| Business Combinations | 4. Business Combinations 3VR Security, Inc. On February 14, 2018, the Company acquired 3VR Security, Inc. (“3VR”), a video technology and analytics company, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Eagle Acquisition, Inc., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), 3VR, and Fortis Advisors LLC, a Delaware limited liability company, acting as Security Holder Representative. Pursuant to the Merger Agreement, at the effective time, Merger Sub merged with and into 3VR and 3VR became a wholly-owned subsidiary of the Company (the “Acquisition”). Under the terms of the Merger Agreement, at the closing of the Acquisition, the Company acquired all of the outstanding shares of 3VR for total purchase consideration of $5.9 million, consisting of:
(i)
payment in cash of approximately $1.6 million;
(ii)
issuance of subordinated unsecured promissory notes in an aggregate principal amount of $2.0 million;
(iii)
issuance of 609,830 shares of the Company’s common stock with a value of approximately $2.3 million. An aggregate of up to $1.0 million, or 294,927 shares, of the Company’s common stock issuable at the closing of the transaction were held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification claims. On May 9, 2018, the Company and the Security Holder Representative reached agreement as to the satisfaction of certain of the indemnification claims asserted by the Company at the closing of the Acquisition. As a result, the purchase consideration, and the amount of goodwill recorded, were reduced by $660,000. Of the 294,927 shares that were held back at closing, 181,319 shares were canceled. On January 25, 2019, the Company filed an additional claim with the Security Holder Representative for an amount exceeding the remaining amount of the holdback shares of approximately $0.3 million, or 93,406 shares. On April 15, 2019, the Company and the Security Holder Representative reached agreement as to the satisfaction of the remaining indemnification claims asserted by the Company at the closing of the Acquisition. As a result, the purchase consideration, and the amount of goodwill recorded, was reduced by the remaining $340,000 and the remaining 93,406 holdback shares were canceled. Additionally, in the event 3VR achieved specified targets in 2018, the Company would have been obligated to issue earnout consideration. Such earnout targets were not achieved. On February 14, 2019, the Company repaid the noteholders an aggregate principal amount, including accrued interest, of $2.1 million. Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The following table summarizes the fair values of assets acquired and liabilities assumed, adjusted for the settlement of the indemnification claims noted above, (in thousands):
Cash
$
195
Accounts receivable
2,029
Inventory
257
Prepaid expenses and other current assets
169
Property and equipment
334
Trademarks
400
Customer relationships
2,900
Developed technology
3,000
Total identifiable assets acquired
9,284
Accounts payable
(1,590
)
Accrued expenses and liabilities
(726
)
Deferred revenue
(2,928
)
Debt
(3,622
)
Total liabilities assumed
(8,866
)
Net identifiable assets acquired
418
Goodwill
5,456
Purchase price
$
5,874
Acquisition related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):
Gross Purchased Intangible Assets
Estimated Useful Life (in Years)
Trademarks
$
400
5
Customer relationships
2,900
10
Developed technology
3,000
10
$
6,300
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of 3VR resulted in $5.5 million of goodwill, which is not deductible for tax purposes. With the addition of the 3VR video security and analytics platform, the Company believes this goodwill largely reflects the expansion of its Hirsch product and service offerings through the complementary offerings of 3VR. In accordance with ASC 350, Intangibles – Goodwill and Other Goodwill and Intangible Assets Pursuant to ASC 805, Business Combinations $ Thursby Software Systems On November 1, 2018, the Company completed the acquisition of Thursby Software Systems, Inc. (“Thursby”), a provider of security software for mobile devices, pursuant to an Agreement and Plan of Merger (the “Thursby Agreement”), by and among the Company, TSS Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub 1”), TSS Acquisition, LLC., a wholly owned subsidiary of the Company (“Merger Sub 2” and together with Merger Sub 1, the “Merger Subs”), Thursby, and William Thursby as the sole Shareholder of Thursby. Pursuant to the Thursby Agreement, at the effective time, Merger Sub 1 merged with and into Thursby and Thursby became a wholly-owned subsidiary of the Company (“Merger 1”), following which Thursby merged with and into Merger Sub 2, whereupon which the separate corporate existence of Thursby ceased with Merger Sub 2 surviving the merger (“Merger 2”). Under the terms of the Thursby Agreement, at the closing of the acquisition, the Company acquired all of the outstanding shares of Thursby for total purchase consideration of $3.1 million, consisting of:
(i)
payment in cash of approximately $0.6 million, net of cash acquired;
(ii)
issuance of 426,621 shares of the Company’s common stock with a value of approximately $2.5 million. An aggregate of up to $0.5 million, or 85,324 shares, of the Company’s common stock issuable at the closing of the transaction are being held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification claims. Additionally, in the event that revenue from Thursby products is greater than $8.0 million, $11.0 million, or $15.0 million in product shipments in 2019, the Company will be obligated to issue earnout consideration of up to a maximum of $7.5 million payable in shares of the Company’s common stock, subject to certain conditions. In the event that such revenue is less than $15.0 million in 2019, but 2020 revenue from Thursby products exceeds $15.0 million, the Company will be obligated to issue an additional $2.5 million in earnout consideration payable in shares of the Company’s common stock. The maximum total earnout consideration payable for all periods is $7.5 million in the aggregate, payable in shares of the Company’s common stock. Management has assessed the probability of the issuance of shares related to the earnout consideration, and the payment of the contingent consideration noted above, and determined it as remote. Accordingly, no value was ascribed to the earnout consideration as of September 30, 2019. Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Such estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition). The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Cash
$
3,485
Accounts receivable
526
Inventory
1,361
Prepaid expenses and other current assets
12
Trademarks
200
Customer relationships
1,500
Developed technology
700
Total identifiable assets acquired
7,784
Accounts payable
(31
)
Accrued expenses and liabilities
(67
)
Deferred revenue
(243
)
Other current liabilities
(4,307
)
Total liabilities assumed
(4,648
)
Net identifiable assets acquired
3,136
Goodwill
3,490
Purchase price
6,626
Less: cash acquired
(3,485
)
Net purchase price
$
3,141
Acquisition related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):
Gross Purchased Intangible Assets
Estimated Useful Life (in Years)
Trademarks
$
200
5
Customer relationships
1,500
10
Developed technology
700
10
$
2,400
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Thursby resulted in $3.5 million of goodwill, which is not deductible for tax purposes. With the addition of the Thursby security software for mobile devices, the Company believes this goodwill largely reflects the synergistic strengthening of its Identity offerings providing complete solutions for secure and convenient logical access across smart cards and derived credentials on Apple iOS and Android mobile devices. In accordance with ASC 350, goodwill will not be amortized but is tested for impairment at least annually in the fourth quarter. See Note 6, Goodwill and Intangible Assets Pursuant to ASC 805, the Company incurred and expensed approximately Viscount Systems, Inc. On January 2, 2019, the Company completed the purchase of substantially all the assets of the Freedom, Liberty, and Enterphone™ MESH products and services of Viscount Systems, Inc. (“Viscount”) and the assumption of certain liabilities (the “Asset Purchase”). Under the terms of the Asset Purchase, the Company was obligated to pay at closing aggregate consideration of $2.9 million consisting of:
(i)
payment in cash of approximately $1.3 million, and
(ii)
the issuance of 419,288 shares of the Company’s common stock with a value of approximately $1.6 million. An aggregate of approximately 31,446 shares of the Company’s common stock issuable at the closing of the transaction were held back for 12 months following the closing for the satisfaction of certain indemnification claims. Additionally, in the event that revenue from the assets purchased under the agreement in 2019 is greater than certain specified revenue targets, the Company will be obligated to issue earnout consideration of up to a maximum of $3.5 million payable in shares of the Company’s common stock (subject to certain conditions). In the event that such revenue targets are not met in 2019, but 2020 revenue from the assets purchased exceeds certain higher targets for 2020, then the Company will be obligated to issue up to a maximum of $2.25 million in earnout consideration in the form of stock. The maximum total earnout consideration liability for all periods is $3.5 million in the aggregate, payable in the Company’s common stock. In the first quarter of 2019, management assessed the probability of the issuance of shares related to the earnout consideration and determined its fair value to be $200,000. In the third quarter of 2019, the Company reassessed the probability and increased the fair value of the earnout consideration liability by $175,000 to $375,000. This increase was included in operating expenses in the Company’s condensed consolidated statements of operations. Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Such estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Accounts receivable
$
636
Inventory
276
Prepaid expenses and other current assets
29
Property and equipment
190
Operating lease ROU assets
550
Trademarks
160
Customer relationships
710
Developed technology
800
Total identifiable assets acquired
3,351
Accounts payable
(372
)
Operating lease liabilities
(61
)
Accrued expenses and liabilities
(120
)
Deferred revenue
(34
)
Earnout consideration liability
(200
)
Other current liabilities
(326
)
Long-term operating lease liabilities
(489
)
Total liabilities assumed
(1,602
)
Net identifiable assets acquired
1,749
Goodwill
1,173
Net purchase price
$
2,922
Acquisition related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):
Gross Purchased Intangible Assets
Estimated Useful Life (in Years)
Trademarks
$
160
5
Customer relationships
710
10
Developed technology
800
10
$
1,670
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The Asset Purchase resulted in $1.2 million of goodwill. With the addition of Viscount’s products and services, the Company believes this goodwill largely reflects the expansion of its Premises offerings with advanced, complementary solutions for the commercial and small- and medium-sized business markets, leveraging Freedom’s IT-centric software, defined architecture, and hardware-light platform. In accordance with ASC 350, goodwill will not be amortized but is tested for impairment at least annually in the fourth quarter. See Note 6, Goodwill and Intangible Assets Pursuant to ASC 805, the Company incurred and expensed approximately $27,000 and $227,000 in acquisition and transactional costs associated with the Asset Purchase during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively, which were primarily general and administrative expenses. |
