Note 9- Business Combination

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Business Combination Disclosure [Text Block]

9. Business Combination

On January 3, 2022, the Company completed its acquisition of EVRYTHNG, a London-based product cloud company. The aggregate preliminary purchase price for the acquisition was $36,634, which included the fair value of the 772 shares issued of common stock of the Company of $31,519 and the warrants issued to purchase 231 shares of common stock of the Company of $1,601. The fair value of the warrants was determined using the Black-Scholes option pricing model using the Company’s stock price on the date of issuance of $40.84, the strike price on the warrants of $36.56 and expected volatility of 60%. The aggregate preliminary purchase price also included $3,986 of cash paid by the Company to pay closing costs on behalf of the EVRYTHNG sellers, less cash acquired of $474. A portion of the consideration was held back by the Company to secure any post-closing adjustments to the initial consideration and the indemnification obligations of the EVRYTHNG sellers.

In August 2022, the Company issued 22 additional shares of common stock of the Company at the fair value of $872, that were originally held back for post-closing adjustments.

In January 2023, the Company issued 10 additional shares of common stock of the Company at the fair value of $428, that were originally held back for indemnification obligations.

On December 10, 2021, the Company entered into a Loan Agreement with EVRYTHNG (the “Loan Agreement”) pursuant to the terms of the acquisition. The Loan Agreement provided a loan facility of $2,000 to EVRYTHNG at an interest rate of 1% per annum. The original loan maturity date was  December 9, 2022. The loan balance of $2,001 on January 3, 2022, was included in the purchase price allocation below, as the liability was assumed by the combined company. The loan payable balance is eliminated in consolidation in the Consolidated Balance Sheets.

The following table presents the final purchase price allocation:

	Purchase Price
	Allocation
	January 3, 2022
Trade accounts receivable, net	$	762
Other current assets		2,178
Property and equipment, net		99
Lease right of use assets and other long-term assets		484
Intangibles		35,720
Goodwill		7,970
Accounts payable and other accrued liabilities		(5,395	)
Deferred revenue		(1,678	)
Loan payable to related party		(2,001	)
Lease liability and other long-term liabilities		(205	)
Total purchase price	$	37,934

The Company allocated $35,720 of the purchase price to intangible assets, which was consisted of $24,170 of developed technology and $11,550 of customer relationships. Goodwill recognized of $7,970 from the acquisition was primarily attributed to an assembled workforce and expected synergies. The Company incurred transaction costs related to the acquisition of $447 in 2022. 

Developed Technology

Developed technology primarily consists of intellectual property of proprietary software products and platforms that are marketed for sale. The Company valued the developed technology by applying the cost method. The significant assumption and estimate used under the cost method was development costs. The Company is amortizing the developed technology intangible asset on a straight-line basis over an estimated useful life of five years.

Customer Relationships

The Company recorded the customer relationships intangible asset separately from goodwill based on a determination of the length, strength and contractual nature of the relationships that EVRYTHNG shared with its customers. The Company valued the single group of customer relationships using the multi-period excess earnings method, which is an income approach. The significant assumptions used in the income approach include estimates about future expected cash flows from customer contracts, the customer attrition rate and the discount rate. The Company is amortizing the customer relationships intangible asset on a straight-line basis over an estimated useful life of 10 years.

The following unaudited pro forma consolidated results of operations include the financial results of Digimarc and EVRYTHNG assuming the acquisition was completed on January 1, 2022, the beginning of the earliest period presented. Pro forma adjustments are primarily comprised of amortization expense on acquired intangible assets, transaction expenses and the elimination of EVRYTHNG’s historical interest expense on long-term debt that was settled at closing. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved or of results that may occur in the future.

	Three Months Ended March 31,
	2023			2022
Revenue	$	7,843		$	7,411
Net loss	$	(14,040	)	$	(17,337	)
Loss per common share:
Basic	$	(0.70	)	$	(1.00	)
Diluted	$	(0.70	)	$	(1.00	)