Annual report pursuant to Section 13 and 15(d)

Note 3 - Acquisitions

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Note 3 - Acquisitions
12 Months Ended
Dec. 31, 2015
Disclosure Text Block Supplement [Abstract]  
Mergers, Acquisitions and Dispositions Disclosures [Text Block]
Note 3
– Acquisitions

The following transactions were accounted for using the purchase accounting method which requires, among other things, that the assets acquired and liabilities assumed are recognized at their acquisition date fair value.

Storycode

On March 4, 2015, the Company acquired all of the issued and outstanding membership interests of the two co-founders (the “Interests”) of Topaz Interactive, LLC, an Oregon limited liability company doing business as “Storycode” pursuant to a Securities Purchase Agreement (the “Storycode SPA”) dated as of that date. The purpose of the acquisition of Storycode was to increase our service offering in our existing digital solutions clients and to obtain new client relationships.

Storycode is headquartered in Portland, Oregon and provides mobile development and creative design services for medium and large businesses.  Storycode creates mobile applications that feature award-winning UX (user experience) and UI (user interface) design working exclusively with the Adobe DPS platform.

In consideration for the Interests, the Company paid Ms. Topaz and Mr. Porath, the two members of Storycode (collectively, the “Storycode Members”): cash in the amount of $300,000; an additional $300,000 paid in escrow to be earned by the members upon the one year anniversary of their employment; an aggregate of 300,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”); and additional, potential earn-out shares of Common Stock based on Storycode’s financial performance for the three years following the closing of the acquisition.  The Company also agreed to employment agreements with the Storycode Members.  Total acquisition costs for the Storycode acquisition incurred during the year ended December 31, 2015 was $86,161, and is included in selling general and administrative expenses in the Company’s Consolidated Statements of Operations.  The purchase price in excess of the fair value of the net book values of the assets acquired and liabilities assumed was allocated to intangible assets based on management’s best estimate of fair values, taking into account all relevant information available at the time of acquisition, and the excess was allocated to goodwill.  The goodwill is deductible for tax purposes.  The intangible assets are being amortized over their expected period of benefit.

The Company has completed the valuation of the acquisition of Storycode to determine the value of the intangible assets and goodwill.

The Company’s allocation of the purchase price in connection with the acquisition of Storycode was calculated as follows:

Cash
 
$
300,000
 
Stock consideration
   
2,604,000
 
Contingent consideration
   
2, 733,334
 
Total consideration
 
$
5,637,334
 

The consideration transferred for the Storycode acquisition was allocated across the net assets of the Company as follows:

Description
 
Fair Value
   
Weighted Average Useful Life
(in years)
 
Cash
 
$
100,000
       
Deferred revenue
   
(59,384
)
     
Trade name
   
330,000
   
7
 
Customer relationship
   
900,000
   
5
 
Non-compete agreement
   
61,000
   
1.5
 
Due from seller
   
46,368
       
Goodwill
   
4,259,350
       
Total consideration
 
$
5,637,334
       

The criteria contained in the Storycode SPA related to the contingent consideration payable to Storycode is from April 1, 2015 through March 31, 2018, and based on performance milestones and other terms set forth in the Storycode SPA, the Storycode Members may receive up to 400,000 restricted shares of 6D Global’s Common Stock.

In addition, the Company after one year of employment with the Company, the Storycode Members will receive $300,000 cash, which was placed in escrow at the closing of the transaction.

The Company determined the fair value of the contingent consideration to be $2,733,334.  The potential range of contingent consideration can range from $0 cash and no issuance of Common Stock, in the event that the Storycode Members are not employed by the Company for one year and the performance milestones are not reached, to $300,000 in cash and 400,000 restricted shares of Common Stock.  The Company recorded the potential earn-out of 400,000 restricted shares which is part of the purchase price in the amount of $2,604,000 as additional paid-in capital included in stockholders’ equity in the Consolidated Balance Sheets.  Since the contingent cash consideration is contingent upon the Storycode Members remaining employees of the Company for a one-year period, the Company will record this as compensation expense in the Consolidated Statements of Operations when earned.

SwellPath

On March 20, 2015, the Company entered into and consummated a Securities Purchase Agreement (the “SwellPath SPA”) to acquire all of the issued and outstanding shares (the “SwellPath Shares”) of SwellPath, Inc., (“SwellPath”) an Oregon corporation.

SwellPath is a professional services firm that delivers analytics consulting, search engine optimization and digital advertising services to medium and large scale enterprises across North America.  SwellPath enables clients to align and maximize their digital marketing initiatives by tracking both on and offline marketing campaigns and performing more effective targeting to enhance return on investment.  SwellPath complements the Company’s overall acquisition strategy to provide a full-service digital marketing solutions offering to its clients, particularly in areas where the Company’s clients have expressed needs, while leveraging the Company’s partnership with Adobe Systems Incorporated to expand its Adobe Analytics offering.

The purchase price for the SwellPath Shares was comprised of: (i) cash in the amount of $300,000; (ii) 300,000 shares of the Company’s Common Stock; and (iii) up to an additional 300,000 shares of Common Stock and $650,000, based upon the achievement by SwellPath of certain performance milestones within the first and second anniversaries of the closing of the transaction.  In addition, the Company acquired all of the goodwill associated with SwellPath from its founder, Adam Ware, for cash in the amount $300,000.  Also, the Company agreed to an employment agreement with Mr. Ware to serve as Vice-President, containing customary terms, conditions and covenants for such an agreement.  Total acquisition costs incurred for the SwellPath acquisition during the year ended December 31, 2015 was $83,030 and is included in selling general and administrative expenses in the Company’s Consolidated Statements of Operations.  The purchase price in excess of the fair value of the net book values of the identifiable assets acquired and liabilities assumed was allocated to intangible assets based on management’s best estimate of fair values, taking into account all relevant information available at the time of acquisition, and the excess was allocated to goodwill.  The goodwill and identifiable intangible assets are not deductible for tax purposes.  The intangible assets are being amortized over their expected period of benefit.

The Company has completed the valuation of the acquisition of SwellPath to determine the value of the intangible assets and goodwill.

The Company’s allocation of the purchase price in connection with the acquisition of SwellPath was calculated as follows:

Cash
 
$
600,000
 
Stock consideration
   
2,325,000
 
Contingent consideration
   
2,189,279
 
Total consideration
 
$
5,114,279
 

The consideration transferred for the SwellPath acquisition was allocated across the net assets of the Company as follows:

Description
 
Fair Value
   
Weighted Average Useful Life
(in years)
 
Cash
 
$
257,601
       
Deferred revenue
   
(67,950
)
     
Accrued liability
   
(51,195
)
     
Deferred tax liability
   
( 620,767
)
     
Trade name
   
10,000
   
3
 
Customer relationship
   
1,560,000
   
5
 
Non-compete agreement
   
67,000
   
1.5
 
Goodwill
   
3,959,590
       
Total consideration
 
$
5,114,279
       

The following are the criteria contained in the SwellPath SPA related to the contingent consideration payable to SwellPath:

1.   If SwellPath’s financial performance for the period from April 1, 2015 to March 31, 2016 exceeds certain performance milestones and other terms set forth in the SwellPath SPA, the Company is may be required to pay SwellPath up to $650,000 in cash.

2.   If SwellPath’s financial performance for the period from April 1, 2016 to March 31, 2017 exceeds certain performance milestones and other terms set forth in the SwellPath SPA, SwellPath may receive up to 300,000 restricted shares of 6D Global’s Common Stock.

The Company determined the fair value of the contingent consideration to be $2,189,279.  The potential range of contingent consideration can range from $0 cash and no issuance of Common Stock, in the event SwellPath fails to achieve the minimum financial performance in the required time, to $650,000 in cash and 300,000 shares of Common Stock, in the event SwellPath achieves the financial performance target as of March 31, 2017.  The Company recorded contingent consideration in the amount of $472,040 as a liability in its Consolidated Balance Sheets which represents the fair value of the cash contingent consideration.  The Company recorded the potential earn-out of 300,000 restricted shares in the amount of $1,717,238 as Additional paid-in capital included in stockholders’ equity in the Consolidated Balance Sheets.  As of December 31, 2015, the Company recorded $145,997 of related accretion associated with the cash contingent consideration as interest expense in the Consolidated Statements of Operations.  The Company will continue to assess earn-out calculations related to the contingent consideration in future periods and any future adjustments will affect operating income.

Unaudited Pro Forma Results

The following table presents the unaudited pro forma results of the Company for the years ended December 31, 2015 and 2014 as if the acquisitions of Storycode and SwellPath occurred on January 1, 2014.  The pro forma results include estimates and assumptions which management believes are necessary.  However, pro forma results do not include an anticipated cost savings or their effects of the planned integration of Storycode and SwellPath and are not necessarily indicative of the result that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future.  The unaudited pro forma revenue and net income for Storycode was $145,712 and $6,042, respectively, for the pre-acquisition period.  The unaudited pro forma revenue and net income for SwellPath was $472,442 and $904, respectively, for the pre-acquisition period.

   
Unaudited Pro Forma Results of Operations for the Acquisitions of Storycode and SwellPath
 
 
 
For the Year Ended
 
 
 
December 31, 2015
(Audited)
   
December 31, 2014
(Audited)
 
 
           
Revenues
 
$
13,408,046
   
$
13,455,455
 
(Loss) income
 
$
(7, 987,605
)
 
$
1,254,127
 
Net (loss) income from operations
 
$
( 17,104,343
)
 
$
1,230,637
 
Basic and diluted (loss) income per share
 
$
(0. 22
)
 
$
0.03