fair value of the Seller’s assets acquired and liabilities assumed as of the Contrail Closing Date. Purchase accounting also reflects the Company’s current estimate that the Earnout Payments will be due at the above-specified maximum level. The Contrail Closing Date balance sheet information disclosed above reflects the present value of such estimated Earnout Payments. The Company ’s initial accounting for the Contrail acquisition was incomplete as of the date of the Original Filing. Therefore, as permitted by the applicable accounting guidance, the above amounts are provisional. The Put/Call Option specifies a fair value strike price as of the exercise date. As such, the Company assigned no value to the Put/Call Option for purposes of purchase accounting. Because the Put/Call Option permits the Seller to require Contrail Aviation to purchase all of the Seller ’s equity membership interests in Contrail Aviation, the Company has presented this redeemable non-controlling interest in Contrail Aviation between the liabilities and equity sections of the accompanying September 30, 2016 condensed consolidated balance sheet. The Company estimates that the fair value of Contrail Aviation would not have changed by more than an inconsequential amount between July 18, 2016 and September 30, 2016. Therefore, other than allocation of the Seller’s proportionate share of Contrail Aviation’s net earnings for this stub period, the Company did not adjust the redeemable non-controlling interest balance from the Contrail Closing Date. Proforma financial information is not presented as the results are not material to the Company's consolidated financial statements. The following presents information on Contrail Aviation’s intangible assets and goodwill at September 30, 2016:
|  |  | July 18, 2016 |  |  | Amortization |  |  | September 30, 2016 |
|  |  | (Unaudited) |  |  |  |  |  |  | (Unaudited) |
Amortizable intangible assets |  | $ | 889,700 |  |  | $ | (26,568 | ) |  | $ | 863,132 |
Goodwill |  |  | 3,986,865 |  |  |  | - |  |  |  | 3,986,865 |
Intangible assets and goodwill, net |  | $ | 4,876,565 |  |  | $ | (26,568 | ) |  | $ | 4,849,997 |

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