NOTE 3. BUSINESS COMBINATIONS

Acquisition of Performance Bridge

On August 21, 2018, the Company acquired all of the outstanding capital stock of Performance Bridge by means of a merger of an indirect, wholly owned subsidiary of the Company with and into Performance Bridge, with Performance Bridge surviving the merger as an indirect, wholly owned subsidiary of the Company. The Company paid initial consideration of $5,158 and the Company may pay up to an additional $5,000 in contingent earnout amounts if Performance Bridge achieves certain revenue milestones in its 2018 fiscal year. The initial consideration was comprised of $1,220 paid in cash, which is subject to adjustment based on a final calculation of Performance Bridge’s net assets at closing and $3,938 paid by the issuance of a total of 349,072 shares of the Company’s common stock based on the Company’s closing stock price on August 21, 2018. A portion of the initial consideration, consisting of $120 in cash and 34,335 shares of common stock, was deposited into a third-party escrow account at closing and will be held in such account until August 21, 2020, to secure certain indemnification and other obligations of the former stockholder of Performance Bridge. The additional earnout consideration (if earned) will be comprised of 20% cash and 80% shares of the Company’s common stock.

The Company has incurred $46 in transaction and integration-related costs relating to this acquisition, which have been expensed as incurred and are included in general and administrative expenses in the accompanying statements of operations and comprehensive loss for the three and nine months ended September 30, 2018.

The acquisition of Performance Bridge has expanded the Company’s media agency offerings of comprehensive podcast solutions.

The following table summarizes the preliminary fair value of purchase price consideration to acquire Performance Bridge:

The following is a preliminary allocation of the purchase price as of the August 21, 2018 closing date under the acquisition method of accounting. The purchase price allocation is based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition:

Acquisition of Wazee Digital, Inc.

On August 31, 2018, the Company acquired all of the outstanding capital stock of Wazee Digital by means of a merger of a wholly owned subsidiary of the Company with and into Wazee Digital, with Wazee Digital surviving the merger as a wholly owned subsidiary of the Company.  The Company paid an aggregate purchase price of $14,279, comprised of $7,423 paid in cash and $6,856 paid by the issuance of a total of 491,157 shares of the Company’s common stock based on the Company’s closing stock price on August 31, 2018. A portion of the consideration, consisting of $925 in cash and 60,576 shares of common stock, was deposited into a third-party escrow account at closing and will be held in such account until August 31, 2020 (subject to partial release after six months following the closing), to secure certain indemnification and other obligations of the former stockholders of Wazee Digital.  

The Company has incurred $1,942 in transaction and integration-related costs relating to this acquisition, which have been expensed as incurred and are included in general and administrative expenses in the accompanying statements of operations and comprehensive loss for the three and nine months ended September 30, 2018.  

The acquisition of Wazee Digital has expanded the Company’s offerings to include digital content management and licensing solutions.

The following table summarizes the fair value of purchase price consideration to acquire Wazee Digital:

The following is a preliminary allocation of the purchase price as of the August 31, 2018 closing date under the acquisition method of accounting. The purchase price allocation is based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition:

Acquisition of Machine Box, Inc.

On September 6, 2018, the Company acquired all of the outstanding capital stock of Machine Box, Inc. (“Machine Box”) by means of a merger of a wholly owned subsidiary of the Company with and into Machine Box, with Machine Box surviving the merger as a wholly owned subsidiary of the Company. The Company paid initial consideration of $1,473, and the Company may pay up to an additional $3,000 in contingent amounts if Machine Box achieves certain technical development and integration milestones within 12 months after the closing of the acquisition. The initial consideration was comprised of $412 paid in cash and $1,061 paid by issuance of a total of 128,300 shares of the Company’s common stock, based on the Company’s closing stock price on September 6, 2018, of which $80 in cash and 26,981 shares of common stock were held back from payment and issuance by the Company until September 6, 2020, to secure certain indemnification and other obligations of the former stockholders of Machine Box. The additional contingent payments (if earned) will be comprised of 20% cash and 80% shares of the Company’s common stock.  

The preliminary fair value of the contingent amount totaled $2,880 and is treated as compensation expense for post-combination services in accordance with the guidance in Accounting Standards Codification (“ASC”) 805, Business Combinations, as payment of such amount is conditioned upon the continued employment of certain key employees of Machine Box in addition to the achievement of certain performance milestones by Machine Box. The preliminary fair value of the contingent amount was determined using a probability-weighted expected payment model. This expense is being recognized as research and development expense over three separate intervals tied to the specific performance milestones during the twelve months following the acquisition.

The Company has incurred $32 in transaction and integration-related costs relating to this acquisition, which have been expensed as incurred and are included in general and administrative expenses in the accompanying statements of operations and comprehensive loss for the three and nine months ended September 30, 2018.

Machine Box is a developer of state-of-the-art machine learning technologies, which will enhance the Company’s aiWARE platform capabilities.

The following table summarizes the preliminary fair value of purchase price consideration to acquire Machine Box:

The following is a preliminary allocation of the purchase price as of the September 6, 2018 closing date under the acquisition method of accounting. The purchase price allocation is based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition:

Assumptions in the Allocations of Purchase Price

Management prepared the purchase price allocations for the acquired businesses, and in doing so considered or relied in part upon a report of a third party valuation expert to calculate the fair value of certain acquired assets and liabilities of each acquired business, which would primarily included identifiable intangible assets and the contingent earn-out amounts. Determining the fair value of assets and liabilities requires management to make significant estimates and assumptions which are preliminary and subject to change upon finalization of the valuation analysis. The goodwill recognized is the excess of the purchase price over the fair value of net assets acquired. Certain liabilities and deferred taxes included in the purchase price allocations are based on management's best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared. Updates to and/or completion of the valuations of certain assets acquired and liabilities assumed and the Company’s evaluation of certain income tax positions may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill amounts in subsequent periods. Based on the preliminary purchase price allocations for the acquisitions of Performance Bridge, Wazee Digital and Machine Box, the Company has recorded goodwill of $8,879, $16,863 and $1,861, respectively. As of the date of this filing, management has not completed the detailed valuation studies necessary to determine the fair values of identifiable intangible assets acquired and residual goodwill. Accordingly, the total excess of the consideration transferred over the net assets acquired has been recorded as goodwill and is subject to further adjustment. The Company does not expect to deduct any of the acquired goodwill for tax purposes.

The Company expects to complete these valuations and evaluations and finalize the purchase price allocations within 12 months of the applicable acquisition date. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired during the measurement period.

In connection with the businesses acquired, the Company has assumed general liabilities related to contractual obligations which are included in accrued expenses and other current liabilities in the purchase price allocations above.

Supplemental Pro Forma Information

The following table presents unaudited pro forma combined financial information for each of the periods presented, as if the acquisition of Wazee Digital had occurred at the beginning of fiscal year 2017:

The pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations of the consolidated business had the acquisition of Wazee Digital actually occurred at the beginning of fiscal year 2017 or of the results of future operations of the consolidated business. The unaudited pro forma financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition in the Company's unaudited consolidated statements of operations.

Acquisition-related costs of $2.0 million are included in the net loss attributable to common stockholders for the three and nine months ended September 30, 2018. As of the date of this filing, management has not completed the detailed valuation studies necessary to determine the fair values of intangible assets acquired. Accordingly, the Company did not adjust the pro forma combined financial information presented above for amortization of intangible assets acquired.