Item 1.01 Entry into a Material Definitive Agreement.
On August 22, 2018, One Stop Systems, Inc., a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Concept Development, Inc., a California corporation (“CDI”) and CDI’s sole shareholder (the “Sole Shareholder”)(collectively, the “Parties”).
Pursuant to the terms of the Merger Agreement, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, a newly created California corporation that is wholly-owned by the Company (“Merger Sub 1”) will be merged with and into CDI with CDI surviving the first merger (the “Surviving Corporation”) and, immediately following the effectiveness of said first merger and as part of a single overall transaction, the Surviving Corporation shall be merged with and into a newly created California limited liability company that is wholly-owned by the Company (“Merger Sub 2”) with Merger Sub 2 surviving the second merger (collectively, the “Merger”).
Effective upon the consummation of the Merger (the “Closing”), as consideration for the Merger Agreement, the Company shall deliver to CDI, the Sole Shareholder, or such other person as may be specified in the Merger Agreement: (i) a cash purchase price of $667,000 (less distributions), subject to post-closing adjustment (the “Cash Purchase Price”), and (ii) duly authorized, newly and validly issued, fully paid and nonassessable shares of restricted common stock of the Company with a value of $4,927,000 (the “Share Purchase Price,” and together with the “Cash Purchase Price,” the “Purchase Price”). As part of the transaction the Company is also assuming a working capital loan obligation of CDI in the amount of $370,096. The number of newly issued shares of restricted common stock of the Company issuable as consideration for the Share Purchase Price is equal to the Share Purchase Price divided by the average closing price per share of the Company’s common stock over the fifteen (15) trading days ending on the last trading day prior to the Closing (the “Common Stock Price”), subject to a maximum share amount of 9.99% of the Company’s common stock outstanding as of the Closing (the “Maximum Share Amount”) which will result in a corresponding downward reduction in the Share Purchase Price. No fractional shares will be issued in connection with the Merger Agreement. Each holder of CDI shares with such fractional interests will, in lieu of fractional shares, receive in cash (rounded to the nearest whole cent), without interest, an amount equal to such fractional amount multiplied by the Common Stock Price.
There is an indemnification escrow holdback of $120,000 and the Purchase Price is subject to working capital adjustments.
The Merger Agreement includes customary representations, warranties and covenants by the Parties. Each Party has agreed, among other things, (i) to generally conduct its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the Closing (other than agreed actions to be taken in anticipation of the Closing); (ii) not to engage in certain types of transactions during this period; and (iii) to secure all necessary approvals to authorize the Merger Agreement. In addition, there are certain additional tax covenants, including that the Company and the Sole Shareholder each payone-half of transfer, documentary, sales, etc. taxes and fees (including any penalties and interest) incurred in connection with the transaction, tax refunds are payable to the Sole Shareholder with tax credits payable to the Company and the Surviving Corporation, as applicable, and each party has agreed to use its reasonable best efforts to cause the Merger to be treated astax-free reorganization and not take any action that could reasonably be expected to prevent or impede the Merger from qualifying as tax free-reorganization
Consummation of the Merger is subject to various closing conditions, including: (i) the accuracy of the representations and warranties made by the Parties immediately prior to Closing: (ii) the performance and compliance by the Parties in all material respects of their covenants, obligations and conditions under the Merger Agreement: (iii) no claim or action will have been commenced against any of the Parties that has not been withdrawn and which would prevent the Closing; and (iv) the absence of any material adverse changes to the businesses and operations of either Party.
As for indemnification, there is a $60,000 indemnification “basket,” a $5,594,000 cap on claims for breach of fundamental representations (subject to downward adjustment if the Share Purchase Price is reduced if the Maximum Share Amount is applicable), and a $366,350 cap onnon-fundamental representations. The preceding limitations on indemnification do not apply to losses arising from fraud, criminal activity or willful misconduct.
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