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)
9 Months Ended
Sep. 30, 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 “Lilien 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 million and consisted of cash of $3 million, and 6 million shares of the Company's common stock deemed to have a fair value of $6 million.  The cash consideration of $3 million was obtained by the Company through a borrowing under a credit facility entered into jointly between SGS and Lilien concurrently with and for the express purpose of consummating that acquisition.   Total costs incurred in connection with the Lilien acquisition were $908,000 which consisted primarily of professional fees.

 

Lilien Systems and SGS 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 Lilien 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 million 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 September 30, 2014 the guaranteed amount was immaterial.

 

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 (in thousands):

 

Assets Acquired:        
Cash   $ 1,112  
Receivables     4,870  
Inventory     55  
Other current assets (Note A)     853  
Prepaid Licenses/Contracts (Note B)     9,147  
Property and equipment     255  
Trade name/trademarks (Note C)     3,250  
Customer relationships (Note C)     2,130  
Goodwill     4,544  
      26,217  
Liabilities Assumed:        
Accounts payable     5,094  
Accrued expenses (Note D)     970  
Deferred Revenue     11,152  
      17,217  
Purchase Price   $ 9,000  

  

(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.