Business Context and Reporting Period
One Stop Systems, Inc. (Delaware) filed this Form 8-K on August 22, 2018, reporting the entry into a Material Definitive Agreement. The Company entered into an Agreement and Plan of Merger and Reorganization with Concept Development, Inc. (CDI), a California corporation, and CDI's sole shareholder.
Key Financial Metrics and Transaction Terms
- Total Purchase Price: Approximately $5,594,000 (subject to adjustments).
- Cash Consideration: $667,000 (less distributions), subject to post-closing adjustment.
- Stock Consideration: $4,927,000 in newly issued restricted common stock.
- Stock Issuance Cap: Maximum of 9.99% of the Company's common stock outstanding at Closing; excess value reduces the Share Purchase Price.
- Assumed Debt: The Company is assuming a CDI working capital loan of $370,096.
- Escrow Holdback: $120,000 held for indemnification purposes.
- Indemnification Caps: $5,594,000 for fundamental representations; $366,350 for non-fundamental representations. A $60,000 "basket" applies.
Material Changes and Transaction Structure
The transaction involves a two-step merger: (1) Merger Sub 1 merges into CDI (CDI survives), and (2) the surviving CDI merges into Merger Sub 2 (an LLC wholly-owned by One Stop Systems). The deal is structured to qualify as a tax-free reorganization, with transfer taxes split equally between the Company and the Sole Shareholder. The filing notes a related party transaction, as the Sole Shareholder of CDI is the brother of one of One Stop Systems' directors.
Guidance, Risks, and Conditions
- Closing Conditions: Accuracy of representations, performance of covenants, absence of material adverse changes, and no pending legal actions preventing the Closing.
- Termination Rights: Either party may terminate if closing conditions are not met by October 31, 2018, or upon material breach uncured within 10-30 days.
- Risks: The transaction is contingent on regulatory approvals and the absence of material adverse changes. The stock consideration is variable based on the 15-day average closing price prior to Closing.
- Management Commentary: The disinterested members of the Board of Directors unanimously approved the Merger Agreement.
Investor Verification Checklist
- Verify the final number of shares to be issued based on the 15-day average stock price at Closing.
- Confirm the final working capital adjustment amount affecting the cash purchase price.
- Review the specific terms of the $370,096 working capital loan being assumed.
- Monitor the October 31, 2018, deadline for the fulfillment of closing conditions.
- Assess the potential dilution impact of the 9.99% maximum share issuance cap.