Quarterly report pursuant to Section 13 or 15(d)

Acquisition of the Business of Lilien LLC

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Acquisition of the Business of Lilien LLC (Lilien LLC)
 3 Months Ended
Mar. 31, 2014
Lilien LLC
  
Business Acquisition [Line Items]  
Acquisition
Note 4 - Acquisition of the Business of Lilien LLC
 
On March 20, 2013, the Company entered into an Asset Purchase and Merger Agreement (the “Agreement”) to acquire substantially all of the assets and liabilities of Lilien LLC and 100% of the stock of Lilien Systems (collectively referred hereafter as “Lilien”) effective as of March 1, 2013. Lilien is an information technology company whose operations complement and significantly expand the Company's current base of business.
 
The purchase price of this acquisition aggregated $9,000,000 and consisted of cash of $3,000,000, and 6,000,000 shares of the Company's common stock deemed to have a fair value of $6,000,000.  The cash consideration of $3,000,000 was obtained by the Company through a borrowing under a credit facility entered into jointly by Sysorex Government Services, Inc. and Lilien Systems concurrently with and for the express purpose of consummating that acquisition.   Total costs incurred for the Lilien acquisition were $907,865 which consisted primarily of professional fees.
 
Lilien Systems and Sysorex Government Services are co-borrowers on the loan and both guaranteed the debt.  As they are part of the consolidated group of the Company no accounting consideration related to the co-guaranty was deemed necessary since such impact, if any, would be eliminated in consolidation.
 
Additionally, under the terms of the Agreement, the Company is liable to the former members of Lilien LLC for the payment of additional cash consideration on March 20, 2015 to the extent that they receive less than $1.00 per share from the sale of the 6,000,000 shares of the Company's common stock referred to above (the “Guaranteed Amount”), less customary commissions, on or before March 20, 2015, provided the stockholders are in compliance with the terms and conditions of the lock-up agreement. Notwithstanding the foregoing, in the event that the gross profits for calendar 2013 and 2014 attributable to the Lilien assets are more than 20% below what was forecasted to the Company, the Guaranteed Amount will be proportionately reduced. As of the date of the acquisition and December 31, 2013 the guaranteed amount was de minimis.
 
The acquisition of Lilien was accounted for by the Company under the acquisition method of accounting, whereby assets acquired and liabilities assumed by the Company are recorded at their estimated fair values as of the date of acquisition and the results of operations of the acquired company are consolidated with those of the Company from the date of acquisition. The Company deemed the quoted market prices for those shares not to be a reliable measurement method due to the very limited trading activity in such securities.
 
The purchase price is allocated as follows:
 
 
Assets Acquired:
      
Cash
   $ 1,112,485  
Receivables
     4,870,471  
Inventory
     55,410  
Other current assets (Note A)
     852,759  
Prepaid Licenses/Contracts (Note B)
     9,146,954  
Property and equipment
        254,638
Trade name/trademarks (Note C)
     3,250,000  
Customer relationships (Note C)
     2,130,000  
Goodwill
     4,544,053  
      26,216,770  
Liabilities Assumed:
        
Accounts payable
     5,094,390  
Accrued expenses (Note D)
     970,139  
Deferred Revenue
     11,152,241  
      17,216,770  
Purchase Price
   $ 9,000,000  
 
(A)
Other current assets consist primarily of $356,000 of rebates receivable, $107,000 of prepaid expenses, $195,000 of unbilled revenues and $153,000 for a working capital settlement adjustment. The asset purchase agreement included a provision for an adjustment to working capital as of the closing date of the transaction.
(B)
Prepaid licenses/contracts are payments made by the Company directly to the manufacturer for the maintenance services and are being amortized over the life of the contract
(C)
The trade name/trademarks and customer relationships are identifiable intangible assets that are being amortized over their useful life of seven years.
(D)
Accrued expenses consist primarily of $654,000 of accrued compensation, $50,000 of accrued other operational expenses and $35,000 of sales taxes payable.