ACQUISITION

12 Months Ended

Dec. 31, 2016

Acquisition

ACQUISITION

In September 2016, the Company announced that it entered into an Amalgamation Agreement (the “Amalgamation Agreement”) with emergeIT Inc., an Ontario corporation, which does business as “ShipTime” (“emergeIT” or “ShipTime”) to acquire emergeIT and merge it with a newly formed PAID subsidiary. The closing for the Amalgamation Agreement occurred on December 19, 2016, and the amalgamation was effective on December 30, 2016.

The transaction has been accounted for as a business combination and the financial results of ShipTime have been included in the Company’s consolidated financial statements for the period subsequent to its acquisition. At estimated acquisition date of the fair value of consideration transferred, assets acquired and liabilities assumed for ShipTime are presented below and represent the Company’s best estimates.

Fair Value of Consideration Transferred

Pursuant to the Amalgamation Agreement the Company formed a new subsidiary under Canadian law (“Callco”). The new subsidiary formed its own Canadian subsidiary (“Exchangeco”), and Callco is the sole shareholder of Exchangeco. Both Callco and Exchangeco are incorporated in Ontario under the province’s Business Corporations Act. Effective December 30, 2016 (the “Effective Date”), Exchangeco merged (amalgamated) with emergeIT so that as of the effective date, the Company owns, indirectly through Callco, all of the issued and outstanding shares of common stock of emergeIT. At that time, the amalgamated entity was renamed “ShipTime Canada Inc.” and is the operating company with respect to the emergeIT assets.

emergeIT was privately held by 13 holders (“emergeIT Sellers”). The emergeIT Sellers owned “Class A” and “Class B” common shares, which converted into “exchangeable shares” of ShipTime Canada Inc. in the merger. Exchangeable shares are rights to the Company’s common stock and preferred stock. These rights can be exercised by the conversion of the exchangeable shares into shares of common and preferred stock of the Company, in accordance with an Exchange and Call Rights Agreement, described below.

emergeIT Class A common shares and Class B common shares were converted into exchangeable shares with rights to receive 447 shares of the Company’s common stock and 3,109 shares of preferred stock, provided that upon the reverse/forward split described below, the right shall be to receive 45 shares of the Company’s common stock and 311 shares of the Company’s Preferred Stock. As of the effective date, outstanding emergeIT options and warrants were replaced by exchangeable shares in the same manner as emergeIT’s Class A and Class B common shares. The Company currently reserves for 550,000 shares of its common stock with regard to the exchangeable shares. Warrants have been issued it an entity controlled by the Company’s CFO for exchangeable shares and are valued at $523,000 on the date of the acquisition.

Pursuant to the Amalgamation Agreement, the Company filed a Certificate of Designations effective on December 30, 2016 which sets aside 5,000,000 shares of Preferred Stock as Series A Preferred Stock. The Series A Preferred Stock holders have no voting rights and have an aggregate liquidation value of approximately $11,581,000. The Series A Preferred Stock also carries a coupon payment obligation of 1.5% per year calculated by taking the 30-day average closing price for an equal number of shares of common stock for the month immediately preceding the coupon payment date, which is made annually. Payout of the coupon may be made out of existing cash or in shares of Series A Preferred stock of the Company. The Series A Preferred Stock have no voting or conversion rights. If purchased, redeemed, or otherwise acquired (other than conversion), the preferred stock may be reissued.

The total acquisition date fair value of the consideration transferred is estimated at approximately as follows:

Preferred stock issuance to emergeIT Sellers	$	11,581,000
Common stock issuance to the emergeIT Sellers		2,035,000
Warrant issuance to an emergeIT warrant holder		523,000
Total acquisition date fair value	$	14,139,000

Allocation of Consideration Transferred

The identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based on their estimated fair values as of December 30, 2016, the acquisition date. The excess of the acquisition date fair value of consideration transferred over the estimated fair value of the net tangible assets and intangible assets acquired was recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.

Cash and cash equivalents	$	278,709
Accounts receivable		13,514
Due from related party		1,026
Prepaid expenses and other assets		20,742
Funds held in trust		169,082
Property and equipment		86,517
Intangible assets		5,780,000
		6,349,590
Accounts payable and accrued liabilities		538,792
Other liabilities		401,114
Deferred tax liabilities		1,260,369
Total liabilities assumed		2,200,275
Goodwill		9,989,685
Net assets acquired	$	14,139,000

Results of Operations

Since the effective date of the acquisition and merger, revenues and expenses of ShipTime have been included in the Company’s consolidated statement of operations for the period ended December 31, 2016 and were insignificant.

Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results (including ShipTime) for the years ended December 31, 2016 and 2015 as though the companies had been combined as of the beginning of each of the periods presented.

The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each period presented, nor is it indicative of results of operations which may occur in the future. The unaudited pro forma results presented include amortization charges for intangible assets and eliminations of intercompany transactions. 

	For the Year Ended December 31, 2016			For the Year Ended December 31, 2015
Total Revenues	$	6,091,401		$	4,372,688
Net loss		(1,011,764	)		(2,199,739	)

Management engaged a third-party valuation firm to assist in the determination of the fair value of the acquired intangible assets of ShipTime. In determining the fair value of the intangible assets, the Company considered, among other factors, the best use of acquired assets, analyses of historical financial performance of ShipTime and estimates of future performance of ShipTime. The fair values of the identified intangible assets related to ShipTime’s customer relationships, trade name, and technology. The fair value of customer relationships was calculated using the income approach. The fair value of the trade name and technology were calculated using the cost approach. The following table sets forth the components of identified intangible assets associated with the ShipTime acquisition and their estimated useful lives.

	Fair Value		Useful Life
Customer relationships	$	4,474,000	15 Years
Trade Name		797,000	5 years
Technology		509,000	2 years
	$	5,780,000

The Company determined the useful lives of intangible assets based on the expected future cash flows and contractual lives associated with the respective asset. Trade names represent the fair value of the brand and name recognition associated with the marketing of ShipTime’s formulations and services. Customer relationships represent the expected benefit from customer contracts that, at the date of acquisition, were reasonably anticipated to continue given the history and operating practices of ShipTime.

In preparing its report, the third-party valuation firm used various financial and other information provided to the valuation firm by the Company’s and emergeIT’s management or obtained from other private and public sources including financial projections prepared by emergeIT management, and relied on the accuracy and completeness of this information. There is no assurance that the valuation firm, or any other financial adviser that the Company might choose, will utilize the same process of methodologies in connection with future valuations of emergeIT, or that such advisor(s) will reach conclusions that are consistent with those presented.