Annual report pursuant to Section 13 and 15(d)

Acquisition of Kulu Valley, Ltd

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Acquisition of Kulu Valley, Ltd
12 Months Ended
Dec. 31, 2015
Business Combinations [Abstract]  
Acquisition of Kulu Valley, Ltd
Acquisition of Kulu Valley, Ltd.
On October 3, 2014, the Company entered into share purchase agreements to acquire 100% of the outstanding shares (the "Share Purchase Transaction") of Kulu Valley Ltd., a private limited company incorporated in England and Wales (“Kulu Valley”). The acquisition was made to expand Qumu’s addressable market through the offering of Kulu Valley’s best-in-class video content creation capabilities and easy-to-deploy pure cloud solution, and provides Kulu Valley’s customers with access to industry leading video content management and delivery capability.
After inclusion of working capital and other adjustments required under the share purchase agreements, the aggregate net purchase price totaled approximately $14,591,000 consisting of a cash outlay of approximately $11,556,000, net of cash acquired in the transaction of $2,466,000, and approximately 275,000 shares of Qumu Corporation's common stock. For purposes of calculating the purchase price attributable to the 275,000 shares of Company common stock issuable in the Share Purchase Transaction, the parties agreed upon a value of $13.75 per share. All of the shares of the Company’s common stock issued in the Share Purchase Transaction were issued to shareholders of Kulu Valley who are also employees of Kulu Valley. Pursuant to the terms of a lock-up letter agreement, the shares issued in the Share Purchase Transaction were restricted from transfer, subject to certain exceptions. The restrictions lapsed for all of the shares issued 365 days following the closing of the Share Purchase Transaction. Following the acquisition, Kulu Valley’s liabilities consisted of trade payables, accrued expenses, deferred tax liabilities and deferred revenue related primarily to active software subscription agreements. Of the cash amounts payable in the acquisition, $2,000,000 was subject to escrow for a fifteen month period to secure certain warranty and indemnification obligations to the Company; the escrow was released in January 2016. The acquisition was funded through the use of cash held by the Company at the acquisition date and the Company's common stock.
The acquisition was accounted for under the provisions of ASC 805, Business Combinations. The results of operations of Kulu Valley are included in the Company’s Consolidated Statements of Operations since October 3, 2014, the date of the acquisition. After the impact of applying fair value purchase accounting adjustments of $1.1 million to reduce the carrying value of deferred revenues, the Company recorded revenues for Kulu Valley of approximately $464,000 during the post-acquisition period in 2014. The acquisition of Kulu Valley’s assets and liabilities does not constitute a material business combination and accordingly, pro forma results have not been included.
The following table summarizes the purchase accounting allocation of the total purchase price to Kulu Valley’s net tangible and intangible assets, with the residual allocated to goodwill (in thousands):
Aggregate purchase price, net of cash acquired
$
15,118

Less: discount applied to Qumu Corporation stock for trade restrictions
(527
)
Net transaction consideration
$
14,591

Current assets
$
1,494

Property and equipment
140

Intangible assets
6,663

Goodwill
8,795

Current liabilities
(1,170
)
Net deferred tax liabilities
(1,331
)
Total net assets acquired
$
14,591


The aggregate purchase price for purchase accounting of $14,591,000 reflects the cash consideration, net of cash acquired, plus the valuation of issued Qumu Corporation (NASDAQ:QUMU) stock at the closing price per share of $12.95 on the date of the acquisition. The Company is not aware of further adjustments required in the purchase price allocation.
The aggregate purchase price was allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed. The fair values assigned to intangible assets were determined through the use of forecasted cash inflows and outflows, primarily applying a relief-from royalty and a multi-period excess earnings method. These valuation methods were based on management’s estimates as of the acquisition date of October 3, 2014. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill, which is non-deductible for tax purposes. Transaction costs of approximately $245,000 were expensed as incurred and were included in the Company’s general and administrative expenses.
The guidance under ASC 805 provides that intangible assets with finite lives be amortized over their estimated remaining useful lives, while goodwill and other intangible assets with indefinite lives will not be amortized, but rather tested for impairment on at least an annual basis. Useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.
In the aggregate, the identifiable intangible assets were valued at $6,663,000, of which $4,233,000 was allocated to developed technology, $2,315,000 was allocated to customer relationships, $74,000 was allocated to trade name and $41,000 was allocated to covenant not-to-compete agreements. The acquired intangible assets will be amortized based on estimated expected future cash flows for a period ranging from fifteen months to nine years.
As part of the opening balance sheet purchase accounting, the Company established a net deferred tax liability of $1.3 million. This consisted of a deferred tax liability of approximately $1.5 million for the estimated future impact of the difference in the U.S. book vs. U.K. statutory and tax basis of the purchased intangible assets, deferred revenues and accrued compensation. Partially offsetting this was the impact of the establishment of deferred tax assets amounting to approximately $0.2 million for the future benefit of utilization of acquired net operating losses and the impact of cumulative temporary U.S. book to tax differences.