Quarterly report pursuant to sections 13 or 15(d)

ACQUISITIONS

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ACQUISITIONS
 3 Months Ended
Mar. 31, 2013
ACQUISITIONS
2. ACQUISITIONS:

Seesmart – On December 20, 2012, Revolution purchased all the equity interests of Seesmart Technologies, Inc. for consideration of approximately $10.1 million in cash funded by the issuance of Series C convertible preferred stock, approximately 7.7 million common stock shares valued at approximately $5.0 million and 11,915 shares of Series D convertible preferred stock valued at approximately $1.0 million. In addition, as described below, the Company settled outstanding convertible note obligations of Seesmart, which resulted in a total purchase price for the enterprise value of the business of $19.6 million. The purchase price is subject to adjustment to the extent that working capital (as defined in the agreement) at closing differs from the amount specified in the agreement. The parties are in negotiations regarding the adjustment but final agreement has not been reached. However, based on the status of the negotiations the Company has estimated a reduction of the purchase price of $1,229,962 which has been reflected in these financial statements as a reduction of goodwill.

Under the Merger Agreement, the Company agreed to distribute the consideration to Seesmart Technologies, Inc.’s shareholders. As this required the Company to obtain current information from Seesmart Technologies, Inc.’s shareholders, not all of the consideration was distributed prior to March 31, 2013. During the three months ended March 31, 2013, the Company issued 738 shares of Series D convertible preferred stock, issued 1,821,672 shares of common stock and paid $2,750,622 as consideration for the Seesmart acquisition. In addition, the Merger Agreement contains provisions for certain escrow amounts of cash and stock. The Company has recorded a liability for the undistributed consideration and escrow amounts at March 31, 2013. The following table summarizes the distributed and undistributed consideration by type as of March 31, 2013:

 

     Distributed Consideration      Undistributed
Consideration		      Unfunded Escrow      Total Consideration  
     Shares      Amount      Shares      Amount      Shares      Amount      Shares      Amount  

Cash

      —         $ 10,410,343         —         $ 288,634         —         $ 563,347         —         $ 11,262,324   

Common stock

      8,428,722         5,478,670         262         169         791,856         514,707         9,220,840         5,993,546   

Series D preferred stock

      11,915         1,012,775         —           —           —           —           11,915         1,012,775   
     

 

 

        

 

 

        

 

 

        

 

 

  
      $ 16,901,788          $ 288,803          $ 1,078,054          $ 18,268,645   
     

 

 

        

 

 

        

 

 

        

 

 

  

 

The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Seesmart acquisition. The final determination of the fair value of certain assets and liabilities including income taxes and contingencies, including the litigation discussed in Note 13, will be completed within the one year measurement period from the date of acquisition as required by the FASB ASC Topic 805, “Business Combinations”.

 

Cash

    $ 68,661   

Accounts receivable

      1,048,345   

Inventory

      1,352,326   

Goodwill

      10,158,702   

Customer relationships

      7,273,000   

Trademarks

      3,434,000   

Other assets

      333,470   
  

 

 

  

Assets acquired

    $ 23,668,504   

Accounts payable

    $ 2,692,064   

Accrued liabilities

      1,137,045   

Deferred revenue

      104,000   

Customer deposits

      1,466,750   
  

 

 

  

Liabilities assumed

    $ 5,399,859   
  

 

 

  

Preliminary purchase price (enterprise value)

    $ 18,268,645   
  

 

 

  
  

Preliminary purchase price (equity value)

    $ 14,914,982   
  

 

 

  

All the goodwill is included in the LED replacement lamps and fixtures segment (which is also one of the Company’s reporting units). None of the goodwill is expected to be deductible for income tax purposes.

On the acquisition date, Seesmart had outstanding convertible notes payable. In accordance with terms of the notes, the notes were converted into the right to receive cash equal to the principal, a 20% premium on the principal plus accrued interest. On the acquisition date, the Company’s cash obligation totaled $3,421,592. During 2013 pursuant to the terms of the merger agreement, the Company offered the note holders to exchange the notes for common stock, at an exchange rate of $0.6959 per share. Holders representing $1,029,895 of the cash obligation elected to receive a total of 1,479,947 shares of common stock. The Company has recognized a $67,929 reduction in the carrying value of goodwill represented the difference in the cash obligation and the value of the common stock issued, based on the market price of the Company’s common stock at the acquisition date. The remaining holders elected to be paid in cash and received $2,391,697.

Elite LED Solutions – On March 8, 2013, Lighting Integration Technologies, Inc. (“LIT”) a wholly owned subsidiary of the Company, acquired certain assets of Elite LED Solutions, Inc. for $500,000 in cash and 300,000 of the Company’s common shares in contingent consideration valued at $356,250. Concurrently, the Company entered into a five-year sales consulting agreement with the principals of the sellers pursuant to which the Company is obligated to pay a $20,000 monthly fee plus additional fees based on achieving specified sales targets and 3% of the net profits of LIT as defined. In addition, the Company agreed to issue 850,000 shares of the Company’s common stock to the sellers which vest over the five-year term of the agreement. The issuance of the shares is being accounted for as compensation to non-employees.

The transaction has been accounted as a business combination and the issuance of the common shares vesting over 5 years has been accounted as compensation pursuant to ASC 505-50 “Equity-Based Payments to Non-Employees”. The Company acquired the business primarily because of the unfulfilled revenue contracts assigned to LIT and the estimated operating synergies expected to be realized with Seesmart. The following summarizes the preliminary purchase price allocation to the assets acquired. The final allocation will be completed within one year of the acquisition:

 

Customer contracts

    $ 1,599,000   

Gain on bargain purchase

      (742,750 ) 
  

 

 

  

Preliminary purchase price

    $ 856,250   
  

 

 

  

The Company is amortizing the customer contracts over the term of the cash flows generated by the contracts, which are expected to be realized within one year.

The pro forma results of the acquisition are not materially different from the historical results.