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BUSINESS COMBINATIONS

9 Months Ended

Sep. 30, 2019

2. Business Combinations

As discussed in Note 1, the Company completed the WMI acquisition on December 20, 2018. The acquisition was accounted for as a business combination in accordance with ASC 805. Accordingly, the Company is required to determine and record the fair value of the assets acquired, including any potential intangible assets, and liabilities assumed at the date of acquisition. The acquisition was considered a stock purchase for tax purposes.

The purchase price for the acquisition was $7.9 million, which is subject to a post-closing working capital adjustment. Two million dollars of the purchase price was placed in escrow at closing and may be released after the completion of the working capital adjustment and for the indemnification contingencies. The escrowed amount is shown as restricted cash on the consolidated balance sheet as of September 30, 2019. The working capital adjustment is based on the historical values of components of working capital as defined in the Stock Purchase Agreement. We have calculated a post-closing working capital adjustment. Air Industries Group (“Air”) formally objected to our calculation. The Stock Purchase Agreement provided the parties 30 days to come to an agreement on the working capital adjustment. The Company and Air could not come to an agreement within the time specified and the issues were submitted to BDO USA, LLP (“BDO”) for a binding resolution. During the course of BDO’s work, Air conceded on three of the four items of contention, leaving only the inventory valuation in dispute. In its report dated September 3, 2019, BDO found in favor of the Company and that there should be no changes to the Closing Working Capital Statement as prepared by the Company. The result of the conceded items and BDO determination would decrease the purchase price of the acquisition by approximately $4.2 million. On September 16, 2019, the Company received a letter from Air acknowledging the conceded items and, among other things, rejecting the determination by BDO. On September 27, 2019, the Company filed a notice of motion in the Supreme Court of the State of New York, County of New York, against Air seeking, among other things, an order of specific performance requiring Air to comply with its obligations under the SPA and Escrow Agreement and a judgment against Air in the amount of approximately $4.2 million.

In October 2019, Air and the Company jointly authorized the release of approximately $619,000 from escrow, which represents the value of the conceded items. The remaining amount of approximately $3.6 million is still in dispute. Because of the uncertain outcome of the September 27 court filing, the Company has not recorded any adjustments to the provisional estimates of the fair value of the assets acquired and liabilities assumed from WMI related to the BDO determination.

The Company is in the process of determining the fair values of the assets and liabilities acquired and has recorded provisional estimates as of the acquisition date. As the Company completes this process and additional information becomes known concerning the acquired assets and assumed liabilities, management will make adjustments to the fair value of the amounts provisionally recorded in the opening balance sheet of WMI during the measurement period, which is no longer than a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. If the final aggregate fair value of the net assets acquired is less than the final purchase price paid, then the Company may be required to record goodwill. Conversely, if the final aggregate fair value of the net assets acquired is in excess of the final purchase price paid, then the Company may potentially conclude that the purchase of WMI was a “bargain purchase.”

As stated above, the Company has determined the following provisional estimates of the fair value of the assets acquired and liabilities assumed from WMI:

	Provisional Fair Values
Other current assets	$	1,049,000
Accounts receivable		1,522,000
Inventory		7,969,000
Property and equipment, net		586,000
Current liabilities		(5,174,000	)
Total	$	5,952,000

The following table presents the unaudited pro forma revenue and net income for the period presented as if the WMI Acquisition had occurred on January 1, 2018, based on the provisional estimates of the fair value of the net assets acquired:

	Three months ended		Nine months ended
	September 30, 2018
Revenue	$	23,968,743	$	68,866,449
Net income	$	1,269,232	$	3,761,492
Income per common share	$	.14	$	.42