Business Combination | Note 4 – Business Combinations Merger with Redbox Entertainment Inc . On August 11, 2022, the Company acquired all the outstanding equity interests of Redbox. Immediately prior to the merger closing, CSSE entered into a definitive financing arrangement with HPS Investment Partners, LLC (“HPS”), that amended Redbox’s existing credit facility and the Company issued a warrant to HPS to acquire 4.5% of CSSE on a fully diluted post-merger basis. See Note 11 and Note 16 for additional information. On closing of the merger, based on the exchange rate of 0.087 for each outstanding Redbox Class A common share, each vested and unvested restricted stock units and the common units of Redbox’s Redwood Intermediate LLC subsidiary, the Company issued an aggregate of approximately 4.7 million shares of Class A common stock and assumed the outstanding warrants of Redbox. Included in the Class A common stock were 199,231 shares issued in connection with the acceleration and settlement of outstanding Redbox’s restricted stock units, or RSUs. The preliminary fair value of the Redbox RSUs was $2.9 million of which $0.7 million was associated with services rendered prior to the acquisition and the remaining $2.2 million was expensed upon the acceleration of vesting immediately following the completion of the acquisition. The results of operations and financial position of Redbox are included in the Company’s consolidated financial statements from the date of acquisition. The Company’s transaction costs of $17.5 million were expensed as incurred in the merger and transaction costs on the Consolidated Statement of Operations. The transaction was accounted for as a business combination. The purchase price consideration is determined with reference to the value of equity that the Company issued to the Redbox shareholders. The preliminary purchase price was calculated as follows (in thousands): Class A common stock $ 65,828,719 Class A common stock issued upon vesting of Redbox RSUs 703,244 Class A common stock warrants issued to Redbox warrant holders 3,473,185 Total merger consideration $ 70,005,148 The acquisition of Redbox has been accounted for using the acquisition method of accounting, which requires that assets acquired, and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date and subject to change up to one year after the date of acquisition and could result in changes to the amounts recorded below: Assets acquired: Cash, cash equivalents and restricted cash $ 12,921,550 Accounts receivable 16,650,034 Content library 21,345,576 Prepaid expenses and other assets 11,494,570 Property and equipment 15,504,940 Right-of-use assets 7,183,735 Intangible assets (1) 279,600,000 Goodwill 230,908,179 Total assets acquired 595,608,584 Liabilities assumed: Debt 359,854,921 Accounts payable and accrued expenses 95,411,196 Operating lease liabilities 7,183,736 Financing lease liabilities 2,241,304 Other liabilities 60,912,279 Total liabilities assumed 525,603,436 Net assets acquired $ 70,005,148 (1) The weighted-average useful life of intangible assets acquired is approximately 14 years . The above allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been completed as of the date of this filing. Any changes in the estimated fair values of the net assets recorded for this business combination upon the finalization of more detailed analyses of the facts and circumstances that existed at the date of the transaction will change the allocation of the purchase price. As such, the purchase price allocations for this transaction are preliminary estimates, which are subject to change within the measurement period. The identifiable intangible assets included customer relationships, technology and trade names and are being amortized on a straight-line basis ranging from 3 years to 15 years . The valuation methods require several judgments and assumptions to determine the fair value of intangible assets, including growth rates, discount rates, customer attrition rates, expected levels of cash flows, and tax rate. Key assumptions used included revenue projections for fiscal 2022 through 2037, a tax rate of 25% , a discount rate of 11% - 12% , and a royalty rate of 2% . The technology intangible asset was valued using the estimated replacement cost method. Goodwill is attributable to the workforce of Redbox as well as expected future growth into new and existing markets and $7.9 million is deductible for income tax purposes. For the three and nine months ended September 30, 2022 Redbox contributed $31.6 million of revenue and $9.5 million of net loss to the Company’s consolidated operating results. Unaudited Pro Forma Financial Information The following table reflects the pro forma operating results for the Company which gives effect to the acquisition of Redbox as if it had occurred on January 1, 2021. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of future results. The pro forma financial information includes the historical results of the Company and Redbox adjusted for certain items, which are described below, and does not include the effects of any synergies or cost reduction initiatives related to the acquisition. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 (unaudited) Net revenue $ 99,561,227 $ 99,349,000 $ 295,625,227 $ 290,801,000 Net loss $ (15,492,821) $ (36,156,310) $ (167,863,000) $ (95,323,179) Pro forma net losses for the three and nine months ended September 30, 2022 and 2021 reflect adjustments primarily related to acquisition costs, interest expense, the amortization of intangible assets and stock-based compensation expense. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results would have been if the acquisition had been completed at the beginning of the respective periods. 1091 Pictures Acquisition On March 4, 2022, the Company consummated its acquisition of certain of the assets of 1091 Media, LLC , including all of the outstanding equity of its operating subsidiary, TOFG LLC, which does business under the name 1091 Pictures (“1091 Pictures”). 1091 Pictures provides full-service distribution services to film and series owners, including access to platforms that reach more than 100 countries, and related marketing support, and has a library of approximately 4,000 licensed films and television shows. The Company paid consideration of $13,283,750 through the payment of $8,000,000 in cash, the issuance of 375,000 shares of the Company’s Class A common stock and the issuance of 80,000 shares of the Company’s Series A preferred stock. The Company has allocated the purchase price to the identifiable net assets acquired, including intangible assets and liabilities assumed, based on the estimated fair values at the date of acquisition. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities was recorded as goodwill. The purchase price allocation is preliminary and subject to change up to one year after the date of acquisition and could result in changes to the amounts recorded below. The preliminary allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the date of the acquisition was as follows: Accounts receivable, net $ 4,677,133 Content assets 4,695,000 Other assets 49,348 Intangibles 2,810,000 Goodwill 6,188,387 Total assets acquired 18,419,868 Accounts payable and accrued expenses 129,244 Revenue share payable 1,623,177 Accrued third party share 3,999,544 Other liabilities 711,677 Total liabilities assumed 6,463,642 Net assets acquired $ 11,956,226 Cash consideration $ 8,000,000 Equity consideration - Class A common stock 3,303,750 Equity consideration - Series A Preferred Stock 1,980,000 Purchase price consideration 13,283,750 Less: cash acquired (1,327,524) Total Estimated Purchase Price $ 11,956,226 The $2,810,000 of acquired intangibles represents the estimated fair value of the quality control certification process, trademarks, technology and noncompete agreements. These definite lived intangible assets are being amortized on a straight-line basis over their estimated useful life of 24 Acquisition of Sonar Assets On May 21, 2021, the Company consummated its acquisition of the principal assets of Sonar Entertainment, Inc. (“SEI”) and certain of the direct and indirect subsidiaries of SEI (collectively, “Sonar”). Sonar is an award-winning independent television studio that owns, develops, produces, finances and distributes content for global audiences. In consideration for the assets purchased from Sonar (“Purchased Assets”), the Company paid to Sonar an initial cash purchase price of $18,902,000 and from time to time will be required to pay additional purchase price based on the performance of the acquired assets (See Note 15 – Acquisition of Sonar Assets). During the 18-month period following the closing, the Company has the right (the “Buyout Option”), exercisable upon written notice to Sonar during such period, to buy out all future entitlements (i.e., additional purchase price and other entitlements not yet due and payable to Sonar as of the date of such notice) in exchange for a one-time payment to Sonar. In connection with the transaction, the Company formed a new subsidiary, CSS AVOD Inc., and issued shares of common stock, representing 5% of the after-issued equity of CSS AVOD, to MidCap Financial Trust, as Agent. At any time during the three-year period immediately following the 18-month anniversary of the asset purchase agreement closing, MidCap, as Agent, shall have the right upon 60 days’ prior written notice to CSSE to require CSSE to purchase such CSS AVOD Shares for $11,500,000 (“Put Election”). The Sonar acquisition was accounted for as a purchase of a business in accordance with ASC 805 and the aggregate purchase price consideration of $53,812,000 has been allocated to the assets acquired and liabilities assumed, based on the estimated fair values at the date of acquisition. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities was recorded as goodwill. The allocation of the purchase price to the fair values of the assets acquired assumed at the date of the acquisition was as follows: May 21, 2021 Accounts receivable, net $ 17,373,257 Film library 13,000,000 Intangible asset 3,600,000 Total identifiable assets acquired 33,973,257 Goodwill 19,838,743 Net assets acquired $ 53,812,000 The amount related to the acquired intangible asset represents the estimated fair value of the distribution network. This definite lived intangible asset is being amortized on a straight-line basis over its estimated useful life of 36 months. Goodwill was calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from the intangible assets acquired that do not qualify for separate recognition. The fair values of assets acquired were based upon valuations performed by independent third-party valuation experts. Cash $ 18,902,000 Fair Value of Additional Purchase Price – Library Accounts Receivable 1,580,000 Fair Value of Additional Purchase Price – Contracted TV Cash Flow 13,700,000 Fair Value of Additional Purchase Price – % of Film Cash Flow 630,000 Fair Value of Additional Purchase Price – % of Non-TV Business Cash Flow 2,300,000 Fair Value of Additional Purchase Price – Development Slate Cash Flow 5,200,000 Fair Value of Additional Purchase Price – CSS AVOD Equity Put 11,500,000 Total Estimated Purchase Price $ 53,812,000 Based on the terms of the asset purchase agreement, the Company estimated the fair value of the Additional Purchase Price components based on, but not limited to, expected future collection of receivables, expected future revenue and cash flows, expected growth rates, and estimated discount rates. The Additional Purchase Price included a 5% interest in CSS AVOD and a Put Option that requires the Company to purchase the shares of CSS AVOD, Inc. (5.0% of the entity) from the investor for $11,500,000. The fair value of the 5.0% interest in CSS AVOD, Inc. was estimated based on expected future cash flows. The Put Option was valued by the Company via a Black-Sholes valuation model assuming an initial price of $125,000, a strike price of $11,500,000, volatility of 100.0% and term of 1.5 years. Financial Impact of Acquisitions The following tables illustrate the stand-alone financial performance attributable to acquisitions included in the Company’s condensed consolidated statement of operations: Three Months Ended September 30, 2022 Redbox Sonar Other Total Net revenue $ 31,585,586 $ 11,764,766 $ 8,464,883 $ 51,815,235 Net income (loss) $ (9,542,257) $ 6,271,509 $ 685,381 $ (2,585,367) Nine Months Ended September 30, 2022 Redbox Sonar Other Total Net revenue $ 31,585,586 $ 25,831,967 $ 21,167,973 $ 78,585,526 Net income (loss) $ (9,542,257) $ 13,131,657 $ 453,211 $ 4,042,611 |