Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.22.2.2
Business Combinations
6 Months Ended
Jun. 30, 2022
Business Combinations [Abstract]  
Business Combinations

NOTE 3. BUSINESS COMBINATIONS

 

VocaliD Acquisition

On June 10, 2022, the Company acquired 100% of VocaliD, a U.S.-based company that specializes in the creation of personalized synthetic voices, pursuant to a stock purchase agreement dated as of June 10, 2022.

The total purchase consideration was $3,394 (the “VocaliD Acquisition Consideration”), which consisted of cash payments of $1,609 at closing and deferred cash payments to be made in 2023 totaling $2,000, which deferred payments were estimated to have a fair value of $1,785 as of the acquisition date. The VocaliD Acquisition Consideration is preliminary and subject to net working capital adjustments that the Company expects to finalize and settle in the measurement period. The Company incurred $200 in acquisition-related expenses and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss.

The following table summarizes the fair value of the VocaliD Acquisition Consideration (in thousands):

 

VocaliD Acquisition Consideration

Preliminary

 

Cash consideration at closing

$

1,609

 

Deferred consideration

 

1,785

 

Total

$

3,394

 

The preliminary allocation of the VocaliD Acquisition Consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows (in thousands):

 

Preliminary allocation of VocaliD Acquisition Consideration**

Preliminary

 

Cash

$

216

 

Intangible assets

 

2,700

 

Total assets acquired

 

2,916

 

Accounts payable

 

6

 

Accrued expenses and other current liabilities

 

40

 

Deferred tax liability

 

663

 

Total liabilities assumed

 

709

 

Identifiable net assets acquired

 

2,207

 

Goodwill

 

1,187

 

Total purchase consideration

$

3,394

 

**The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill is primarily attributable to the assembled workforce. For income tax purposes, the Company elected to treat the transaction as a stock acquisition and none of the goodwill generated from the acquisition was tax deductible.

 

 

Identifiable Intangible Assets

The identifiable intangible assets acquired consisted of developed technology valued at $2,700 with estimated useful lives of 3 years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

The fair value of the intangible assets has been estimated using a cost approach. Under the cost approach, the replacement cost is used to estimate the value of the asset. The key assumptions include the Company’s estimates of the direct and indirect costs required to replace the asset.

 

March 2022 Acquisition

On March 1, 2022, the Company acquired 100% of an influencer-based management company, which is a California limited liability company, pursuant to a securities purchase agreement dated as of March 1, 2022. The entity is an influencer management company that works with a select group of social media influencers to create content and custom marketing campaigns for brand partners and agencies.

The total purchase consideration was $5,844 (the “March Acquisition Consideration”), which consisted of a cash payment of $1,500 at closing, $1,929 for the fair value of the Company’s 116,550 shares of common stock, and deferred cash payments to be made in 2023 and 2024 totaling $3,000, which deferred payments were estimated to have a fair value of $2,707 on the acquisition date. The total purchase price was decreased by $976 for the settlement of a preexisting receivable and increased by $684 to adjust for the cash on hand at the time of the transaction closing. The March Acquisition Consideration is preliminary and subject to net working capital adjustments that the Company expects to finalize and settle in the measurement period. In addition, the sellers may receive up to $4,500 in contingent earnout consideration based on achieving certain milestones tied to the entity’s financial performance in fiscal 2022 and 2023, which amount will be paid in cash (the “March Acquisition Earnout”). The fair value of the March Acquisition Earnout was estimated to be $3,015 as of March 1, 2022, all of which was deemed to be compensation to the seller which will be recognized as compensation expense over the earnout period in the general and administrative expenses on the condensed consolidated statement of operations and comprehensive loss. The Company incurred $270 in acquisition-related expenses and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss.

The following table summarizes the fair value of the March Acquisition Consideration (in thousands):

 

March Acquisition Consideration

Preliminary

 

 

Cash consideration at closing

$

1,500

 

 

Equity consideration at closing

 

1,929

 

 

Deferred consideration

 

2,707

 

 

Acquired cash

 

684

 

 

Settlement of pre-existing receivable

 

(976

)

 

Total

$

5,844

 

 

The preliminary allocation of the March Acquisition Consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows (in thousands):

 

Preliminary allocation of March Acquisition Consideration**

Preliminary

 

 

Cash

$

715

 

 

Accounts receivable

 

1,088

 

 

Prepaid and other current assets

 

120

 

 

Property and equipment

 

53

 

 

Intangible assets

 

3,000

 

 

Other assets

 

247

 

 

Total assets acquired

 

5,223

 

 

Accounts payable

 

18

 

 

Accrued expenses and other current liabilities

 

1,793

 

 

Operating lease liabilities, non-current

 

140

 

 

Total liabilities assumed

 

1,951

 

 

Identifiable net assets acquired

 

3,272

 

 

Goodwill

 

2,572

 

 

Total purchase consideration

$

5,844

 

 

 

**The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill is primarily attributable to opportunities to cross-sell into our Commercial Enterprise customer base. For income tax purposes, the Company elected to treat the transaction as an asset acquisition. Tax deductible goodwill generated from the acquisition is $2,842 (including transaction costs of $270).

 

 

Identifiable Intangible Assets

The identifiable intangible assets acquired consisted of the influencer network, trade name and brand relationships with estimated useful lives of 2-10 years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

The fair value of the intangible assets has been estimated using an income approach. Under the income approach, the after-tax cash flows associated with the asset are discounted to present value. The key assumptions include the Company’s estimates of the projected cash flows and discount rates.

The valuation of the intangible assets acquired along with their estimated useful lives, is as follows (in thousands):

 

 

Estimated

Fair Value

 

 

Estimated Useful Lives (in years)

 

Influencer network

$

1,500

 

 

 

5

 

Trade name

 

200

 

 

 

10

 

Brand relationships

 

1,300

 

 

 

5

 

Total intangible assets

$

3,000

 

 

 

 

 

PandoLogic Acquisition

On September 14, 2021, the Company acquired 100% of PandoLogic, a company incorporated under the laws of the state of Israel, pursuant to an Agreement and Plan of Merger dated as of July 21, 2021. PandoLogic is a leading provider of intelligent hiring solutions and utilizes its proprietary platform to accelerate the time and improve the efficiency in the process for employers hiring at scale for both mass

market and difficult-to-source candidates. PandoLogic’s fully autonomous recruiting platform helps employers source talent faster and more efficiently with predictive algorithms, machine learning and AI.

The total purchase consideration for PandoLogic was $135,563 (the “Merger Consideration”), which consisted of cash payments of $58,733 at closing, $31,500 for the fair value of the Company’s 1,704,822 shares of common stock, and up to $65,000 in contingent consideration based on achieving certain earnouts tied to financial performance of PandoLogic in fiscal 2021 and 2022, which amount will be paid in a combination of cash and common stock (the “PandoLogic Earnout”) and a net working capital adjustment of $5,818 paid in cash. The Company utilized a Monte Carlo simulation model to estimate the fair value of the PandoLogic Earnout. The fair value of the PandoLogic Earnout was estimated to be $44,900 as of September 14, 2021, $39,512 of which was deemed to be purchase consideration and recorded within contingent consideration current and contingent consideration non-current on the condensed consolidated balance sheet. The remaining $5,388 will be recognized as compensation expense over the earnout period in the general and administrative expenses on the condensed consolidated statement of operations and comprehensive loss. Subsequent to the closing date, the Company is required to reassess its estimate of the fair value of the PandoLogic Earnout, including certain future PandoLogic Earnout obligations triggered on the employment status of certain PandoLogic management, and record any changes in earnings when the estimate is based on information not known as of the acquisition date (See Note 5). The Company incurred $2,161 in acquisition-related expenses in 2021 and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss.

The following table summarizes the fair value of the Merger Consideration (in thousands):

 

Merger Consideration

Amount

 

Cash consideration at closing

$

58,733

 

Equity consideration at closing

 

31,500

 

Contingent earnout

 

39,512

 

Net working capital adjustment

 

5,818

 

Total

$

135,563

 

The allocation of the Merger Consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows (in thousands):

 

Allocation of Merger Consideration**

Amount

 

Cash

$

11,581

 

Accounts receivable

 

21,344

 

Prepaid and other current assets

 

8,710

 

Property and equipment

 

618

 

Intangible assets

 

92,000

 

Other assets

 

1,653

 

Total assets acquired

 

135,906

 

Accounts payable

 

13,183

 

Accrued expenses and other current liabilities

 

9,443

 

Deferred tax liability

 

12,686

 

Total liabilities assumed

 

35,312

 

Identifiable net assets acquired

 

100,594

 

Goodwill

 

34,969

 

Total purchase consideration

$

135,563

 

**The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill is primarily attributable to operational efficiencies from operating PandoLogic products on aiWARE as well as opportunities to cross-sell into our Commercial Enterprise customer base.

 

 Identifiable Intangible Assets

The identifiable intangible assets acquired consisted of developed technology, customer relationships and tradename with estimated useful lives of 4-7 years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

The fair value of the intangible assets has been estimated using a combination of the income and cost approaches. Under the income approach, the after-tax cash flows associated with the asset are discounted to present value. The key assumptions include the Company’s estimates of the projected cash flows and discount rates. Under the cost approach, the replacement cost is used to estimate the value of the asset. The key assumptions include the Company’s estimates of the direct and indirect costs required to replace the asset. The valuation of the intangible assets acquired from PandoLogic along with their estimated useful lives, is as follows (in thousands):

 

 

Estimated

Fair Value

 

 

Estimated Useful Lives (in years)

 

Customer relationships

$

70,000

 

 

5 - 7

 

Developed technology

 

20,000

 

 

 

4

 

Trade name

 

2,000

 

 

 

5

 

Total intangible assets

$

92,000

 

 

 

 

 

Taxes

In connection with the acquisition, a net deferred tax liability of $12,686 was established primarily for the differences between the fair value of the acquired non-goodwill intangible assets and PandoLogic’s historical tax basis in these assets. No deferred tax asset or liability is recorded on PandoLogic goodwill, $33,111 of which is not deductible for tax purposes. In August 2021, PandoLogic obtained the approval for Preferred Technology Enterprise status under which its Israeli tax rate is reduced from the 23% statutory rate to a 12% beneficial rate.  This arrangement is scheduled to expire in December 2025. The acquired Israel deferred tax assets and liabilities are computed based on the tax rate in the year of their expected reversal. No valuation allowance is recorded on the acquired PandoLogic deferred tax assets as it is more likely than not they will be utilized to offset future taxable income.

Unaudited Pro Forma Results

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Veritone and PandoLogic as if the companies were combined for the three and six month periods ended June 30, 2021. The unaudited pro forma financial information for all periods presented included the business combination accounting effects resulting from this acquisition, including adjustments to reflect recognition of intangible asset amortization and accretion of contingent consideration. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of January 1, 2021.

The unaudited pro forma financial information was as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

2021

 

 

2021

 

 

Net revenue

 

$

33,698

 

 

$

57,492

 

 

Loss before provision for income taxes

 

 

(13,687

)

 

 

(50,078

)

 

Net loss

 

 

(11,526

)

 

 

(47,279

)