Note 7. Business Acquisitions

Grinding & Dicing Services, Inc.

On January 1, 2023 (the “Closing Date”), the Company and its wholly-owned subsidiary, Akoustis, Inc. (the “Purchaser”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) with GDSI and the stockholders of GDSI (the “Sellers”). Pursuant to the Purchase Agreement, the Purchaser acquired all of the outstanding capital stock of GDSI (such acquisition, the “Transaction”). The acquisition is expected to support a strategy to reshore operations to the United States, improve rapid prototype and development cycle time, and provide prototype cost savings.

The total consideration paid to the Sellers at closing of the Transaction consisted of $13.9 million in cash and approximately $1.7 million of shares of the Company’s common stock. In addition, the Company issued a secured promissory note (the “Promissory Note”) in the original principal amount of $4.0 million issued by the Purchaser to the Sellers’ representative. The Sellers’ representative is a current employee of the Company. The Promissory Note does not bear interest, is subject to partial prepayment (reduction of the outstanding principal amount down to $1.3 million) on the second anniversary of the Closing Date, and is payable in full on the third anniversary of the Closing Date. The Purchaser can reduce the principal amount of the Promissory Note to satisfy the Sellers’ indemnification obligations under the Purchase Agreement, and if GDSI’s President is terminated for cause or due to disability or resigns without good reason prior to maturity the Promissory Note will be cancelled in its entirety. The Promissory Note is secured by certain of the Purchaser’s and GDSI’s assets. In the event of certain events of default, including failure to pay amounts due under the Promissory Note and certain bankruptcy events, the outstanding principal amount of the Promissory Note will become immediately due.

The purchase price was allocated based on the estimated fair values of the assets acquired and liabilities assumed as follows (in thousands):

The fair values of the intangible assets acquired included trade names of $0.19 million, developed technology of $1.98 million and customer relationships of $6.11 million and the provisional value of the fixed assets acquired was $2.5 million.

The fair value of the trade names acquired was determined based on an income approach using the “relief-from-royalty” method which estimated the value of the intangible asset by discounting the future cash flows of the asset to present value. Key inputs include a royalty rate of 0.5% and a discount rate of 19.0% as of the valuation date. The acquired trademarks assets are being amortized on a straight-line basis over their estimated useful lives of five years.

The fair value of the developed technology acquired was determined based on an income approach using the “relief-from-royalty” method which estimated the value of the intangible asset by discounting the future cash flows of the asset to present value. Key inputs include a royalty rate of 5% and a discount rate of 19.0% as of the valuation date. The acquired developed technology assets are being amortized on a straight-line basis over their estimated useful lives of seven years.

The fair value of the customer relationships acquired was determined based on an income approach using the “multi-period excess earnings” method in which the value of the intangible asset is determined by discounting the future cash flows of the asset to present value. Key inputs include a discount rate of 19.0% and an attrition rate of 7.5% as of the valuation date. These customer relationships are being amortized on a straight-line basis over their estimated useful life of seven years.

The fair value of the fixed assets acquired was primarily determined using a cost approach and used the original cost of the asset as the key input. The acquired fixed assets are being depreciated over their estimated useful life of 5 years.

The goodwill resulting from the acquisition of GDSI, which has been recorded in the Fabrication Services segment, is attributed to synergies and other benefits that are expected to be generated from this transaction and is not deductible for income tax purposes. During the year ended June 30, 2023, the Company recorded acquisition costs associated with the acquisition of GDSI totaling $0.2 million in “General and administrative expenses” in the Consolidated Statements of Operations. 

Revenues included in the consolidated statement of operations for the year ended June 30, 2023 from this acquisition for the period subsequent to the closing of the transaction was approximately $3.8 million. Loss from operations included in the consolidated statement of operations for the year ended June 30, 2023 from this acquisition for the period subsequent to the closing of the transaction was approximately $1.4 million. 

Pro Forma Results

The following unaudited pro forma financial information summarizes the results of operations for the years ended June 30, 2023 and 2024, as if the GDSI acquisition had been completed as of July 1, 2022 (in thousands). The pro forma results were calculated applying the Company’s accounting policies and include the effects of adjustments related to the amortization charges from the acquired intangibles. The unaudited pro forma information does not purport to be indicative of the results that would have been obtained if the acquisitions had actually occurred at the beginning of the year prior to acquisition, nor of the results that may be reported in the future.