Note O – Business Combination

On August 30, 2019, the Company and its newly-formed wholly-owned subsidiary, Eastern Engineered Systems, Inc., a Delaware corporation (“EES” and with the Company, the “Company Parties”) entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Big 3 Holdings, LLC, a Delaware limited liability company (“Seller”), Big 3 Precision Mold Services, Inc., a Delaware corporation and wholly-owned Subsidiary of Seller (“Big 3 Mold”), and Big 3 Precision Products, Inc., a Delaware corporation and wholly owned Subsidiary of Seller (“Big 3 Products”), Industrial Design Innovations, LLC, a Delaware limited liability company and wholly-owned Subsidiary of Big 3 Products (“Design Innovations”), Sur-Form, LLC, a Delaware limited liability company and wholly-owned Subsidiary of Big 3 Products (“Sur-Form”), Associated Toolmakers Limited, a limited company formed under the laws of England and Wales and wholly-owned Subsidiary of Big 3 Mold (“Associated” and together with Big 3 Mold, Big 3 Products, Design Innovations and Sur-Form, collectively “Big 3 Precision”), TVV Capital Partners III, L.P., a Delaware limited partnership (“TVV III”), TVV Capital Partners III-A, L.P., a Delaware limited partnership (“TVV IIIA”), Alan Scheidt, (“Scheidt”), Todd Riley (“Riley”), Clinton Hyde (“Hyde,” and together with TVV-III, TVV-IIIA, Scheidt and Riley, the “Seller Owners”), and Big 3 Holdings, LLC, a Delaware limited liability company, as the initial Seller Representative (the “Seller Representative”). The Seller and the Seller Owners are collectively the “Selling Parties”. On August 30, 2019, pursuant to the Stock Purchase Agreement, the Company, through EES, acquired all of the outstanding equity interests of Big 3 Precision Products and Big 3 Mold Services, and indirectly through them, all of the outstanding equity interests in Design Innovation, Sur-Form and Associated, for an adjusted purchase cash price of $81.1 million. The acquisition was financed with a combination of $2.1 million of cash on hand, and a $100.0 million credit agreement (the “Credit Agreement”) with Santander Bank, N.A., for itself, People’s United Bank, N. A. and TD Bank, N.A. as lenders and a $20 million revolving credit line with lenders through a credit agreement (the “Credit Agreement”). In connection with the Credit Agreement, the Company also used its cash to repay the remaining balance (approximately $19.1 million) of its then outstanding term loan with People’s United N.A.

Through its two divisions, Big 3 Precision Products and Big 3 Precision Mold Services, Big 3 Precision serves diverse markets including truck, automotive, plastic packaging products, packaged consumer goods and pharmaceuticals. In particular, Big 3 Precision Products works with leading manufacturers to design and produce custom returnable packaging to integrate with their assembly processes. Big 3 Precision Mold Services is a global leader in the design and manufacture of blow mold tools.

At August 30, 2019:

Consideration
Cash	$	338,714
Debt		80,817,039
	$	81,155,753
Recognized amounts of identifiable assets acquired and liabilities assumed
Accounts receivable	$	13,649,937
Inventory		3,240,382
Prepaid and other assets		32,268
Property plant and equipment		13,770,170
Other noncurrent assets		1,337,337
Other intangible assets		21,054,000
Current liabilities		(4,910,384	)
Deferred revenue		(1,585,709	)
Income tax payable		(2,039,117	)
Note payable		(375,379	)
Deferred tax liabilities		(7,114,732	)
Total identifiable net assets		37,058,773
Goodwill		44,096,980
	$	81,155,753

Accounts Receivable

Acquired receivables are amounts due from customers, and are stated at net realizable value.

Inventories

The estimated fair value of inventories acquired, which is at net realizable value.

Property, Plant and Equipment

The property plant and equipment are estimated at net realisable value at the time of the acquisition.

Intangible Assets

The estimated fair value of identifiable intangible assets is determined primarily using the Income Approach method which is a valuation technique that provides an estimate of the fair value of an asset based on the market participant’s expectations of the cash flows that an asset would generate over its remaining useful life. Some of the more significant assumption inherent in the development of the identifiable intangible assets valuation, from the perspective of a market participant, include the estimate net cash flows for each year for each project or product, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors.

Goodwill Allocation

Goodwill of $44,096,980 arising from the acquisition consists of the difference between the consideration paid and the fair value of the assets and liabilities acquired. None of the goodwill recognized is expected to be deductible for income tax purposes. The following table summarizes the consideration paid for Big 3 Precision and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date.

Current Liabilities

Acquired current liabilities are amounts owed to vendors or accrued expenses.

Deferred Revenue

Deferred revenue is the amount of customers deposits at the time of the acquisition.

Income taxes

Income taxes are the estimated amount of state and federal taxes to settle certain tax positions prior to the acquisition.

Deferred Tax Liability

The deferred tax liability is stated at estimated tax liability due to the difference in the book basis of assets compared to the tax basis of those assets at the time of acquisition.

Acquisition Related Expenses

Included in general and administrative expenses in the consolidated statements of operations for the three and nine month periods ended September 28, 2019 were $765,000 and $1,184,000, respectively, for acquisition expenses.