Annual report pursuant to Section 13 and 15(d)

Acquisitions and Disposals of Subsidiaries

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Acquisitions and Disposals of Subsidiaries
12 Months Ended
Dec. 31, 2016
Acquisitions and Disposal of Subsidiaries [Abstract]  
ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES
5. ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES

 

Disposal of VaultLogix

 

On February 17, 2016, the Company entered into a securities exchange agreement whereby the Company and VaultLogix exchanged the White Oak Global Advisors term loan and assigned the term loan to JGB (Cayman) Concord Ltd. Refer to Note 11, Term Loans, and Note 20, Discontinued Operations, for additional detail. As a result of this assignment, the Company and VaultLogix’s obligations to White Oak Global Advisors, LLC was satisfied as of March 31, 2016. The Company recorded an $843 loss on extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2016.

 

NOTES PAYABLE - CONTINGENT CONSIDERATION

 

The Company has issued contingent consideration in connection with the acquisitions the Company completed during the years ended December 31, 2016 and 2014. The following describes the contingent consideration arrangements. 

 

AWS Entities: As additional consideration, the Company agreed to pay the AWS seller certain earn-out payments based on the first and second anniversary EBITDA of the AWS Entities.

 

First Anniversary: Following the first anniversary of the closing date, the Company calculated the EBITDA of the AWS Entities for the twelve-month period beginning on the closing date and ending on the first anniversary of the closing date. The Company was required to make an earn-out payment to the sellers based on such EBITDA as follows: (i) if such EBITDA was less than $2,000 no payment was required; (ii) if such EBITDA was equal to or greater than $2,000 and less than or equal to $3,000 then the First EBITDA Adjustment was to be equal to such EBITDA and was to be paid by the Company to the sellers in cash; (iii) if such EBITDA was greater than $3,000 and less than or equal to $4,000, then the First EBITDA Adjustment was to be equal to 1.5x such EBITDA and was to be paid by the Company to the sellers in cash; (iv) if such EBITDA was greater than $4,000 and less than or equal to $5,000, then the First EBITDA Adjustment was to be equal to 2.0x such EBITDA, of which 50% was to be paid by the Company to the sellers in cash and 50% was to be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the first anniversary of the closing date; or (v) if such EBITDA was greater than $5,000, then the First EBITDA Adjustment was to be equal to 2.25x such EBITDA, of which 50% was to be paid by the Company to the sellers in cash and 50% was to be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the first anniversary of the closing date. 

 

Second Anniversary: Following the second anniversary of the closing date, the Company calculated the EBITDA of the AWS Entities for the twelve-month period beginning on the first anniversary of the closing date and ending on the second anniversary of the closing date. The Company was required to make an earn-out payment to the sellers based on such EBITDA as follows: (i) if such EBITDA was less than or equal to the First Anniversary EBITDA, then no payment was required; (ii) if such EBITDA exceeds the First Anniversary EBITDA (the “EBITDA Growth Amount”) by an amount less than $1,000, such EBITDA Adjustment was to be equal to 2.0x the EBITDA Growth Amount and was to be paid by Company to the sellers in cash; (iii) if the EBITDA Growth Amount was equal to or greater than $1,000 and less than $3,000, then such EBITDA Adjustment was to be equal to 2.25x the EBITDA Growth Amount, of which 88.88% was to be paid by Company to the sellers in cash and 11.12% was to be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the second anniversary of the closing date; or (iv) if the EBITDA Growth Amount was equal to or greater than $3,000, then such EBITDA Adjustment was to be equal to 2.5x the EBITDA Growth Amount, of which 80% was to be paid by Company to the sellers in cash and 20% was to be paid by the issuance to the sellers of unregistered shares of common stock at a price per share equal to the closing price of the common stock on the second anniversary of the closing date.

 

During the year ended December 31, 2015, the Company issued 252,525 shares of common stock, with a fair value of $500, to the former owners of AWS for the final payment of contingent consideration owed per the purchase agreement, which was recorded within stock compensation expense on the consolidated statement of operations.

 

VaultLogix: As additional consideration, the Company agreed to provide the VaultLogix sellers certain price protection. If the closing price per share of the Company’s common stock 180 days after the closing was less than 90% of $16.50, as adjusted for any stock splits, dividends, recapitalizations, or similar transactions, then the Company was required to issue additional shares of common stock. Additionally, the adjusted closing price for purposes of the calculation could not be less than $12.50 per share. As such, the price protection of $870 was recorded as a liability on the Company’s balance sheet. During the year ending December 31, 2015, the Company issued 223,031 shares of common stock, with a fair value of $651, to the former owners of VaultLogix for the final payment of contingent consideration owed per the purchase agreement.

 

On December 1, 2014, VaultLogix acquired the assets of Axim. As part of this acquisition, the Company agreed to (1) an additional payment equal to 2X the EBITDA increase for the twelve months beginning on January 1, 2015 and concluding March 31, 2015 and (2) an additional payment equal to 2.5X the EBITDA increase over the first year EBITDA calculated as of the March 31, 2015 for the period beginning on April 1, 2015 and concluding on March 31, 2016. The Company determined the fair value of the contingent consideration to be $1,873 at the date of acquisition, which also approximated the value of the contingent consideration as of December 31, 2014. During the year ended December 31, 2015, the Company determined that, based on the results of the third-party entity since the date of acquisition, the third-party would not meet all EBITDA adjustment amounts and, as a result, the fair value of the contingent consideration was adjusted to zero. The Company recorded this adjustment as a gain on fair value of contingent consideration of $1,873 on its consolidated statement of operations as of December 31, 2015.

 

SDN Essentials, LLC: On January 1, 2016, the Company completed an asset purchase agreement with SDNE, which was accounted for as a business combination under ASC Topic 805-10.. The asset purchase agreement included provisions for earn-out payments as follows: an additional earn-out payment of $200 shall be earned for the first 12 months subsequent to the closing provided that gross revenues for the business exceed $1,350 and discretionary cash flow (defined as EBITDA less capital expenditure) exceeds $200 for the 12 months following closing. An additional earn-out payment of $315 shall be earned for the first 12 months subsequent to the closing provided that gross revenues for the business exceed $1,750 and discretionary cash flow exceeds $315. Any earn-out will be paid in cash and/or in common stock at the option of the purchaser. This amount was earned on January 1, 2017 and will be due within 90 days of the calculation of gross revenues for the 12 month accounting period. The Company recorded the full $515 as contingent consideration on the consolidated balance sheet as of December 31, 2016. 

 

The purchase consideration for the acquisition was calculated as follows:

 

    SDNE  
Cash   $ 50  
Common Stock, fair value     1,050  
Contingent consideration     515  
Total consideration   $ 1,615  

 

The purchase consideration was allocated to the assets acquired and liabilities assumed as follows:

 

    SDNE  
Current assets   $ 475  
Goodwill     823  
Intangible assets:        
Customer lists     145  
Non-compete     361  
Property and equipment     97  
Current liabilities     (286 )
Total allocation of purchase consideration   $ 1,615  

 

As of January 1, 2017, the earn-out provisions were met.