Quarterly report pursuant to Section 13 or 15(d)

MMERGER AGREEMENT AND DIVESTITURE

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MMERGER AGREEMENT AND DIVESTITURE
9 Months Ended
Dec. 31, 2019
Business Combinations [Abstract]  
MERGER AGREEMENT AND DIVESTITURE

NOTE 10  – MERGER AGREEMENT AND DIVESTITURE

 

Merger Agreement

 

On July 8, 2019 (the “Closing Date”), the Company entered into, and closed the transactions contemplated by, the Lineal Plan of Merger, by and between the Company, Camber Energy Merger Sub 2, Inc., the Company’s then newly formed wholly-owned subsidiary, Lineal, and the Lineal Members. Pursuant to the Lineal 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 Lineal 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 Lineal 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 “July 2019 Lineal Note”).

 

Also as part of the Lineal 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”).

 

The Lineal Plan of Merger, Series D Designation and Series E Designation, provided that, effective upon the date that the stockholders of the Company had approved the Lineal 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 were to hold between 6% and 6.67% of the Company’s fully-diluted capitalization (depending on certain factors); (b) Discover was to 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 held the Series E Preferred Stock, were to have the right to convert such Series E Preferred Stock, subject to the terms thereof, as discussed above, into 66.67% of the Company’s fully-diluted capitalization, or 70%, subject to certain factors.

 

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

 

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

 

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 were accounted for as mezzanine equity. The 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 Lineal 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 in connection with the Lineal Merger was based on the current values of the assets and liabilities of Lineal as of the Lineal 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 was 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 was allocated to goodwill.

 

Divestiture

 

On December 31, 2019, the Company entered into, and closed the transactions contemplated by the Redemption Agreement, by and between the Company, Lineal and the Preferred Holders.

 

Pursuant to the Redemption Agreement, the Company redeemed the Company’s Series E and F Preferred Stock issued in connection with the Lineal Merger and ownership of 100% of Lineal was transferred back to the Preferred Holders, and all of the Series E Preferred Stock and Series F Preferred Stock of the Company outstanding were cancelled through the redemption. See also “NOTE 10 – Merger Agreement and Divestiture”.

 

The Redemption Agreement also provided for (a) the entry by Lineal and the Company into a new unsecured promissory note in the amount of $1,539,719, the outstanding amount of the July 2019 Lineal Note together with additional amounts loaned by Camber to Lineal through December 31, 2019 (the “December 2019 Lineal Note”); (b) the unsecured loan by the Company to Lineal on December 31, 2019 of an additional $800,000, entered into by Lineal in favor of the Company on December 31, 2019 (“Lineal Note No. 2”); and (c) the termination of the prior Lineal Plan of Merger and Funding Agreement entered into in connection therewith (pursuant to which all funds previously held in a segregated account for future Lineal acquisitions, less amounts loaned pursuant to Lineal Note No. 2, were released back to the Company). The December 2019 Lineal Note and Lineal Note No. 2, accrue interest, payable quarterly in arrears, beginning on March 31, 2020 and continuing until December 31, 2021, when all interest and principal is due, at 8% and 10% per annum (18% upon the occurrence of an event of default), respectively. As of December 31, 2019, $51,656 of interest related to the December 2019 Lineal Note and Lineal Note No. 2 was accrued and included in the consolidated balance sheet in Accounts Receivable.

 

The divestiture resulting from the Redemption Agreement qualifies as a discontinued operation in accordance with U.S. generally accepted accounting principles (“GAAP”). As a result, operating results and cash flows related to the Lineal operations have been reflected as discontinued operations in the Company’s consolidated statements of operations and consolidated statements of cash flows for the periods presented.

 

The net consideration received for the divestiture was as follows:

 

Return of Series E Preferred Shares

 

$

14,666,000

 

Return of Series F Preferred Shares

 

 

2,434,000

 

   Total net consideration

 

$

17,100,000

 

 

The fair value of the instruments immediately prior to the divestiture was determined using an income valuation approach to estimate 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. Immediately prior to the Lineal Disposition, the Company recognized a gain on the change in fair value of the Series E and F Preferred Shares of $3,018,000, included within net loss from discontinued operations.

 

The following table summarizes the assets and liabilities of Lineal which were transferred from the Company to the Preferred Holders, together with Lineal, as part of the Redemption agreement:

 

Cash   $ 2,101,879  
Accounts receivable     1,673,538  
Deferred tax assets     34,000  
Cost in excess of billings     497,340  
Property and equipment     1,996,229  
Right of use asset – operating leases     710,898  
Other current assets and deposits     49,275  
Goodwill     18,314,222  
Accounts payable – trade     (260,882 )
Accrued and other liabilities     (369,448 )
Billings in excess of costs                                                                                                               (445,759)  
Operating lease liabilities     (710,898 )
Finance lease liabilities     (237,925 )
Notes payable     (3,545,841 )
   Net assets divested   $ 19,806,628  

As a result of the above, the Company recognized a loss on the disposal of the Lineal operations of $2,706,628 included within net loss from discontinued operations.

 

Components of amounts reflected in the Company’s consolidated statements of operations related to discontinued operations are presented in the following table for the three and nine months ended December 31, 2019.

 

    Three Months Ended     Nine Months Ended  
    December 31, 2019     December 31, 2019  
Contract revenue   $ 2,821,229     $ 9,106,764  
Contract costs     (2,875,530 )     (7,772,726 )
Depreciation and amortization     (90,415 )     (155,282 )
Selling, general and administrative     (885,164 )     (1,649,643 )
Operating loss     (1,029,880 )     (470,887 )
Other income     9,925       273,037  
Interest expense     (1,529 )     (113,522)  
Net (loss) from discontinued operations     (1,021,484)       (311,372 )
Loss on disposal of business     (2,706,628 )     (2,706,628 )
Change in value of preferred stock     3,018,000       3,018,000  
Total loss on discontinued operations   $ (710,112 )   $