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Business Acquisitions

6 Months Ended

Jun. 30, 2020

6.	Business Acquisitions

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.

On April 21, 2020, the Company entered into an asset purchase agreement to acquire substantially all of the assets of CEO Image. 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 acquisitions as follows:

	Total		March 2, 2020		April 21, 2020
Assets acquired:
Cash	$	17,269	$	17,269	$	-
Accounts receivable		1,122,737		1,071,770		50,967
Accounts receivable, unbilled		276,023		276,023		-
Parts and supplies		91,396		91,396		-
Prepaid expenses		73,116		73,116		-
Other current assets		5,954		5,954		-
Right of use assets		2,885,618		2,885,618		-
Property and equipment		735,885		732,372		3,513
Intangible assets (see Note 7)		1,361,000		1,230,000		131,000
		6,568,998		6,383,518		185,480
Liabilities assumed:
Accounts payable		169,289		129,622		39,667
Accrued expenses		163,168		155,949		7,219
Lease liabilities		2,947,684		2,947,684		-
Federal and state taxes payable		168,900		168,900		-
Deferred revenue		195,448		39,186		156,262
Deferred tax liabilities - Net		149,900		149,900		-
		3,794,389		3,591,241		203,148

Total identifiable net assets/(liabilities)		2,774,609		2,792,277		(17,668	)

Purchase price		5,094,285		4,592,453		501,832

Goodwill - Excess of purchase price over fair value of net assets acquired	$	2,319,676	$	1,800,176	$	519,500

The purchase price of Graphic Sciences was financed with a $686,200 seller earnout liability 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.

The purchase price of CEO Image was partially financed with a $203,000 seller earnout liability and $170,000 in installment payments. $128,832 was paid in cash at the closing. Goodwill in the amount of $519,500 was recognized in the acquisition of CEO Image 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. Seller notes totaling $170,000 are included in notes payable – current.

Acquisition costs which include legal and other professional fees of approximately $636,440 were expensed as nonrecurring transaction costs and are included in Significant transaction costs in the accompanying condensed consolidated statement of operations.

The earnout arrangement for Graphic Sciences 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 earnout 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.

The earnout arrangement for CEO Image requires the Company to pay the seller up to $185,000 annually for a three year period based on a sales revenue level achieved by certain customers of CEO Image on an annual basis, resulting in a max payout to the seller over a two year period of $370,000, as defined. Management estimated a fair value of the earnout of $203,000 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 revenue over a two 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 acquisitions of Graphic Sciences and CEO Image had occurred on January 1, 2019.

	For the Three months ended
	(unaudited)			(unaudited)
	June 30, 2020			June 30, 2019
Total revenues	$	1,994,408		$	2,779,865

Net loss	$	(264,269	)	$	(83,704	)

Basic and diluted net loss per share	$	(0.09	)	$	(0..03	)

	For the Six months ended
	(unaudited)			(unaudited)
	June 30, 2020			June 30, 2019
Total revenues	$	4,482,809		$	4,785,171

Net loss	$	(721,755	)	$	(707,152	)

Basic and diluted net loss per share	$	(0.26	)	$	(0.25	)

The unaudited pro forma consolidated results are based on the Company’s historical financial statements and those of Graphic Sciences and CEO Image 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.