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Business Acquisition

3 Months Ended

Mar. 31, 2020

6.	Business Acquisition

On March 2, 2020, the Company entered into a stock purchase agreement to acquire all of the issued and outstanding stock of Graphic Sciences. The acquisition was accounted for in accordance with GAAP and was made to expand the Company’s market share in the document management industry and due to synergies of product lines and services between the Companies.

The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities at the date of acquisition as follows:

Assets acquired:
Cash	$	17,269
Accounts receivable		1,071,770
Accounts receivable, unbilled		276,023
Parts and supplies		91,396
Prepaid expenses		73,116
Other current assets		5,954
Right of use assets		2,885,618
Property and equipment		732,372
Intangible assets (see Note 7)		1,230,000
		6,383,518
Liabilities assumed:
Accounts payable		129,622
Accrued expenses		155,949
Lease liabilities		2,947,684
Federal and state taxes payable		168,900
Deferred revenue		39,186
Deferred tax liabilities - Net		149,900
		3,591,241

Total identifiable net assets		2,792,277

Purchase price		4,592,453

Goodwill - Excess of purchase price over fair value of net assets acquired	$	1,800,176

The purchase price was financed with a $686,200 seller contingent liability (contingent consideration arrangement) and $3,906,253 was paid in cash. Goodwill in the amount of $1,800,176 was recognized in the acquisition of Graphic Sciences and is attributable to the cash flows of the business derived from the potential of the Company to outperform the market due to its existing relationship and other synergies created within the Company.

Acquisition costs which include legal and other professional fees of approximately $460,767 were expensed as nonrecurring transaction costs and are included in Significant transaction costs in the accompanying condensed consolidated statement of operations.

The contingent consideration arrangement requires the Company to pay the seller up to $833,000 annually for a three year period based on a gross profit level achieved by Graphic Sciences on an annual basis, resulting in a max payout to the seller over a three year period of $2,500,000, as defined. Management estimated a fair value of the contingent consideration liability of $686,200 which would be owed to the seller based on the terms of the earnout, and accordingly, recorded this liability at the acquisition date in accordance with GAAP. The fair value was based on projections of future gross profit over a three year period and valuation techniques that utilized expected volatility, threshold probability, and discounting of future payments.

As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded. The finalization of the purchase accounting assessment may result in changes in the valuation of assets acquired and liabilities assumed and may have an impact on the Company’s results of operations and financial position.

The following unaudited pro forma information presents a summary of the consolidated results of operations for the Company as if the acquisition of Graphic Sciences had occurred on January 1, 2019.

	For the Three Months Ended
	(unaudited)			(unaudited)
	March 31, 2020			March 31, 2019
Total revenues	$	2,488,401		$	2,005,306

Net loss	$	(457,486	)	$	(623,448	)

Basic and diluted net loss per share	$	(0.16	)	$	(0.22	)

The unaudited pro forma consolidated results are based on the Company’s historical financial statements and those of Graphic Sciences and do not necessarily indicate the results of operations that would have resulted had the acquisition actually been completed at the beginning of the applicable period presented. The pro forma financial information assumes that the companies were combined as of January 1, 2019.