Note 3: Acquisition of ChizComm Entities

On February 1, 2021, the Company through GBI Acquisition LLC, a New Jersey limited liability company, and 2811210 Ontario Inc., a company organized under the laws of the Province of Ontario, two wholly owned subsidiaries of the Company, closed its previously announced acquisition pursuant to a Purchase and Sale Agreement (the “Purchase Agreement”) with (i) Harold Aaron Chizick, (ii) Jennifer Mara Chizick, (iii) Wishing Thumbelina Inc. (“Wishing Thumbelina”), and (iv) Harold Aaron Chizick and Jennifer Mara Chizick, the trustees of The Chizsix (2019) Family Trust for and on behalf of Harold Aaron Chizick, Jennifer Mara Chizick and Jay Mark Sonshine, trustees of The Chizsix (2019) Family Trust, (the “Trustees”) (each a “Seller” and, collectively, “Sellers”), pursuant to which the Company acquired from the Sellers all of the issued and outstanding equity interests of ChizComm Ltd., a corporation organized in Canada (“ChizComm Canada”), and ChizComm USA Corp., a New Jersey corporation (“ChizComm USA” and, together with ChizComm Canada, “ChizComm”) (the “Acquisition”).

Total consideration paid by the Company in the transaction at closing consisted of $8.5 million in cash and 1,980,658 shares (the “Closing Shares”) of the Company’s common stock, $0.001 par value per share (the “Common Stock”) with a value of approximately $3.5 million, both as subject to certain purchase price adjustments. Of the Closing Shares, 674,157 shares of Common Stock, with a value of approximately $1.2 million, were deposited into an escrow account to cover potential post-closing indemnification obligations of Sellers under the Purchase Agreement. Additionally, the Purchase Agreement also provides for the issuance of additional shares of Common Stock with an aggregate value of up to $8.0 million that may be issued to the Sellers if certain EBITDA and performance levels are achieved within a four-year period commencing on the date of the Purchase Agreement (Earn-Out).

The Acquisition was approved by the board of directors of each Company. Transaction costs incurred relating to this acquisition including legal and accounting totaled $539,806, which is included in general and administrative expenses on the statement of operations. The acquisition expands the Company’s revenue streams into media and advertising services.

The Company has determined that the Acquisition constitutes a business acquisition as defined by Accounting Standards Codification (“ASC”) 805, Business Combinations. Accordingly, the assets acquired and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s purchase price allocation was based on an evaluation of the appropriate fair values and represent managements best estimate based on available data. Fair values are determined based on the requirements of ASC 820, Fair Measurements and Disclosures (“ASC 820”).

The Earn-Out arrangement meets the liability classification criteria outlined in ASC 480, “Distinguishing Liabilities from Equity”, as it is not indexed to the Company’s own shares and is classified as a liability in the accompanying balance sheet. Liability classified contingent consideration is measured initially at the fair value on the acquisition date and is remeasured at each reporting period. Subsequent differences between the estimated fair value of the Earn-Out recorded at the acquisition date and the remeasurement date will be reflected as a charge or credit, as applicable, in the statement of operations.

The following table summarizes the fair value of the purchase price consideration paid to acquire ChizComm:

The preliminary purchase price allocation was based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in connection with the acquisition of ChizComm. The accounting for the acquisition at March 31, 2021 is preliminary as the Company is finalizing its valuation and determination of it’s intangible assets and contingent consideration and expects to be finalized in subsequent quarters. The Company has engaged a third party valuation firm to assist with the purchase price allocation which will be completed in subsequent quarters.

The identifiable intangible assets acquired of $9,630,000 was composed of $3,430,000 for ChizComm’s trade name with an indefinite remaining economical life, $6,140,000 for ChizComm’s customer base with a remaining useful life of approximately 12 years, and $60,000 for ChizComm’s non-compete agreements with a remaining economic life of 3 years.

Management is responsible for determining the fair value of the identifiable assets acquired as of the effective Date. Management considered a number of factors, including reference to an analysis under ASC 805 solely for the purpose of allocating the purchase price to the assets acquired.

Valuation Methodology

Customer relationships for ChizComm were valued by performing a discounted cash flow analysis using the multiperiod excess earnings method. This method includes discounting the projected cash flows associated with existing customers based primarily upon customer turnover data over its expected life and considers the operating expenses and contributory asset charges associated with servicing such existing customers. Projected cash flows attributable to the customer relationships were discounted to their present value at a rate commensurate with the perceived risk. The useful lives of customer relationships are estimated based primarily upon the present value of cash flows attributable to the customer relationships.

Trademarks and trade names for ChizComm were valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.

Non-compete agreements were valued using a with and without method. Under this method, estimated prospective financial information (“PFI”) is calculated with the existence and ownership of an intangible asset and compared to the PFI in the absence of the ownership of the intangible asset. The after-tax differential PFI attributable to the intangible asset is then discounted to its present value.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:

The acquisition was treated for tax purposed as a nontaxable transaction and as such, the historical tax bases of the acquired tax bases of the acquired assets, net operating loose, and other tax attributes of ChizComm will carryover. As a result, no new goodwill for tax purposes was created on connection with the acquisition as there is no step-up to the fair value of the underlying tax bases of the acquired net assets.

The preliminary purchase price allocation was based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in connection with the acquisition of ChizComm, as follows:

Supplemental Pro Forma Information (Unaudited)

The following supplemental pro forma information summarizes our results of operations for the periods presented, as if we completed the acquisition of ChizComm on the beginning of the period presented.

Supplemental proforma information as follows: