4.  Acquisitions

 

Acquisition of Interwork Technologies

 

On April 30, 2020, pursuant to a Stock Purchase Agreement dated April 20, 2020, the Company completed the purchase of Interwork Technologies Inc., a Delaware corporation, and Interwork Technologies Inc., a corporation incorporated under the laws of the Province of Ontario, Canada (collectively “Interwork”). The Company acquired Interwork for an aggregate purchase price of $5 million Canadian dollar (equivalent to $3.6 million USD), subject to certain working capital adjustments, paid at closing plus a potential post-closing $1.1 million Canadian dollar (equivalent to $0.8 million USD) earn-out. The allocation of the purchase price was based upon the estimated fair value of Interwork’s net tangible and identifiable intangible assets as of the date of the acquisition. The transaction was accounted for under the purchase method of accounting.

The financial position and operating results of Interwork is included in the Company’s consolidated financial statements from the date of acquisition. The net sales and net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it has been integrated into the Company’s operations.

The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet and the acquisition date fair value of the total consideration transferred were as follows. The Company is in the process of filing remaining tax returns; thus the provisional measurements of goodwill and deferred income taxes are subject to change:

 

 

 

Intangible assets are comprised of approximately $3.8 million of vendor relationships with a weighted average amortization period of 13.7 years, representing the expected period of benefits, of which $2.3 million is deductible for Canadian income tax purposes. Goodwill, which was allocated to the Distribution segment, is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. Goodwill recognized as a result of the acquisition is not deductible for income tax purposes.

The purchase consideration includes approximately $0.8 million of potential earn-out consideration if certain targets are achieved, payable in cash. As of December 31, 2020, the Company reassessed the earn-out liability and increased the fair value of the earn-out liability by less than $0.1 million, with the adjustment recognized within selling, general and administrative expenses during the year ended December 31, 2020. The earn-out liability is included in accounts payable and accrued expenses as of December 31, 2020 as payment would be due in the third quarter of 2021.

 

Acquisition of CDF Group Limited

 

On November 6, 2020, the Company entered into a Share Purchase Agreement and purchased the entire share capital of CDF Group Limited (“CDF”) for an aggregate purchase price of approximately £13.3 million (equivalent to approximately $17.4 million USD), subject to certain working capital and other adjustments. The allocation of the purchase price was based upon the estimated fair value of CDF’s net tangible and identifiable intangible assets as of the date of the acquisition. The transaction was accounted for under the purchase method of accounting.

The financial position and operating results of CDF is included in the Company’s consolidated financial statements from the date of acquisition. The Company recorded net revenue for CDF of approximately $3.8 million and net income of approximately $0.2 million during the year ended December 31, 2020.

The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet and the acquisition date fair value of the total consideration transferred is depicted in the table below. Due to the timing of the closing of the transaction in the fourth quarter of 2020, the Company has not yet completed its evaluation and determination of certain assets acquired and liabilities assumed, primarily (i) the final valuation of goodwill and intangible assets, (ii) capitalized software, and (iii) the final evaluation and assessment of income tax accounts; therefore the final fair value of the assets acquired and liabilities assumed may vary from the Company’s preliminary estimates:

 

 

 

 

 

Estimated intangible assets are comprised of approximately $6.4 million of customer relationships with an amortization period of 13 years and $0.5 million of tradenames with an amortization period of 15 years, representing the expected periods of benefits. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. Goodwill recognized as a result of the acquisition is not deductible for income tax purposes.

 

The preliminary allocation of the purchase price for the acquisitions of Interwork and CDF were allocated based on information that is currently available. The Company's estimates and assumptions underlying the initial allocations is subject to the collection of information necessary to complete its allocations within the measurement period, which is up to one year from each of the acquisition dates.

 

The Company incurred acquisition related costs of approximately $1.5 million during the year ended December 31, 2020 in conjunction with the acquisitions of Interwork and CDF, which are reflected in the accompanying consolidated statements of earnings. There were no acquisition related costs incurred during the year ended December 31, 2019.

 

Pro Forma Results (unaudited)

 

The following unaudited pro forma financial information summarizes the results of operations for the years ended December 31, 2020 and 2019 as if the acquisition of Interwork and CDF had been completed as of the beginning of 2020 and 2019, respectively. The pro forma results are based upon certain assumptions and estimates, and they give effect to actual operating results prior to the acquisitions and adjustments to reflect the change in intangible assets amortization and income taxes at a rate consistent with the tax rates of the local jurisdictions. As a result, these pro forma results do not necessarily represent results that would have occurred if the acquisitions had taken place on the basis assumed above, nor are they indicative of the results of future combined periods.