Note 3: Acquisition of Ameba

On January 13, 2022, the Company closed its previously announced acquisition of Ameba Inc., a corporation incorporated under the laws of the province of Manitoba (“Ameba”), pursuant to a Stock Purchase Agreement (the “SPA”) by and between the Company and Tony Havelka, a resident of the Province of Manitoba (the “Seller”), in which the Company acquired from the Seller all of the issued and outstanding equity interests of Ameba. In addition to the SPA, pursuant to an Asset Purchase Agreement (the “APA”) by and between the Company, the Seller and Tek Gear Inc., a corporation owned by the Seller, the Company acquired from the Seller, a proprietary software platform (the “Technology”) that powers the Ameba subscription video on demand (“SVOD”) deliveries. The SPA, together with the APA, are referred to as the “Ameba Acquisition.”

Consideration paid by the Company in the transaction at closing consisted of $3.5 million in cash pursuant to the SPA and $0.3 million in cash pursuant to the APA, for total consideration of $3.8 million, or $3.6 million net of cash acquired, excluding transaction costs and subject to a net working capital adjustment (the “NWC Adjustment”) as described in more detail below.

Transaction costs incurred relating to the Ameba Acquisition, including legal and accounting, totaled $0.1 million, which is included in general and administrative expenses on the statement of operations. The agreement provides for an adjustment to the purchase price based on an adjusted net working capital (“NWC”) as defined in the agreement. The Company recorded an estimated liability of $0.3 million related to the NWC Adjustment, which is reflected within Accrued Expenses in the condensed consolidated balance sheet. 

The Ameba acquisition facilitates the Company’s expansion into SVOD with its technology and content essential to the launch of the ad-free subscription-based Kartoon Channel! Kidaverse platform. The acquisition provides immediate benefit recognized through the content available on the SVOD Ameba channel app, available for download on Amazon Fire TV, Roku, Xbox 360, Xumo, LG Smart TV, TiVo, VEWD, CINEMOOD and iOS and Android devices.

The Company has determined that the Ameba Acquisition constitutes a business acquisition as defined by ASC 805. 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 preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based on the requirements of ASC 820 and represents managements best estimates.

The following table summarizes the consideration paid, including the preliminary Net Working Capital Adjustment (in thousands):

As of March 31, 2022, the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets. The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent quarters.

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 on January 11, 2022 as follows (in thousands):

 The identifiable intangible assets acquired of $3.1 million is comprised of $2.8 million for the Digital Network, Ameba TV, with a remaining economic life of 18 years, $24,000 for Ameba’s trade name with a useful life of 3 years and $0.3 million for the SVOD technology with a remaining useful life of approximately 3 years. The goodwill arising from the acquisition consists largely of the synergies expected from the combined businesses, including the Company’s build-out of its technology for the expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content Production & Distribution reporting unit and is not deductible for tax purposes.

The allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions that are subject to change within the purchase price allocation period, generally one year from the acquisition date. 

Valuation Methodology

The digital network was valued by performing a discounted cash flow analysis. This method includes discounting the projected cash flows associated with the current digital network content, based primarily upon historical revenue and projections over its expected life and considers the operating expenses and contributory asset charges associated with servicing such network. Projected cash flows attributable to the digital network was discounted to the present value at a rate commensurate with the perceived risk. The useful life of the digital network is estimated based primarily upon the present value of cash flows attributable to the digital network.

The Ameba trade name was 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. The useful life of the trade name is based on the estimated time it will take for the Company to rebrand the Ameba trade name and logo with the Company branded Kartoon Channel! Kidaverse trade name.

The technology was valued at cost.

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

Supplemental Pro Forma Information

The following unaudited supplemental pro forma information summarizes the Company’s results of operations as if the acquisition was completed in the beginning of the periods presented (in thousands, except for share and per share data):