Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.21.2
Business Combinations
9 Months Ended
Sep. 30, 2021
Business Combinations [Abstract]  
Business Combinations

3. BUSINESS COMBINATIONS

Acquisition of mGage

On June 1, 2021, the Company completed its Merger with Vivial and the resulting acquisition of the business owned by Vivial known as mGage, a leading global mobile messaging provider. The acquisition of mGage provided an opportunity for the Company to expand its network operator connections and become one of only four companies providing direct connectivity to all tier-1 US carriers.

Pursuant to the Merger Agreement dated as of February 18, 2021, by and among the Company, its wholly-owned subsidiary, Volcano Merger Sub, Inc. (“Merger Sub”), Vivial and GSO Special Situations Master Fund LP, solely in its capacity as the Stockholder Representative, Vivial was merged with and into Merger Sub, with Vivial surviving as a wholly-owned subsidiary of the Company. The name of Vivial was changed to mGage Group Holdings, Inc. (“mGage Group Holdings”) as a result of the Merger. Subsequently, on July 1, 2021, mGage Group Holdings changed its name to Kaleyra US Inc.

The Merger consideration consisted of cash consideration and common stock consideration and was subject to post-closing price adjustments as set forth in the Merger Agreement. On August 30, 2021, the Company prepared and delivered to the Stockholder Representative a written statement (the “Post-Closing Statement”) setting forth the calculation of closing cash and closing net working capital which ultimately resulted in the final Merger consideration to be equal to $217.0 million pursuant to the terms of the Merger Agreement. The original cash consideration amounted to $199.2 million of which $198.6 million was paid on June 1, 2021 and the remaining amount was settled through the period ended September 30, 2021, including a working capital adjustment of $997,000. The common stock consideration was paid with the issuance to Vivial’s former equity holders of a total of 1,600,000 shares of Kaleyra common stock (the “Parent Common Stock”). The resulting amount, which was based upon the $11.77 per share closing price of Parent Common Stock as of June 1, 2021, was equal to $18.8 million and has been recognized as part of the consideration transferred.

The Merger was financed through (i) the proceeds from the issuance and sale by the Company, of an aggregate of 8,400,000 shares of Kaleyra common stock to PIPE Investors at $12.50 per share, pursuant to the subscription agreements dated February 18, 2021; and (ii) the proceeds from the issuance in a private placement, of $200 million aggregate principal amount of Merger Convertible Notes to certain institutional investors. See Note 10 – Notes Payable for additional details on the Merger Convertible Notes.

The Merger was accounted for as a business combination and the total fair value of the consideration transferred of $217.0 million was allocated on a preliminary basis to the net tangible and intangible assets and liabilities based on their estimated fair values as of the acquisition date and the excess was recorded as goodwill. The Company will continue to evaluate certain assets, liabilities and tax estimates that are subject to change within the measurement period (up to one year from the acquisition date). During the three months ended September 30, 2021, Kaleyra redetermined the estimated fair value of certain identified finite-lived intangible assets, net of deferred tax liabilities and the resulting residual goodwill. The measurement period adjustment was recognized through a decrease of $8.9 million in the current period condensed consolidated balance sheet line item “Intangible assets, net” mostly relating the acquired developed technology, a net decrease of $1.9 million in the current period condensed consolidated balance sheet line item “Deferred tax liability” and an increase of $5.9 million in the current period condensed consolidated balance sheet line item

“Goodwill”. The measurement period adjustment also included a working capital adjustment of $997,000. The acquired entity’s results of operations have been included in the condensed consolidated financial statements of the Company from the date of acquisition.

The following table summarizes the fair value amount recognized for the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

Customer relationships (1)

 

$

76,256

 

Developed technology (1)

 

 

30,033

 

Trade names (1)

 

 

13,060

 

Deferred tax assets on loss carryforward

 

 

25,011

 

Goodwill (2)

 

 

86,321

 

Accounts receivable and other current assets

 

 

29,996

 

Property and equipment

 

 

8,450

 

Cash and cash equivalents

 

 

2,856

 

Total assets acquired

 

 

271,983

 

Deferred tax liabilities

 

 

32,284

 

Accounts payable and other current liabilities

 

 

22,665

 

Total liabilities assumed

 

 

54,949

 

Net assets acquired

 

$

217,034

 

 

(1)

Identified finite-lived intangible assets. The estimated fair value of the intangible assets acquired was determined by the Company, which considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets. The estimated useful life is 7 to 9 years for customer relationships, 6 years for developed technology and 8 years for trade names.

 

(2)

Goodwill is the excess of fair value of the consideration transferred over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed and represents expected synergies of the combination of the acquired business. Goodwill is not deductible for income tax purposes.

In 2021, the Company incurred costs related to this acquisition of $5.5 million that were expensed in general and administrative expenses in the accompanying condensed consolidated statements of operations.

The contribution of mGage to the consolidated revenue and consolidated net loss for the three and nine months ended September 30, 2021 was $34.0 million and $44.1 million, respectively, and net income of $4.7 million and $5.7 million, respectively.

Acquisition of Bandyer

On July 8, 2021, Kaleyra completed the acquisition of the entire share capital of Bandyer, a company based in Italy that offers cloud based audio/video communications services to Italian financial institutions, retail companies, utilities, insurance, human resources and digital healthcare organizations (the “Bandyer Acquisition”). Bandyer’s services are extremely suitable for different industries and completely compatible with any device and expand and complete Kaleyra’s already wide offering of communication channels.

The consideration for the Bandyer Acquisition consisted of cash consideration of $15.4 million (€13 million) of which $13.3 million (€11.5 million) was paid at the acquisition date and the remaining amount was retained in an escrow account. The above purchase consideration may be increased or decreased by an amount equal to the sum of the acquisition date net debt and the portion of the acquisition date net working capital that will be collected by December 31, 2021 (the “Price Adjustment”). The Price Adjustment has not been considered in the calculation of the provisional goodwill. The acquisition of Bandyer was financed through the available financial resources of Kaleyra.

The Bandyer Acquisition was accounted for as a business combination and the total fair value of the consideration transferred of $15.4 million was allocated on a preliminary basis to the net tangible and intangible assets and liabilities based on their estimated fair values as of the acquisition date and the excess was recorded as goodwill. The Company will continue to evaluate certain assets, liabilities and tax estimates that are subject to change within the measurement period (up to one year from the acquisition date). The acquired entity’s results of operations have been included in the condensed consolidated financial statements of Kaleyra from the date of acquisition.

The following table summarizes the fair value amount recognized for the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

 

Property and equipment, net

 

$

116

 

Developed technology (1)

 

 

7,999

 

Customer relationship (1)

 

 

1,798

 

Goodwill (2)

 

 

8,040

 

Cash and cash equivalents

 

 

349

 

Trade receivables and other current assets

 

 

671

 

Other non current assets

 

 

21

 

Total assets acquired

 

 

18,994

 

Deferred tax liabilities

 

 

2,452

 

Accounts payable and other current liabilities

 

 

986

 

Long term portion of employee benefit obligation

 

 

126

 

Current portion of bank and other borrowings

 

 

39

 

Total liabilities assumed

 

 

3,603

 

Net assets acquired

 

$

15,391

 

 

(1)

Identified finite-lived intangible assets. The estimated fair value of the intangible assets acquired was determined by Kaleyra, which considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets. The estimated useful life is 8 years for customer relationships and 15 years for developed technology.

 

(2)

Goodwill is the excess of fair value of the consideration transferred over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed and represents expected synergies of the combination of the acquired business. Goodwill is not deductible for income tax purposes.

Unaudited supplemental pro-forma information

The following table presents unaudited supplemental pro-forma information for the three and nine months ended September 30, 2021 and 2020 as if both the Merger and the Bandyer Acquisition had occurred on January 1, 2020. The main adjustments reflected in the unaudited pro-forma financial information are as follows:

 

(i)

the amortization of intangible assets arising from the purchase price allocation amounting to (i) zero and $4.9 million for three and nine months ended September 30, 2021, respectively, net of the related tax effect of zero and $1.8 million, respectively, which are referred to the period starting on January 1, 2021 through the date of the business combinations, and (ii) $2.9 million and $8.7 million for three and nine months ended September 30, 2020, respectively, net of the related tax effect of $1.1 million and $3.2 million, respectively, which are referred to the entire periods;

 

(ii)

the financial expenses incurred in connection with the Merger Convertible Notes amounting to (i) zero and $5.9 million for three and nine months ended September 30, 2021, respectively, which are referred to the period starting on January 1, 2021 through the date of the Merger, and (ii) $3.6 million and $10.6 million for three and nine months ended September 30, 2020, respectively, which are referred to the entire periods. No pro forma tax benefit has been reflected in connection with the pro forma adjustment to financial income (expense), net as Kaleyra is in a net loss tax position and a valuation allowance would be established for the amount of any deferred tax assets.

Transaction costs incurred in connection with the transactions were not eliminated. The pro-forma financial information is not necessarily indicative of the results of operation that would have occurred had the transactions been affected on the assumed dates.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except share and per share amounts)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue

 

$

84,025

 

 

$

71,756

 

 

$

232,917

 

 

$

206,819

 

Net loss

 

 

(11,859

)

 

 

(8,235

)

 

 

(31,631

)

 

 

(22,051

)

Net loss per common share, basic and diluted

 

$

(0.29

)

 

$

(0.21

)

 

$

(0.77

)

 

$

(0.67

)

Weighted-average shares used in computing net loss per common share, basic and diluted

 

 

41,554,876

 

 

 

38,330,869

 

 

 

41,033,860

 

 

 

32,972,425

 

 

 

The contribution of mGage to the pro-forma consolidated revenue was $34.0 million and $98.6 million for the three and nine months ended September 30, 2021, respectively, and $33.2 million and $102.9 million for the three and nine months ended September 30, 2020, respectively.

The contribution of mGage to the pro-forma consolidated net loss was income of $4.7 million and $1.9 million for the three and nine months ended September 30, 2021, respectively, and a loss of $2.6 million and income of $946,000 for the three and nine months ended September 30, 2020, respectively.

The contribution of Bandyer to the pro-forma consolidated revenue was $482,000 and $1.2 million for the three and nine months ended September 30, 2021, respectively, and $314,000 and $801,000 for the three and nine months ended September 30, 2020, respectively.

The contribution of Bandyer to the pro-forma consolidated net loss was income of $15,000 and a loss of $892,000 for the three and nine months ended September 30, 2021, respectively, and a loss of $260,000 and of $712,000 for the three and nine months ended September 30, 2020, respectively.