Quarterly report pursuant to Section 13 or 15(d)

MERGER AGREEMENT

v3.19.3
MERGER AGREEMENT
6 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
MERGER AGREEMENT

NOTE 11 – MERGER AGREEMENT

 

On July 8, 2019 (the “Closing Date”), the Company entered into, and closed the transactions contemplated by, a Plan of Merger, by and between the Company, Camber Energy Merger Sub 2, Inc., the Company’s newly formed wholly-owned subsidiary, Lineal, and the Lineal Members. Pursuant to the Plan of Merger, the Company acquired 100% of the ownership of Lineal from the Lineal Members in consideration for newly issued shares of Series E Redeemable Convertible Preferred Stock and Series F Redeemable Preferred Stock, as described in greater detail below.

 

In connection with the Plan of Merger, the Company entered into several other agreements, including (a) a Security Exchange Agreement dated July 8, 2019 (the “Exchange Agreement”), by and between the Company and Discover; (b) a Termination Agreement dated July 8, 2019, by and between the Company and Discover Growth; and (c) a Funding and Loan Agreement dated July 8, 2019, by and among the Company, Lineal, and certain of the Lineal Members who also acquired shares of the Company’s preferred stock as a result of the Merger (the “Funding Agreement”), which provided for the Company to loan $1,050,000 to Lineal, which loan was evidenced by a Promissory Note entered into by Lineal, as borrower, in favor of the Company, as lender, dated July 8, 2019 (the “Note”).

 

Also as part of the Merger, the Company designated three new series of preferred stock, (1) Series D Convertible Preferred Stock (the “Series D Preferred Stock” and the certificate of designations setting forth the rights thereof, the “Series D Designation”); (2) Series E Redeemable Convertible Preferred Stock (the “Series E Preferred Stock” and the certificate of designation setting forth the rights thereof (the “Series E Designation”); and (3) Series F Redeemable Preferred Stock (the “Series F Preferred Stock” and the certificate of designation setting forth the rights thereof, the “Series F Designation”, and the Series E Preferred Stock and the Series F Preferred Stock, collectively, the “Series E and F Preferred Stock”). Additionally, with the approval of the holders thereof, the Company amended and restated the designation of its Series C Redeemable Convertible Preferred Stock (the “Series C Preferred Stock” and the amended and restated designation setting forth the rights thereof, the “Series C Designation”). All of the preferred stock and related designations are described in greater detail below.

 

The result of the Plan of Merger, Series D Designation and Series E Designation, will be that, effective upon the date that the stockholders of the Company have approved the Plan of Merger and issuance of shares in connection therewith (the “Stockholder Approval” and such date of Stockholder Approval, the “Stockholder Approval Date”), and subject to certain closing conditions, (a) the common stock holders of the Company will hold between 6% and 6.67% of the Company’s fully-diluted capitalization (depending on certain factors); (b) Discover will hold Series D Preferred Stock convertible into 26.67% of the Company’s fully-diluted capitalization, subject to the terms of the Series D Preferred Stock; and (c) the Lineal Members, who hold the Series E Preferred Stock, will have the right to convert such Series E Preferred Stock, subject to the terms thereof, as discussed below, into 66.67% of the Company’s fully-diluted capitalization, or 70%, subject to certain factors. In the event the Stockholder Approval Date does not occur, the Series E Preferred Stock will not be convertible, the Series C Preferred Stock will not be exchanged for Series D Preferred Stock, no Series D Preferred Stock will be outstanding and as a result, the terms of the Series C Preferred Stock, as set forth in the Series C Designation, will continue to apply. Additionally, in the event the Company completes a further acquisition/combination prior to Stockholder Approval, the post-Stockholder Approval ownership percentages above may be subject to modification with the mutual approval of the preferred stockholders and the Company.

 

Pursuant to the Plan of Merger, Merger Sub merged with and into Lineal, with Lineal continuing as the surviving entity in the Merger and as a wholly-owned subsidiary of the Company. 

 

 The Funding Agreement required the Company, promptly following the Closing Date, to deposit into a newly opened and dedicated bank account, $4,000,000 (the “Deposit”), which was intended to be used for acquisitions. The disbursement of the Deposit from the account is required to be approved by (i) a person designated by the holders of the Series E Preferred Stock; and (ii) the Company. As of September 30, 2019, a total of $4,000,000 remained of the Deposit.

 

The Funding Agreement also required the Company to fund $1,050,000 in immediately available funds to Lineal (the “Loan”). The Loan was documented by a promissory note and the Loan was made on July 9, 2019.

 

In the event the Stockholder Approval has been received, the Note and all principal and interest due thereunder will be automatically forgiven by the Company.

 

On July 3, 2019, the Company entered into an Indemnification Agreement with each of its then officers and directors.

 

The terms of the Plan of Merger, and the designations of the preferred stock are described in greater detail in the Company’s Current Report on Form 8-K and Form 8-K/A filed with the Securities and Exchange Commission on July 9, 2019 and July 10, 2019, respectively.

 

The Plan of Merger contained certain post-closing requirements. Those include:

 

- Requiring the Company to prepare and file a proxy statement on Schedule 14A with the Securities and Exchange Commission (“SEC”) in order to seek shareholder approval of the issuance of the shares of common stock upon conversion of the Series E Preferred Stock, the terms of the Plan of Merger and such other matters that the holders of the Series E Preferred Stock may reasonably request and/or that are required to be approved by the shareholders of the Company pursuant to applicable NYSE American rules and regulations in accordance with applicable rules and requirements of the SEC and the NYSE American at a duly called meeting of shareholders of the Company (the “Shareholder Meeting”) which Shareholder Approval shall be received prior to November 22, 2019, or if a Lineal Transaction (defined below) has not occurred prior to September 23, 2019, a date which is 60 days after the closing of a Lineal Transaction, or such other later date which is approved by the Company and a majority in interest of the Series E Preferred Stock (a “Majority Interest”). “Lineal Transaction” means an acquisition by Lineal of assets or securities which results in the Company, immediately after such acquisition, being able to meet the initial listing requirements of the NYSE American.

 

- Notwithstanding the above, the Shareholder Approval is not to be received, and the Shareholder Meeting shall be adjourned, extended, delayed, abandoned or re-scheduled, if the NYSE American determines that a “back-door listing”/“reverse merger” is deemed to occur upon receipt of such Shareholder Approval, until or unless the Company, upon receipt of the Shareholder Approval (or immediately prior to such anticipated date of Shareholder Approval), in the reasonable determination of the Company, qualifies for initial listing of the Company’s common stock on the NYSE American, pursuant to the applicable guidance and requirements of the NYSE American.

 

- After the Closing Date, until the Shareholder Approval is received, the executive officers and directors of Company, shall not, in aggregate, be paid, or accrue, compensation in excess of $78,333 per month, not including the reimbursement of certain expenses, unless such compensation is approved with the consent of a Majority Interest.

 

The consideration paid for the acquisition was as follows:

 

Series E Preferred Shares   $ 18,701,000  
Series F Preferred Shares     1,417,000  
   Total consideration   $ 20,118,000  

 

 

The Series E Preferred Shares and the Series F Preferred Shares were determined to be contingently redeemable preferred stock, and are accounted for as mezzanine equity. The initial fair value of the instruments was determined using an income valuation approach to estimated cash flows of the acquired business, analysis of the terms and rights of each class of equity instrument issued by the Company and an assessment of the probability of the various scenarios that could occur depending on the outcome of the Stockholder Approval vote, and the impact each scenario would have on the capital structure of the Company. Subsequent to the date of the Merger, the instruments will be assessed to determine whether it is probable of the instruments being redeemed as a result of contingencies being resolved. When it is deemed probable, the fair value will be adjusted to the new estimate of fair value in that period.

 

The allocation of the preliminary purchase price to the assets and liabilities acquired from the Merger is based on the current values of the assets and liabilities of Lineal as of the Merger date on July 8, 2019 and are as follows:

 

Cash   $ 449,763  
Accounts receivable     2,776,477  
Deferred tax assets     34,000  
Cost in excess of billings     944,250  
Property and equipment     1,436,920  
Right of use asset – operating leases     913,396  
Other current assets and deposits     60,132  
Goodwill     17,992,118  
Accounts payable – trade     (400,889 )
Accrued and other liabilities     (893,013 )
Operating lease liabilities     (913,396 )
Finance lease liabilities     (313,472 )
Loan Payable – shareholder     (492,337 )
Notes payable     (1,475,949 )
   Net assets acquired   $ 20,118,000  

 

The total purchase price is allocated to the acquired tangible and intangible assets and liabilities of Lineal based on their estimated fair values as of the purchase closing date. The excess of the purchase price over the fair value of assets and liabilities acquired, if any, is allocated to goodwill. The purchase price allocation above is preliminary, as the Company has not completed the assessment of the fair value of assets acquired, liabilities assumed and the identification of any intangible assets. The Company expects to finalize the purchase price allocation within one year of the acquisition date, which may result in material changes to the preliminary values recognized above.

 

The results of Lineal are included in the consolidated financial statements effective July 8, 2019. Revenue and income from operations for the period since the acquisition date through September 30, 2019 were $6,285,535 and $1,323,471, respectively. The Company incurred transaction costs of $567,000 related to the acquisition.

 

The following schedule contains pro-forma consolidated results of operations for the three and six months ended September 30, 2019 and 2018 as if the acquisition occurred on April 1, 2018. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2018, or of results that may occur in the future.

 

    Three Months Ended September 30, 2019     Three Months Ended September 30, 2018     Six Months Ended September 30, 2019     Six Months Ended September 30, 2018  
Revenue   $ 6,726,043     $ 5,868,154     $ 12,264,466     $ 10,234,586  
Operating income (loss)     (625,426 )     23,374,978       (2,314,344 )     19,433,893  
Net income (loss)     (312,403 )     22,757,458       (1,975,521 )     17,821,311  
Income (loss) per common share - basic   $ (4.47 )   $ 16,946.73     $ (22.15 )   $ 20,333.50  
Income (loss) per common share - diluted   $ (4.47 )   $ 5,026.74     $ (22.15 )   $ 4,205.84